D.33 Investment Planning: Portfolio development and analysis Flashcards
(20 cards)
Which of the following investment strategies would be most appropriate for an investor who wants to minimize risk while maintaining a moderate level of return?
A)Aggressive growth
B) Growth and income
C) Income
D) Balanced
Balanced
Explanation: A balanced portfolio typically includes a mix of stocks, bonds, and other asset classes that can provide a moderate level of return while minimizing risk.
D.33 Investment Planning: Portfolio development and analysis
Jane has a portfolio of stocks and bonds with a current value of $100,000. She wants to increase her exposure to international equities. Which of the following strategies would be most appropriate?
A) Buy individual foreign stocks
B) Invest in a foreign stock mutual fund
C) Purchase foreign currency
D) Invest in a foreign bond fund
Invest in a foreign stock mutual fund
Explanation: This approach can provide Jane with exposure to a diversified portfolio of foreign stocks, which can help to reduce the risk
D.33 Investment Planning: Portfolio development and analysis
Which of the following factors is most likely to influence an investor’s willingness to take on risk in their investment portfolio?
A) Age
B) Income level
C) Investment goals
D) All of the above
All of the above
Explanation: Age, income level, and investment goals are all important factors that can influence an investor’s willingness to take on risk in their portfolio.
D.33 Investment Planning: Portfolio development and analysis
An investor has a portfolio of stocks that have been performing poorly over the past year. Which of the following strategies would be most appropriate to address this situation?
A) Sell the underperforming stocks and invest in a different sector
B) Hold onto the underperforming stocks and wait for a rebound
C) Increase the allocation to the underperforming stocks to reduce overall risk
D) Invest in a stock mutual fund to diversify the portfolio
Sell the underperforming stocks and invest in a different sector
Explanation: This approach can help the investor to reduce risk and potentially capture better returns by diversifying their portfolio.
D.33 Investment Planning: Portfolio development and analysis
An investor is interested in adding real estate to their portfolio. Which of the following investment vehicles would be most appropriate?
A) REITs
B) Physical real estate property
C) Real estate crowdfunding
D) All of the above
All of the above
Explanation: REITs, physical real estate, and real estate crowdfunding can all be viable options for adding real estate exposure to an investment portfolio.
D.33 Investment Planning: Portfolio development and analysis
Which of the following asset classes is generally considered to be the least risky?
A) Stocks
B) Bonds
C) Commodities
D) Real estate
Bonds
Explanation: Bonds are generally considered to be less risky than stocks or commodities, as they offer a fixed income stream and a lower level of volatility.
D.33 Investment Planning: Portfolio development and analysis
An investor is looking to build a portfolio that maximizes return for a given level of risk. Which of the following strategies would be most appropriate?
A) Asset allocation
B) Diversification
C) Market timing
D) All of the above
Diversification
Explanation: Diversification can help an investor to build a portfolio that maximizes return for a given level of risk, by spreading their investments across different asset classes.
D.33 Investment Planning: Portfolio development and analysis
Which of the following strategies would be most appropriate for an investor who is nearing retirement and wants to reduce their exposure to risk?
A) Increase the allocation to growth stocks
B) Increase the allocation to high-yield bonds
C) Reduce the allocation to stocks and increase the allocation to bonds
D) Reduce the allocation to bonds and increase the allocation to stocks
Reduce the allocation to stocks and increase the allocation to bonds
Explanation: This approach can help an investor to reduce their exposure to risk by shifting their investments to less volatile asset classes.
D.33 Investment Planning: Portfolio development and analysis
Which of the following is a measure of an investment’s volatility relative to the market?
A) Beta
B) Standard deviation
C) Sharpe ratio
D) Alpha
Beta
Explanation: Beta is a measure of an investment’s volatility relative to the market. A beta of 1 indicates that the investment has the same level of volatility as the market, while a beta of less than 1 indicates lower volatility and a beta of greater than 1 indicates higher volatility.
D.33 Investment Planning: Portfolio development and analysis
An investor has a portfolio of large-cap stocks and wants to add exposure to small-cap stocks. Which of the following strategies would be most appropriate?
A) Buy individual small-cap stocks
B) Invest in a small-cap stock mutual fund
C) Purchase small-cap stock options
D) All of the above
Invest in a small-cap stock mutual fund
Explanation: This approach can provide the investor with exposure to a diversified portfolio of small-cap stocks, which can help to reduce the risk of investing in any individual small-cap company.
D.33 Investment Planning: Portfolio development and analysis
Which of the following factors is most likely to influence an investor’s investment horizon?
A) Age
B) Income level
C) Risk tolerance
D) All of the above
Age
Explanation: Age is an important factor that can influence an investor’s investment horizon, as younger investors may have a longer investment horizon and be more willing to take on risk than older investors.
D.33 Investment Planning: Portfolio development and analysis
«FIX»An investor has a portfolio of bonds and wants to add exposure to high-yield bonds. Which of the following strategies would be most appropriate?
A) Buy individual high-yield bonds
B) Invest in a high-yield bond mutual fund
C) Purchase high-yield bond ETFs
D) All of the above
Invest in a high-yield bond mutual fund
Explanation: This approach can provide the investor with exposure to a diversified portfolio of high-yield bonds, which can help to reduce the risk of investing in any individual high-yield bond.
