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88 Cards in this Set
- Front
- Back
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What 4 main factors should an RR consider when assessing a customers RISK tolerance?
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1. number or dependents - and their educational needs
2. investment objectives - safety income, growth or speculation 3. Net worth - assists and liabilities 4. Time horizon - length of time until money is needed for retirement or education |
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As a rule of thumb what type of customer should an RR suggest primarily fixed income securities and some cash:
1. younger 2. older 3. middle age |
2. older
someone near retiring or retired because they are looking for income and can't afford to take risks because they don't work |
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out of the following customers which one should generally avoid fixed income securities such as bonds and preferred stocks:
1. younger 2. middle age 3. older |
1. younger
should invest in equities (stocks) and some cash because they are looking for appreciation |
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if a customer asks a RR for advice on the purchase of shares for a very closely held company what should the RR tell the customer?
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a thin market for thinly traded stock is a major risk factor
if you wanted to sell/liquidate buyers would be scare |
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What considerations come into factor when developing an asset allocation mix for a customer? (4 things)
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1. # of years until specified goal would like to be reached like college or retirement
2. how much money needed for that goal 3. how much they have to invest now 4. how much can be invested each month |
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Put in order from most percentage investment to least percentage invested for an asset allocation mix for a customer who has less than 5 yrs to reach their goal with little risk tolerance aka a conservative mix:
foreign stocks large cap equities cash bonds med cap equities |
60% cash
25% bonds 10% large cap 3% small cap 2% foreign |
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an asset allocation mix with 15% cash, 35% bonds, 32% large cap, 10% med cap, 8% foreign stocks would be best for what type of customer
1. conservative - less than 5 years to goal with little risk tolerance 2. moderate mix - 5 to 10 years to goal 3. aggressive mix - more than 10 years to goal and can tolerate risk |
#2
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What type of customer would set up an asset allocation mix with little to no money in cash, some in foreign stocks, bonds, and med-cap equities, and half of their account in large-cap equities?
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aggressive mix with more than 10 years and can tolerate risk
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If an investor is looking for tax deferral and write offs and is tolerant to risk and lack of liquidity what would be suitable?
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DPPs or limited Partnerships
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If an investor has a small nest egg of money with little or no experience what would be the best recommendation?
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mutual funds because they offer diversification and professional management
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A conservative investor with little to no risk tolerance interested in income and capital preservation should consider?
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immediate fixed annuities, T-bonds and T-notes
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older person who needs income and growth to protect their purchasing power would be best to invest in?
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blue chip stocks - pays 50% dividend and has reliable growth
growth & income fund Convertible bonds - income plus potential for growth |
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A conservative investor wants capital preservation and liquidity within the next 12 months
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T-Bills
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Investor looking for capital appreciation and willing to incur risk to magnify their appreciation
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commons stocks purchased or sold in a margin account
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Between bonds and annuities what type provides investors with the most purchasing power protection?
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variable annuities
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What is the advantage of owning a zero coupon treasury bond?
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knowing your rate of return is set as long as the investor holds it until maturity
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A young investor interested in aggressive capital appreciation should invest in?
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sector funds
small cap equity funds international funds emerging market funds |
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What would an RR do if a customer wanted to execute a transaction in their account that the RR thought was unsuitable?
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RR may enter the order and note that the order was unsolicited
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If a client had most of his portfolio in fixed income securities and expects that interest rates will decline in the next year, what should the RR advise the client to do?
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Leave the portfolio as is because when interest rates decline bond prices will go up and his portfolio would increase in value
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If an RR wanted to make a recommendation to the client in writing what 3 things must it disclose?
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1. date of recommendation
2. CURRENT market value of security being recommended 3. If the market firm makes market in that security then it must be stated |
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If an investor feels that the market is "efficient" what investment strategy would be best?
- short term investments - long term investments - speculative accounts - margin accounts |
long term investments where they buy and hold for anticipation of growth
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What does the total return on an investors investment include?
