AGLS exam 2

Beth just read that 40 years ago, milk was about $1.15 per gallon and today it is about $6 per gallon. She thought that seemed very high, especially if she can only earn 7% from her investments. She also thought that she would need about $3 million for retirement in today's dollars. If inflation is the same in the future as it has been over the last 40 years for a gallon of milk, how much will she need to have accumulated when she retires in 30 years? $3.00 million. $6.84 million. $10.35 million. $22.84 million.

$10.35 million explanation: The question requires you to determine the inflation rate over the last 40 years and apply that to the $3 million to determine the future retirement needs: Step 1 PV = -$1.15 N = 40 PMT = $0 FV = $6.00 I = 4.21646% Step 2 PV = $3,000,000 N = 30 I = 4.21646% PMT = $0 FV = $10,356,460

The P/E ratio of the S&P 500 should be 20 based on historical analysis and your projection of the future. If the earnings of the S&P 500 are currently $50 then the S&P 500 should be at: $250. $500. $750. $1,000.

$1000 explanation: The price is determined as V = P/E x EPS = 20 x $50 = $1,000

Byron and Mandy are married and have a net worth of $20,000 and total assets of $150,000. If their revolving credit and unpaid bills total $8,000, how much are their total liabilities? $122,000. $130,000. $138,000. $150,000.

$130000 Explanation: Assets - Liabilities = Net Worth ÷ ($150,000 - $20,000 = $130,000)

Stephanie wanted to save for her daughter's education. Tuition costs $10,000 per year in today's dollars. Her daughter was born today and will go to school starting at age 18. She will go to school for 4 years. Stephanie can earn 12% on her investments and tuition inflation is 6%. How much must Stephanie save at the beginning of each year if she wants to make her last savings payment at the beginning of her daughter's first year of college? $1,889. $2,104. $2,389. $1,687.

$1687 explanation: Step 1: Solve for NPV CF0 = 0 CF1-17 = 0 CF18 - 21 = 10,000 i = (1.12 ÷ 1.06) - 1 x 100 = 5.66 NPV = 13,696.05 Step 2: Solve for annual savings N = 18 i = 12 PV = 13,696.05 PMTAD = ? FV = 0 1,687

Rod is 40 years old and plans on retiring at age 62 and living until age 90. Assume that he currently earns $110,000 and his wage replacement ratio is 72 percent. Social Security will provide $20,000 (in today's dollars) in retirement benefits per year. Inflation is expected to be 3 percent and Rod can earn 6 percent return on his investments. Find the amount Rod will need to have saved by day one of retirement. $1,993,230 $2,455,219 $2,004,516 $2,214,056

$2,214,056 explanation: We start by calculating income needed per year (during retirement) in today's dollars. 110,000(0.72) - 20,000 = 59,200 Next we need to inflate this out to future dollars. PV = -59,200 n = 62 - 40 = 22 i = 3% solve for FV = 113,433.32 The next step determines the balance he needs in his investment accounts at retirement. PMT = 113,433.32 n = 90 - 62 = 28 i = {[(1.06)/(1.03)]-1}*100 = 2.9126 Solve for PV = -2,214,056

Your client, Tom, has come to you inquiring about retirement. He wants to know approximately how much (in future dollars) he will need to have saved by retirement. You have calculated that he will need about $182,365 a year to maintain his current life style. He expects to retire at age 64 and live to around 90, and his return on investment averages at 9%. Estimated average inflation is 3%. How much does Tom need to have on day 1 of retirement to meet this goal? $1,987,422 $2,127,937 $2,662,389 $2,552,815

$2,552,815 explanation: Given the information above, we need to first calculate working life expectancy or WLE. WLE = 90 - 64 = 26 Then we must calculate our inflation adjusted discount rate.i = {[(1+0.09)/(1+0.03)]-1}*100 = 5.82% Now we can determine the following n = 24 i = 5.82% FV = 0 PMT = -182,365 Set Calculator to begin mode So we calculate PV = 2,552,815

