7 Reviewing Suitability: Portfolio Construction / Asset Allocation

A 30-year old single individual wishes to invest for retirement. He is employed at a high paying job at a stable employer, has a high risk tolerance and, has no current income needs from his investments. The BEST asset allocation to recommend to the customer is:

100% common stocks / 0% bonds

A customer, age 40, is concerned that the inflation rate is ready to explode, and wishes to invest funds to protect against the consequences of such an event. The BEST asset allocation mix to recommend to this customer is:

100% money market instruments

What portfolio construction is most appropriate for a retired doctor who is age 75?

25% common stock / 75% bonds

A customer is in the highest tax bracket and will possibly be subject to the AMT. Which of the following is the BEST investment recommendation?

5.40% Municipal bond that is not subject to the AMT

Which bond recommendation would be the MOST safe for an individual who seeks income that is free from federal income tax?

AA-rated revenue bond that is escrowed to maturity

A 60-year old retiree is in a very low tax bracket. He has a low risk tolerance and wishes to make an investment that will provide income. Which is the BEST recommendation?

Bank CD

Which bond portfolio where all investment is made up front would be MOST negatively affected by a sharp rise in interest rates?

Barbell

Which bond portfolio construction is based on a phase-in of purchases in installments over time?

Bullet

ABC stock is currently trading at an all-time high price of $150 per share. Your client contacts you about the stock, stating that he believes that the stock is ripe for a sell off after its next quarterly news announcement. He has $10,000 to use for a trade, but does not want to lose more than this amount. The BEST recommendation to the client is to:

Buy ABC Puts

A trader liquidates an exchange listed stock position and invests the proceeds in an exchange listed stock index fund. The trader has reduced which risk?

Capital Risk

Which of the diversification factors below will not reduce the non-systematic (credit) risk of a bond portfolio?

Coupon rate

A client with young children wants to invest $1,500 a year to pay for their ongoing educational expenses. Which recommendation would give the customer tax-free growth and tax-free distributions if these distributions are used to pay for educational expenses?

Coverdell ESA

When making a recommendation of corporate commercial paper to a customer, which risk is the MOST important consideration?

Credit risk

During a period of economic recession, the best performing asset classes are likely to be:

Defensive Stocks, Investment Grade Corporate Bonds

Which bond recommendation would be the LEAST safe for an individual who seeks income that is free from federal income tax?

Double-barreled bond

A younger female customer, in the highest tax bracket, already has a substantial investment portfolio that is invested in a balance of quality stocks and bonds. She wants an investment that will provide rapid asset growth and is willing to assume risk. The BEST recommendation would be:

Emerging markets fund

A young widow who works has a $750,000 net worth and a securities portfolio valued at $200,000. The current asset allocation of the portfolio is 80% equity securities; 8% fixed income securities; and 12% money market securities. In which circumstance should she consider reallocating her portfolio?

If she becomes unemployed during a recessionary period

A 67-year old woman has heavily invested her portfolio in growth securities. She realizes that as she approaches retirement, she needs to reallocate her portfolio for more income. However, she does not want to give up the growth objective. What would be the best investment recommendation for the funds that she will reallocate away from growth securities in her portfolio?

Income stocks and blue-chip stocks

An older female customer, in the lowest tax bracket, wants an investment that will provide asset growth for retirement. The best recommendation would be:

Index fund

Which statements are TRUE about asset classes and investment time horizons?

Interest bearing investments are the better choice for short term time horizons, Equity investments are the better choice for long term time horizons

A customer who is retired wants to select an investment that is marketable, and that provides the highest rate of return. The BEST choice would be to recommend:

Investment Grade Preferred Stock

A couple wants to invest for the college education of their 4 children. The children are 1, 5, 10, and 16 years old. What is the biggest suitability concern when making an investment recommendation?

Investment time horizon

Which bond portfolio where all investment is made up front would be LEAST negatively affected by a sharp rise in interest rates?

Ladder

During a period of economic expansion, the securities which will enjoy the greatest price appreciation are likely to be the:

Large Cap Growth Stocks, Investment Grade Corporate Bonds

A trader maintains a position in a small capitalization stock that has low trading volume. The trader has a high level of which of the following risks?

