Series 7 - Chapter 15
While some clients may keep the firm well informed of any changes, others may not be so forthcoming. Changes in a client's _____________________ of purchases and sales may indicate a different financial situation.
patterns
Beta is a measure of a stock's (or portfolio's) volatility in relation to the market as a whole. The market is typically represented by the S&P 500 Index and is assigned a beta of 1. If a portfolio's beta is 1.5, this means that the portfolio's price will change 1 1/2 times as much as the market. The term high beta is usually associated with a beta of greater than _____________ and offers a customer a high risk, high reward investment.
2
Bond Buyer Municipal Bond Index represents the average of the prices of _____________ recently issued and actively traded municipal bonds. The prices are calculated based on quotations that are obtained from municipal broker's brokers. The index is published daily and the components of the index are adjusted __________________ per month. The SIFMA Index is a seven-day market index of Variable Rate Demand Obligations (_____________________) with at least $___________ million outstanding. The Municipal Market Data (_________________) Curve is the yield curve of the highest-rated (AAA) municipal bonds and it's published by Thomson Reuters
40; twice; VRDOs; 10; MMD
A registered representative's customers are a husband and wife who are in their early 70s and are retired. They live on a small pension from the post office and also collect Social Security benefits. If the couple has assets of $355,000 to invest and they're in the lowest tax bracket, what portfolio allocations are most suitable? Choice A - A mix of 25% domestic equities, 60% bonds, 10% cash, 5% international equities Choice B - A mix of 75% high-grade municipal bonds and 25% equities Investment Selection: 25% domestic equities, ___________% bonds, 10% cash, 5% international equities
60
________________________-decline figures measure the number of stocks that have increased compared to the number that have decreased during a trading session or other period. This data, which is intended to show the direction of the market as well as the breadth of a market movement, is published daily.
advance
The Bond Buyer compiles information regarding different indexes that are widely watched in the municipal bond industry. These indexes provide an indication of the average weekly yields for ________________ general obligation and revenue bonds
both
The Dow Theory attempts to determine changes in the underlying trend of the market. Historically, Dow theorists have looked to the Dow Jones Averages for this information. According to this theory, a major trend is confirmed only when ______________ the Dow Jones Industrial Average and Dow Jones Transportation Average reach a new high or new low. Without this confirmation, the belief is that the market will drift back to its previous trading pattern
both
A _________________________ occurs when the stock's price either increases above a resistance level or declines below a support level. When this happens, technical analysts believe the price of the stock will continue on its course. A breakout above the resistance level is considered a bullish signal. To profit from this, investors may enter a buy ________________ order slightly above the resistance level. As the stock's price increases above resistance, the order will be executed and investors will profit as the stock continues to increase in value. Another alternative is for investors to purchase call options on the stock once the breakout has occurred.
breakout; stop
The S&P 500 Composite Index consists of mainly NYSE stocks, but also some NYSE Mkt LLC (formerly AMEX) and Nasdaq stocks. This index gives a _____________________ measure of the market as compared to the Dow Jones Averages. The S&P 500 Index consists of approximately: 400 industrial stocks 20 transportation stocks 40 financial stocks 40 utility stocks
broader
The Wilshire Associates Equity Index consists of stocks that trade on the New York Stock Exchange, the NYSE Mkt LLC, and Nasdaq. The index represents the dollar value of all of the stocks and is considered the _____________________ of all indexes and averages
broadest
A saucer is a chart pattern used by technical analysts that indicates that a stock has formed a bottom in its trading cycle and is ready to rise. The bottom of the saucer pattern is a ______________________ indicator for the stock. As shown in the exhibit to the right, when the stock reaches $30 per share, it will begin to rise and cause a buying opportunity
bullish
According to this theory, it's a ___________________ indicator if there's a positive advance-decline figure (i.e., more advancing issues than declining issues). However, it's considered bearish if the market averages (e.g., the Dow Jones Industrial Average) are up, but the advance-decline figures are negative.
bullish
The put/call ratio is a technical market indicator that's found by dividing the volume of all put transactions by the volume of all call transactions on a daily basis. Technical analysts view the put/call ratio as a contrarian indicator. Although a high ratio indicates that the mood of investors is bearish, from an analyst's point of view it reflects an oversold market and a higher probability that the market will reverse course and turn ___________________. The opposite is true for a low put/call ratio, which is viewed as a bearish indicator.
