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After reviewing a client's risk tolerance, time horizon and financial objectives. Andy recommends that a long-term asset mix of 55% equities, 40 bonds and 5% cash would be most appropriate for the client.
Which approach has Andy taken in his recommendation?
Strategic asset allocation is a long-term approach to portfolio management where a target allocation among asset classes (e.g., equities, bonds, cash) is established based on the client's risk tolerance, time horizon, and financial objectives. This allocation remains relatively constant over time, with periodic rebalancing to maintain the original proportions.
Details of Andy's Recommendation: Andy recommends a fixed asset mix of 55% equities, 40% bonds, and 5% cash, which aligns with the principles of strategic asset allocation. The focus is on maintaining this allocation to meet long-term goals, without frequent shifts based on short-term market movements.
Why Other Options Are Incorrect:
A . Dynamic asset allocation: This involves frequent changes to asset allocation in response to market trends, which is not evident in Andy's recommendation.
B . Tactical asset allocation: This is a short-term, active approach where adjustments are made based on market conditions to capitalize on opportunities.
D . Ongoing asset allocation: While this involves periodic rebalancing, it is not a defined approach like strategic allocation.
CSC Volume 2, Chapter 16: Asset allocation strategies.
How can an analyst use trend analysis to analyze a company's financial statements?
Trend analysis involves comparing a company's financial ratios or metrics over several periods to identify patterns or changes that may indicate performance trends. This approach is essential for evaluating a company's financial health over time and detecting improvements or declines in critical financial metrics.
By analyzing the current ratios---which measure liquidity and the company's ability to cover short-term obligations---with data from prior years, an analyst can determine trends such as increasing efficiency, solvency, or potential financial stress. This method provides meaningful insights into a company's financial trajectory, supporting better decision-making.
Option B and C are incorrect because they either limit the analysis to a short timeframe or ignore the significance of using a stable and representative base year. Option D deviates from the principle of selecting relevant industry peers.
Volume 2, Chapter 14: Company Analysis, Trend Analysis, Canadian Securities Course.
What is margin in an equity transaction?
In an equity transaction, margin refers to the loan that a dealer extends to a client to facilitate the purchase of securities. The client pays a portion of the purchase price (the margin requirement), while the dealer provides the remainder as a loan. This enables clients to leverage their investments and potentially enhance returns, albeit with increased risk.
Other options:
Amount paid by a client when using credit to buy securities: Describes the margin requirement but does not fully define margin.
Good-faith deposit to ensure future financial obligations: Refers to initial margin in derivatives trading, not equity transactions.
Interest paid by the client to borrow securities: Refers to short-selling, not buying on margin.
Volume 1, Chapter 9: Equity Transactions, section on 'Margin Accounts' explains the mechanics of margin trading and loans.
What do the returns on treasury bills often represent?
Detailed Explanation: Treasury bills (T-bills) are short-term government debt instruments with minimal risk of default. Their returns are often used as a proxy for the risk-free rate in financial analysis, as they represent the theoretical return on an investment with zero credit risk. The risk-free rate is critical for discounting cash flows and comparing returns on various investments.
Other options:
A . Bank prime rate is the interest rate commercial banks charge their most creditworthy customers.
B . Inflation rate is unrelated to the direct return on T-bills, though it impacts real returns.
D . Federal funds rate applies in the U.S. to interbank lending, not directly to T-bills.
CSC Volume 1 (2023 Edition): Chapter on the financial markets, inflation, and trade settlement.
CSC Volume 2 (2024 Edition): Sections on portfolio analysis and risk-free securities.