Your client, Jim, age 40, earns $78,000 annually. His spouse, Pam, age 38, used to work at the office with Jim, but is now a homemaker. They have one child who just turned age 14. Jim's personal cosumption during the year was equal to $19,456 and he paid $8,550 in taxes. Assume the inflation rate is 3% and the yield on U.S. Treasury Bonds is 5%. Calculate Jim and Pam's Life insurance need using the Capitalization of Earnings Method. $1,252,640 $2,574,690 $2,105,455 $1,883,489

$2574690 explanation: (78,000-19456-8550)/[(1.05/1.03)-1]

Contributing $2,300 to her retirement fund at the end of each year beginning at age 18 through age 52, with an average annual return of 11%, how much does Shelly have in her retirement account at this time to use toward a possible early retirement? $688,312 $705,726 $736,122 $809,326

$705,726 n = 52 - 18 = 34 i = 11 PV = 0 PMT = -2,300 FV = 705,726

Holly's salary is $120,000 per year. She contributes 12% of her salary to her 401(k) plan. Her employer matches with 5% of her salary to a 401(k) plan. She also contributes $2,500 per year to an IRA. Holly's annual savings rate is? 12.00%. 14.08%. 17.00%. 19.08%.

%19.08 explanation: ($14,400 + $6,000 + $2,500) ÷ 120,000 = 19.08%

Jade is looking for an insurance policy for her home. Her friend, Shamus, who is an attorney, just told her that the policy is a contract and has some unique characteristics. Which of the following terms applies to the insurance contract?1. Indemnity.2. Res ipsa loquitur.3. Adhesive. 1 and 3. 2 only. 2 and 3. 1, 2 and 3.

1 and 3 explanation: The first and third terms apply to an insurance contract. It is based on the principle of indemnity. It is adhesive - The insured had no opportunity to negotiate terms; thus ambiguities are charged to the insurer. Res ipsa loquitur does not apply. The term is a Latin phrase and effectively means "the thing itself speaks" or "the thing speaks for itself."

Which of the following statements regarding investment risk is correct?1. Beta is a measure of systematic, non-diversifiable risk.2. Rational investors will form portfolios and eliminate systematic risk.3. Rational investors will form portfolios and eliminate unsystematic risk.4. Systematic risk is the relevant risk for a well-diversified portfolio.5. Beta captures all the risk inherent in an individual security. 2 and 5. 1, 2, and 4. 1, 3, and 4. 2, 3, and 4.

1, 3, and 4 explanation: Statement 2 is untrue because systematic risk cannot be diversified away. Statement 5 is untrue because beta measures systematic risk, not all risk.

Tracy and Brett are married.Their current assets $9,243Their current liabilities $6,921Their monthly nondiscretionary expenses $4,693Their annual combined income $70,000Their annual debt payments (excluding monthly housing costs)$22,084What is Tracy and Brett's current ratio? 0.7958. 1.3355. 1.9695. 5.0387.

1.3355 Explanation: Current ratio = cash + cash equivalents ÷ current liabilities =$9,243 ÷ $6,921 =1.3355

Tracy and Brett are married.Their current assets $9,243Their current liabilities $6,921Their monthly nondiscretionary expenses $4,693Their annual combined income $70,000Their annual debt payments (excluding monthly housing costs)$22,084What is Tracy and Brett's emergency fund ratio in months? 1.2430. 1.3355. 1.9695. 3.1697.

1.9695 Explanation: Emergency Fund Ratio = current assets ÷ monthly nondiscretionary expenses = $9,243 ÷ $4,693 = 1.9695months.

Which of the following is a good benchmark for savings for retirement as a percent of gross income for someone who is between age 25 and 30? 5% to 10%. 10% to 15%. 15% to 20%. 20% to 25%.

10% to 15% explanation: A 25 year old should be saving between 10% and 15% of their income to build a retirement fund. By beginning early, these funds should accumulate significantly through compounding.

