Question 1

Asset Allocation is

Accepted Answer

the diversification of investments in a customer’s account or a managed account.

Question 2

Two fundamental concepts of asset allocation:

Accepted Answer

balance/mix and rebalancing.

Question 3

What is the balance or MIX (asset allocation)?

Accepted Answer

It refers to the balance or MIX of different asset classes (e.g. stocks, bonds, cash, etc.) within an investment portfolio.

Question 4

What is rebalancing?

Accepted Answer

the ability to switch investments in response to the current market conditions and interest rate moves (rebalancing). When we switch from one asset class to another asset class, we refer to that as rebalancing.

Question 5

When determining asset allocation for a customer, the most important factors to consider are the investor’s

Accepted Answer

current investments, strategies, and objectives.

Question 6

Active Asset Allocation

Accepted Answer

refers to active “stock picking” and market timing to CONSTANTLY REBALANCE the portfolio to attempt to obtain returns in excess of a specific benchmark or expected return.

Question 7

Tactical Asset Allocation

Accepted Answer

focuses on SHORT-TERM asset mix. There are targeted balances, but adjustments can be and are made within a range based on current market and current economic conditions such as a recessionary period. (cf. p. 184)

Question 8

Tactical Asset Allocation -- with the maximum and minimum percentages, the portfolio manager can

Accepted Answer

re-allocate assets to areas with the highest anticipated performance.

Question 9

Is Tactical Asset Allocation a form of market timing?

Accepted Answer

Yes. Tactical Asset Allocation is a form of market timing.

Question 10

Is Tactical Asset Allocation a form of Active Asset Allocation?

Accepted Answer

Yes. Tactical Asset Allocation is a form of Active Asset Allocation.

Question 11

What are growth investors?

Accepted Answer

Growth investors focus on companies with above average earnings, and above average prospective earnings.

Question 12

Growth stocks generally have higher than average _____________, and therefore, generally trade with a _______________.

Accepted Answer

future earnings potential, higher P/E ratio Growth stocks generally have higher than average future earnings potential, and therefore, generally trade with a higher P/E ratio (price/earnings ratio — generally 35 or higher).

Question 13

What is the general P/E ratio on growth stocks?

Accepted Answer

generally 35 or higher.

Question 14

Value investors focus on value stocks which are _____________, with ________________________.

Accepted Answer

undervalued companies, low Price-to-Earnings Ratios (P/E Ratios).

Question 15

Do undervalued companies usually pay dividends?

Accepted Answer

Yes.

Question 16

Do undervalued companies have low price/book ratios?

Accepted Answer

Yes.

Question 17

Do undervalued companies have little or no debt?

Accepted Answer

Yes.

Question 18

Why are they called “value investments”?

Accepted Answer

because they have little or no debt).

Question 19

Would a high yield, low P/E stock provide the value investor with income?

Accepted Answer

Yes. High yield, low P/E stock WOULD provide the value investor with income.

Question 20

What do value investors look at when evaluating an investment?

Accepted Answer

Value investors will look at book value, overall yield, dividend yield, P/E ratio, price/sales, and the capitalization of the company.

Question 21

Passive Asset Allocation

Accepted Answer

is a form asset allocation where the portfolio is SET and is re-balanced at pre-determined intervals (e.g., semi-annually, annually).

Question 22

What does re-balancing in Passive Asset Allocation do?

Accepted Answer

Rebalancing ensures that the portfolio is brought back to pre-determined target percentages.

Question 23

What are passive investment strategies compared to?

Accepted Answer

a specific index as a benchmark to gauge performance.

Question 24

Strategic Asset Allocation

Accepted Answer

The assets in the portfolio over the long-term are balanced and generally kept at an ASSIGNED balance. Example: Portfolio Balance 30% in Large Cap Equities 20% in Small Cap Equities 35% in Long Term Corporate Debt 15% in Treasury Bills

Question 25

Why are assets maintained at an assigned balance in Strategic Asset Allocation?

Accepted Answer

to achieve the highest anticipated return versus risk.

Question 26

Is Strategic Asset Allocation a form of Passive Asset Allocation?

Accepted Answer

Yes. Strategic Asset Allocation is a form of Passive Asset Allocation. Because we try to maintain those assigned balances.

Question 27

What are Barbell Portfolios?

Accepted Answer

a portfolio of bonds with concentrations of short and long-term maturities, but very few mid-range maturities.

Question 28

Are Barbell Portfolios adjusted to maintain long and short distributions?

Accepted Answer

Yes. The portfolio is adjusted to maintain long and short distributions .

Question 29

Contingent Immunization Strategy

Accepted Answer

is a strategy whereby a portfolio manager has the opportunity to actively manage a portfolio, but if the returns fall below a specified level, then the active management ceases, and immunization of the portfolio occurs.

Question 30

Immunization of a portfolio

Accepted Answer

takes place when the duration of the portfolio assets EQUALS the duration of the portfolio liabilities.

