Part 4 - Client Recommendations
B) benefits are increased by 8% for each year from the full retirement age. For example, if full retirement age is 66, four years at 8% means the payout is 132% of the base amount.
A benefit of waiting until the age of 70 to claim Social Security benefits is that A) a higher percentage of the monthly benefit is exempt from income taxes. B) benefits are increased by 8% for each year from the full retirement age. C) the income tax rate is reduced once the claimant reaches 70. D) Medicare benefits are increased.
D) sector rotation
A portfolio manager who routinely shifts portfolio assets to take advantage of the business cycle is said to be engaging in A) correlation B) asset allocation C) rebalancing D) sector rotation
A) an investment constraint
An investment adviser has a client who wants to save for college for her child. The child will be entering college in 5 years. This would be an example of A) an investment constraint B) a capital need C) planning too late D) tactical asset allocation
D) I and IV
It would be correct to state that I. the specialist stands ready to buy or sell stock on the floor of an exchange in an effort to keep an orderly market II. the specialist stands ready to buy or sell stock on the over-the-counter market in an effort to keep an orderly market III. the market maker stands ready to buy or sell stock on the floor of an exchange in an effort to keep an orderly market IV. the market maker stands ready to buy or sell stock on the over-the-counter market in an effort to keep an orderly market A) I and III B) II and III C) II and IV D) I and IV
D) Banks Banks tend to have high liquidity needs because they must be ready to meet withdrawals at any time by depositors. The nature of foundations, defined benefit pension plans, and trusts is such that they typically have lower liquidity needs than banks.
Low risk tolerance and high liquidity needs are typical characteristics of which type of institutional investor? A) Foundations B) Trusts C) Defined benefit pension plans D) Banks
D) $1,100,000.00 The question asks for the gross estate, not the adjusted gross estate or taxable estate.
Mr. Wright died with the following assets and liabilities: $200,000 in securities left to his wife, a $650,000 home left to his wife (the home cost $150,000), a $250,000 life insurance policy with his daughter as beneficiary, and $75,000 in debts and estate expenses. What is Mr. Wright's gross estate? A) $250,000.00 B) $600,000.00 C) $1,025,000.00 D) $1,100,000.00
B) an estimate of all of the possible returns an investment is expected to yield
Probable return is A) the current worth of future income discounted to reflect what that income is worth today B) an estimate of all of the possible returns an investment is expected to yield C) the difference between an investment's present value and its cost D) the one discount rate that equates the future value of an investment with its net present value
B) Earnings momentum/book value
Two contrasting styles of portfolio management are growth and value. Which of the following pairs best describes the contrast? A) High P/E ratio/low current ratio B) Earnings momentum/book value C) Capital structure/earnings per share D) Dividend yield/dividend payout ratio
C) I, II, III and IV
Which of the following are fiduciaries? I. Executor of an estate II. Administrator of a trust III. Custodian of an UGMA account IV. Investment adviser representative granted with discretionary authority over the account A) I and II B) I, II and III C) I, II, III and IV D) II, III and IV
A) Systematic
A portfolio manager using index options is trying to hedge which of the following types of risks? A) Systematic B) Financial C) Selection D) Purchasing power
D) look for companies whose sales, earnings, or market share are increasing at an above-average rate Less price conscious (willing to overpay for a stock)
As compared to value investors, growth investors tend to A) be very price-conscious when purchasing stocks B) take more of a long-term approach to their investments C) look for companies that are undervalued or overlooked by other investors D) look for companies whose sales, earnings, or market share are increasing at an above-average rate
D) Dividend yield of 0.3% Growth investors look for PE ratios of 20:1 or greater.
Based on the following information, which stock is most likely to appeal to a growth investor? A) Book value of $22 per share, current market value of $17 per share B) P/E ratio of 8:1 C) Dividend payout ratio of 65% D) Dividend yield of 0.3%
B) General partnership Because all the partners in a general partnership share collective liability, the investment policy to be followed in the business's account is based on the collective suitability of all partners.
For which of the following business entities would suitability be based on the objectives of all the owners on a collective basis? A) Sole proprietorship B) General partnership C) C corporation D) Pension plan
A) A limited liability company (LLC)
If a businessowner's goal is to establish an entity that features ease in raising capital, which of these entities is the most appropriate? A) A limited liability company (LLC) B) An S form of corporation C) A sole proprietorship D) A general partnership
B) Sell the security.