An analysis of the monthly returns for the past year of a mutual fund portfolio consisting of two fundsrevealed the following statistics:o Fund A total return = 18%o Fund A Standard deviation = 23%o Fund A Percentage of portfolio = 35%o Fund B total return = 11%o Fund B Standard deviation = 16%o Fund B Percentage of portfolio = 65%The Correlation Coefficient (r) between the two funds equals 0.25. What is the standard deviation of the portfolio? 13.16%. 14.66%. 18.45%. 19.50%.

14.66%

Susan's annual salary is $80,000. She contributes 10% of her salary to her 401(k) plan; and her employer contributes 5% of her salary to a profit sharing plan. She also contributes $2,500 per year to an IRA. What is Susan's approximate savings rate? 5%. 10%. 15% 18%.

18%

Which of the following statements is/are correct?1. The Statement of Cash Flows includes monthly recurring cash flows from income and expenses.2. The Statement of Net Worth explains changes to net worth between two Statements of Financial Position that are not reported elsewhere on other financial statements. 1 only. 2 only. 1 and 2. Neither 1 nor 2.

2 only explanation: The Statement of Cash Flows only presents the cash flows that are not recurring income and expense items. The Statement of Net Worth does exactly what Statement 2 indicates.

John and Mary, both 44 years old, are married and have one child, age 10. They plan to pay for hiscollege at an in-state university from age 18 to 23 and they would like to retire at age 62. They have provided the following financial data.Joint employment income $200,000John's 401(k) plan contributions $16,500Mary's IRA contributions $3,000John's 401(k) plan employer match $5,000Annual gifts from John's parents $10,000Total Investment Assets $380,000Total Cash and Cash Equivalents $100,000From the goals and data given, which of the following statements is/are correct? (Do not make assumptions that are not stated)1. John and Mary's investment assets to gross pay ratio is adequate for their age.2. John and Mary's savings rate is appropriate for their goals. 1 only. 2 only. 1 and 2. Neither 1 nor 2.

2 only explanation: The investment assets to gross pay ratio is $480,000 ÷ $200,000 = 2.4 times which is not adequate for persons age 45. Their savings rate is $24,500 ÷ $200,000 = 12.25% and appears adequate for both the retirement and the education goals.

John purchased a stock that has a beta of 1.2, a standard deviation of 13%, and returned 16% this year. The market's return was 12% with a standard deviation of 14%. If the risk free rate of return is 3%, what is the alpha of John's stock? -2.2. -1.4. 1.4. 2.2.

2.2 explanation: The alpha is any return in excess of the expected return based on CAPM. Alpha = Rs - [Rf + B(Rm - Rf )]. Therefore, a = 16% - [3% + 1.2 x (12% - 3%)] = 16% - 13.8% = + 2.2%

Lori, a self-employed pediatrician, currently earns $200,000 annually. Lori has been able to save 15% of her annual Schedule C net income. Assume that Lori paid $19,000 in social security taxes, and that she plans to pay off her mortgage at retirement, thereby relieving her of her only debt. Lori presently pays $4,333.33 per month toward the mortgage. Based on the information provided herein, what do you expect Lori's wage replacement ratio to be at retirement? 41.0%. 49.5%. 59.0%. 67.0%.

49.5% explanation: Dollar Value Percentage Salary 200,000 100% Social Security 19,000 (9.5%) Savings 30,000 (15%) Mortgage 52,000 (26%) 99,000 49.5%

Jerry, age 72, is retired. Jerry's primary investment objective is generating income. Based on the results of Jerry's risk tolerance questionnaire, he is a conservative investor. Generally, which of the following asset allocation strategies is most appropriate for Jerry's retirement investments? 50% Equities and 50% Bonds. 80% Bonds and 20% Equities. 80% Equities and 20% Bonds. 100% Bonds and 0% Equities.

80% Bonds and 20% Equities.

