Question 1

How do you determine the risk tolerance level of an investor? (pp. 464-466)

Accepted Answer

Determining risk tolerance level is not a precise technique, because generally it is a subjective measure. Also, it may rise with an increase in the net worth, income, investment knowledge, and sophistication; it could also decline as the client approaches retirement.
For simplicity, investors can be classified as high, medium, low, and zero risk takers. The most effective way of making this determination is to ask the investor to take a well-designed test.

Question 2

Are there certain investment vehicles which should be specifically considered as a client approaches retirement? (pp. 464-470)

Accepted Answer

Some of the products that merit closer examination are: (a) Fixed annuity, (b) Split annuity, (c) Bond funds, and (d) Jumbo CD. Others can be easily added to this list.

Question 3

What are the three basic investment objectives of a typical investor?

Accepted Answer

The three basic investment objectives relate to an investor's need for liquidity, current income, and investment growth. Liquidity An essential component of a well-designed investment portfolio is the percentage allocated for cash reserves. The investor's liquidity needs can be classified into three categories: Operating funds, emergency funds, and funds earmarked for capitalizing on future investment opportunities. The cash reserves portion of an investment portfolio satisfies all three liquidity needs of an investor. Current Income The types and amounts of fixed income securities and annuities included in an investment portfolio are influenced by the investor's current income needs. There are two major considerations in determining these income needs. First, the total of all the income sources-salary, pension, current investment income, bonuses, and so on-should be compared with the current income needs which, in turn, are determined by the desired standard of living of the investor. The excess of income needs over total income sources, if any, is the amount of additional income which must be generated by new investments. Second, the investor must recognize the trade-off involved in this process; the higher the amount invested in securities generating current income, the lower the amount available for investing in growth securities, and the smaller the potential for future growth of the principal. Investment Growth One of the major objectives in investment planning is to maximize the growth of the total investment portfolio. Several major considerations determine the amount of investable funds to be allocated to growth investments and the types of investment products selected to achieve this objective. These considerations include the returns desired, the investor's risk tolerance level, and the investor's future income needs and time horizon.

Question 4

What are the three stages of financial life cycle through which an investor passes?

Accepted Answer

The answer of What are the three stages of financial...

Question 5

What is meant by the term, investor preference?

Accepted Answer

The answer of What is meant by the term, investor...

Question 6

The concept of investment planning involves:

Accepted Answer

Investment planning involves considering a variety of factors, including the time horizon of the investment, the individual's life cycle stage, and any relevant tax considerations. A comprehensive investment plan should address all of these factors.

Question 7

How can a financial planner determine the risk tolerance level of an investor? (pp. 449-453)

Accepted Answer

The answer of How can a financial planner determine the...

Question 8

You have just presented Figure 10.2 (in the text)  entitled "Life Cycle Stages and Distribution of Investment" to a prospective client named Karl Gore. Karl is 60 years old and totally disagrees with your allocation between safe and risky investments. How do you respond to his criticism?

Accepted Answer

The answer of You have just presented Figure 10.2 (in...

Question 9

Karen Shultz has checked the item "I cannot afford any loss of principal regardless of potential return" on the Measuring Attitude Toward Risk (p. 458 in the text) questionnaire. However, 90 percent of her portfolio, which is approaching $1 million, is in equity securities. Karen seeks your advice.

Accepted Answer

The answer of Karen Shultz has checked the item "I...

Question 10

Which of the following is not part of the investment life cycle:

Accepted Answer

The answer of Which of the following is not part...

Question 11

Comment on the following statement: The investment planning process is initiated with goal setting. (pp. 442-443)

Accepted Answer

The answer of Comment on the following statement: The investment...

Question 12

Investment planning process involves:

Accepted Answer

The investment planning process involves analyzing the current investment portfolio, determining the client's risk tolerance level, and analyzing the client's investment preferences. Therefore, all of the above options are the best choice.

Question 13

When a client comes to a financial planner, he usually 
I. knows his objectives
II. knows general investment and tax saving strategies
III. doesn't know his current income needs
IV. knows the desired rate of growth of his funds

Accepted Answer

The statement that a client usually doesn't know his current income needs is the only option that is true. The other statements imply that the client has knowledge or awareness of their objectives, investment and/or tax-saving strategies, or desired rate of growth; however, this may not always be the case. It is the financial planner's job to assist the client in determining their objectives, risk tolerance, and overall financial situation.

Question 14

Explain the various components of a Target Investment Portfolio (TIP).

Accepted Answer

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Question 15

Comment on the following statement: Risk and return are positively related.

Accepted Answer

The answer of Comment on the following statement: Risk and...

Question 16

What are the basic steps involved in reorganizing an investment portfolio?

Accepted Answer

The answer of What are the basic steps involved in...

Question 17

Bob Barrett wants to invest $50,000 in stocks. His objective is to use this fund for financing his son's college education. His son is a senior in high school. What is your recommendation?

Accepted Answer

The answer of Bob Barrett wants to invest $50,000 in...

Question 18

Jeff Esard has asked you to develop an investment plan for his family. Jeff has over $100,000 to invest and he believes that by investing in equities, he should be able to double his money in three and a half years. Would you be willing to accept Jeff as your client?

Accepted Answer

The answer of Jeff Esard has asked you to develop...

Question 19

You have explained to Paul Heleski the advantages of dollar cost averaging. Paul asks why a financial planner should not be able to invest the entire sum when the market hits the bottom. How do you respond to Paul's question?

Accepted Answer

The answer of You have explained to Paul Heleski the...

Question 20

Which of the following statements is true:

Accepted Answer

Investment goals are not static and may change over time due to various factors such as changes in personal circumstances, market conditions, and financial priorities. It is important for financial advisors to regularly review and adjust investment goals with their clients to ensure alignment with their evolving needs and objectives. A, B, and C are not entirely true as clients may have different levels of understanding of diversification, liquidity, and investment planning objectives.

Quiz 10: Investment Planning Strategies