If a client who holds a convertible preferred stock believes the company may go bankrupt within the next 3 years, what would you advise the client to do with the stock? A) Buy puts on the common stock as a hedge. B) Sell the security. C) Sell calls on the preferred stock. D) Immediately convert to common stock because the preferred dividends may no longer be paid.
A) Investment-grade corporate bond. REMEMBER, low-income : muni bonds not suitable
If a customer is in the 15% federal income tax bracket and his main investment objective is current income, which of the following securities should the agent recommend? A) Investment-grade corporate bond. B) Zero-coupon bond. C) City of Milwaukee GO bond. D) U.S. government bond.
D) internal rate of return (IRR). IRR = YTM
The yield to maturity of a bond represents the bond's A) real rate of return. B) annualized rate of return. C) net present value (NPV). D) internal rate of return (IRR).
A) loan out the customer's margin securities
A customer opens a margin account with a broker-dealer and signs a loan consent agreement. The loan consent agreement allows the firm to A) loan out the customer's margin securities B) lend the customer money C) commingle the customer's securities with securities owned by the firm D) hypothecate securities in the account
A) Risk tolerance Although each of the choices represents information that is part of the data gathering process, an IA cannot make suitable recommendations without knowing the investor's risk tolerance.
An IAR has set up the initial meeting with a prospective advisory client. An important part of that meeting is gathering client data. Of the following items, which is generally considered to be the most important for preparing suitable recommendations? A) Risk tolerance B) Age of the prospect C) Assets available for investment D) Life stage
C) the person appointed as administrator of the estate
During a trip to visit grandchildren, one of your clients suffers a massive heart attack and dies, intestate. Directions for handling the account could only come from A) the person with a durable power of attorney B) the spouse C) the person appointed as administrator of the estate D) the person named as executor of the estate
C) employer contributions to the plan are not subject to current taxation to the employee... Tax deferral is found in both NQDC plans and qualified plans
Each of the following are advantages offered by a nonqualified deferred compensation plan that are not found in a qualified plan EXCEPT A) they are an attractive benefit for highly compensated employees because they're free from the contribution limits. B) they are an attractive benefit to the employer because participation requirements and nondiscrimination restrictions do not apply. C) employer contributions to the plan are not subject to current taxation to the employee. D) deferred compensation plans are not subject to most of the requirements of the Employee Retirement Income and Security Act of 1974 (ERISA).
B) Buy and hold Among investing strategies, it is hard to find one more passive than buy and hold—nothing is traded until maturity. Each bond strategy here involves activity (replacing bonds, etc.)
Investors wishing to employ a passive strategy for their bond portfolios would most likely elect which of the following? A) Barbell B) Buy and hold C) Bullet D) Laddering
A) buying bonds of highest quality Quality has no substantial impact on interest rate risk. *If you hold until maturity, you eliminate interest rate risk as you are sure to receive the par value of the bond.
One of the most significant risks taken by bond investors is interest rate risk. All of these steps could be used to mitigate the effects of this risk EXCEPT A) buying bonds of highest quality B) buying bonds with short-term maturities C) holding bonds to maturity D) laddering the portfolio
C) pricing securities based on their systematic risk Under the CAPM, securities are priced based on their systematic risk only, because this risk cannot be eliminated through diversification.
The capital asset pricing model (CAPM) is an investment theory that serves as a model for A) pricing securities based on their total risk B) pricing securities based on their unsystematic risk C) pricing securities based on their systematic risk D) measuring the correlation between a security and the overall market
D) Working in a hazardous occupation In most cases, those who work in hazardous occupations will be denied disability income coverage. Premiums will be higher as one gets older and Type 2 diabetes or too high a BMI can lead to a premium surcharge (rated), but those are generally not causes for denial of coverage.
Which of the following situations would most likely cause an individual's application for a disability income insurance policy to be denied? A) Type 2 diabetes B) Being over 50 years of age C) BMI over 26 D) Working in a hazardous occupation
A) the efficient frontier The feasible set of portfolios represents all portfolios that can be constructed from a given set of stocks. Remember: An efficient portfolio is a feasible portfolio
While attending a seminar given by one of your firm's analysts, you hear the term, feasible set. That would mean the discussion was dealing with the topic of A) the efficient frontier B) convexity C) opportunity cost D) a range of returns
A) a defined benefit pension plan A defined benefit pension plan is one that promises to pay employees a certain specified benefit at retirement.