bullish
An RR's clients are a husband and wife who are both in their 20s and have jobs that pay well. If they're considering several asset allocations to create a long-term retirement savings portfolio, what's an appropriate investment mix? Choice A - An asset allocation of 80% stock and 20% bonds Choice B - An asset allocation of 100% stock Investment Selection 80% stock and 20% bonds placed into IRAs Rationale To accumulate the assets that they'll need at retirement, the couple should include a significant allocation of _______________________ stocks in their portfolio. Placement of the investments into an IRA will serve to defer any taxes due. Although a portfolio that's predominately allocated to bonds will be safer, it's unlikely to produce the required long‐term returns.
common
EPS
earnings per share
The original ideas of Modern Portfolio Theory have been extended in a number of directions. One of these extensions is the Capital Asset Pricing Model (CAPM). __________________ attempts to describe how the market values (prices) investments and provides insights into the nature of risks.
CAPM
The Dow Jones Averages are the most widely quoted measurements of the stock market. The Dow Jones Composite Average consists of 65 stocks and is broken down into the following three sub-averages: Dow Jones Industrial Average - consisting of 30 stocks Dow Jones Transportation Average - consisting of 20 stocks Dow Jones Utility Average - consisting of 15 stocks Of the three Dow Jones Averages, the Dow Jones Industrial Average (___________________) is the most commonly quoted. The DJIA contains 30 of the leading blue-chip companies that represent the backbone of industry in the U.S., such as Apple, Pfizer, and IBM.
DJIA
Momentum investors often move rapidly from one sector of the market to another—essentially in an effort to chase money flows. For example, if gold stocks are in favor, they will overbuy in that area; however, if auto stocks are subsequently moving higher, they will change focus rapidly. Many of these investors use sector specific __________________ to accomplish this rapid movement from one sector to another
ETFs
Some of the other indices that are widely used include the Major Market Index which consists of 20 well-known highly capitalized stocks, the Nasdaq Composite Index which consists of all Nasdaq-listed securities, and the Nasdaq 100 which consists of 100 of the largest companies listed on Nasdaq. The Morgan Stanley Capital International Europe, Australasia, and Far East (MSCI EAFE) Index follows the equity performance of the developed markets, but excludes the U.S. and Canada. Lastly, the _________________ Index mostly follows the stocks of companies that trade on the London Stock Exchange. (The FTSE acronym is derived from its two parent companies—the Financial Times and the London Stock Exchange.)
FTSE
The 20 Bond Index shows the average yield on 20 general obligation (______________) bonds with 20-year maturities and has an average rating that's equivalent to Aa2 for Moody's and AA for S&P. The 11 Bond Index shows the average yield on 11 of the 20 bonds that are in the 20 Bond Index and has an average rating that's equivalent to Aa1 for Moody's and AA+ for S&P. The Revenue Bond Index shows the average yield on 25 revenue bonds with _____________-year maturities and has an average rating that's equivalent to A1 for Moody's and A+ for S&P
GO; 30
Regardless of the method being employed, investors are constantly seeking to construct the perfect portfolio. But ultimately, how does a person measure perfection? Is it the absolute return or is it small or non-existent losses? To adequately answer the question, the goal must be reviewed—to generate the maximum return for a given level of risk. Prior to the middle of the last century, theories about investing focused mainly on the strengths and weaknesses of individual securities. According to these approaches, good analysts constructed portfolios that contained only the strongest performing stocks or other securities. But beginning in the 1950s, a number of financial analysts revolutionized the approaches to investing. These advances are grouped under the heading the Modern Portfolio Theory (_________________).
MPT
The ____________________________ Walk Theory states that security analysis doesn't produce investment recommendations that will allow investors to consistently outperform a randomly selected portfolio. Therefore, a professionally managed portfolio will perform just as well as a portfolio that's selected in a non-discriminatory fashion (e.g., throwing darts at a newspaper listing of stock prices). The theory also states that stock prices represent all of the available information regarding a company's performance. Essentially, the theory suggests that it's futile to try to identify undervalued securities through the use of either fundamental or technical analysis.
