D.34 Investment strategies

Question 1

Which investment strategy is best suited for a retiree who desires steady income and capital preservation?

A) Growth Investing
B) Value investing
C) Income investing
D) Momentum investing

Answer 1

Income investing

Explanation: Income investing is the most suitable strategy for a retiree who desires steady income and capital preservation. Income investors prioritize investments that generate consistent returns through dividend payments, bond interest, and other forms of regular income.

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Question 2

An investor believes that the stock of a particular company is currently undervalued and expects it to appreciate over the next few years. Which investment strategy is most appropriate?

A) Growth investing
B) Value investing
C) Income investing
D) Momentum investing

Answer 2

Value investing

Explanation: Value investing is the most appropriate strategy for an investor who believes that the stock of a particular company is undervalued and expects it to appreciate over the next few years. Value investors look for stocks that are trading at a discount to their intrinsic value and have the potential to increase in price over time.

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Question 3

A new investor with a long-term investment horizon and high risk tolerance wants to invest in stocks. Which investment strategy is most appropriate?

A) Growth investing
B) Value investing
C) Income investing
D) Momentum investing

Answer 3

Growth investing

Explanation: Growth investing is the most appropriate strategy for a new investor with a long-term investment horizon and high risk tolerance who wants to invest in stocks. Growth investors look for companies with high potential for future growth, even if they are not currently profitable. These investors are willing to take on higher risk in exchange for the potential for greater returns.

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Question 4

An investor is looking to make short-term gains by investing in stocks that have recently experienced strong price increases. Which investment strategy is most appropriate?

A) Growth investing
B) Value investing
C) Income investing
D) Momentum investing

Answer 4

Momentum investing

Explanation: Momentum investing is the most appropriate strategy for an investor looking to make short-term gains by investing in stocks that have recently experienced strong price increases. Momentum investors believe that stocks that have recently performed well are more likely to continue performing well in the short-term.

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Question 5

Jane is looking to invest her money in a way that maximizes her returns while minimizing her risk. Which of the following investment strategies is best suited for her?

A) Day trading
B) Long-term investing
C) Speculative investing
D) Options trading

Answer 5

Long-term investing

Explanation: Long-term investing. Long-term investing is a strategy that involves holding onto investments for a period of several years or more. This is a good strategy for Jane, as it allows her to benefit from the long-term growth potential of the markets while minimizing the risk of short-term volatility. Day trading, speculative investing, and options trading are all much riskier strategies that are not suitable for most investors.

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Question 6

John is looking to invest his money in a way that provides a steady stream of income. Which of the following investment strategies is best suited for him?

A) Growth investing
B) Value investing
C) Dividend investing
D) Momentum investing

Answer 6

Dividend investing

Explanation: Dividend investing is a strategy that involves investing in companies that pay regular dividends to shareholders. This is a good strategy for John, as it provides him with a steady stream of income from his investments. Growth investing and momentum investing are more focused on capital appreciation, while value investing is focused on finding undervalued companies.

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Question 7

Maria is looking to invest her money in a way that provides the highest possible returns, but she is willing to take on a higher level of risk to achieve this. Which of the following investment strategies is best suited for her?

A) Growth investing
B) Value investing
C) Dividend investing
D) Fixed-income investing

Answer 7

Growth investing

Explanation: Growth investors look for companies with high potential for future growth, even if they are not currently profitable. These investors are willing to take on higher risk in exchange for the potential for greater returns.

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Question 8

You are advising a client who has a low-risk tolerance and wants to invest in a diversified portfolio of fixed-income securities. Which investment strategy would be most appropriate for this client?

A) Value investing
B) Growth Investing
C) Dollar-cost averaging
D) Buy-and-hold

Answer 8

Buy-and-hold

Explanation: Buy-and-hold. This strategy involves buying a diversified portfolio of securities and holding them for the long term, without attempting to time the market. This is a suitable strategy for a client with a low risk tolerance who is seeking stable returns.

