series 7 -- suitability

A customer has the following investment mix: 25%Growth Stocks 25%U.S. Government Bonds 25%Investment Grade Corporate Bonds 25%Speculative Stocks Which asset classes have the greatest reinvestment risk? I Growth Stocks II U.S. Government Bonds III Investment Grade Corporate Bonds IV Speculative Stocks

II and III (Reinvestment risk is associated with fixed income securities that make periodic payments to investors. Bond interest payments are made every 6 months, and the investor that receives these will "reinvest" them into additional bond holdings. If interest rates are falling over the long term, then these interest payments are reinvested at lower and lower rates, resulting in an "averaging down" of the portfolio's rate of return)

Which of the following investment portfolios is MOST liquid?

a money market fund

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

bullet

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

buy leveraged inverse ETFs

The use of index funds as investment vehicles for asset classes increases:

diversification

A 60-year old customer has a 401(k) account with your firm that has $280,000, mainly invested in growth mutual funds. The customer has an elderly widowed aunt who has died, and her estate attorney has contacted him, notifying him that he has been left $100,000 as an inheritance. The customer is single and has an annual income of $100,000 per year. He wants to use the inheritance to buy a retirement home, which he expects to do in 7 years. Over this investment time horizon, the general expectation is that interest rates will rise. The best recommendation to the customer is to invest the $100,000 in:

money market instruments (If the customer were to invest in money market instruments with very short term maturities, then as they matured (say yearly), the proceeds would be reinvested at higher and higher rates. Thus, the customer would capture higher interest income as rates rise.)

An elderly investor has a short-term investment time horizon, is very concerned about loss of liquidity and is very risk averse. Your main concern when making a recommendation to this client is:

preservation of capital

Which of the following investments is LEAST liquid?

private placements

Diversification of a portfolio among asset classes:

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

A growth investor would consider a company's:

stock price appreciation rate

A constant ratio investment plan requires:

that the same percentage amount be kept invested in equities

Customers who actively trade their listed stock portfolios should have a strong understanding of:

timing risk

A 60-year old man is looking to create a portfolio that will provide current income and preservation of capital. Which of the following portfolios would be the BEST recommendation to the client?

treasury bills, a money market mutual fund, and bank CDs

Passive asset management is:

using index funds as the investments for each asset class

An older customer, age 63, who is in the lowest tax bracket, seeks an investment that will give him an income stream. The BEST recommendation would be:

AAA corporate bond (Because the customer is in a low tax bracket, you would not recommend the municipal bond. Most variable annuity separate accounts are invested in equities for growth to supplement other forms of retirement income. Because they are equity funds, they do not give much of an income stream. The CD and the AAA Corporate bond both provide income, which is the stated objective. However, the AAA corporate bond is top-rated and will give a higher income stream than a CD.)

A 65-year old man is retired and living on social security. He is married and his wife does not work. The client has inherited a small amount of money that he wishes to invest. What should you recommend as an investment?

CDs (Since this is a retired individual living on social security, he really does not have investment funds that can be put into risky assets. The safest asset given is CDs, which would provide extra income and safety of principal. You might argue that a bond fund could be recommended, but the NAV of a bond fund will decline in a rising interest rate environment, so there is the risk of loss of principal. This is not the case with a CD)

A customer, age 69, has never invested in securities. She is retired with no dependents, living on a fixed pension of $35,000 per year. She has a savings account with $160,000 and her home is fully paid. She desires to supplement her retirement income, assuming minimal risk. The BEST recommendation would be for the customer to invest $100,000 of her cash savings into a(n):

CMO planned amortization class tranche

Diversification among multiple asset classes reduces the: I market risk of the portfolio II marketability risk of the portfolio III standard deviation of portfolio returns

I and III only (Diversification of a portfolio reduces market risk; and also reduces the variability of investment returns. It does not affect marketability risk - that is, how difficult is it to liquidate given position in the portfolio.)

Which of the following are appropriate investment strategies for a client with a 20-year time horizon? I Holding less cash II Holding more stock III Holding less bonds

I, II, III (In such a case, equity securities are the best investment, earning the highest returns historically over long time periods. Cash would be least suitable; bonds are not much better over the long-term, especially if there is inflation. The best portfolio would be one predominantly holding stocks.)