Random
Investment‐grade (highly rated) convertible corporate bonds offer investors both the safety of income and the potential for appreciation if the underlying equity increases in value. Although U.S. Treasury securities are safer, they don't offer the equity upside potential of a convertible issue. If clients demand an even greater degree of safety, _________________ are an appropriate choice. It's unlikely that the high-yield bond fund is the best choice for this customer. Although these products provide income, they do so at greater risk and offer no inflation protection
TIPS
CAPM (Capital Asset Pricing Model)
Theory of the relationship between risk and return which states that the expected risk premium on any security equals its beta times the market risk premium
The following are sample allocation applications that are based on the age of a customer: A 25-year-old may want 25% of his portfolio allocated to fixed-income investments, with 75% allocated to equity securities A 45-year-old may want 45% of his portfolio allocated to fixed-income investments, with 55% allocated to equity securities An 80-year-old may want 80% of his portfolio allocated to fixed-income investments, with 20% allocated to equity securities Keep in mind, these percentages may need to be __________________________ based on the financial profile and risk tolerance of an individual customer.
adjusted
For suitability purposes, exam questions may ask the question, what percentage of a client's portfolio should be allocated to bonds? Given the tradeoff between risk and reward, the general guideline is that customers should have an amount invested in debt (as a percentage of their overall portfolio) that's approximately equal to their ______________. Or, put another way, simply subtract a person's age from 100 to arrive at the percentage that should be invested in equities. For example, a 30-year-old may have ___________% of her portfolio allocated to equities (100 - 30 = 70) and 30% allocated to bonds.
age; 70
While a stock's beta measures its performance related to the overall market, __________________ measures the portion of a stock's return that's achieved independent of the market. Alpha is influenced by factors that are unique to the company and its industry group. As a risk-adjusted return, alpha represents the ___________________________ between an asset's expected return (as implied by beta) and its actual return. If a security's actual return is higher than its beta, the security has a positive alpha; however, if the return is lower, it has a negative alpha.
alpha; difference
The reverse of the saucer pattern is the inverse saucer, where the stock forms a top in its pattern and is expected to fall. Following the logic used in the saucer, the reverse is a _________________________ indicator. Both fundamental and technical analyses are based on the assumption that the future performance of a security (or the market) is predictable by using current and past information. However, there's another school of thought that disagrees with this premise—the Random Walk Theory.
bearish
The amount of non-diversifiable risk associated with a particular portfolio or asset is measured as ________________ (β). The value of beta describes the risk of a portfolio or asset as compared to the total market, which is measured as volatility. The total market is assigned a β value of 1; however, some representation of the total market (usually the S&P 500 Index) is commonly employed. For example, if Investment Z has a β of 1.5, this suggests that it's 50% more volatile than the market as a whole. Therefore, if the market rises by 10%, Investment Z is expected to rise by 15% (10% x 1.5). Conversely, if the market declines by 10%, Investment Z is expected to decline by 15% (10% x 1.5)
beta
Any point behind the frontier, such as Point A, represents a portfolio that's not optimal. There are portfolios that offer better returns than A for the same level of risk (Portfolio B). Also, there are portfolios that offer the same return as A, but with less risk (Portfolio C). The lesson is that portfolios on the efficient frontier are _________________________ than those behind it. A more challenging issue is deciding between Portfolios B and C. Is one better than the other? The decision depends on an investor's risk tolerance. If Portfolio B is chosen, the investor expects to achieve a better return than C, but with more risk. While it's clear that when given a choice an investor should not choose Portfolio A, the selection of either between B or C is a matter of investor preference and risk tolerance
better
Indexes and averages monitor the performance of a group of securities. Some are intended to reflect the entire market and are referred to as ___________________-based, while others measure only a market segment or particular industry and are referred to as ____________________-based.
broad; narrow
The diagram above, which depicts the head and shoulders bottom formation (also referred to as the inverted head and shoulders), is the opposite of a head and shoulders top. This pattern is the reversal of a downward trend and is considered a _____________________ indicator.
bullish
The NYSE Composite Index contains all of the __________________ stocks that are listed on the New York Stock Exchange. As with the S&P 500 Index, this index is also divided into four sub-indexes for industrial, transportation, financial, and utility issues.
common
The bottom-up analysis focuses on fundamental analysis and the evaluation of ____________________________ based on a number of factors. The goal is to find stable companies that have a history of profits and to determine whether a company is undervalued relative to its peers. The analysis will also consider the economic climate to further validate the investment decision
companies
Growth Analysis This method of analysis is used by investors who are concerned with a company's future earnings potential. The investors are seeking companies with rapidly growing earnings in the hope that this growth will continue. Growth investors believe that if the company's earnings are outperforming the market, the stock's price will _______________________ to increase. Also, as long as the company controls its costs and increases sales, the value of the business will increase and the stock price will grow along with future earnings.
