Types of

Investment Risk

• Business/credit Risk
• Interest Rate Risk
• Purchasing Power Risk
• Liquidity Risk
• Marketability/Redeemability Risk
• Reinvestment Risk
• Taxability Risk
• Market Risk
• Social & Political Risk
• Currency Exchange Risk

Business/Credit Risk

• Risk issuer may not be able to meet interest/principal payment on fix income securities.
• influences related to bus success/failure such as competitive pressure, market share, competence of management
• Managed w/long term focus

Interest Rate Risk

• threat of suffering loss due to change in interest rate
• Fixed income securities subject to interest rate risk
• Longer maturities @ greater risk than shorter maturity terms

Purchasing Power

(Inflation)Risk

• Inflation cause $ to decrease in value, purchasing power shrinks, and there's possibilitiy value of assets decrease as a result
• All fixed income securities subject to inflation risk.

Liquidity Risk

• Risk investor may sustain loss if security must be liquidated
• the more volatile investment the higher the risk
• Possible difficulty in the sale of asset

Marketability/Redeemability

Risk

Risk of purchasing/redeeming security @ inappropriate time thus sustaining loss/mitigating profit

Reinvestment risk

Taxability

Risk

Market Risk

• exposure to uncertain future market value of portfolio based on changes w/ investor sentiment  & resulting movement of overall securities market
• Usually managed w/ short term focus

Social and Political Risk

• Risk certain investment may fall out of social/political favor & may become obsolete/less profitable

Currency

Exchange

Risk

Risk

vs

Reward

Concept

• suggests investments involving greater risk often yield greater reward
• Ex: Equities, while often volatile in short term historically produce greater gains over long term but there's no guarantee

Importance

 of

Diversification

-Always stress to investors diversified portfolio carries lower degree of investor risk as not all market segments move in tandem to each other

Defensive Strategy

-typically investing in instruments not susceptible to market fluctuation/risk of principal

EX: investment in money markets instruments

Defensive Stocks

-industries likely to perform steadily  in spite of changes to economic cycle

-EX: food, clothing, toiletries, utilities typically vary little in periods of economic downturn

Cyclical

Stocks

-More cloely tied to economic cycle

-Expected to out perform during period of expansion & growth & under perform during economic downturn. Examples

• Durable goods - autos, refrigerators, consumer electronics
• Construction related material & equipment

Aggressive

Investor

Invests in securities seeking long term appreciation of principal w/out fear of fluctuation in short term

EX: emerging growth companies

Suitability

Factors

-Investment advisor responsability to know the client and ask investor questions pertaining to investment objectives, timeframe,financial status, risk tolerance

-Judgement based on totality of info. obtained from client

-2 important considerations in determining scope of members suitability is customer capability evaluate investment risk independently & extent to which customer excersing independent judgment

Essential in determining suitable investment portfolio. Information needed to obtain includes:

• Income
• Expenses
• Discretionary Income
• Assets & Liabilities
• Liquid Assets
• Insurance needs
• Participation in retirement programs
• Participation in benefit plans
• Tax Status

Investment Objectives

Clients

-Refers to investor's desire for liquidity & safety of principal, protection against lost of invested principal

-Investor with low risk tolerance typically sacrifices growth for higher level of liquidity

-EX: Cap. preservation, money market funds, short term treasuries, Ginnie Maes

Current

Income

-Investments yielding income now

-Growth generally sacrificed b/cuz distributions taken in cash. Yield is primary focus so moderate price volitiliy may be of less concern

-Depending on risk tolerance,tax bracket, and income needs following income producing investments may be considered:

• Corporate Bonds
• Treasurey Securities
• Agency Securities
• Blue Chip Stocks
• Utility Stocks
• Preferred stocks

Growth of

Invested

Capital

-Investors with longer investment horizons better suited for equities based portfolio

-Common Stocks  more volatile in short term keep pace w/ inflation & offer more potential for increase in investment over time

Investment Objectives

and

Recommendations

• Capital Preservation / Safe Securities - Gov. Securities and Ginnie Maes
• Growth - Common stock and common stock mutual funds
• Income - Bonds (Munis, corporate, not Zero coupon) and Preferred stock
• Liquidity - Money market funds

Risk Tolerance

of Clients

The degreeof uncertainty investors can tolerate with regards to negative change in the value of their porfolio.

-Tolerance varies acording to age, investment experience, income requirements, financial goals

-Refered to as  sleep factor as it's a personal & emtional consideration

-If tolerance not properly considered danger of inappropriate/ill timed buy/sell decisions

• Suitability not profitability is determinant of fair dealings w/ customers
• If customer insists on purchasing security agent feels is unsuitable agent may execute order but should obtain written statement order was unsolicited & not recommended

Trading

in Mutual Funds

-Investment advisors are fiduciaries who owe clients utmost good faith & full fair disclosure of all material facts.

-Following examples are fraudulent activity & violation of standard of fair dealing

• Deliberate omission of mat. fact info. regarding security
• Use of disretion in account w/out authorization
• Failure to disclose mat. fact about conflict of interest
• Making unauthorized transactions in customer accounts
• Misusing customer funds/securities, commingling
• Opening fictitious account