Which type of account does NOT grow tax deferred?

UTMA account

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 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

What is the BEST investment recommendation for an individual in a high tax bracket who is risk averse?

municipal bonds

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 won't meet the client's objective of monthly income

A 30-year old customer who has two young children wishes to make an investment that will provide for their college tuition. Which would be the BEST recommendation?

purchase treasury STRIPS yearly in custodian accounts for the children (To provide for a child's college education, the purchase of zero-coupon obligations makes sense, since income is not needed until many years into the future. They can be purchased in a custodial account for the benefit of the child. Treasury STRIPS are zero coupon Treasury obligations, and hence are extremely safe. This is the best choice. IRA accounts can only be established based on a person's earned income - which a young child would not normally have. Purchasing a variable annuity for the child makes no sense, since distributions before age 59 1/2 are subject to a penalty tax. The purchase of income bonds is not too bright, since they only pay income if a corporation meets target earnings levels. These are extremely risky investments.)

A 60-year old customer desires an investment that will provide for retirement income when she reaches age 65. The customer is able to invest $1,000 per month over that time period. Which of the following recommendations is most suitable?

the purchase of a variable annuity contract (A variable annuity contract places no dollar limit on contributions; and the income earned on investments is tax deferred during the accumulation period. Thus, the customer would be allowed to contribute $12,000 per year; and would receive the benefit of the tax deferred build up. At age 65, she could annuitize and convert the value of the account into an annuity contract that would make payments for her life. This is the best choice offered.)

A customer calls her registered representative and says the following: "I'm looking for a safe investment for $100,000 that I have, that will give me a moderate level of income. I have 2 children, ages 12 and 13, and I will need to use these monies to pay for their college education, starting in 5 years." All of the following recommendations would be suitable EXCEPT:

GNMA pass-through certificates with 5, 6, 7, 8, 9 year maturities

If a portfolio manager's market sentiment is bearish, then which of the following are appropriate actions? I Cash positions will be decreased II Cash positions will be increased III Investments in stock positions will be decreased IV Investments in stock positions will be increased

II and III (From a "market sentiment" standpoint, a portfolio manager will increase his or her cash position; and decrease the portion of funds invested in securities, when he or she is bearish on the market. Conversely, if the manager is bullish, he or she will decrease the cash position and increase the invested portion of the portfolio.)

Customer Q, age 40, is married with 3 young children. He earns $120,000 per year and has $10,000 of liquid assets to invest. The customer has no current portfolio, but does own his home, worth $400,000 against which there is a $200,000 mortgage. The customer informs you that his father just died, leaving him an inheritance of $150,000. He wishes to invest the money so that he can retire in 20 years, using the investment's income. The BEST recommendation to the customer is to invest the $150,000 in:

a low-load variable annuity separate account w a growth objective

A potential client is 81 years old and has asked his representative for recommendations of speculative "Dot Com" stocks. The customer has a broadly diversified bond and high dividend paying stock portfolio that provides retirement income, in addition to the customer receiving social security. The customer is concerned that his purchasing power is decreasing and wishes to allocate an increased portion of his portfolio to aggressive growth stocks. The BEST recommendation for this customer is to:

allocate a portion of the customer's portfolio to "Dot Com" stocks that will not reduce the customer's retirement income below the amount needed for comfortable living

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 (Thus, we are left with bank certificates of deposit as the only viable choice. They are low risk and will provide income with a higher "after-tax" return for a person in a low tax bracket than equivalent maturity municipal investments.)

A 65-year old widow that is in a low tax bracket and that has a low risk tolerance wishes to make an investment that will provide income. Which is the BEST recommendation?

bank certificates of deposit (This elderly widow is in a low tax bracket and seeks income. Growth stocks and emerging markets stocks do not provide income; rather, they provide capital gains. Municipal bonds are not appropriate for a low tax bracket investor, since the bonds are exempt from Federal income tax, and the market interest rate is lower than that for taxable investments because of this. Municipal bonds are only suitable for high tax bracket investors, where the exemption from federal tax has real value. Thus, we are left with bank certificates of deposit as the only viable choice. They are low risk and will provide income with a higher "after-tax" return for a person in a low tax bracket than equivalent maturity municipal investments.)