Which of the following statements is true? To be more conservative in planning for an individual's retirement, decrease the individuals life expectancy. A sensitivity analysis helps the advisor determine the single most effective factor in a retirement plan. A Monte Carlo Analysis uses a random number generator to provide the advisor with an array of possible outcomes utilizing the same fact patter. The capital preservation model assumes that at retirement the client will have exactly the same account balance as he did at his ideal working age.

A Monte Carlo Analysis uses a random number generator to provide the advisor with an array of possible outcomes utilizing the same fact patter. explanation: The correct answer is a Monte Carlo Analysis uses a random number generator to provide the advisor with an array of possible outcomes utilizing the same fact pattern.

Janice is a nurse in the critical care department. She has property insurance, but does not have disability insurance through the hospital. She does not know that much about disability, except that a friend of hers told her that she needed to acquire it. Which of the following statements is correct? Any occupation is the better choice for coverage than own occupation. The elimination period is the period after the policy stops paying benefits. A guaranteed renewable feature of a policy obligates the insurer to continue coverage as longas premiums are paid on the policy. All of the above.

A guaranteed renewable feature of a policy obligates the insurer to continue coverage as longas premiums are paid on the policy. explanation: Own occupation is a better definition than any occupation as it is specific to what the insured does for a living. The second choice is not correct, as the elimination period is the time after a disability before the policy begins paying benefits. The third is correct.

What is the total American Opportunity & Lifetime tax credit the Jones family can take, given thefollowing information?1) Sally is a sophomore and incurs $5,000 in education expenses. 2) Tommy is in grad school and incurs $7,000 in education expenses.3) Mom, who has a 4 year degree, goes back to school and incurs $4,000 in education expenses. American Opportunity Tax Credit is $1,650 & Lifetime Learning Credit is $2,200. Lifetime Learning Credit is $1,650 & American Opportunity Tax Credit is $2,200. American Opportunity Tax Credit is $2,500 & Lifetime Learning Credit is $2,000. Lifetime Learning Credit is $2,500 & American Opportunity Tax Credit is $2,000.

American Opportunity Tax Credit is $2,500 & Lifetime Learning Credit is $2,000. explanation: Sally (American Opportunity) = 100% x 2,000 + 25% x 2,000 = 2,500 Tommy & Mom (Lifetime) Maximum is 20% x 10,000 = 2,000

Bob wants to accumulate wealth, but he has told you that he is risk-averse. Which of the following is the first action he should take to achieve his goal of accumulating wealth? He should invest in products which bring the highest expected return. The first step is to develop an investment policy statement to more accurately determine his goals before advising where to invest. Put Tom's assets in 100% cash equivalents because he told you he is risk-averse. First determine Tom's risk tolerance to assess his ability and willingness to accept risk.

First determine Tom's risk tolerance to assess his ability and willingness to accept risk. explanation: Option a is not appropriate because the investments with the highest expected return would have the greatest risk. Option b is not appropriate because the risk tolerance should be determined before developing the investment policy statement. Option c would be good, but the client's risk tolerance should be determined before taking any action.

Which of the following statements is/are correct?1. Net worth represents the personal equity that the individual has in his assets and can never beless than zero.2. If Lisa purchased a car using 30% cash and 70% debt, her net worth would increase by 30%. 1 only. 2 only. Both 1 and 2. Neither 1 nor 2.

Neither 1 nor 2. Explanation: Net worth is properly defined in statement 1 but can be negative. Lisa's net worth would remain the same. She decreased her assets by 30%, increased an asset by 100%, and increased her liabilities by 70%, resulting in no change to net worth.

Loss severity is the: Probability that a liability judgment may exceed an individual's net worth. Probable size of a loss that may occur. Probable number of losses that may occur. Probability that a particular property could be totally lost.

Probable size of a loss that may occur. explanation: Loss severity is the probable size of a loss that may occur.