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Question 9

A client wants to invest in a single stock that they believe will perform well in the future. Which investment strategy would be most appropriate for this client?

A) Value investing
B) Growth Investing
C) Dollar-cost averaging
D) Index investing

Answer 9

Growth Investing

Explanation: This strategy involves investing in stocks of companies that are expected to grow at a faster rate than the market average. This strategy is suitable for clients who are willing to take on higher risk in exchange for potentially higher returns.

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Question 10

A client is interested in investing in the stock market but is worried about market volatility. Which investment strategy would be most appropriate for this client?

A) Value investing
B) Growth investing
C) Dollar-cost averaging
D) Asset allocation

Answer 10

Dollar-cost averaging

Explanation: This strategy involves investing a fixed amount of money at regular intervals, regardless of market conditions. This strategy can help reduce the impact of market volatility and can be suitable for clients who want to invest in the stock market but are worried about timing the market.

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Question 11

An investor is looking to maximize their returns in a short period of time. Which investment strategy is best suited for this goal?

A) Value investing
B) Growth Investing
C) Dividend Investing
D) Index investing

Answer 11

Growth investing

Explanation: Growth investing focuses on investing in companies with high potential for growth, which can lead to significant returns in a short period of time.

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Question 12

An investor is looking to minimize their risks and generate steady income. Which investment strategy is best suited for this goal?

A) Value investing
B) Growth investing
C) Dividend investing
D) Index investing

Answer 12

Dividend investing

Explanation: Dividend investing focuses on investing in companies that pay out regular dividends, which can provide a steady stream of income. This strategy can also help to minimize risk by investing in established companies with a track record of paying dividends.

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Question 13

An investor is looking to invest in a variety of assets to reduce overall risk. Which investment strategy is best suited for this goal?

A) Value investing
B) Growth investing
C) Asset allocation
D) Market timing

Answer 13

Asset allocation

Explanation: Asset allocation involves investing in a mix of asset classes, such as stocks, bonds, and cash, to reduce overall risk. This strategy helps to ensure that a single asset class does not dominate the portfolio and cause large losses.

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Question 14

An investor believes that certain stocks are undervalued and will increase in price over time. Which investment strategy is best suited for this belief?

A) Value investing
B) Growth investing
C) Dividend investing
D) Index investing

Answer 14

Value investing

Explanation: Value investing focuses on investing in companies that are undervalued by the market and have the potential to increase in price over time. This strategy requires a deep understanding of a company’s financials and its prospects for future growth.

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Question 15

Which investment strategy is most appropriate for someone in their 20s?

A) Investing solely in bonds
B) Investing solely in stocks
C) Diversifying their portfolio with a mix of stocks and bonds
D) Investing in real estate

Answer 15

Diversifying their portfolio with a mix of stocks and bonds

Explanation: This is the most appropriate investment strategy for someone in their 20s because it balances risk and potential returns. Stocks offer higher potential returns, but are riskier, while bonds offer lower potential returns but are less risky. By investing in both, the investor can take advantage of potential gains in the stock market while still having a safety net in bonds.

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Question 16

What is dollar-cost averaging?

A) Investing a fixed amount of money in the stock market each year
B) Investing a fixed amount of money in the stock market each month
C) Investing a variable amount of money in the stock market each year
D) Investing a variable amount of money in the stock market each month

Answer 16

Investing a fixed amount of money in the stock market each month

Explanation: Dollar-cost averaging is a strategy where an investor invests a fixed amount of money at regular intervals, typically monthly, regardless of the current price of the stock. This helps to mitigate the risk of investing a large sum of money at the wrong time and allows the investor to take advantage of potential market fluctuations.

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Question 17

Which of the following is a passive investment strategy?

A) Stock picking
B) Market timing
C) Index fund investing
D) Short selling

Answer 17

Index fund investing

Explanation: Passive investment strategies involve investing in a diversified portfolio with the intention of holding the investments for the long term. Index fund investing involves investing in a portfolio that tracks a broad market index, such as the S&P 500, with the intention of achieving market returns. This strategy does not involve stock picking or market timing, which are active investment strategies.