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

barbell (A barbell portfolio only has 2 maturities - a very short term and a very long term - say 2 years and 20 years, for an average life around 10 years (actually 11 years here, but we are simplifying things). The longer term bonds give a higher yield but have higher interest rate risk. This risk is offset by the fact that the 2 year bonds will mature soon and the proceeds can be reinvested at higher rates. The big risk here is that long rates rise sharply as compared to short rates (a steepening of the yield curve). In this scenario, the loss on the long term bonds will be much greater than the fact that the short term bond proceeds can be reinvested in 2 years at somewhat higher rates.)

A customer has an existing portfolio that is mainly invested in high quality corporate bonds for stable income. As market interest rates have dropped, the customer's income has declined and she would like to reallocate part of the portfolio to corporate bonds that offer potential growth. The BESTrecommendation is to buy:

convertible debentures (Convertible bonds trade as equivalent to the common stock if the market price of the common rises above the conversion price. Thus, as the market price of the common rises, the convertible bond price will rise as well. This gives the customer the potential for growth.)

A customer in a low tax bracket has just inherited $10,000 and is looking for an investment that will provide current income and liquidity. The BEST recommendation is a:

corporate bond ETF (The Corporate Bond ETF is liquid because it is exchange traded, and it provides taxable income from its bond investments. Because the customer is in a low tax bracket, lower yielding tax-free municipal bond investments are not appropriate.)

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

coupon rate (To reduce non-systematic risk (meaning the risk that any one security may be a "bad" investment), diversification of a bond portfolio by choosing different issuers, different industries, different geographic issuer locations, and different maturities (since long term bonds give issuers longer time periods in which they can go broke) are all valid.)

A married couple has a teenage child who has expressed interest in going to a vocational school. They both work, have a moderate level of income and would like to save a modest amount each year for this purpose without the concern of paying taxes on annual account earnings. The best recommendation to this couple is to make an annual contribution to a(n):

coverdell ESA

A client, age 67, owns his own home free and clear. The customer has an annual income of $25,000, mainly from social security and interest on funds held in a bank savings account. The customer has never invested and is told by his nephew that the technology company that he works for is coming out with a hot new product that will really increase the company's stock price. The BESTrecommendation to be made to this client is to:

do nothing

A couple has 15 years to retirement. They currently have $100,000 to invest and have expressed a concern about inflation eroding their future retirement income. The BEST recommendation would be to:

dollar cost average by investing $3,000 a month into a single growth fund and choose automatic reinvestment of distributions (Using dollar cost averaging to invest in growth funds, spreading the investment over an approximate 3 year time frame would allow the couple to make their investment while minimizing "timing risk" - which is simply the risk of making an investment just before the market dumps. Furthermore, putting the money into 1 growth fund gets breakpoints (reduced sales charges) as the investment accumulates in the fund.)

A 45 year old investor has stated investment objectives of income and growth. Which mutual fund could be added to the customer's portfolio?

equity income fund (An equity income fund invests in stocks that pay dividends and that have growth potential. Fixed income securities provide income, but no growth, making Choices A and D incorrect. A sector fund invests in stocks in one industry or geographic area - the investment choices are not based on the investment objectives of this client)

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 young couple in a low tax bracket have 2 young children and they want to start saving for the kids' college education. The BEST recommendation would be:

growth funds

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

growth investing

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

ladder

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

pre-refunded bond (When a municipality pre-refunds its debt, it backs those bonds with escrowed U.S. Government and Agency securities, making the credit rating AAA. This is the safest bond of the choices offered, since it is backed by collateral.)

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 period

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 (Certificates of Deposit are non-negotiable - they are non-marketable, so this does not meet the client's needs. Preferred stock is marketable, but not as marketable as Treasury securities, making Treasury securities the better choice. So we are left with either a T-Bill or a T-Note. Treasury notes pay interest semi-annually; while Treasury Bills do not provide a regular income stream, so a T-Note is the better choice.)

A customer has a term loan that is maturing in 3 years in the amount of $100,000. The customer has the cash now, and wants to know the best investment to make for the 3 years until the loan payment is due. The BEST recommendation is to buy:

treasury notes maturing in 3 years

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 (Since this customer is in the highest Federal tax bracket (currently 37%), 37% of the return offered by taxable Treasury Bonds or Corporate Bonds would go to tax, and only 63% of the 6% return (3.78%) offered by these would be kept after-tax. Thus, the 5.40% or 5.60% tax-free municipal bonds are the best choices. Since this customer is possibly subject to the AMT (Alternative Minimum Tax), which adds back "tax preferences" to reported income and taxes the adjusted-up figure at a flat 26-28%, buying the bond that is NOT subject to the AMT is the way to go!)