All of the following statements concerning educational funding are correct EXCEPT: QTPs allow individuals to participate in prepaid tuition plans whereby tuition credits are purchased for a designated beneficiary for payment or waiver of higher education expenses, or participate in savings plans whereby contributions of money are made to an account toeventually pay for higher education expenses of a designated beneficiary. Prepaid Tuition Plans are plans where prepayment of college tuition is allowed at current prices plus a small premium for enrollment in the future. A Savings Plan is a type of QTP where the owner of the account contributes cash to the account so that the contributions can grow tax deferred. One of the disadvantages of QTPs is that the owner/contributor shares control of the account with the student/beneficiary.

One of the disadvantages of QTPs is that the owner/contributor shares control of the account with the student/beneficiary. explanation: The owner controls the account, not with the beneficiary.

When creating a valid contract, including insurance contracts, which of the following elements is not required? Purposeful deadline (The time period in which the contract must be fulfilled) Consideration (usually money or the promise to pay) Legal competency of all parties (generally at least age 18) Offer and acceptance (one party makes the offer, the other party accepts, rejects, or counters)

Purposeful deadline (The time period in which the contract must be fulfilled) explanation: Offer and acceptance, legal competency of all parties, consideration, and lawful purpose (the purpose of the contract is not for an unlawful activity) are all elements of a valid contract

What impact would inflation have on retirement? Increases capital needs Fewer alternatives in retirement Unable to meet capital requirements Reduces purchasing power

Reduces purchasing power explanation: The correct answer is that inflation reduces purchasing power.

Unsystematic risk can be reduced by buying: Stock in less interest rate sensitive companies. stock of companies in the same industry. Stocks in numerous unrelated industries. Stocks in natural resource companies.

Stocks in numerous unrelated industries.

Which of the following types of life insurance could not be descibed as an investment, with a savings component? Permanent life insurance Ordinary life insurance Universal life insurance Term life insurance

Term Life insurance explanation: The basic difference between term life insurance and permanent life insurance is that where permanent insurance has a savings and investment component, term does not.Ordinary life insurance and universal life insurance are both types of permanent life insurance.

Which of the following is not a method used to measure investment returns? The Alphanumeric Rate of Return. The Geometric Return. The Weighted Average Return. The Internal Rate of Return.

The Alphanumeric Rate of Return. explanation: There is no such term as alphanumeric. The other options (b - d) are methods used to measure investment return rates.

All of the following statements concerning educational funding are correct EXCEPT: The American Opportunity Tax Credit is available for qualified tuition and enrollment fees incurred in the first four years of post-secondary education for the taxpayer, spouse, or dependent. The Lifetime Learning Credit is a tax credit available to pay for tuition and enrollment fees for undergraduate, graduate or professional degree programs. If used to pay for qualified higher education expenses at an eligible institution or state tuition plan, Series EE United States Savings Bonds bestow significant tax savings. The Uniform Gift to Minor's Act (UMGA) allows parents the option to put assets in a custodial account for a child once the child exceeds the age of 14.

The Uniform Gift to Minor's Act (UMGA) allows parents the option to put assets in a custodial account for a child once the child exceeds the age of 14. explanation: UGMA accounts will allow the child to access the funds when they reach age 18.

A client comes to you with a portfolio of securities that he has put together. Based on your analysis the beta of the portfolio is +1. What does this mean? The portfolio exhibits too much business specific risk. The portfolio exhibits systematic risk. The portfolio is undiversified. The portfolio will return less than the market.

The portfolio exhibits systematic risk. explanation: Beta is a measure of the volatility in comparison to a benchmark, typically the broad market. A beta of +1 means the portfolio moves in tandem with the market as a whole. Beta will not provide enough information to determine whether the other answers are correct. If R2 was high, then you could determine that the other choices were certainly incorrect.

All of the following statements concerning educational fund 529 Savings Plans are correct EXCEPT: Contributions are recognized on a five year pro rata basis. Earnings grow on a tax deferred basis, unless used for qualified education expenses, and then distributions are tax free. The primary benefit of a 529 Savings plan is the state income tax deduction for contributions . Earnings are included in gross income and a 10% penalty is assessed if distributions are not used for qualified education expenses.

