Review Investment Recommendations: portfolio management styles/techniques

A customer is dollar cost averaging by investing $400 per month into a mutual fund. Over 4 months, the customer has made purchases at $13 per share, $10 per share, $8 per share, and $9 per share. By using this method, the customer has an average cost per share that is how much lower than the average price per share?

$.32 The average cost per share is: $1600/165.213 shares = $9.68 per share. The average price per share is: $13 + $10 + $8 + $9 = $40 / 4 = $10 per share. Thus, the average cost is $.32 lower than the average price per share. Finally, note that mutual funds can issue fractional shares.

A portfolio manager generates a 15% rate of return on an "aggressive growth" portfolio compared to a 13% rate of return on the benchmark portfolio and a 10% rate of return on the Standard and Poor's 500 index over the same period. The passive rate of return on the portfolio is:

13%

A portfolio manager generates a 10% rate of return on a "small cap" portfolio, compared to an 8% rate of return on the benchmark portfolio and a 6% rate of return on the Standard and Poor's 500 index over the same period. The active rate of return on the portfolio is:

2%

A portfolio manager generates a 20% rate of return on a "small cap" portfolio, compared to a 15% rate of return on the benchmark portfolio and a 10% rate of return on the Standard and Poor's 500 index over the same period. The active rate of return on the portfolio is:

5%

Mid Cap:

Any company whose market cap is between $2 billion and $10 billion

Small Cap

Any company whose market cap is between $300 million and $2 billion

Micro Cap

Any company whose market cap is less than $300 million

Large Cap:

Any company whose market cap is over $10 billion

The typical asset classes are:

Cash/Money Market Instruments Fixed Income Securities Equities Commodities Real Estate

When looking at index funds, what is the "benchmark measure"?

Comparable index

What style of investing justifies paying a premium for companies that have good future potential?

Growth

Which TWO of following investments offer tax benefits? I Municipal bonds II REITs III Real Estate IV Index Funds

I and III

Which statements are TRUE? I Strategic portfolio management establishes the basic portfolio structure II Tactical portfolio management establishes the basic portfolio structure III Strategic portfolio management allows market timing adjustments to portfolio structure IV Tactical portfolio management allows market timing adjustments to portfolio structure

I and IV

A money market fund would include which of the following in its portfolio? I Treasury Bills II CDs III Guaranteed repurchase agreements IV Treasury Bonds

I, II, III

The Russell 2000 Index includes stocks traded in which of the following markets? I NYSE II AMEX (NYSE American) III NASDAQ

I, II, III All U.S. companies listed on the NYSE, AMEX (NYSE American) or NASDAQ are considered for inclusion in the Russell 2000 Small Cap Index with a few exceptions, including the minimum price of $1.00; trading volumes; and other various factors.

An IAR has constructed a buy and hold bond portfolio. The major factors to consider are: I selecting bonds that will give superior performance II making sure all of the bonds have a high credit rating III choosing bonds that are not callable IV choosing bonds from differing issuers

II and III

Buy and hold is an appropriate strategy when investing in: I stocks II stock mutual funds III stock exchange traded funds IV stock options

II and III

Market Capitalization of a company is determined by:

Market Value per share x Outstanding shares

A portfolio that is rebalanced annually is considered to be:

Passive

Which of the following indexes is the most widely quoted measure of the overall performance of small to mid cap company shares?

Russell 2000 Index

Changing the mix of a portfolio that has been structured to meet specific financial goals is called:

Strategic allocation

Timing is the important factor in which portfolio management strategy?

Tactical allocation

The management styles are

active (manager selects the specific investments) passive (manager uses index funds as the investment vehicles)

A passively managed index fund, to compensate for a negative tracking error, would:

actively manage a portion of its portfolio

A Statement of Investment Policy prepared for distribution to a client that purchases asset allocation services covers all of the following EXCEPT: compensation of the investment manager for providing either active or passive portfolio management; customer's investment objectives financial needs and financial goals; guidelines regarding investments that are permitted and those that are prohibited; guidelines regarding investment diversification or concentration;

compensation of the investment manager for providing either active or passive portfolio management

A portfolio manager who believes that an extremely large short interest in NYSE listed issues is bullish would be called a:

contrarian

An Investment Adviser Representative (IAR) has developed an investment strategy for a client. Before the actual strategy is implemented, a catastrophe occurs that jolts the financial markets; and it is apparent that the initial strategy, if implemented, would be adversely affected. The IAR should:

develop another plan

An individual that invests a constant dollar amount at regular time intervals over a long-term investment time horizon is:

dollar cost averaging

A money manager that employs momentum investing makes investment decisions based on the:

earnings trends of the company

An index fund manager, in order to meet its investment objective, attempts to:

exceed the underlying index's return by slightly overweighting securities that he or she expects to outperform the market to cover the fund's expenses

A client might not wish to invest his or her funds in a single index fund because the client:

gives up the ability to allocate funds among differing asset classes

a growth stock would have a

high P/E ratio and a low dividend payout ratio.

Active asset managers select investments based primarily upon:

inefficient market pricing of the investment

Contingent bond portfolio immunization:

is an investment approach where an active fund manager will switch to a defensive strategy if the portfolio falls below a predetermined point

Dollar cost averaging is used most often by:

mutual fund investors

A bond investment strategy that minimizes interest rate risk by adjusting the portfolio duration to match the client's investment time horizon is called:

portfolio immunization

If one asset class greatly underperforms another class in an asset allocation plan, the portfolio must be:

rebalanced

"Passive/Active;

rebalanced annually and actively managed

Passive/Passive

rebalanced annually and invested in index funds

"Active/Active;"

rebalanced monthly and actively managed

Active/Passive

rebalanced monthly and invested in index funds

the use of index funds as investment vehicles for asset classes

reduces market rate risk and reduces the standard deviation of return

A portfolio with an objective of global investing would:

spread its investments across both domestic and foreign securities, overweighting countries that are likely to experience faster rates of growth

The defining characteristic of global investing is the:

spreading of portfolio investments in a weighted manner in both domestic and foreign securities

If a bond fund manager employs a contingent immunization strategy, then the manager will:

switch from an active management strategy to a defensive strategy if asset values drop below a preset level

Strategic portfolio management is the selection of the:

target asset allocation for each asset class selected for investment

All of the following are advantages of "DRIPs" EXCEPT: additional shares of the issuer are purchased with no commission charges; the investor gets to decide the timing of additional stock purchases in that issuer; the investor can add to an existing position in that issuer without having to place an order through a broker; the process of buying additional shares via a DRIP allows for dollar cost averaging;

the investor gets to decide the timing of additional stock purchases in that issuer

A company that is listed on the NYSE has been in business for 30 years. It has a low P/E ratio and a consistent record of growing dividend payments from its large cash reserves. This would be categorized as a:

value stock

Tactical portfolio management is the selection of the:

variation permitted in target asset allocation for each asset class selected for investment