The time horizon to be used when constructing a portfolio to pay for college expenses for a person who is expected to start college in 10 years and finish college in 15 years is:

15 years (If a portfolio is being constructed to fund a person's college education, it must be able to provide income to pay for college until schooling is finished.)

A 25-year old man receives $50,000 and wants to retire at age 65 with an income of $1,500 per month from his investment portfolio. The adviser should invest:

25% in bonds and 75% in stocks

A single 30-year old investor has no current investments and $20,000 in a savings account. The customer earns $150,000 per year and has discretionary investment funds of $25,000 per year. Which of the following is an appropriate asset allocation for this customer?

30% aggressive growth fund, 30% emerging markets fund, 30% growth fund, 10% money market fund (A younger customer should be allocated more heavily into growth stocks)

What portfolio construction is most appropriate for a retired school teacher who is age 60?

40% common stock / 60% bonds

An individual who is 25 years from retirement has $500,000 to invest today. He is risk tolerant and is looking to withdraw $80,000 per year once he retires. Which asset allocation is BEST for this client?

50% stocks / 40% bonds / 10% cash

A young couple wishes to save $50,000 as the down payment on a new house that they plan to purchase in the next 6 months. Which of the following are suitable investment vehicles to recommend to the couple? I Money market funds II Bank certificates of deposit III Blue chip stocks IV Commercial paper

I, II, IV (This couple needs $50,000 cash in 6 months. Clearly, money market funds and bank certificates of deposit are suitable. Blue chip stocks are not suitable, since they are subject to market risk. Commercial paper is usually not marketed to individuals; it is mainly an institutional market. However, some corporations sell commercial paper directly to customers in minimum $10,000 units via their websites. This is another very safe short term investment, and is suitable.)

Which statements are TRUE about asset classes and investment time horizons? I Equity investments are the better choice for short term time horizons II Interest bearing investments are the better choice for short term time horizons III Equity investments are the better choice for long term time horizons IV Interest bearing investments are the better choice for long term time horizons

II and III

An elderly customer seeking extra income who has $100,000 to invest could be recommended which of the following? I The $100,000 purchase of a variable annuity II The $100,000 purchase of dividend paying blue chip stocks in a cash account against which calls are sold III The $200,000 purchase of dividend paying blue chip stocks at 50% margin in a margin account IV The $100,000 purchase of Treasury bonds

II and IV (The purchase of a variable annuity is not suitable for an elderly customer. The whole concept behind a variable annuity is that the product has time to build value on a tax deferred basis in the separate account prior to annuitization. An elderly customer needs the income now. Covered call writing is the most popular retail income strategy in a flat market, and is appropriate for conservative investors that are looking for extra income. The customer sells calls against stock that is already owned, getting premium income. This would be suitable. The margining of blue chip stock positions to "double up" on the amount of stock owned (since Regulation T margin is 50%) is not suitable because this does not come for free! The customer is borrowing the extra money to buy the new shareholding, using his existing stock as collateral, and he must pay interest on the loan. The interest charge will eat up any dividends that the stocks pay - so there goes his income. The purchase of Treasury bonds is suitable, since they provide current income and they are safe as it gets.)

A 25-year old single client has just started his own small business and is not covered by a retirement plan. He has $5,000 to invest and currently has a low level of income. He wishes to start saving for retirement. The BEST recommendation is a:

Roth IRA (Anyone with earned income can open an IRA. Because this individual is in a low tax bracket, a Roth IRA contribution, which is non-deductible, makes sense (there is no real benefit from making a deductible contribution to a Traditional IRA). With $5,000 to invest, this is within the $6,000 contribution limit for 2020. Earnings build "tax-free" in a Roth, and distributions taken at retirement age are non-taxable. Also remember that high-earners cannot open a Roth IRA. In contrast, if a Traditional IRA were opened, this individual would get a tax deduction (he is not covered by another qualified plan), but it would have little value because of his low tax bracket. Earnings would build tax deferred and when distributions are taken at retirement age, they would be taxable, so the Roth is the better deal.)

