©2012, college for financial planning, all rights reserved. module 4 investment principles &...
TRANSCRIPT
©2012, College for Financial Planning, all rights reserved.
Module 4Investment Principles & Mutual Funds
Foundations In Financial PlanningSM Professional Education Program
Learning Objectives
4–1: Identify types of investment risk and their characteristics.
4–2: Identify factors affecting an investor’s risk tolerance.4–3: Identify types and characteristics of investment
return and how they relate to investor risk tolerance. 4–4: Define the concepts of asset allocation,
diversification, and modern portfolio theory. 4–5: Describe methods of investment analysis and their
characteristics. 4–6: Describe various approaches to investing.4–7: Identify definitions or characteristics relating to
mutual funds. 4–8: Describe types or styles of mutual funds.
4-2
Basic Investment Objectives & Concepts
• Objectiveso Incomeo Growtho Capital
preservation• Risk tolerance• Time horizon• Taxes
4-4
Systematic Risk
• Market risk• Interest rate risk• Reinvestment rate risk• Purchasing power risk (inflation)• Currency risk (exchange rate)
4-5
Unsystematic Risk
• Business risk• Financial risk• Credit risk• Default risk• Liquidity risk• Marketability risk• Event risk
4-6
Liquidity Risk & Marketability Risk
4-7
Investment Vehicle Liquidity Marketability Other Main Sources of Risk
Insured savings accounts High N/A1 P, R
Money market accounts/funds High N/A1 P, R
EE and I bonds High N/A1 P, R
Treasury bills High High P, R
Commercial paper High High P, R
Certificates of deposit High N/A1,2 P, R
Treasury notes and bonds Moderate3 High P, I, R
High-grade common stock Moderate High M, B
High-grade corporate bonds Moderate3 High/moderate P, I, R, CR, E
High-grade municipal bonds Moderate3 High/moderate P, I, R, CR, E
High-grade preferred stock Moderate High P, I, R, CR
Lower-grade common stock Moderate/low High B, M, F
High-yield corporate bonds Moderate/low3 High/moderate B, F, I, R, CR, D, E
Puts and calls Low High M, B
Real estate investments Low Low M, B, F
REITs Moderate High M, B, R
Tangible (hard) assets Low Low M
Futures contracts Low High M
Mortgage-backed securities Moderate High/moderate P, I, R
Limited partnerships Low Low4 M, B, F1 A secondary market does not exist. However, withdrawals or redemptions can be made.2 Some brokerage firms sell CDs, as well as maintain a secondary market in them, providing a moderate/high degree of marketability. Most CDs are redeemed, however.3 In general, the longer the period to maturity is, the lower the degree of liquidity is.4 A small number of firms provide a secondary market for some limited partnerships. Also, some partnerships permit a limited number of units to be sold back to the general partner.
Risk Tolerance Factors
• Goals• Time frame• Experience • Personality• Market conditions• Financial conditions• Age • Investment Advice
4-8
Asset Allocation
Two main decisions• What assets?• What proportion?
Strategic• Passive
Tactical• Sector rotation• Market timing
Core/satellite
4-11
Diversification & MPT
• Asset classes• MPT defined
o Correlation coefficiento Efficient portfolios
4-12
Features of Mutual FundsAdvantages• Pooling• Diversification• Professional
management
Costs and Expenses
• Transaction (loads)• Operating
expenses
Taxation• Four types of basis
4-15
The Prospectus
• Minimum investment• Investment objective• Risk• Investment policies• Management• Fees and sales charges• Performance
4-16
Summary Prospectus
• A condensed version of the full, statutory prospectus
• Contains, in order, investment objective, fees and expenses, investment strategies, risks, and performance, fund management, brief information on purchase and sale of fund shares, brief tax information, and financial intermediary compensation (if applicable)
4-17
Other Fund Types
• Money market funds• Index funds• Growth funds• Sector funds• International and global funds• Asset combination funds• Closed-end funds
4-20
Question 1
Which one of the following is a type of unsystematic risk?a. business riskb. interest rate riskc. purchasing power riskd. market risk
4-22
Question 2
Diversification reducesa. systematic risk.b. unsystematic risk.c. market risk.d. purchasing power risk.
4-23
Question 3
Which one of the following is a measure of how much an investment’s returns vary from its average return?a. betab. correlation coefficientc. standard deviationd. covariance
4-24
Question 4
With a core/satellite asset allocation approach, the core portion generally represents which percentage range of the portfolio?a. 50% to 60%b. 60% to 70%c. 70% to 80%d. 80% to 90%
4-25
Question 5
The broad category of expenses listed in a mutual fund’s prospectus area. management fees and 12b-1 expenses
only.b. management fees and other expenses
only.c. 12b-1 expenses and other expenses
only.d. management fees, 12b-1 expenses,
and other expenses.
4-26
Question 6
A type of fund with a net asset value that does not change is a a. bond fund.b. index fund.c. money market fund.d. stock fund.
4-27