Investment Goals and Client Needs

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Questions and Answers

What is the relationship between stock market performance and economic growth expectations?

They are negatively correlated.

They are highly correlated. (correct)

They are only correlated during financial crises.

They are not correlated at all.

What typically happens to interest rates during times of economic contraction?

Interest rates drop leading to a decrease in bond prices.

Interest rates remain unchanged.

Interest rates drop resulting in increased bond prices. (correct)

Interest rates increase due to higher demand for loans.

Which of the following asset classes historically generated the highest returns?

Government bonds

Small company stocks (correct)

Real estate investment trusts (REITs)

Large company stocks

How do inflation and taxes impact investment returns?

They have a major impact on returns. Signup and view all the answers

Which method indicates that the risk of equities is small compared to T-bills?

Probability of not meeting investment return objectives. Signup and view all the answers

What does the risk-reward trade-off suggest about returns in relation to risk?

Returns may increase with an increase in risk. Signup and view all the answers

What is a significant misconception regarding Treasury Bills in regards to returns?

They have returns that barely keep pace with inflation. Signup and view all the answers

What aspect of risk does focusing solely on return variability neglect?

Reinvestment risk. Signup and view all the answers

What effect does trading in the first half of the month have on market returns?

It accounts for all the market's cumulative advance. Signup and view all the answers

Which statement is true regarding the Monday effect?

For large firms, it is entirely a weekend effect. Signup and view all the answers

Which of the following statements about P/E ratios is correct?

Low P/E stocks exhibit superior risk-adjusted results. Signup and view all the answers

What is the relationship between PEG ratios and future rates of return according to studies?

There is a hypothesized inverse relationship. Signup and view all the answers

What key finding does the study with annual rebalancing indicate regarding PEG ratios?

No consistent relationship exists. Signup and view all the answers

What characterizes a price-weighted index?

Higher-priced stocks have a greater impact on the index value. Signup and view all the answers

How is the value of a simple price-weighted index calculated?

By dividing the sum of share prices by the number of companies. Signup and view all the answers

What distinguishes a value-weighted index from other types?

It adjusts automatically for stock splits. Signup and view all the answers

What does free-float market capitalization take into account?

Only shares that are publicly traded without restrictions. Signup and view all the answers

Which index is an example of an unweighted index?

Value Line Average Signup and view all the answers

What is the initial value assigned to a value-weighted index?

100 Signup and view all the answers

What aspects must be identified to understand a client's risk tolerance?

Appetite to take risks and market knowledge Signup and view all the answers

Which of the following best describes a fundamentally weighted index?

Components are chosen based on non-market capitalization criteria. Signup and view all the answers

Which index is primarily based on price-weighted methodology?

Nikkei 225 Signup and view all the answers

What does a policy statement provide in the context of portfolio management?

A benchmark for evaluating portfolio performance Signup and view all the answers

Which of the following factors is NOT considered when identifying the client's needs?

Client's favorite investment types Signup and view all the answers

What is the purpose of using a benchmark portfolio?

To reflect the risk and return objectives specified Signup and view all the answers

What might an unanticipated change in portfolio value indicate?

Reevaluation of the investment policy may be necessary Signup and view all the answers

Which of the following elements contributes to establishing a suitable investment strategy?

Assessing clients' emotional reactions to market changes Signup and view all the answers

How can a policy statement help prevent unethical behavior by the portfolio manager?

By establishing clear performance standards Signup and view all the answers

Why is it important to know about the client's liquidity needs?

To understand their financial obligations and cash flow Signup and view all the answers

What are the categories resulting from combining market-cap groups with value and growth classifications?

Socially Responsible Investment Indexes and style index categories Signup and view all the answers

Which of the following is NOT a type of growth style index?

Mid-cap value Signup and view all the answers

What does the FT/S&P Actuaries World Index measure?

The performance of 2,500 securities in 30 countries Signup and view all the answers

Why are global equity indices difficult to compare?

Due to differences in sample selection, weighting, or computational procedure Signup and view all the answers

What is the base date for the FT/S&P Actuaries World Index?

December 31, 1986 Signup and view all the answers

Which securities are included in the FT/S&P Actuaries World Index?

Securities that allow direct holdings of shares by foreign nationals Signup and view all the answers

Which of these is an example of a Socially Responsible Investment Index?

MSCI SRI Signup and view all the answers

What percentage of the total value of all listed companies in each country does the FT/S&P Actuaries World Index cover?

70% Signup and view all the answers

Study Notes

Client Identification and Investment Goals

Understand client types, nature, and existence of separate beneficiaries.
Determine income requirements, growth expectations, and maintenance of purchasing power.
Assess risk tolerance including stability of values and appetite for losses.
Identify liquidity needs, time horizon, tax, and legal considerations.

Policy Statement

Clarify investor needs and real risks of adverse financial outcomes, alongside emotional reactions.
Evaluate knowledge about investments and general financial literacy.
Recognize other capital or income sources and legal restrictions affecting investments.
Establish a standard for evaluating portfolio performance through appropriate benchmarks aligned with investment goals.

Benchmarking in the Philippines

Money market funds benchmarked against 91-day T-bills and TD rates.
Equity funds benchmarked against the Philippine Stock Exchange Index (PSEi).
Bond funds utilize the BPI Local Bond Index and Bloomberg Sovereign Bond Index for performance comparison.

Asset Allocation

Stock market performance is influenced by broader economic growth expectations.
Bonds may experience price increases during economic contractions due to lower interest rates driven by expansionary policies.
Small company stocks typically yield higher returns and volatility compared to larger firms.

Risk-Reward Trade-Off

Increased investment risk usually correlates with potential higher returns.
Price-weighted indexes assign greater weight to stocks with higher prices affecting overall index valuation.

Stock Market Indexes

Various stock classification methods based on weighting include unweighted, fundamentally weighted, value-weighted, and free-float market capitalization.
Includes examples of growth and value style indexes, socially responsible investment indexes, and global equity indices.

Global Equity Indices

FT/S&P Actuaries World Index measures 2,500 securities across 30 countries, accounting for 70% of total company values.
Market-value weighted index gives emphasis to companies allowing direct foreign investment with results reported in various currencies.

January Anomaly and Calendar Effects

Notable seasonal phenomena include higher returns in the first half of trading months and negative returns typically experienced on Mondays.
Specific effects such as ghost month in August and year-end influences impact trading behaviors.

Cross-Sectional Return Prediction

Low P/E stocks generally perform better in terms of risk-adjusted returns than high P/E stocks, indicating inefficiencies in the semi-strong market hypothesis.
Mixed results exist regarding the effectiveness of PEG ratios, with some studies suggesting an inverse relationship to future returns, though annual rebalancing shows inconsistent results.

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Description

This quiz focuses on understanding client types and their investment goals, including income requirements and risk tolerance. It covers key considerations such as liquidity needs, time horizons, and legal factors affecting investments. Additionally, it discusses benchmarking investment performance in the Philippines.