A. appreciation B. Dividends C. Interest D. Distributions 1. A 2. A, B, C 3. B, C, D 4. ALL |
4. ALL
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When quoting or recommending bonds what should the RR make sure they tell the client?
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Rates and prices are subject to change
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If an investor is looking for Income and stability with capital appreciation and is not afraid of loosing their principal amount what should they invest in?
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preferred stock
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If an investor is looking for tax free income what could an RR recommend?
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municipal bonds not subject to AMT or taxation
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Which has less capital risk bonds or stocks?
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bonds = less capital risk, you get your principal at maturity
stocks = you can loose all the money you invested |
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How can you eliminate non-systematic risk?
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this is a company specific risk and can be minimized by diversification
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What 2 things should a customer do to minimized risk in a common stock portfolio?
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- largest percentage of securities in the portfolio affected differently by economic conditions &
- largest percentage of portfolio consist of leading common stocks |
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As an RR would you recommend municipal securities for the portfolio of a pension fund?
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NO
because a pension fund is tax exempt and muni bonds are tax exempt income which is not needed in a pension fund |
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What are suitable for a pension fund interested in income?
1. government securities 2. corporate bonds 3. common stock 4. covered option writing A. 1, 2, 3 B. 2, 3, 4 C. 1, 2, 4 B. ALL |
C. 1, 2, 4
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What is a sophisticated model of the relationship between expected risk and expected return that believes that investors demand higher returns for greater risks?
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Capital Asset Pricing Model - CAPM
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Which type of asset allocation generally keeps the assists in the portfolio at an assigned balance?
1. Tactical Asset allocation 2. Dynamic Asset allocation 3. Strategic Asset allocation |
3
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What type of asset allocation involves frequent changes in assets composition in response to changes in market and economic conditions?
1. Tactical Asset allocation 2. Dynamic Asset allocation 3. Strategic Asset allocation |
2
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What type of asset allocation redistributes percentages of assets in each sector of a portfolio including stock bonds or cash depending on the current market performance of each sector?
1. Tactical Asset allocation 2. Dynamic Asset allocation 3. Strategic Asset allocation |
1
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What is a bonds duration and what should bond buyer look for when buying a bond? (low or high duration)
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duration = degree of sensitivity in abounds price to small changes in interest rates and length of maturity of the bond
higher = more volatile the price of the bond will be lower = best for bond buyers |
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Replicating or matching the holdings of a n index, buying and holding investments, and low management fees, are all characteristics of what type of investment management?
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Passive investment management
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A portfolio manager who is "bearish" should do what with the securities in the portfolio?
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move the portfolio into securities that are resistant to declines in the market
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What is the biggest risk with investing in small cap companies?
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liquidity risk
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What constitutes a durable good?
What are nondurable goods? |
"hard good" life of 3 years or more
"soft goods" food, fuel, drugs, clothes, alcohol |
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What is the investment theory that does not think technical or fundamental analysis will earn or be able to produce better than average rates or return and that the current share prices reflect all relevant information making impossible for investors to buy undervalued stocks or sell shares for inflated prices?
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Efficient Market Hypothesis
EMH Weak = past semi strong version = publicly reflected strong version = all info public and private reflected |
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What is the difference between a fundamental analysis and a technical analysis?
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fundamental deals with a specific company and its factors
technical deals with the market price moves and trends such as supply and demand factors |
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One of the theories of technical analysis is the Odd Lot Theory which believes that you should do what when odd lot investors are selling or buying?
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the opposite because they are wrong
so if odd lot investors are selling then you should buy and vice versa |
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What technical analysis theory is a concerned with the number of stocks the advance in relation to the number of stocks that decline and is a good measure of the strength of a bull or bear market?
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advance-decline ratio
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Market sentiment is a technical analysis theory that is best described as what?
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the mood of investors; their bearish or bullish outlook
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What technical analysis theory refers to the percentage of stocks that are participating in the market movement?
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breadth of the market
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What technical analysis theory measures the rate of the acceleration of a price movement?
