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requires selecting asset classes and allocating the client’s funds among those classes in a fixed proportion.
ADJUSTING THE PORTFOLIO.
When allocation percentages are changed,
TACTICAL ASSET ALLOCATION
- involves changing the proportions of the assets that are allocated within the portfolio to correspond with changes in market conditions or other reasons.
- −This type of asset allocation is sometimes referred to as a MARKET TIMING STRATEGY.
The INSURED ASSET ALLOCATION strategy involves determining a minimum value for the overall portfolio.
−When the total value of the portfolio goes above the minimum, the portfolio can shift into more aggressive investments, such as common stock.
−When the total value of the portfolio starts to contract, the asset allocation shifts into safer investments, such as T-bills or money market funds.
The WEAK FORM of the Efficient Market Theory
assumes that current stock prices fully reflect all security market information.
−If the weak form of the Efficient Market Theory holds, then security market information should have no relationship to future returns and technical analysis should not allow investors to earn excess returns.
The SEMI-STRONG form of the Efficient Market Theory
assumes that the prices of securities adjust rapidly to all publicly available information.
The STRONG FORM of the Efficient Market Theory
assumes that the prices of securities reflect all information about the firm, whether it be public or private.
RANDOM WALK THEORY,
states that it is impossible to predict the market’s future by looking at past performance.
involves market-timing risk.
Any order given by an investment adviser or an investment adviser representative to a broker/dealer on behalf of a client must include the following
- −Whether the order is a buy or a sell
- −The current bid and ask price
- −The customer account number (or other identifier)
- −Time the order was received
- −What broker/dealer the order was sent to
- −Name of person who recommended the transaction
- −Name of the person who placed the order
- −If the order is discretionary
When a recommendation is being made for a specific client, four elements need to be examined:
- −The customer’s financial status (income, age, current holdings, and net worth)
- −The customer’s tax status and how the product will affect this status
- −The customer’s investment objectives, time horizon, risk tolerance, need for liquidity, and experience
- −Any other information considered to be reasonable in making a recommendation
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