An employer has a qualified retirement plan that promises to pay employees a specific percentage of their average salary if they complete 20 years of service. This type of pension plan is A) a defined benefit pension plan B) a 401(k) plan C) a defined contribution pension plan D) a profit-sharing plan
C) II and III
Limited liability is a characteristic of being an owner of I. a general partnership II. an interest in a limited partnership III. shares of an S corporation IV. a sole proprietorship A) III only B) I, II, and III C) II and III D) I and IV
B) 50% in an S&P 500 index fund; 50% in a portfolio of high-quality bonds Even though the government bond fund carries less market risk, with a 16-year retirement goal, some inflation protection is necessary. The index fund carries some market risk, but does offer purchasing power protection. The 50/50 mix would seem to be most appropriate.
A client is risk averse and is planning on retiring in 16 years. As the client's investment adviser, which of the following would you recommend? A) A high-yield bond fund B) 50% in an S&P 500 index fund; 50% in a portfolio of high-quality bonds C) A government bond fund D) A diversified open-end investment company concentrating in small-cap stocks
C) AAA-rated zero-coupon bonds maturing in 16 years Being risk averse, the safety of AAA bonds with the guaranteed return of increased principal in 16 years makes this the most appropriate investment.
A client is risk averse and is planning on retiring in 16 years. The client is rolling over $100,000 from his 401(k) plan, all of which is currently invested in his former employer's stock. As the client's investment adviser, which of the following would you recommend? A) Highly rated preferred stocks paying liberal dividends B) Laddering U.S. Treasury bills C) AAA-rated zero-coupon bonds maturing in 16 years D) Keeping the money in the employer's stock
C) Corporation The corporation (always assume C corporation unless it says different on the test) offers limited liability to its shareholders, but there is no flow-through of income or loss. LLCs and limited partnerships offer both and the sole proprietorship has unlimited liability.
A feature of which of the following business entities is limited liability but no flow-through of earnings or losses? A) LLC B) Limited partnership C) Corporation D) Sole proprietorship
B) have a check drawn on the account payable to the trustee for trustee expenses The trustee can be reimbursed for trustee expenses that are reasonable. A trust account must be managed by the trustee and not by the beneficiary. Only the trustee can direct a withdrawal of funds, provided the withdrawal is done in a manner consistent with the trust document. Trust funds must be placed in custodial accounts.
Because a trust account is managed for the beneficial interest of the beneficiary, the investment adviser representative handling the account can A) have funds withdrawn from the account at the direction of the beneficiary B) have a check drawn on the account payable to the trustee for trustee expenses C) place the securities in the trust fund in a noncustodial brokerage account D) arrange to have the trust's funds pledged to support a loan for the trustee
D) I and III If the customer elects to receive distributions in cash while other investors purchase shares through reinvestment, his proportional interest in the fund will decline. Automatic reinvestment is always at NAV.
Customer A and Customer B each have an open account in a mutual fund that charges a front-end load. Customer A has decided to receive all distributions in cash, while Customer B automatically reinvests all distributions. How do their decisions affect their investments? I. Receiving cash distributions may reduce Customer A's proportional interest in the fund. II. Customer A may use the cash distributions to purchase shares later at NAV. III. Customer B's reinvestments purchase additional shares at NAV rather than at the offering price. IV. Due to compounding, Customer B's principal will be at greater risk. A) II and III B) I and IV C) II and IV D) I and III
C) It is canceled on the death of either principal. When the customer or her son dies, the power of attorney also expires.
If a customer who has granted a durable power of attorney to her son dies, which of the following statements regarding the power of attorney is TRUE? A) It remains in effect only if the son is the sole heir to the estate. B) It remains in effect until the son cancels it. C) It is canceled on the death of either principal. D) It remains in effect until the executor of the estate cancels it.
A) Standard deviation CML - standard deviation (total risk) SML - beta (systematic risk)
What is the risk measure associated with the capital market line (CML)? A) Standard deviation B) Alpha C) Beta D) Systematic risk
A) 457 The 457 plan allows participants to withdraw funds at any time, not just after age 59½, without incurring the 10% tax penalty. Income taxes would, of course, be due, but no penalty.
Without the need to meet any special conditions, a participant in which of the following retirement plans would be able to withdraw funds prior to age 59½ and not incur a 10% tax penalty? A) 457 B) 401(k) C) 501(c)(3) D) 403(b)
A) a governmental plan must hold its assets in trust or custodial accounts for the benefit of individual participants A governmental Section 457 plan must be funded—that is, it must hold plan assets in trusts or custodial accounts for the benefit of individual participants. Conversely, a tax-exempt (nongovernmental) Section 457 plan may not be funded.