continue
Trading volume is reported _______________ by both the exchanges and FINRA with volume figures showing the total number of shares traded for each security and the market. Analysts monitor these figures carefully since, historically, volume tends to lead a trend in prices. A trendline is a solid line that traces the lows of a stock as it moves in an upward direction, or the highs of a stock as it moves in a downward direction. Once a trendline has been established, the price movement of a stock will usually follow the trendline
daily
The Bond Buyer includes a variety of statistics that relate to the municipal bond market. The 30-day Visible Supply is compiled on a _________________ basis (with weekly average shown) by adding together the total dollar value of all municipal securities being underwritten on a competitive and negotiated basis which are expected to reach the market over the next 30 days. Issues that are due to mature in _____________ months or more are included in the totals. The visible supply gives an indication of the supply side of the market.
daily; 13
An RR's client is a recent college graduate who has just landed his first full-time job and has recently moved out of his parents' home. If the investor wants to allocate 10% of his salary to stock market investments, what's an appropriate recommendation? Choice A - A variable annuity Choice B - A work-sponsored retirement plan Investment Selection: Prior to investing the client's assets, the appropriate step is to have the client investigate whether his employer offers a retirement plan, such as a 401(k) plan. Rationale: Employer-sponsored retirement plans typically grow on a tax-________________________ basis and are often the first choice to consider when making an investment. Generally, these plans permit pre-tax investments (which reduce current taxable income) and normally offer a wide range of low-cost investment choices.
deferred
MPT shifted investors' attention away from individual securities toward a total portfolio that consists of various classes of assets. For example, a simple portfolio may contain three basic asset classes in various proportions. One mix may be 60% stocks, 30% bonds, and 10% cash equivalents, while another mix may be 20% stocks, 20% bonds, and 60% cash equivalents. MPT suggests that there's actually a whole series of possible mixes that are optimal. An optimal portfolio is one that provides the greatest return for a given amount of risk. A graph of these optimal portfolios (shown below) produces a diagram that's referred to as an _______________________ frontier.
efficient
A high-income, high-net-worth investor is seeking income and safety of principal. What's the appropriate allocation recommendation for this customer? Choice A - A mix of U.S. Treasuries and high-grade corporate bonds Choice B - A mix of investment-grade municipal bonds Investment Selection: Investment-grade municipal bonds Rationale: Safety of principal refers to a customer's desire to be able to preserve or retain the initial amount of her investment over its life. Many bonds offer this benefit to investors. The higher the rating of the debt instrument, the greater the likelihood that investors will achieve the safety of principal that they desire. Investment‐grade municipal bonds offer safety of principal and also offer tax-_____________________ income to investors who are in a high tax bracket. In this case, although the Treasury securities and corporate bonds will provide income, the income is federally taxable. Remember, since investors who have significant taxable income will typically have a higher marginal rate of taxation, they're good candidates for tax-free bonds
exempt
When following the top-down analysis approach, a broad analysis of the economy is conducted _____________ and then specific industries are identified that seem to benefit from the anticipated future economic conditions. Ultimately, particular companies are chosen from within those industries
first
The price-earnings ratio of the Dow Jones stocks is an indicator that a ____________________________ analyst will examine. A technical analyst will review the advance-decline theory, short interest, and the trendline theory.
fundamental
CAPM (Capital Asset Pricing Model) does not establish a price objective for the stock; it doesn't predict ____________________ values of stocks.
future
For this client, the majority of the assets are being allocated to a safe investment (municipal bonds) since the client is uncomfortable with risk. With the client's consent, the RR may allocate a small portion of the client's portfolio to equities in order to provide some __________________ potential. Ultimately, this portion may be increased over time if the client becomes more comfortable with the fluctuations of the stock market and provides permission.
growth
The customer is an accredited investor who consistently invests in high-risk ventures. He's a seasoned stock market investor who enjoys trading both options and leveraged products. The customer is also the custodian for his 6-year-old niece's UGMA account. What investment(s) should be recommended for the UGMA account? Choice A - Hedge funds, since these products offer the potential for significant returns Choice B - A broad collection of equity securities Investment Selection: A broad-based portfolio of high-quality stock funds or good quality individual stocks Rationale: In some cases, assets are being invested for the benefit of a third party such as a child or infirmed relative. In these cases, the RR must examine the profile and objective of the beneficiary, not the person who is making the ultimate investment decisions. In this case, a high-quality equity portfolio is a suitable recommendation for the niece's account. Hedge funds are ________________________ investments and are inappropriate for placement in a UGMA account.
