Investment Management Basics

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Questions and Answers

What is the primary risk Raoul faces by using leverage to finance his investment?

His liquidity will improve significantly.

He may incur higher fees than anticipated.

He could lose more than his initial equity investment. (correct)

The fund's performance is guaranteed to be lower.

Which factor is NOT considered when determining a client's suitability for investment?

Total available capital.

Risk capacity and stability.

The client's favorite investment types. (correct)

Investment objectives.

Which document should sales representatives refer to for mutual fund's risk ranking?

Historical client reviews.

Market performance index.

Annual report of the fund.

Fund facts and prospectus. (correct)

What is meant by 'reasonability' in the context of suitability assessment?

It includes subjective and qualitative factors. Signup and view all the answers

How does borrowing to invest typically affect a client's risk profile?

It may increase overall risk exposure. Signup and view all the answers

What is the initial step in the investment management process?

Identifying objectives and goals. Signup and view all the answers

What total amount does Raoul plan to invest in the growth fund, including borrowed funds?

$16,950 Signup and view all the answers

In assessing risk capacity, which of the following factors is NOT relevant?

Investment market trends. Signup and view all the answers

What should a sales representative inform Ms. Ng about using leverage to purchase mutual funds?

It carries greater risk than using cash resources. Signup and view all the answers

How does leveraging impact the returns on mutual fund investments?

It magnifies both losses and gains. Signup and view all the answers

What is a potential consequence of utilizing a line of credit for buying securities?

It can result in higher financial risk due to leveraged investments. Signup and view all the answers

Why might a client be referred to a discount broker?

For insisting on placing an unacceptable order. Signup and view all the answers

Which of the following statements is true regarding cash purchases versus leveraged purchases in mutual funds?

Cash purchase returns align directly with fund value changes. Signup and view all the answers

What risk does a leveraged purchase of mutual funds introduce compared to a cash purchase?

It increases both the potential risks and rewards. Signup and view all the answers

In terms of client risk profiles, which type of client should be cautious with using leverage for mutual fund purchases?

Clients who are seeking stable returns. Signup and view all the answers

What is the main consideration for a client in understanding leverage when investing in mutual funds?

Leverage magnifies both gains and possible losses. Signup and view all the answers

What must clients have regarding leverage warnings?

Written evidence of acknowledgement Signup and view all the answers

Which factor is NOT considered when evaluating Ahmad's investment suitability?

Family recommendations Signup and view all the answers

What is a primary consequence of borrowing funds for investments?

Borrowed funds must be repaid with interest Signup and view all the answers

If a trade is deemed unsuitable for Ahmad, what action should be taken?

Refuse the trade and advise Ahmad Signup and view all the answers

What describes Ahmad's approach to investing based on the provided information?

Conservative with a short-term focus Signup and view all the answers

What is typically NOT included in a client's risk profile assessment?

Personal relationships Signup and view all the answers

Why is it important for clients to acknowledge the risks associated with leverage?

To clarify that losses may still occur regardless of investments Signup and view all the answers

What must be communicated to clients regarding the repayment of borrowed funds?

It must occur regardless of investment performance Signup and view all the answers

Study Notes

Investment Management Process

The first step in the investment management process is identifying investment objectives and goals.

Mutual Fund Sales

Sales representatives should reference a mutual fund's fund facts and prospectus to determine its risk ranking.
Representatives can sell both proprietary and third-party funds.

Suitability and Reasonability

Suitability is determined by a client's financial situation, investment experience, and risk tolerance.
Reasonability is a subjective assessment if a client's order is reasonable given their specific needs.
If a client insists on placing an unreasonable order, they can be referred to a discount broker.

Leverage in Investment

Leverage involves borrowing money to invest, which can magnify both gains and losses.
Investing with leverage carries greater risk than investing with cash alone.
Clients must fully understand the risks involved in leveraged purchases, including the potential for losses exceeding their initial investment.
Clients must receive written documentation acknowledging their understanding of leverage risks.
Borrowed funds must be repaid with interest regardless of investment performance.

Unsuitable Orders

If a trade is unsuitable and unreasonable for a client, it should be refused.
For example, a client with little investment knowledge, a conservative risk profile, and a short time horizon should not be recommended to invest 70% of their portfolio in an equity mutual fund.
In such cases, a branch compliance officer should advise the client that their order is refused.

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Description

This quiz covers essential concepts in investment management, including identifying investment objectives, mutual fund sales practices, suitability and reasonability assessments, and the implications of leverage in investing. Test your knowledge on the processes and considerations that shape effective investment strategies.