A customer, age 25, is looking to invest in securities with the objective of growth to protect against the effect of long term inflation on his portfolio's value. The customer believes that active asset management, along with its higher fees, is not worthwhile. Which recommendation is MOST suitable for this customer?

S&P 500 index fund (This customer is looking for long term growth, so common equities are an appropriate investment rather than long term bonds. Since the customer does not believe in active asset management, a passive approach is best - that is, an index fund that has very low ongoing fees)

A self-employed client has an annual income of $200,000 and is in a high tax bracket. He is not covered by a retirement plan and would like to make the maximum contribution to one to reduce his taxable income. He believes that he will be in a lower tax bracket once he retires. The BESTrecommendation is to contribute to a:

SEP IRA

A self-employed individual makes $200,000 per year. To which type of retirement plan can the maximum contribution be made?

SEP IRA

A smaller business with variable cash flow is looking to establish a pension plan for its 50 employees. It wants a plan that allows it to contribute the largest possible amount for its employees, but wants the flexibility to reduce contributions in lean years. The BEST recommendation is a:

SEP IRA (A SEP IRA is a Simplified Employee Pension IRA, which is easier to set up and administrate than most other pension plans. It allows the employer to make a deductible contribution of a maximum of 25% of an employee's income (20% effective rate), capped at $57,000 in 2020. It also allows the employer to vary the contribution percentage each year - a key advantage of a SEP IRA. A SIMPLE IRA is another employer sponsored plan that is "simple" to set up, but it only allows an employee to contribute $13,500 in 2020 as a salary reduction. In addition, the employer must make a matching contribution of either 2% or 3% of the employee's salary - and this must be made in either good or bad times.)

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 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 (If she loses her job in a recession and has no spouse, it might be hard to find another job. She will need to use money in the securities portfolio to live and an 80% allocation in equity securities will expose her to stock losses due to the recession and also not give current income. She should reallocate the portfolio, liquidating a good chunk of the equities position and increasing the money market fund allocation so that she can draw on it for income.)

Active asset managers select investments based primarily upon:

inefficient market pricing of the investment (Active asset managers believe that by performing fundamental analysis, they can find undervalued companies - that is, companies that are not "efficiently priced". Passive asset managers believe that the market is basically efficient, and that one cannot consistently find "undervalued securities" - so why bother? Instead, just invest in an asset that mimics the index - that is, an index fund. This will do as well as the "market" with much lower expenses that those associated with "active" asset management.)

A customer, age 51, has a 20 year investment time horizon, a moderate risk tolerance, and is looking for investments that provide both income and growth. The best recommendation would be:

large cap growth stocks

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 (Liquidity risk is the risk that a security can only be sold by incurring large transaction costs. The easiest securities to sell (meaning the most liquid) are large capitalization issues listed on the NYSE. Small cap stocks that are inactively traded have a high level of 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 US government bonds (In periods of deflation, interest rates fall. A fixed income security's price will go up as interest rates fall. Furthermore, since prices are deflating, the fixed interest payments received are able to buy more and more over time. This is the best investment choice. In times of deflation, real estate prices fall; as do gold prices. Stock prices tend to fall as well, since companies are forced to cut their prices to maintain sales volume.)

Growth investors:

make their investment decision based on the market performance of that security

Active portfolio management is:

managing a portfolio to exceed the performance of a benchmark portfolio

Defensive stocks included in a portfolio's construction will minimize exposure to:

market risk

When making a recommendation of a 10 year Treasury Note to a customer, the MOST important risk consideration is:

market risk

A customer has $20,000 to invest, but needs immediate access to the funds to pay a variety of bills that will arrive over the next 3 months. The BEST recommendation is for the customer to deposit the funds to a:

money market checking account

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 (Municipal bonds are not suitable for tax deferred accounts such as pension plans and IRAs. These accounts are already tax deferred, so putting taxable investments in them that generate a higher rate of return than municipals is appropriate. Furthermore, these higher returns will compound tax deferred as long as they are held in the pension account. Municipals give a lower rate of return than governments or corporates because of the federal tax exemption on their interest income. They are a bad choice for retirement accounts.)