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Question 18

Which investment strategy is best for someone with a high risk tolerance?

A) Investing solely in bonds
B) Investing solely in stocks
C) Diversifying their portfolio with a mix of stocks and bonds
D) Investing in commodities

Answer 18

Investing solely in stocks

Explanation: Stocks offer the highest potential returns, but are also the riskiest investment. Someone with a high risk tolerance is willing to accept this risk in exchange for the potential for higher returns. Investing solely in bonds or commodities would be too conservative for someone with a high risk tolerance.

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Question 19

Which of the following is an advantage of investing in real estate?

A) High liquidity
B) Low barrier to entry
C) Potential for passive income
D) Limited tax benefits

Answer 19

Potential for passive income

Explanation: Real estate can be a good investment for someone in their 20s because it has the potential to provide passive income through rental properties. Real estate also offers tax benefits, such as mortgage interest deductions, and the potential for capital gains. However, real estate is not a liquid investment and requires a significant amount of money to get started, making it a high barrier to entry investment.

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Question 20

Which of the following investment strategies is most appropriate for someone nearing retirement?

A) Investing solely in stocks
B) Investing solely in bonds
C) Diversifying their portfolio with a mix of stocks, bonds, and other assets
D) Investing in high-risk, high-reward assets

Answer 20

Diversifying their portfolio with a mix of stocks, bonds, and other assets

Explanation: As an investor nears retirement, it is important to strike a balance between risk and reward. A diversified portfolio can help an investor achieve this by offering exposure to a variety of assets with different levels of risk and return potential.

D.34 Investment strategies

Question 21

What is a target-date fund?

A) A fund that invests in a specific industry sector
B) A fund that adjusts its investment mix to become more conservative as its target date approaches
C) A fund that invests solely in foreign equities
D) A fund that invests in short-term, high-yield bonds

Answer 21

A fund that adjusts its investment mix to become more conservative as its target date approaches

Explanation: A target-date fund is designed to help investors with a specific retirement date in mind. As the target date approaches, the fund automatically shifts its allocation to become more conservative, reducing the risk exposure for the investor.

D.34 Investment strategies

Question 22

At what life stage might an investment strategy with a greater focus on growth be appropriate?
A) Early career
B) Mid-career
C) Pre-retirement
D) Retirement

Answer 22

Early career

Explanation: During the early stages of a client’s career, they may have a longer investment horizon and be able to take on more risk, making an investment strategy with a greater focus on growth more appropriate. As they approach retirement, they may want to shift their investment strategy towards one with a greater emphasis on income generation and capital preservation.

D.34 Investment strategies

Question 23

Which of the following investment strategies may be most appropriate for a client in the pre-retirement phase?

A) Value investing
B) Growth investing
C) Balanced investing
D) International investing

Answer 23

Balanced investing

Explanation: Clients in the pre-retirement phase may want to balance their need for growth with a focus on capital preservation as they approach retirement. A balanced investment strategy, which combines both stocks and bonds, may be an appropriate approach to achieve this balance.

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Question 24

What investment strategy may be appropriate for a client who has a special needs child and wants to ensure they are taken care of financially in the event of their death?

A) Annuities
B) Life insurance
C) Real estate investment trusts
D) Hedge funds

Answer 24

Life insurance

Explanation: Life insurance can provide financial support for a special needs child in the event of a parent’s death, making it an important consideration for clients in this situation.