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Market momentum
includes the degree of strength or weakness in various industry groups and the price and volume trends in the market |
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According to the technical analysis short interest theory when would it mean there was a strong market?
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small short interest = weak market
larger short interest = strong market |
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According to the technical analysis volume theory when the trading volume is bullish that means advance and declines are what?
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bullish = heavy advances light declines
bearish = light advances and heavy on declines |
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What technical analysis theory states that historical movements cannot be relied on to predict the future and that the stock market is efficient and reacts instantly to new information there for it is impossible to outperform the market?
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random walk
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According to the charts point of view when we have a head and shoulder top formation what kind of market are we looking at?
head and shoulders inverted/bottom formation the market is? |
Top formation = bearish
Bottom/inverted formation = bullish |
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What is the support level on a stocks trend chart of market fluctuations of price over time?
resistance level? selling climax? |
support level - price at which a downward trend is expected to level off
resistance level - price at which an upward trend is expected to level off selling climax - occurs at the end of a bear market. sharp drop in stock prices followed by increasing volume after lengthy decline |
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What 5 factors are important for a Fundamental Analysis?
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1. management
2. earnings 3. companys outlook 4. companies annual report 5. price/earnings ratios |
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Out of the following which stock market index is not capitalization weighted:
1. DJIA 2. NYSE Composite Index 3. Standard & Poors Index of 500 Stocks 4. Wilshire |
DJIA - Dows Jones Industrial Average - price weighted of 30 selected common stocks divided by a constant. narrowest sampling of stocks best indicator of market direction
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Which type of stock market index is the best indicator of what direction the market is going in?
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DJIA Dows Jones Industrial Average - market price of 30 selected common stocks divided by a constant
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What stock market index measures the average mart performance?
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Standard & Poors Index of 500 stocks - broad based index of 500 highly capitalized companies from ALL sectors
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What is the broadest stock market index of all?
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Wilshire - measure the dollar value of more than the top 5,000 publicly traded stocks in US
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What stock market index contains only 65 common stocks from the industrial, transportation, and utility indices?
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Dow Jones Composite Average
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Out of the following which stock market index has the widest sampling of stocks?
1. NYSE 2. Dows Jones Industrial Average 3. Vale Line Index 4. Standard & Poors Composite Index |
3
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What stock market index is affected by price changes in all listed common stocks only?
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NYSE Composite Index
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A portfolio with a Beta less than 1 would be expect to move less or more than the market?
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less than the market
1 equal same as market above 1 equals more than market |
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What measurement would let an investor know the extent to which a stock price would react to news or events related to that company?
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Alpha measurement
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Beta measures the ____ of a particular stocks price when compared to the market as a whole.
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volatility
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What does consolidating mean?
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the market is moving sideways
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What trades on Program trading? What type of analysis is NOT considered on Program Trading?
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trading by institutions selling or buying stocks or an index on which options and/or futures are also traded
does not consider fundamental analysis factors |
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What is the basic balance sheet equation?
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Total assets = total liabilities + net worth
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Where does the net worth on the balance sheet of a corporation come from?
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it is shareholders equity (preferred stock & common stock), Paid in surplus or capital (the excess over par value received when common stock was initially sold by the corporation) and retained earnings by the company
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What is the total liabilities of a company on the balance sheet made up of?
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long term debt + current liabilities = total liabilities
long term debt = bonds/debentures/loans current liabilities = things that must be paid within the next year (acts payable, note pay, fed taxes, dividends pay) |
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What is the least liquid of all current assets listed on a balance sheet?
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inventory
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What is another name for the income statement?
What 3 things do income statements show about the company's finances? |
Income statement aka Profit and Loss Statement (P&L)
1. Amt corporation revenues 2. expenses paid 3. amy of earning after expenses were paid in that year or whatever time frame it is for |
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In order to get the Operating Profit(EBIT) for a corporations income statement you would subtract what 3 things from the total sales?