illiquid
The index approach basically concedes that most investors don't outperform the market. The goal of _________________________ investors is to find the least expensive and most tax-efficient products that reconcile with their objectives. These investors often choose to go it alone since they believe registered representatives or financial advisers lack the knowledge to beat the market. Investment choices may include index funds and ETFs since both of these products offer a low-cost and tax-efficient way to gain broad exposure to the market.
indexing
The client is a retired school teacher who is seeking current income and a portfolio that provides some inflation protection. If she's willing to accept a moderate level of risk, what should an RR recommend? Choice A - A collection of high-grade convertible corporate bonds Choice B - A high-yield bond fund Investment Selection: High-grade convertible corporate bonds Rationale: Investors with a primary investment goal of current income want investments that produce a steady, reliable stream of cash. These investors typically need this income in order to defray daily living expenses, especially during retirement years. Some examples of income investments include most bonds, preferred stocks, and fixed annuities. Often, the downside to income investments is that they produce little, if any, growth in principal (the original amount invested). Over time, this may present a problem due to the fact that ______________________ erodes the purchasing power of the income.
inflation
An RR's client is an elderly customer who is seeking preservation of his capital. What investment should an RR recommend to this customer? = Choice A - U.S. Treasury bonds = Choice B - U.S. Treasury bills Investment Selection: U.S. Treasury bills Rationale: Investors who are concerned about the potential loss of their capital will invest in securities that provide safety. Although they want to achieve a return on their investment, these investors don't want to put their principal at risk. Although T-bonds are not subject to default risk, they do expose customers to ____________________-rate risk. On the other hand, T-bills protect clients against both default risk and interest-rate risk. Older clients with a preservation of capital objective often invest in short-term instruments, such as U.S. government T-bills, insured certificates of deposit, or money-market funds.
interest
Short ______________________ refers to the amount of a company's common stock that's been sold short, but has not yet been covered (closed out). Periodically, the NYSE and the Nasdaq Market System compile a list of various companies' short interest. Although it may appear that an increase in short interest from one month to another is a bearish indicator, those who follow the short interest theory normally consider rising or large short interest to be a ____________________ indicator. According to the short interest theory, short sellers must eventually cover their short sales and, as they purchase the stock, it will cause the market price to increase. Other short sellers, fearing future increases in the stock's price, will cover their short sales and create additional upward pressure on the stock (commonly referred to as a short _____________________).
interest; bullish; squeeze
The Dow Jones Industrial Average (DJIA) is considered one of the most widely quoted measurements of the U.S. equity market. The 30 stocks that comprise the Index are among the _____________________ and most widely held companies in the U.S. The DJIA as well as the S&P 500 Index include companies that are referred to as large-cap. Most, but not all of the stocks, are listed on the NYSE.
largest
A customer in his early 50s has recently received a sizable bonus and has an investment objective of growth. The customer has an existing large portfolio of equities and fixed-income securities. Now the customer is seeking additional diversification into real estate, but wants access to his funds if an emergency arises. What should be recommended to this customer? Choice A - A REIT Choice B - A new construction DPP Investment Selection: A REIT Rationale: Since the customer already has a large, existing portfolio of equity and fixed-income investments, some exposure to alternative asset classes is appropriate. Both DPPs and REITs provide this type of diversification. However, it's important to notice that the customer requires liquidity. When comparing REITs to DPPs, most REITs are exchange-traded and provide __________________________, while DPPs are not exchange-listed and often have multi-year holding periods.
liquidity
One of the basic assumptions of the Modern Portfolio Theory is that investors are risk-averse. Essentially, investors prefer the __________________ risk possible to obtain a given level of return. Or, put another way, investors want the highest return possible given a specific level of risk.
lowest
Alpha is a measure of an investment's performance on a risk-adjusted basis. The excess return of the investment relative to the return of the benchmark index is its alpha. Simply stated, alpha is often considered to represent the value that a portfolio _______________________ adds or subtracts from a fund portfolio's return. On the other hand, beta is a measure of the volatility of a security or a portfolio in comparison to the market as a whole. In other words, it is the tendency of an investment's return to respond to swings in the market (i.e., the S&P 500 Index). Essentially, the market has a beta of 1.0 and security and portfolio values are measured based on how they deviate from the market.
