Portfolio Management — Review for the Series 7 Exam

By Steven M. Rice

Instead of just randomly recommending securities to customers or potential customers, you’re expected to know why you’re recommending those securities. Typically, most brokerage firms have their own analysts who are responsible for doing the research and recommending which securities the registered reps should promote.

For the Series 7 exam, you need to know how to make appropriate recommendations based on your customers and their individual needs.

Practice questions

  1. All of the following securities have reinvestment risk EXCEPT

    A. Treasury bills

    B. Treasury notes

    C. municipal revenue bonds

    D. municipal GO bonds

    Answer: A. Treasury bills

    Reinvestment risk is the additional investment risk taken with interest or dividends received. Treasury notes, revenue bonds, and GO (general obligation) bonds all have reinvestment risk because they pay interest. However, Treasury bills (T-bills) don’t have reinvestment risk because they’re issued at a discount and mature at par value. Therefore, there are no interest payments made along the way to reinvest.

  2. One of your wealthy clients is in the highest tax bracket and has a portfolio with a nice mixture of corporate bonds and stocks. What would be the best recommendation to help the client round out his portfolio?

    A. U.S. Treasury securities

    B. municipal bonds

    C. REITs

    D. CMOs

    Answer: B. municipal bonds

    Because your client is in the highest tax bracket, he should have some tax-advantaged investments, like municipal bonds or municipal bond funds, in his portfolio. Because the interest received from municipal bonds is federally tax-free, high income tax bracket investors save more tax money by investing in them.

  3. A customer wants to purchase a security that does not fit his investment objectives. After making him aware of that fact, he decides that he wants to go ahead with the purchase anyway. What should you do?

    A. Refuse the order.

    B. Change the customer’s investment objectives.

    C. Talk it over with a principal prior to taking the order.

    D. Take the order and mark the order ticket as “unsolicited.”

    Answer: D. Take the order and mark the order ticket as “unsolicited.”

    You don’t have to refuse the order unless the order is to purchase a direct participation program. In this case, you just have to mark the order ticket as “unsolicited” and take the trade.