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

municipal bonds (Municipal bonds are not suitable for tax deferred accounts such as pension plans and IRAs. These accounts are already tax deferred, so putting taxable investments in them that generate a higher rate of return than municipals is appropriate)

Which of the following is NOT a suitable investment for Individual Retirement Accounts?

municipal bonds (Municipal bonds are not suitable for tax deferred accounts such as pension plans and IRAs. These accounts are already tax deferred, so putting taxable investments in them that generate a higher rate of return than municipals is appropriate. Furthermore, these higher returns will compound tax deferred as long as they are held in the pension account. Municipals give a lower rate of return than governments or corporates because of the federal tax exemption on their interest income. They are a bad choice for retirement accounts. Finally, zero-coupon governments and corporates give a higher rate of return than municipals, since the annual accretion of the discount on these is taxable; and they are great investments to put in a retirement account; since then the annual accretion of the discount will build tax-deferred.)

A 79-year old customer in the highest tax bracket with $1,000,000 to invest is risk averse. Which investment recommendation would be appropriate?

municipal bonds (Since this customer is in the highest tax bracket, and appears to be wealthy (with $1,000,000 to invest), tax-free municipal bonds are the best recommendation.)

Customer Z is a single 26-year-old man who earns $125,000 annually. He informs you that he is getting married and that his new wife's income of $75,000 per year will put them into the highest federal tax bracket. The couple will have investable income of $25,000 per year. The couple wishes to buy a house in 5 years that will be substantially more expensive than the condominium in which they currently reside. To meet the customer's needs for the large cash down payment in 5 years and to reduce taxable income, the BEST recommendation is to:

open a cash account and invest in mutual funds holding high yielding common and preferred stocks

The portfolio management technique that uses a market index as a performance benchmark that the asset manager must meet is called:

passive asset management

A 68-year old new customer has investment objectives of preservation of capital and income in retirement. The customer has a low risk tolerance and is in the 35% marginal federal tax bracket and is in the 10% state tax bracket. Which investment recommendation would be most suitable for this client?

pre-refunded GO bonds

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 stock (This customer does not want to buy any more bonds. Preferred stock is a fixed income equity security, so it meets the customer's requirement that the recommendation not be a bond; and it pays a fixed dividend rate (similar to bonds) for income.)

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

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

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 retired customer that has a portfolio of blue chip stocks is looking to supplement his retirement income. An appropriate recommendation would be to:

sell covered calls

Currently, the yield curve is ascending. A customer believes that the Federal Reserve will start to tighten credit by raising short-term interest rates; and also believes that long term yields will move downwards from current levels because of record demand for long-term Treasury obligations by pension funds. To profit from this, the best recommendation would be to:

sell short-term t bills and buy long-term t bonds (If short term interest rates are expected to rise, then short-term fixed income security prices will fall, so the customer will want to sell these (establishing a short position). If long term interest rates are expected to fall, then long-term fixed income security prices will rise, so the customer will want to buy these (establishing a long position).)

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

short-term treasury note

Establishing the structure of a portfolio to meet specific financial goals is called:

strategic allocation

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 retired customer has an existing stock portfolio held in a cash account. He has heard that "leveraging" his portfolio can increase his return. The portfolio holds blue chip stocks that pay current dividends. He wants to transfer the positions to a margin account and use them as collateral to buy more stocks of the same blue chip companies. Which statement is TRUE?

this is not an appropriate strategy because the customer's income will decline (This customer needs income. If he margins the blue chip stock positions to "double up" on the amount of stock owned (since Regulation T margin is 50%), this does not come for free! He is borrowing the extra money to buy the new shareholding, using his existing stock as collateral, and he must pay interest on the loan. The interest charge will eat up any dividends that the stocks pay - so there goes his income!)

A new client who is in the lowest tax bracket has 2 young children. He has just inherited $10,000 and wants to use the money to invest for the college education of both children. The client has never invested before and states that he wants an investment with no risk. What recommendation is appropriate?

treasury bills

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 (The client will need access to the funds in 1 year to start paying for college. The client cannot afford an investment loss, so the safest most liquid security listed as a choice is Treasury bills - which have a maximum 1-year maturity limiting interest rate risk and are government guaranteed, limiting credit 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 (This customer wants to use the funds within 3 months. A short-term T-Bill maturing in 3 months or less would be the best recommendation)