Liquidity risk

An investor believes that interest rates will be flat or falling into the future; and that prices may deflate. The MOST appropriate investment is:

Long term U.S. Government bonds

All of the following are suitable investments for an Individual Retirement Account EXCEPT:

Municipal Bonds

An IRA is allocated in large cap stocks, TIPS, foreign stocks and municipal bonds. When reviewing this portfolio, you should be MOST concerned about the:

Municipal bond holding

Louise is a 63-year old widow who has just retired. Louise owns her home, has no debt, and lives on Social Security payments, a pension, interest from her Certificates of Deposit, and a passbook savings account at a local bank. Two of her CDs are due to mature, and interest rates have dropped. Louise would like an investment that will provide more in monthly income than her CDs will at the new lower interest rate. She is concerned about meeting her expenses if her income drops, and she is risk averse. Her representative recommends ABC Equity Asset Allocation Fund to Louise. The fund has had outstanding performance over the past 3 years and is managed by a well-known money manager. Is the representative's recommendation suitable for this client?

No, the fund will not meet the client's objective of monthly income

Which bond recommendation is most suitable for a customer who wishes to avoid credit risk?

Pre-refunded bond

A customer with additional funds to invest seeks income, but thinks his portfolio is too heavily weighted in debt securities. The BEST recommendation to the customer is:

Preferred stocks

An 85-year old risk averse investor is not happy about the minimal return she is earning on her current investments. She is stressed about having enough income because her cost of living has been increasing by more than 10% annually. Her current portfolio composition consists of: 40% Money Market Fund 50% Bonds 10% Equities What changes should you suggest to her portfolio?

Reduce the Money Market Fund allocation by 30% (to 10%) and put the released funds in AAA-rated corporate bonds

A 60-year old man seeks an investment that gives safety, liquidity and income. The BEST recommendation would be:

Short-term Treasury Note

A growth investor would consider a company's:

Stock price appreciation rate

The setting of specific goals for an investment plan to be created for a customer is known as:

Strategic asset management

The overall economic performance of developing countries is expected to outpace that of the United States over the coming years. A customer that wishes to profit from this should receive which recommendation and accompanying risk disclosures?

The customer should be recommended an emerging markets fund, as long as the customer is willing to assume political risk and exchange rate risk

A customer has just received a $100,000 inheritance and wants to know what to do with the money until he decides how to use it. He thinks that he will make his decisions on what to do with the funds within 3 months. The BEST recommendation is for the customer to buy:

Treasury Bills

A customer who is retired wants to select an investment that is liquid, marketable, and that provides regular income. The BEST choice would be to recommend:

Treasury Notes

An investor has $50,000 that she wishes to invest for her child's college expenses, which the child starts next year. The most suitable recommendation to the client is to invest the funds in:

Treasury bills

Which asset classes have the greatest reinvestment risk?

U.S. Government Bonds, Investment Grade Corporate Bonds

Which type of account does NOT grow tax deferred?

UTMA account

Which of the following investment portfolios is MOST liquid?

a money market fund

Institutional portfolio managers have been allocating an increasing percentage of their funds to cash and cash equivalent positions. This is an indication that their market sentiment is:

bearish

A 60-year old man who is living on social security payments inherits $250,000. He seeks an investment that gives growth and income. The BEST recommendation would be to:

buy stocks and bonds

A customer, age 55, has a diversified portfolio of blue chip equity investments that pay a reliable cash dividend. The customer would like to retire at age 65. The customer has an expensive lifestyle, and even though he makes a good income, he uses the dividend income from his investments to pay his large monthly bills. The main problem that is evident here is that the:

customer is unable to take advantage of the compounding effect of reinvesting dividends

The time horizon to be used when constructing a portfolio for a person who will retire in a few years is the:

expected lifetime of that person

A new client has been employed as a manager at XYZ Corporation (NYSE listed) for the last 20 years and has a defined contribution pension plan at his employer that he has chosen to invest 100% in XYZ Common stock. The value of the pension plan is now $750,000. The customer is 7 years from retirement and has asked for advice about what steps he should take regarding his retirement account. As the adviser to the customer, your IMMEDIATE concern should be the:

fact that the customer is concentrated in one stock and lacks diversification in his portfolio

