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TACTICAL ASSET ALLOCATION involves:
changing the proportions of the assets that are allocated within the portfolio to correspond with changes in market conditions or other reasons.
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Tactical Asset Allocation is also referred to as:
MARKET TIMING STRATEGY
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INSURED ASSET ALLOCATION strategy involves:
- Determining a minimum value for the overall portfolio.
- When the total value of the portfolio goes above the minimum, the portfolio can shift into more aggressive investments, such as common stock.
- When the total value of the portfolio starts to contract, the asset allocation shifts intosafer investments, such as T-bills or money market funds
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The PASSIVE MANAGEMENT approach assumes the market is:
Efficient
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EFFICIENTMARKET THEORY (or EFFICIENT MARKET HYPOTHESIS) states that current market prices for securities reflect:
All information about those securities because this information is available to everyone.
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The three forms of Efficient Market Theory are:
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The WEAK FORM of the Efficient Market Theory assumes that:
Current stock pricesfully reflect all security market information
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If the weak form of the Efficient Market Theory holds, then security market information should have:
No relationship to future returns and technical analysis should not allow investors to earn excess returns
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The SEMI-STRONG form of the Efficient Market Theory assumes that the prices of securities:
Adjust rapidly to all publicly available information.
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The STRONG FORM of the Efficient Market Theory assumes that the prices of securities:
reflect all information about the firm, whether it be public or private
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The PASSIVE APPROACH is also related to the RANDOM WALK THEORY, which states that:
it is impossible to predict the market’s future by looking at past performance
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Advisers who recommend the Passive Approach believe that carefully selecting securities and using a BUY AND HOLD STRATEGY for long periods of time
Result in greater returns than MARKET TIMING and IN-AND-OUT TRADING techniques
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The major advantages of the passive management approach such as a buy and holdstrategy include:
- Lower management fees
- Lower capital gains taxes
- Lower transaction and commission costs
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Two examples of passive investments are:
investing in a fixed income security or a unit investment trust
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INDEX INVESTING is a:
Passive Management strategy. Rather than investing inindividual securities, the client is advised to invest in index funds
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Another example of active management is SECTOR INVESTING, or SECTOR ROTATION, where money is:
moved from one industrial sector to another in an effort to take advantage of the cycles of different sectors.
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GEOMETRIC AVERAGE is the method most frequently used in comparing and determining:
the performance of a portfolio manager for periods that are greater than one year.
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VALUE INVESTORS seek securities that are:
undervalued (compared to other securities in the same industry) by comparing price/earnings ratios, price/book ratios, or dividend payout ratios.
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The advantages of value investing are:
- Lower downside risk
- lower volatility
- lower portfolio turnover
- transaction fees
- capital gains taxes
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While growth investing may make larger capital appreciation possible, the disadvantages include:
- Higher portfolio turnover
- higher management fees
- higher transaction costs
- higher capital gains taxes for investors than with a value-oriented portfolio
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A company’s Market Capitalization is calculated by:
multiplying the market price per share by the number of shares outstanding
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LUMP-SUM INVESTING involves:
Market-timing risk.
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A round lot is:
100 shares.
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An odd lot is any amount of shares:
not divisible by 100
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A block trade is a minimum of:
10,000 shares
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MARKET MAKERS are broker/dealers who offer to buy or sell securities in the:
OTC market by publishing their quotes in an interdealer quotation system
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If a question on the test asks for a way to protect:
always buy puts
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Investors who have a stock position will incorporate option positions to enhance their stock position. They do this in one of two ways:
- Buying options to protect their stock
- Writing options for income
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When investors buy options to protect their positions, they are considered to be:
HEDGING their positions
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When investors write options against their stock position, they are doing so to:
generate income for their portfolios
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American options can be exercised____________while European options may only be exercised __________________.
- prior to the expiration date
- on the expiration date
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Covered options are options written while the investor is in:
- A stock position to meet the exercise obligation.
- Covered options are written to increase the return on an existing portfolio or to reduce speculative risk for a short-term investor.
- Writers would have a covered call if they wrote a call option at the same time that they had a stock position.
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Derivatives are any investment instrument that:
derives its value from another investment
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Examples of derivatives include:
- Futures contracts
- Forward contracts
- CMOs
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RISK ARBITRAGE is a type of special situation investing in which the:
investor seeks to purchase investments in companies involved in takeovers or acquisitions
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