manager
An RR's customer is a biotech engineer who believes that biotechnology will be a leading industry in the 21st century. He wants some exposure to this area of investing that offers high-risk with the potential for high-reward and is seeking to maximize his returns by utilizing margin. What investment should be recommended to this customer? Choice A - A biotechnology sector ETF Choice B - A biotechnology mutual fund Investment Selection: A biotechnology sector ETF Rationale: Both the biotechnology ETF and the biotechnology mutual fund provide exposure to this market segment. A sector ETF concentrates its investments in a given industry, such as mining, biotechnology, or computer technology. While these funds are certainly more risky than other diversified offerings, they provide exposure to a given industry for any investors who seek it. The key to this question is that the customer intends to use margin to maximize his returns. Remember, ETFs are _________________________, but mutual funds are not.
marginable
A newly married couple in their early 20s is interested in investing a portion of the money they received as wedding gifts. The couple has very little savings and virtually no investment experience. If they have just purchased a new home and are eager to begin making money in the stock market, what's the appropriate recommendation? Choice A - A mix of index mutual funds and corporate bonds Choice B - Short-term bonds or money-market securities and a small allocation of equity Investment Selection: Short-term bonds or money-market securities and a small allocation of equity Rationale:: As a general rule, most investors should have a cash reserve equal to at least three months' living expenses. In certain circumstances, such as when a client's income is unpredictable, it may be wise to maintain a larger cash reserve. These capital reserves should be kept in a safe, liquid investment such as a money-____________________fund. Although this couple is ready and willing to invest in the stock market, until they establish sufficient cash reserves, only a small portion of their assets should be allocated to equities.
market
Rationale It may initially seem as though this client is the perfect candidate for a growth portfolio; however, his investment time horizon is not long enough. Before designing an investment program for a customer, an RR must determine the investor's time horizon (i.e., the amount of time that a client has available to achieve his financial goals). Generally, the longer an investor's time horizon, the more volatility (fluctuation) the portfolio can tolerate. Investors with short time horizons usually require more stable, conservative investments since they will need their money sooner. Based on this client's short time horizon, equity investments are unsuitable. The client will need liquid assets to purchase his home and cannot afford fluctuations in value; therefore, a _______________________-market or short-term bond fund is the most suitable.
money
There are several sources of information regarding primary and secondary market municipal bond transactions. One of the significant sources is The Bond Buyer. The Bond Buyer is the online newspaper of the ____________________________ industry that contains news that's pertinent to both the municipal market and the financial community in general. It also contains announcements such as notices of sale, call notices, and a new issue calendar
municipal
The term market momentum is used to describe a situation in which prices are moving in a certain direction along with a high level of trading volume. There's also an expectation that this pattern will continue in the near future. For example, if the S&P 500 Index has been trading either up or down significantly over a period of days along with heavy trading volume, some traders will anticipate that this pattern may continue for a few more days. Market ______________________ refers to the strategy of attempting to profit by buying some securities while at the same time selling short other securities
neutral
Although there are a number of ways to categorize investment risks, CAPM simplifies the analysis of risks by classifying them into two types—diversifiable and _____________-diversifiable risk.
non
Diversifiable Risk This risk, which is also referred to as ____________-systematic risk, is associated with owning the securities of specific companies. CAPM suggests that this risk is able to be avoided or even eliminated by holding a diversified portfolio of securities. Since it's avoidable, investors are not compensated for assuming diversifiable risk.
non
Considering the customers' ages and limited incomes, investing a greater portion of their assets in bonds will provide additional income, while the assets invested in equities will provide the potential for growth. As explained previously, one approach that's used by many professionals is to subtract a client's age from 100 to determine the percentage of assets that should be invested in equities. The general assumption is that as clients get older, they have less risk tolerance and, therefore, less money should be invested in equities. Only a small percentage of a client's assets should be allocated to the international marketplace. Remember, clients who are in the lowest tax bracket are generally ______________ good candidates for municipal investments
not
A 35-year-old small business owner, who is single and appears to be doing well financially, informs an RR that he wants to day-trade. Fearing identity theft, the client refuses to provide the RR with background information beyond what's required under AML rules (e.g., name, Social Security number, date of birth). What should the RR recommend for this client? Choice A - A collection of small capitalization equities and some long options Choice B - Nothing Investment Selection: _______________________ Rationale: Some clients may be reluctant to disclose their complete financial information. If a client refuses to provide certain information, an RR may not make assumptions about the client's finances. An RR may only make recommendations that are based on the information that has been disclosed by the client. In some cases, a firm may decide not to open an account due to a client's unwillingness to provide sufficient background information.
nothing
The odd-lot theory focuses on the trading activity of small investors. Small public investors are commonly referred to as _____________-lotters due to their purchases and sales typically being in amounts that are less than 100 shares (i.e., odd-lots). The theory suggests that small investors are usually incorrect in their market timing. In other words, they purchase when the market is at its highest and sell when the market is at its lowest. Statistics are kept that track odd-lot purchase and sell orders and are published on a daily basis.
