Podcast
Questions and Answers
Which asset class has the characteristic of maximum price volatility?
Which asset class has the characteristic of maximum price volatility?
What level of risk is associated with corporate issues that have a maturity of less than a year?
What level of risk is associated with corporate issues that have a maturity of less than a year?
Which category of equities typically has predictable earnings and high dividend payouts?
Which category of equities typically has predictable earnings and high dividend payouts?
In terms of price-to-earnings ratio, which equity category is noted for its lower ratio?
In terms of price-to-earnings ratio, which equity category is noted for its lower ratio?
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What is the primary characteristic of long-term fixed-income securities?
What is the primary characteristic of long-term fixed-income securities?
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Which of the following equity categories does not typically provide dividends?
Which of the following equity categories does not typically provide dividends?
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What is the purpose of comparing a portfolio's total return to the average total return of comparable portfolios?
What is the purpose of comparing a portfolio's total return to the average total return of comparable portfolios?
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Which benchmark is commonly used to evaluate the performance of an investment portfolio?
Which benchmark is commonly used to evaluate the performance of an investment portfolio?
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What constitutes total earnings when calculating total return for a portfolio?
What constitutes total earnings when calculating total return for a portfolio?
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Why might performance against a market benchmark be inappropriate for some portfolios?
Why might performance against a market benchmark be inappropriate for some portfolios?
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How can individual investors best estimate their performance against others in the market?
How can individual investors best estimate their performance against others in the market?
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What is a potential drawback of using comparative surveys for assessing portfolio performance?
What is a potential drawback of using comparative surveys for assessing portfolio performance?
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What can cause the cash component in an investment portfolio to increase?
What can cause the cash component in an investment portfolio to increase?
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Which factor directly influences the proportion of interest income a client should receive compared to dividends?
Which factor directly influences the proportion of interest income a client should receive compared to dividends?
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What should be considered a constraint when conducting investment activities?
What should be considered a constraint when conducting investment activities?
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What guidelines must a portfolio manager follow when creating an investment policy statement?
What guidelines must a portfolio manager follow when creating an investment policy statement?
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How can high tax rates affect traditional investments like guaranteed investment certificates (GIC)?
How can high tax rates affect traditional investments like guaranteed investment certificates (GIC)?
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What is one example of a unique circumstance that may influence an investment policy?
What is one example of a unique circumstance that may influence an investment policy?
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Why is it important for a client who is an insider of a company to be aware of compliance guidelines?
Why is it important for a client who is an insider of a company to be aware of compliance guidelines?
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Which of the following is true regarding dividends from Canadian corporations?
Which of the following is true regarding dividends from Canadian corporations?
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What is the primary benefit of asset class timing?
What is the primary benefit of asset class timing?
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What factor complicates investors' ability to time asset classes effectively?
What factor complicates investors' ability to time asset classes effectively?
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How does term-to-maturity affect asset class timing in bond investments?
How does term-to-maturity affect asset class timing in bond investments?
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What indicates that the equity cycle tends to lead the economic cycle?
What indicates that the equity cycle tends to lead the economic cycle?
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Why is the Toronto Stock Exchange significant in the context of economic and equity cycles?
Why is the Toronto Stock Exchange significant in the context of economic and equity cycles?
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What does the variation in total returns of investment portfolios primarily relate to?
What does the variation in total returns of investment portfolios primarily relate to?
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What is a notable challenge investors face regarding interest rate changes?
What is a notable challenge investors face regarding interest rate changes?
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What observation reflects the impact of the worldwide pandemic on economic cycles?
What observation reflects the impact of the worldwide pandemic on economic cycles?
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How do successful asset class timing decisions typically depend on understanding economic cycles?
How do successful asset class timing decisions typically depend on understanding economic cycles?
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What characterizes the relationship between the equity cycle and the economic cycle?
What characterizes the relationship between the equity cycle and the economic cycle?
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Study Notes
Constructing a Portfolio
- Investors can choose from different risk categories within each asset class, ranging from low-risk cash equivalents to highly risky speculative equities.
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Cash and Cash Equivalents:
- Government issues (less than a year): Lowest risk, highest quality.
- Corporate issues (less than a year): Highest risk, lowest quality.
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Fixed-Income Securities:
- Short term (one to five years): Low risk, low price volatility.
- Medium term (five to 10 years): Medium risk, medium price volatility.
- Long term (over 10 years): High risk, maximum price volatility.
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Equities:
- Conservative: Low risk, high capitalization, predictable earnings, high dividend payouts, lower price-to-earnings ratio, low price volatility.
- Growth: Medium risk, average capitalization, potential for above-average growth in earnings, aggressive management, lower dividend payout, higher price-to-earnings ratio, potentially higher price volatility.
- Venture: High risk, low capitalization, limited earnings record, no dividends, price-to-earnings ratio of little significance, short operating history, highly volatile.
- Speculative: Maximum risk, shorter term, maximum price volatility, no earnings, no dividends, price-to-earnings ratio not significant.
Portfolio Management Process
- Investment Policy Statement: A written agreement between a portfolio manager and a client outlining investment guidelines.
- Asset Class Timing: The strategy of shifting assets between stocks, bonds, and cash equivalents based on market conditions and potential for higher returns.
- Equity and Economic Cycles: Equity cycles often lead economic cycles, meaning stock prices tend to rise before economic growth increases.
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Portfolio Monitoring: Regularly assess and adjust the portfolio based on:
- The impact of the economy.
- Market performance.
- Client's situation.
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Evaluating Portfolio Performance:
- Compare the total rate of return of the portfolio to industry norms and other portfolio managers.
- Consider risk levels and investment objectives.
- Track longer-term performance to assess management ability.
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Rebalancing the Portfolio:
- Adjust asset allocations to align with original weightings.
- Sell securities that have performed well and buy those that have done poorly.
- Helps maintain portfolio alignment with client goals.
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Factors Influencing Portfolio Construction:
- Tax requirements: Account for the client's marginal tax rate when allocating investments (e.g., dividends vs. interest income).
- Legal and regulatory requirements: Ensure compliance with all applicable laws and regulations (e.g., insider trading restrictions).
- Unique circumstances: Consider client preferences and ethical considerations (e.g., socially responsible investing).
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Description
Test your knowledge on constructing a portfolio by exploring different asset classes and their associated risk levels. This quiz covers cash equivalents, fixed-income securities, and equities, focusing on their characteristics and volatility. Understand how to balance risk for effective investment strategies.