D.33 Investment Planning: Portfolio development and analysis
Which of the following strategies is most likely to reduce the risk of an investment portfolio?
A) Investing in a single stock
B) Investing in a mutual fund
C) Investing in a commodity futures contract
D) Investing in a currency ETF
Investing in a mutual fund
Explanation: Investing in a mutual fund can help to reduce the risk of an investment portfolio by providing exposure to a diversified portfolio of stocks or other asset classes.
D.33 Investment Planning: Portfolio development and analysis
An investor is interested in adding exposure to emerging markets to their portfolio. Which of the following strategies would be most appropriate?
A) Buy individual emerging market stocks
B) Invest in an emerging market stock mutual fund
C) Purchase emerging market bond ETFs
D) All of the above
Invest in an emerging market stock mutual fund
Explanation: This approach can provide the investor with exposure to a diversified portfolio of emerging market stocks, which can help to reduce the risk of investing in any individual emerging market company.
D.33 Investment Planning: Portfolio development and analysis
Which of the following is a measure of an investment’s risk-adjusted return?
A) Beta
B) Standard deviation
C) Sharpe ratio
D) Alpha
Sharpe ratio
Explanation: The Sharpe ratio is a measure of an investment’s risk-adjusted return, taking into account the investment’s volatility and the risk-free rate of return.
D.33 Investment Planning: Portfolio development and analysis
An investor has a portfolio of stocks and bonds and wants to add exposure to real estate. Which of the following strategies would be most appropriate?
A) Buy individual real estate properties
B) Invest in a real estate mutual fund
C) Purchase real estate investment trusts (REITs)
D) All Of the above
All Of the above
Explanation:All the options provided can give an investor exposure to real estate, but they vary in terms of management intensity, liquidity, and diversification:
Buy individual real estate properties: This method provides direct exposure to real estate but requires active management (like dealing with tenants, maintenance, etc.) and substantial capital. It is also the least liquid option.
Invest in a real estate mutual fund: These funds pool together money from many investors to invest in a diversified portfolio of real estate-related assets. They provide diversification and professional management but might come with management fees.
Purchase real estate investment trusts (REITs): REITs are companies that own, operate, or finance income-producing real estate. They offer a way to invest in real estate without having to buy property and are traded on stock exchanges, providing liquidity and dividend income.
Thus, depending on the investor’s risk tolerance, capital availability, desired level of involvement, and liquidity needs, any of the strategies could be appropriate.
D.33 Investment Planning: Portfolio development and analysis
Which of the following is a measure of an investment’s risk relative to its benchmark?
A) Beta
B) Standard deviation
C) Sharpe ratio
D) Alpha
Beta
Explanation: Beta is a measure of an investment’s risk relative to its benchmark, with a beta of 1 indicating the same level of risk as the benchmark.
D.33 Investment Planning: Portfolio development and analysis
An investor has a portfolio of stocks and wants to add a broad exposure to commodities. Which of the following strategies would be most appropriate?
A) Buy individual commodities
B) Invest in a commodity mutual fund
C) Purchase commodity futures contracts
D) All of the above
Invest in a commodity mutual fund
Explanation: This approach can provide the investor with exposure to a diversified portfolio of commodities, which can help to reduce the risk of investing in any individual commodity.
D.33 Investment Planning: Portfolio development and analysis
Maria has $25,000 she wants to invest from her portfolio into fixed income securities. Her primary goals are to ensure the principal remains safe, earn a modest income, and have an opportunity to offset inflation over time. Which of the following would be the most appropriate investment choice for Maria?
A) Municipal bonds
B) Junk corporate bonds
C) Long-term zero coupon bonds
D) Treasury inflation-protected securities (TIPS)
Treasury inflation-protected securities (TIPS)
Explanation: TIPS are U.S. government securities designed to provide protection against inflation. The principal value of TIPS rises with inflation and falls with deflation. Maria’s objectives of safety of principal, modest current income, and a chance to offset cost-of-living increases align with the features of TIPS. While the other options might meet some of her goals, TIPS directly addresses all of them, making it the most suitable choice.
D.33 Investment Planning: Portfolio development and analysis
Sarah is a 29-year-old lawyer who falls into the 35% marginal tax bracket. She has already set up a sufficient emergency fund and possesses a moderate risk tolerance. She now has $15,000 she wishes to invest for a period of 10 years. Given the options below, which investment would be the most suitable for Sarah?
A) Municipal bond funds with a 2.5% average 10-year annual total investment return
B) Growth common stock fund with a 6.5% average 10-year annual total investment return
C) International stock fund with a 9% average 10-year annual total investment return
D) A blue chip common stock with an 8.5% average 10-year annual total investment return
Municipal bond funds with a 2.5% average 10-year annual total investment return.
Explanation: Even though the municipal bond funds offer a lower return compared to the other options, they are typically exempt from federal income taxes. For Sarah, who is in the 35% marginal tax bracket, the tax-adjusted return of the municipal bond fund might be more attractive than the other options. When considering her risk tolerance and the fact that she won’t be paying federal taxes on the returns from the municipal bond funds, this option may be the most suitable for her. However, a comprehensive financial analysis would be required in real-world situations to ensure the suitability of the investment choice.
D.33 Investment Planning: Portfolio development and analysis