Question 31

A general rule of thumb concept for asset allocation for investors: (older, younger, middle aged investors)

Accepted Answer

a). Older investors would be primarily invested in fixed income securities (bonds) and some cash. b). Younger investors would be primarily invested in equities (stocks) and some cash. c). Middle-aged investors would be invested in a combination of equities, fixed income, and some cash.

Question 32

Capital Appreciation Strategy

Accepted Answer

seeks to maximize capital appreciation, or the increase in the value of a portfolio or asset over the long term.

Question 33

What type of asset would a portfolio with a Capital Appreciation Strategy mostly contain?

Accepted Answer

This would include a portfolio that mostly consists of equities, or stocks, in hopes that the value of the stock will increase over time.

Question 34

Investing for capital appreciation over time brings on more risk, but

Accepted Answer

the potential for returns can be much greater.

Question 35

Income investing

Accepted Answer

is a simple and straightforward investing strategy which involves accumulating assets such as stocks, bonds, mutual funds, and real estate that generate the highest possible annual income at the lowest possible risk.

Question 36

Indexing

Accepted Answer

a passively managed portfolio. Indexing means weighting a portfolio to mirror a broad based index or buying shares in an index fund.

Question 37

Do the returns on index funds provide highly predictable returns, relative to the benchmark index?

Accepted Answer

Yes. The returns on index funds provide highly predictable returns, relative to the benchmark index (example: if you created a portfolio that mirrored the S&P 500, then the returns on your portfolio would basically mirror the S&P 500).

Question 38

Does an indexing strategy attempt to identify under or overvalued securities?

Accepted Answer

No. This strategy does NOT attempt to identify under or overvalued securities.

Question 39

When tracking an index fund, should there be deviation between the fund’s performance and the benchmark?

Accepted Answer

No. When tracking an index fund, there should be NO deviation between the fund’s performance and the benchmark.

Question 40

When tracking an index fund, what is a deviation between the fund’s performance and the benchmark called?

Accepted Answer

If there is a deviation, it would be referred to as a “tracking error."

Question 41

Since indexing mirrors a specific index, there is no need for a portfolio manager therefore

Accepted Answer

lowering the cost of management as compared to a managed fund.

Question 42

Can passively managed funds be allocated by market capitalization?

Accepted Answer

Yes. Investments may also be allocated by market capitalization.

Question 43

What is market capitalization?

Accepted Answer

Market capitalization is the current market price per share, times the number of shares outstanding.

Question 44

Equity assets classification -- What is a micro cap company?

Accepted Answer

Micro cap = a company with capitalization of less than $250 million

Question 45

Equity assets classification -- What is a small cap company?

Accepted Answer

Small cap = a company with capitalization of $250 million up to $2 billion.

Question 46

Equity assets classification -- What is a mid cap company?

Accepted Answer

Mid cap = a company with capitalization of $2 billion to $10 billion.

Question 47

Equity assets classification -- What is a large cap company?

Accepted Answer

Large cap = a company with capitalization over $10 billion

Question 48

Are the equity asset classifications (micro, small, mid, large cap) considered to be a rule of thumb and change periodically in the real world?

Accepted Answer

Yes. These numbers are considered to be a rule of thumb and change periodically in the real world.

Question 49

Buy & Hold Strategy

Accepted Answer

(sometimes referred to as the old fashioned way of investing/buying stock) is a portfolio management strategy in which the investment manager or investor designs a portfolio and purchases appropriate investments to fit that portfolio, then holds the investments with the anticipation of appreciation and income.

Question 50

Is a buy and hold strategy the simplest form of portfolio management?

Accepted Answer

Yes.

Question 51

Is there rebalancing with buy and hold strategies? What is the effect?

Accepted Answer

No. There is no rebalancing with such a strategy, which reduces transaction-related costs. (fewer costs in this strategy than with trading in and out of stocks. If you buy and hold, that reduces the transaction-related costs of the portfolio).

Question 52

Does a buy and hold strategy cause the investor to end up with lower taxation rates? Why?

Accepted Answer

Yes. This type of strategy usually causes the investor to end up with lower taxation rates due to the fact that they get into the land of long-term. Long-term gains are generally taxed at lower tax rates than short-term gains. Typically ends up in lower taxation rates due to long-term holding periods versus an active trading strategy which would involve short-term capital gains.

Ch 10(1-3) Inv Recs -- Strategies & Portfolio | Strategies, Portfolio Managment, and Indices Flashcards

Define Investment Strategies and Styles (Asset Allocation). Detail Diversification, Sector Rotation, Leverage, & Types of Investment Analysis. Define the stock market indices.

Brainscape's Knowledge GenomeTM

Ch 10(1-3) Inv Recs -- Strategies & Portfolio | Strategies, Portfolio Managment, and Indices Flashcards

Define Investment Strategies and Styles (Asset Allocation). Detail Diversification, Sector Rotation, Leverage, & Types of Investment Analysis. Define the stock market indices.

Brainscape's Knowledge Genome^TM