The primary benefit of a 529 Savings plan is the state income tax deduction for contributions explanation: Difficult question, but the primary benefit is tax deferred growth. Not all states have a state income tax deduction and in many states the phaseout is fairly low

The estimated value of a real estate asset in a financial statement should be based upon the: Income tax basis of the asset, after adjusting straight line and accelerated depreciation. The client's estimate of current value. Current replacement value of the asset. The value that a well-informed buyer is willing to accept from a well-informed seller where neither is compelled to buy or sell.

The value that a well-informed buyer is willing to accept from a well-informed seller where neither is compelled to buy or sell. Explanation: The question is what values should be used in preparation of a personal financial statement. The answer is fair market value (FMV) and option d is the definition of FMV.

B.J. leaves his garage door open during the day because he knows he has property insurance and he is lazy. One day someone steals his new truck from his garage. Leaving the garage door open is an example of: Physical hazard. Moral hazard. Morale hazard. A peril - theft.

morale hazard explanation: Morale hazard is indifference to loss because you have insurance.

Which of the following statements, if any, is (are) correct?1. Aside from risk tolerance, the time horizon is one of the most important factors to consider when deciding in which securities to invest, and how much and when to invest.2. QTPs generally require a decrease in the risk level of investments, the closer the student/beneficiary gets to the beginning of college. 1 only. 2 only. Both 1 and 2. Neither 1 nor 2.

both 1 and 2

As a general rule, everyone needs life insurance sufficient to replace future income, regardless of whether they have dependents. True False

false

The WLE and the RLE expectancy are not inversely related. True False

false

The account balance method of education funding uses real dollars and the annuity due funding plan to calculate the present value of the cost of education. True False

false

The blackout period refers to the period of time immediately following the death of the breadwinner. True False

false

The student loan interest deduction is not an above the line deduction. True False

false

If the risk/return performance of a stock lies below the Security Market Line, the stock is said to have a: Negative correlation coefficient. Negative alpha. Negative expected return. Negative covariance.

negative alpha explanation: Performance of a stock below the SML will under perform because it is overvalued and therefore has a negative alpha. The Jensen formula can be used to prove this relationship such that Alpha = Return of the stock - (Riskfree rate + Beta x Market risk premium). If the return of the stock is less than expected, alpha will be negative.

Your client, Terry, was working at a chemical plant when it suddenly caught fire and he was severely injured. Terry is no longer able to do his duties at the plant, however he landed a job teaching chemistry online at a local college. If he is currently receiving disability insurance, what type of disability would an insurance company define this as? Any Occupation Hybrid Partial Period Correct! Own Occupation

own occupation explanation: Own occupation coverage is determined by whether or not the insured can carry out each and every one of the duties of his employment. Any occupation coverage is defines when the insured is considered unable to work any occupation.

Which of the following types of aid is not need based? Pell Grant. Plus Loan. Perkins Loan. Subsidized Stafford Loan.

plus loan explanation: A PLUS is simply based on the parent's credit score and is not based on financial need.

Tom and Betty have AGI of $150,000 and have not planned for their children's education. Their children are ages 18 and 17 and the parents anticipate paying $20,000 per year, per child for education expenses. Which of the following is the most appropriate recommendation to pay for the children'seducation? 529 Savings Plan. PLUS Loan. Pell Grant. Coverdell ESA.

plus loan explanation: It's too late for the parents to begin saving for their children's education so that eliminates the 529 Savings Plan and Coverdell ESA. Their AGI is too high for a Pell Grant.

One of the challenges in retirement planning is that people are living longer and have been retiring early over the last 20 years with only a recent reversal in retirement age. True False

true

Which of the following is most likely not classified as an investment amount on the Statement of Financial Position? Cash value of permanent life insurance. Valuable antique furniture. A 529 Plan for education. The vested portion of a pension plan.

valuable antique furniture explanation: Collectibles are generally personal use assets. The cash value of permanent life insurance is most likely an investment asset unless the intent of the policy owner is to liquidate the cash value within one year in which case, it would be classified as cash and cash equivalents. Options c and d are both investment assets.