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Question 25

Which investment strategy may be most appropriate for a client who is retired and needs to generate income from their investments? A) Value investing B) Growth investing C) Dividend investing D) Real estate investment trusts

Answer 25

Dividend investing ***Explanation***: Clients in retirement may need to generate income from their investments, making a dividend investing strategy an appropriate approach. Dividend stocks can provide a regular stream of income, while still allowing for potential growth over time. ## Footnote *D.34 Investment strategies*

Question 26

Lisa is a financial planner and has a client named Maria. Maria approached Lisa for assistance in evaluating an investment in fixed-income securities. Given Maria's very low risk tolerance, her main investment objectives are to achieve a high after-tax total return and to preserve her capital. It's worth noting that Maria resides in a state with no income tax, and her marginal federal tax rate stands at 24%. She forecasts inflation to average around 2.5% over the subsequent two decades. Considering the aforementioned details, which two securities from the options provided below, each having a 10-year maturity, would be the MOST appropriate to fulfill Maria's investment objectives? Note: Out of the options, only the municipal general obligation bonds are insured. - Municipal general obligation bonds with a coupon rate of 3.85% - Municipal revenue bonds with a coupon rate of 4.25% - Treasury bonds with a coupon rate of 4.5% - Treasury inflation-protected securities with a coupon rate of 2.00% A) Municipal general obligation bonds and municipal revenue bonds B) Municipal general obligation bonds and U.S. Treasury inflation-protected securities C) Municipal revenue bonds and U.S. Treasury bonds D) Municipal revenue bonds and U.S. Treasury inflation-protected securities.

Answer 26

Municipal general obligation bonds and U.S. Treasury inflation-protected securities. ***Explanation***: Maria's main objectives are a high after-tax total return and capital preservation. Given that she is in the 24% tax bracket and lives in a state without an income tax, she would benefit from the tax-exempt status of municipal bonds. Among the municipal bonds, the general obligation bonds are insured, adding an extra layer of security that aligns with her low risk tolerance. Furthermore, since she's concerned about inflation averaging 2.5% over the next 20 years, the Treasury inflation-protected securities (TIPS) would be appropriate. TIPS provide protection against inflation, as they adjust with the Consumer Price Index. The 2.00% real rate, when combined with the anticipated inflation rate, will likely provide a return that aligns with her objectives. ## Footnote *D.34 Investment strategies*

Question 27

XYZ Corp's stock is currently valued at $48. Jordan anticipates that due to an upcoming revelation about a potential major acquisition, the stock price for XYZ Corp has an even chance of either surging or plummeting in the near future. Which of the following investment tactics is most suitable for Jordan? A) Purchase a $50 put and buy a $50 call. B) Write a $55 call and buy a $45 call. C) Write a $60 put and write a $60 call. D) Short sell at $55 and buy a call at $45.

Answer 27

Purchase a $50 put and buy a $50 call. ***Explanation***: This strategy is called a "straddle." By buying both a put and a call at the same strike price, Jordan is positioned to profit regardless of whether the stock price rises or falls dramatically. This approach is particularly suitable when anticipating a significant price movement in either direction but being uncertain about the direction. In this case, Jordan would profit from the put if the stock price decreases significantly and from the call if the stock price increases substantially. ## Footnote *D.34 Investment strategies*

Question 28

Samantha, a new client, approaches Daniel, a CFP® professional, seeking advice on her investment strategy. She has a lump sum of $100,000 and is unsure whether to invest it all at once or spread it out over time. Daniel recommends dollar cost averaging for her situation. What could be the primary reason for this recommendation? A) To instill a habit of disciplined investing. B) To capitalize on a continuously rising market. C) To maximize returns while minimizing market risk. D) To consistently surpass the returns of a lump-sum investment strategy.

Answer 28

To instill a habit of disciplined investing. ***Explanation:*** Dollar cost averaging is a strategy in which an investor divides the total amount to be invested across periodic purchases of a target asset in an effort to reduce the impact of volatility on the overall purchase. The main benefit of this strategy is to encourage disciplined investing, regardless of market conditions. While it might provide some level of protection against market fluctuations, it's not necessarily designed to capitalize on a rising market, guarantee maximum returns, or consistently outperform lump-sum investing. ## Footnote *D.34 Investment strategies*