A basic difference between a Section 457 plan established on behalf of a governmental entity and one established by a private tax-exempt organization is that A) a governmental plan must hold its assets in trust or custodial accounts for the benefit of individual participants B) a tax-exempt plan participant does not have to include plan distributions in taxable income C) a governmental plan cannot make a distribution before the participant attains age 70½ D) a tax exempt plan's distributions are not eligible for a favorable lump sum 10-year averaging treatment.
C) III only A GRAT is an estate planning tool designed to pass assets to beneficiaries (usually children) in a way to minimize gift and/or estate taxes. Because incidents of ownership remain with the grantor, all income is taxed to the grantor.
A grantor retained annuity trust (GRAT)would not be used to reduce I. estate taxes. II. gift taxes. III. income taxes. A) II and III only B) I only C) III only D) I and II only
A) Limited partnership General partnerships could allow the other partners to more easily control the day-to-day operations than a limited partnership, in which the other investors (presumably limited partners) would not be permitted to take a role in the running of the business.
A man is planning to start his own glass-sculpturing business. He wants to be able to deduct his anticipated losses for the first 2 years. He anticipates that the enterprise will borrow money from lenders and is willing to personally guarantee the debt. He also wants to attract other investors but does not want to give up control of the day-to-day business decisions. What business form do you recommend? A) Limited partnership B) General partnership C) S corporation D) C corporation
A) Barbell bonds Can buy a 2 year and 10 year and in 2 years when rates are higher, roll them.
An investor has $50,000 to invest in bonds. Currently, 10-year bonds are offering very attractive yields, but the client is concerned that in a few years, rates will be even higher. What would you suggest? A) Barbell bonds B) Diversifying C) Laddering D) Bullet bonds
B) II and III When it comes to seniors, it is felt that life stage (including whether the customer is employed, retired, or nearing retirement) and current retirement savings relate particularly to seniors.
It is generally accepted that agents and IARs will give greater consideration to which of the following when making recommendations to their senior clients? I. Age II. Life stage III. Retirement savings IV. Tax status A) III and IV B) II and III C) I and IV D) I and II
D) I, II, and IV The agent would factor in the client's projected earnings until retirement and, in order to do that, would need to know the current age. To be sure to allow for enough to keep up with the rising cost of living, the projected inflation rate is needed. However, market volatility does not impact the analysis because the amount of the selected death benefit will remain constant, regardless of changes to the market.
When performing a capital needs analysis for a client, factors to be considered would include I. the client's projected earnings II. the projected inflation rate III. projected market volatility IV. the client's age A) I, II, III, and IV B) I and II C) III and IV D) I, II, and IV
A) Style Following a value or a growth style, or using a buy-and-hold strategy, is independent of the continent of domicile of the issuer. International equities are considered another asset class for purposes of asset allocation in one's portfolio.
Which of the following is NOT a type of diversification that is achieved by investing in international equities? A) Style B) Currency C) Asset class D) Geographic
C) a tactical approach to investing tactical approach = active trading
Wrap fee accounts would tend to be most suitable for investors who follow A) a buy-and-hold philosophy B) a strategic approach to the market C) a tactical approach to investing D) a passive approach to investing
D) an intermediate-term, high-grade corporate bond fund The high-grade corporate bonds will offer a greater return with slightly more risk than the government bonds. If the question had said the investor wished to minimize risk, then the government bond fund would have been a better selection.
A retired person seeking to maximize income with reasonable safety and liquidity should most likely consider investing in A) an intermediate-term government bond fund B) a large-cap growth fund C) a long-term government bond fund D) an intermediate-term, high-grade corporate bond fund
A) zero Because the employee has not made any contributions, the cost basis is zero. In any qualified plan, if all of the contributions are in pre-tax dollars, the cost basis is zero no matter who contributes the money.
In a qualified plan, if the employer makes all the contributions, the employee's cost basis is A) zero B) the value of the contributions C) the increase in value only D) one-half of the contributions made
C) How the funds are spent after being withdrawn from the portfolio How funds are spent after withdrawal would not be a constraint of an IPS. Anything that might be an obstacle to reaching the goals, such as regulatory restrictions and specific investor preferences, are considered constraints.