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Sales - ( costs of goods sold + selling & adm costs + depreciation ) = Operating Profit (EBIT)
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What is subtracted from the operating profit (EBIT) to get the total income (EBT)?
What is subtracted from the Total Income (EBT) to get the Net Income (EAT)? What is subtracted from the Net Income (EAT) to get the NET EARNINGS? What is subtracted from the NET EARNINGS to get the companies Retained earnings for the year? |
Sales - ( costs of goods sold + selling & adm costs + depreciation ) = Operating Profit (EBIT)
Operating Profit - BOND INTEREST = Total Income (EBT) Total Income - TAXES = Net Income (EAT) Net Income - DIVIDENDS ON PREFERRED STOCK = Net Earnings Net Earnings - DIVIDENDS ON COMMON STOCK = Retained Earnings |
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What figure on the Income statement is the most important and used to calculate EPS?
what is the EPS formula? |
Net Earnings
NET EARNINGS / Common Shares Outstanding = EPS |
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What income/earnings is the one used on an Income statement to tell you a corporations income/earnings prior to tax?
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Total Income (EBT)
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What is the difference in a corporation who has a conservative or speculative capital structure?
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conservative = large % common stock; small % bonds
Speculative = large % bonds; small % common stock |
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What is the purpose of leverage?
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to increase r.o.r on common stock in profitable years and to accommodate a sudden growth in sales
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What would happen to the EPS on common stock if a corporation called in its preferred stock from the money it received by issuing bonds?
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since bond interest is a pre-tax deduction it would mean that the corporation would pay less taxes out of its total income and there for have a higher net earnings increasing the EPS on common stock
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Where is the depreciation taken from on the balance sheet and income statement?
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depreciation is less the fixed assets on the balance sheet and since it is a tax deduction it is subtracted from the total sales on the income statement
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If a corporation pays a stock dividend how will it affect the retained earnings and common stock?
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increase common stock
decrease retained earnings |
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If a company is using the FIFO for valuations of inventory when prices are sharply rising what will happen to the income reported?
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it will increase
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All of the following would result in a dilution which is a decrease of earnings per share except:
1. stock dividend 2. exercising warrants and options 3. converting preferred stock and bonds 4. stock split A. 1, 2, 4 B. 2, 3, 4 C. ALL D. 1, 4 |
D. stock split or dividend would not dilute the EPS
warrants, new issued shares, options, or convertible securities = dilution in EPS |
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When a company issues debentures (bonds) at par the company's total assets ________ , total liabilities would _____, and working capital would ______.
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INCREASE
Total assets would increase because they would receive cash Total liabilities would increase because they would have more debt Working capital would increase because the current assets increased the but current liabilities would not change with the increase = +working capital |
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If a company's convertible bonds were converted into common stock what would the effect on the balance sheet would be?
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total liabilities decreased = bonds outstanding were under long term debt which is now decreased
increase to shareholders equity = more common stock outstanding which would also dilute the EPS |
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Can you determine the expense ratios from the corporations balance sheet?
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No.
for expense ratios you would use the Income statement |
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On the ex date of a cash dividend what happens to the current liabilities on the balance sheet of a corporation until they are pay and then what happens?
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declared dividends on the ex date = increase current liabilities
cash dividends paid = decrease in current liabilities |
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When is Net working capital used and what is the formula?
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Net Working Capital = current assets - current liabilities
This would increase when a company takes on long term debt because the current assets would increase this would be used only for emergencies |
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What does the current ratio measure?
What is the formula? what is the standard minimum? |
current ratio = current assets / current liabilities
min 2:1 measures liquidity |
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What is the (P/E) Ratio - Price Earnings Ratio?
What does is measure? How do stock splits affect the (P/E)? When would be the best ratio to buy a stock? |
P/E = market price / EPS
measures how much you will earn on the stock versus the market price paying for the stock teens are the best ratio to buy at 17:1 15:1 stock splits do not affect the P/E ration since the market value would split with it *** IMPORTANT: aka Multiple at which stock is selling |
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what does the growth + Income give you?
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the total return
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