NASAA Series 65, Uniform Investment Adviser Law ExaminationClient Investment Recommendations and StrategiesEasy
A portfolio manager is employing a strategy that involves frequently buying and selling securities based on perceived mispricings, aiming to profit from short-term market inefficiencies. This strategy typically involves higher transaction costs and can lead to significant taxable events. What is this portfolio management strategy called?
- APassive index investing.
- BBuy and hold.
- CActive trading/Market Timing.
- DStrategic asset allocation.
Show answer & explanationAnswer & explanation
Correct answer: C. Active trading/Market Timing.
Active trading, often synonymous with market timing, involves frequent buying and selling to capitalize on short-term price movements or perceived mispricings. This approach typically incurs high transaction costs and can trigger frequent taxable events.
Why the other options are wrong
- A. Passive index investing involves minimal trading and low costs, aiming to match market performance, which is contrary to the description.
- B. Buy and hold is a long-term strategy with minimal trading, aiming to benefit from long-term growth and avoid frequent transaction costs.
- D. Strategic asset allocation is a long-term strategy for setting target asset class weights, not frequent trading based on short-term mispricings.
Active Trading/Market Timing
An investment strategy characterized by frequent buying and selling of securities in an attempt to profit from short-term price fluctuations and perceived market inefficiencies.
- Involves high transaction costs due to frequent trading.
- Often results in frequent taxable events (short-term capital gains).
- Relies on predicting market direction or individual security movements.
Memory trick: Active trading: Constantly moving, costs soaring.