odd
Technical analysts often advise their clients to buy when odd-lot sell orders increase relative to odd-lot buy orders. A sell recommendation will be issued by analysts when odd-lot buy orders increase relative to odd-lot sell orders. Basically, technical analysts advise investors to do the ______________________ of whatever action is taken by small public investors
opposite
Levels A and B show an area of resistance. At this level, selling pressure tends to prevent the security's price from continuing to increase. In some cases, investors feel that previous buying has left prices too high and will consider the price level to be ___________________________. Levels C and D show an area of support. At this level, buying pressure tends to prevent the security's price from continuing to decline. In some cases, investors feel that previous selling has left prices at an attractive level and will consider the price level to be _________________________.
overbought; oversold
MPT has found that the key to optimal portfolios is the degree of correlation between asset classes. Finding asset classes that don't show a high degree of ____________________ correlation produce the best results. Ideally, investors would like assets that showed strong _____________________ correlations, but this desire is not always realistic. Although most financial assets show some degree of positive correlation, excellent results may still be produced with investments that show a modest lack of correlation.
positive; negative
Technical Analysis
research on recurrent and predictable stock price patterns and on proxies for buy or sell pressure in the market
Over time, a stock tends to trade within a certain price range. In some cases, there's an increase to a particular price level at which heavy selling pressure is encountered. This is referred to as an area of _______________________. At this point, prices are too expensive and it causes buying to cease. For this reason, analysts describe the market as being overbought. In other cases, there's a decline to a particular price level that causes investors to purchase at the attractive lower price. This buying stops the price decline and is referred to as an area of ____________________. Ultimately, prices become so enticing that selling stops and buying begins. For this reason, analysts describe the market as being oversold. When a stock is trading between what's been identified as its support and resistance levels, it's considered to be in the ____________________________ phase
resistance; support; consolidation
Growth investors usually purchase stocks that have high price-to-earnings (P/E) ratios, a high level of retained earnings, and low dividend payout ratios. Remember, growth companies tend to ________________ most of their earnings to finance expansion of operations rather than paying dividends to shareholders
retain
Avoiding diversifiable risk is as simple as constructing a portfolio of relatively uncorrelated assets; however, non-diversifiable risk must be approached differently. The reason for this is that the amount of risk being assumed by a portfolio is directly related to its expected ____________________
return
Analysts consider it normal for stock prices to rise on increasing volume, but don't feel that it signifies a reversal in the market's trend. However, a small price rise that's accompanied by decreasing volume is often considered the _______________________ of a trend and is, therefore, bearish
reversal
Non-Diversifiable Risk This risk, which is also referred to as market risk or systematic risk, is associated with the overall movement of the market. Since this risk is not able to be avoided through diversification, investors are rewarded for assuming it. The greater the non-diversifiable risk, the greater the potential ___________________
reward
During an initial interview with a successful 45-year-old doctor who has her own practice, she makes it clear to her RR that she's disturbed by the thought of taking risks with her money, but realizes that the stock market provides the best long-term returns. What should the RR recommend for this customer? Choice A - A portfolio consisting of 60% equity and 40% fixed-income Choice B - A portfolio primarily consisting of municipal bonds with a small to moderate (20 to 25%) allocation of equities Investment Selection A mix that's weighted heavily toward municipal bonds or municipal bond funds and a small allocation of individual equity securities and/or equity funds. Rationale Based on the asset allocation approximation rule, the recommended portfolio may appear to hold too little equity. However, in this case, the increased bond allocation is appropriate given the customer's _____________ aversion. A customer's ability to tolerate risk is not based solely on her financial resources, but also on her values and attitudes. Two customers who have the same financial resources may perceive risk differently. An RR should pay careful attention to what investors say about their tolerance for risk
risk
In the diagram above, the stock rises in price (to Point A), but then declines to form the left shoulder. The stock again increases in price to a point above the previous high (to Point B), only to fall back to the previous low. The stock once again increases (to Point C), but fails to reach a new high. The last indication occurs when the stock falls to the level of the previous low point and then declines further (to Point D). After observing a head and shoulders top formation and believing that it represents the reversal of an upward trend and a bearish indicator, technical analysts may instruct their clients to either _________________ their existing position to avoid a large loss on the stock or to profit by selling the stock short.
