What equity investment philosophy places greater emphasis on industry weighting than on security selection?
Answer(s): D
Sector rotation is an investment philosophy that prioritizes weighting industries based on their expected performance during different economic cycles, placing less emphasis on individual security selection. The feedback from the document states:"Sector rotation is a portfolio manager's attempt to profit through timing. It is based on the belief that different industries will perform well during certain stages of the economic cycle. Industries expected to outperform would be overweighted. More emphasis is placed on industry weighting than on security selection."
Chapter 15 Selecting a Mutual FundLearning Domain: Evaluating and Selecting Mutual Funds
A fund manager who utilizes an interest rate anticipation philosophy forecasts a rise in interest rates.What change in asset allocation should he implement?
When anticipating rising interest rates, a fund manager using an interest rate anticipation philosophy should reduce interest rate sensitivity by increasing holdings in short-term T-bills and high coupon bonds, which are less affected by rate increases. The feedback from the document states:"Interest rate anticipation is a fixed-income investing philosophy that involves moving between long- term government bonds and very short-term T-bills, based on a forecast of interest rates over a certain time horizon. Price sensitivity to interest rate movements increases as the term to maturity increases and the coupon decreases. Therefore, to avoid a large capital loss if interest rates rise, the fund manager would decrease the fund's interest rate sensitivity."
Your soon-to-be-retired client has accumulated $700,000 in a mutual fund investment. He has consulted with you with respect to systematic withdrawal plans. His other sources of income in retirement are uncertain. He is not interested in leaving a legacy at his death. Which plan would best suit his needs?
Answer(s): A
An annuity provides a steady income stream until the client's death, suitable for someone with uncertain income sources and no interest in leaving a legacy. The feedback from the document states:"The client needs a steady source of income from his investment. This rules out a ratio withdrawal plan and a life withdrawal plan. With a fixed-dollar withdrawal plan his capital could be exhausted before he dies. He should choose an annuity that will pay a fixed amount every year until his death. If he lives beyond the guaranteed term, the annuity will cease with his death, but this fact is not important as he does not wish to leave a legacy."
Chapter 16 Mutual Fund Fees and ServicesLearning Domain: Evaluating and Selecting Mutual Funds
In what circumstance would an investor receive a T3 or T5 reporting a capital gain from a mutual fund investment?
A T3 or T5 slip reporting a capital gain is issued when an investor sells their mutual fund units at a profit, not when the fund itself realizes gains. The feedback from the document states:"In the normal course of portfolio management, shares are bought and sold either at a gain or at a loss for the fund. By the end of the year, many funds will have generated net capital gains on their portfolio transactions. The capital gains are distributed in the form of a capital gains dividend reported on a T5 or T3." However, for the investor, the correct answer is A, as clarified by standard tax rules: capital gains are realized by the investor upon selling units at a price higher than their average cost.
What value are withdrawals under a ratio withdrawal plan based upon?
Withdrawals under a ratio withdrawal plan are based on the current portfolio value, ensuring the fund is never fully depleted unless a 100% payout ratio is used. The feedback from the document states:"Under a ratio withdrawal plan, the ratio is always based on the current portfolio value. Technically, this means that clients will never fully exhaust their mutual fund investment under this type of plan. Only in the unrealistic situation of a 100% payout ratio would the fund be completely paid out."
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