A client has a portfolio of $2,000,000 that consists of $600,000 of an Energy ETF; $600,000 of a Gold/Precious Metals ETF; $600,000 of a Uranium/Oil ETF and $200,000 of short term Treasury securities. This customer's investment objective is:

growth

An investment strategy where a higher price is paid for a stock based upon expected returns is:

growth investing

A 50-year old customer is in a very low tax bracket. She lives in a state that has one of the highest income tax rates. The customer is seeking income and preservation of capital. She has a 10 year investment time horizon. The best recommendation would be a 10 year maturity:

investment grade corporate bond

Municipal bonds are NOT a suitable recommendation for a(n):

investment in a qualified retirement plan

Growth investors:

make their investment decision based upon the market performance of the security

Active portfolio management is:

managing a portfolio to exceed the performance of a benchmark portfolio

Passive portfolio management is:

managing a portfolio to meet the performance of a benchmark portfolio

A retired married customer, age 73, has a portfolio that is invested in Blue Chip stocks and Treasury bonds that provides current income. The customer is concerned that he is paying a very high Federal and State combined income tax rate. An appropriate recommendation for this customer would be to diversify part of his portfolio into an investment in:

municipal bonds

When the investment performance of each asset class varies from the anticipated rate of return, the:

portfolio must be rebalanced by liquidating portions of overperforming classes and investing the proceeds in underperforming classes

When a manager liquidates securities out of one asset class and invests the proceeds in another asset class to maintain the desired asset allocation percentages as market prices move, the manager is:

rebalancing the portfolio

Diversification of a portfolio among asset classes:

reduces the variability of the rate of return over the investment time horizon

An investor has a long-term investment time horizon, no liquidity needs and is very risk averse. Your main concern when making a recommendation to this client is:

safety of principal

Value investors:

seek to find investments that are undervalued by the market

A customer owns 1,000 shares of XYZZ stock, purchased at $40 per share. The stock is now at $45, and the customer has become extremely bearish on the company. The client asks her representative for an "aggressive recommendation." The client should be told to:

sell 1,000 shares of XYZZ and buy 10 XYZZ Put Contracts

A customer owns 1,000 shares of XYZZ stock, purchased at $40 per share. The stock is now at $45, and the customer has become neutral on the stock, but believes that the stock still has good long term growth potential. The client asks her representative for a "conservative recommendation" that will give her a positive portfolio return. The client should be told to:

sell 10 XYZZ 45 Call Contracts

A wealthy, sophisticated investor with a high risk tolerance has just turned extremely bullish on the market. To profit from this, the BEST recommendation to the client would be to:

sell leveraged inverse ETFs

An 80-year old client lives on his social security payments that total $25,000 per year. 3 years ago, on the advice of the broker, he invested in a technology fund where he lost most of his assets. The remaining balance in his brokerage account is $17,000. The client has annual living expenses of $30,000 and a net worth of $128,000. The customer approaches a new broker to take over management of his account. The representative that receives the account should:

sell the holding in the account and invest the proceeds in a more conservative fund within the same family of funds

The target allocation for a specific asset class has been set at 20% of total assets under an asset allocation scheme. The manager is permitted to reduce this percentage to 15%; and can increase it to 25%; as he or she sees fit. The setting of the 20% target allocation is called:

strategic asset management

The target allocation for a specific asset class has been set at 20% of total assets under an asset allocation scheme. The manager is permitted to reduce this percentage to 15%; and can increase it to 25%; as he or she sees fit. If this action is taken by the manager, this is termed:

tactical asset management

A constant ratio investment plan requires:

that the same percentage amount be kept invested in equities

The parents of a high school student are planning to send the child to college in one year. The registered representative should recommend a portfolio that:

tiers Treasury notes over a 5-year time frame

Passive asset management is:

using index funds as the investments for each asset class