sell
Other tools that are available to technical analysts include the various theories concerning market activity. These theories refer to certain historical patterns in the market that, when properly identified, may signal a bullish or bearish investment environment. When a bullish signal is identified, analysts will issue a recommendation to buy securities; however, with a bearish signal, the recommendation will be to either sell existing positions or to sell securities _____________________.
short
The client is a New York advertising agency executive who is interested in making a mutual fund investment. The client is 30-years-old, single, has an annual salary of $250,000, and recently received a sizable bonus to be used as the down payment to purchase a home within the next year. What's the most appropriate recommendation? Choice A - An asset allocation of 70% equity and 30% debt Choice B - An asset allocation of 100% money-market funds and/or short-term bonds Investment Selection A portfolio of money-market funds and/or ______________-term bonds
short
The Russell 2000 Index tracks the smallest 2,000 stocks in the Russell 3000 Index and is considered the best indicator of _________________ capitalized companies.
small
An RR's client has been using a 529 plan to save for her child's college education and her child will be attending college in a few years. What asset allocation should an RR recommend? Choice A - A mix of 80% equities and 20% fixed-income securities Choice B - A mix of 20% equities and 80% fixed-income securities Investment Selection: 20% equity securities and 80% fixed-income securities Rationale: Although the student is young, she will _______________ need to access the funds for college. As a child approaches college age, a suitable investment strategy is to move from growth-oriented securities (e.g., equities) to income‐oriented securities (e.g., bonds and money-market funds). Once a child begins to attend college, most of the funds should be invested in money‐market funds or other types of short‐term investments that offer liquidity and limited capital risk. In this case, since there are a few years remaining for the assets to grow, a minimal percentage of the account should be invested in equities
soon
A _________________________ asset allocation strategy may include the periodic rebalancing of the portfolio on a monthly, quarterly or annual basis in order to keep the original asset allocation intact. A ____________________ asset allocation strategy is more dynamic and attempts to exploit inefficiencies in the markets by rebalancing the portfolio frequently in response to changes in economic and market conditions.
strategic; tactical
Short interest and trading volume are used by ______________________ analysts. Earnings per share (EPS), the Price-to-Earnings (P/E) ratio, current ratio, and working capital are used in fundamental analysis.
technical
___________________________ analysis involves the study of indexes, averages, theories, price trends, and charts in an effort to predict the direction of both the overall market and specific stocks. Technical analysts tend to ignore the fundamental approach and assume that markets are efficient and all information (both public and private) has already been incorporated in a security's price. These analysts consider the past history of both securities and the markets to formulate their opinions. Technical analysts seek to identify market trends as early as possible and they advise their clients regarding which investments will likely profit from the trend until there's a reversal. To do this, technical analysts follow the markets, individual securities, and an assortment of market data.
technical
Fundamental Analysis
the study of a company's accounting statements and future prospects to determine its value
A breakout below the support level is a bearish signal. To profit from this, investors may enter a sell stop order slightly below the support level. As the stock's price decreases below support, the order will be executed (essentially a short sale) and investors will profit as the stock continues to decrease in value. Another approach is to purchase put options on the stock. Head and Shoulders Patterns: A head and shoulders formation indicates the reversal of a trend. There are two types of formations—head and shoulders ______________ and head and shoulders __________________________.
top; bottom
The value analysis method is used by investors (or funds) that are interested in stocks of companies that are intrinsically __________________________ or trading at a discount to their book value. If the market is efficient and the issuing companies continue to generate profits, these stocks are attractive to long-term investors since their depressed prices make them a good value. Value stocks are characterized by a low P/E ratio, a history of profits, a high _________________________ yield, and a low market-to-book ratio. Value investors are most concerned with the fundamental value of businesses as opposed to their current share price and believe that companies that are out of favor and underperforming may be overlooked. Many of these investors have very long-term time horizons and seek out companies that are undergoing a fundamental change such as a restructuring or shift in leadership
undervalued; dividend
An investment with a β of less than 1 is not as ____________________ as the total market and is expected to fall less in declining markets than the average security, but also rise less in bull markets. When beta is calculated for an entire portfolio, the weighted ______________________ of the betas of the component parts (securities) is used.
volatile; average
The placement ratio is compiled on a _____________________ basis at the close of business on ____________________. The ratio represents the dollar amount of bonds that were sold by underwriting syndicates over the week as a percentage of the amount of bonds that were issued that week. To be included, an offering must be for $_______ million or more. The placement ratio gives an indication of the ____________________ side of the market.
weekly; Friday; 1; demand