Many investment advisers prepare an investment policy statement (IPS) when counseling their clients. Which of the following should least likely be included as a constraint in an investment policy statement? A) Constraints put on investment activities by regulatory agencies B) Any unique needs or preferences an investor may have C) How the funds are spent after being withdrawn from the portfolio D) Asset classes the client specifically forbids or limits based on past experience
D) prohibited because the offering price does not bear a reasonable relationship to the current market Markup has to be reasonable
One of the features of broker-dealers is that they sometimes maintain an inventory of securities, even when not in the role of market maker. If a broker-dealer has shares of a somewhat speculative, thinly traded stock in its inventory whose last reported trade was several days ago at $4 per share and the firm were to offer its shares at $10 per share, the NASAA Statement of Policy on Dishonest or Unethical Business Practices of Broker-Dealers and Agents might consider this A) may only be done if the broker-dealer makes adequate disclosure to clients who purchase the stock B) prohibited because broker-dealers may not offer stock to the public from their own inventory C) not prohibited because with thinly traded stocks, one expects there to be a wide spread D) prohibited because the offering price does not bear a reasonable relationship to the current market
A) Trustee and beneficiary A grantor can also be a trustee and beneficiary
One of your clients approaches you about setting up a trust. If your client assumes the role of grantor, what additional roles may be taken? A) Trustee and beneficiary B) Trustee C) Beneficiary D) As the grantor, no other roles may be taken
A) unlike an inheritance, there is no stepped-up cost basis. One of the benefits of inheriting low cost basis securities is the stepped-up basis and that does not apply to gifts. For the purposes of gift tax, the FMV would be used.
One of your ultra-high net worth clients would like to give some low cost basis stock as gifts to her adult grandchildren. It would be prudent for you to tell her that A) unlike an inheritance, there is no stepped-up cost basis. B) for purposes of the gift tax, her cost basis will be used. C) it would be wise for her to use a TOD account to avoid probate. D) making the gift under the Uniform Transfer to Minors Act is generally the most advantageous for the child.
C) Establish an emergency fund Goal setting is important, but the regulators feel that the first step in any plan is making sure that there is a "rainy day" fund.
The Jones family has scheduled an initial visit with a financial planner. Mr. Jones has an annual salary of $70,000, and this is their first attempt at financial planning. Which of the following should be the first step taken by the financial planner? A) Pay off credit card debt B) Set goals and dates for reaching them C) Establish an emergency fund D) Determine a reasonable fee for designing the plan
A) 14% 10% (current market) - 2% (risk-free rate) = 8% 8% * 1.5 (beta) = 12 12 + 2 (risk-free rate) = 14%
The capital asset pricing model (CAPM) is used by many to assess the expected return of a security. If the current risk-free rate is 2%, the current return on the market is 10%, and a particular stock's beta is 1.5 with a standard deviation of 3.2, the expected return would be A) 14% B) 15% C) 18.2% D) 12%
D) a 401(k) and a 403(b) Contributions to a 457 plan do not have to be aggregated with other retirement plans.
The contribution limit has to be aggregated when participating in both A) a 457 and a Roth IRA B) a 403(b) and a 457 C) a 401(k) and a 457 D) a 401(k) and a 403(b)
C) a 50% municipal bond fund, 40% government bond fund, 10% large-cap common stock fund The 10% large-cap fund provides some inflation protection with very moderate downside risk.
Your client is 75 years old and has $100,000 to invest. He enjoys a relatively high income and is not concerned with immediate liquidity, although he is risk averse. The most suitable asset allocation strategies listed below would be A) a 50% municipal bond fund, 40% government bond fund, 10% money market fund B) a 50% municipal bond fund, 50% large-cap common stock fund C) a 50% municipal bond fund, 40% government bond fund, 10% large-cap common stock fund D) a 50% municipal bond fund, 40% money market fund, 10% large-cap common stock fund
C) the administrator in intestacy If an individual dies without a will (intestate), the state will appoint an administrator in intestacy who, just as an executor for one who had a will, has control over the deceased's assets. A durable power of attorney, just like any other power, expires upon the death of either party to the power.
One of your clients dies. You could legally take instructions regarding the individual's estate from A) a person with durable power of attorney B) a CPA who prepared the deceased's tax return C) the administrator in intestacy D) the spouse of the deceased
B) ease of formation General partners have full liability...
There are many different legal ways to structure a new business entity. One of these is the general partnership. Among the benefits of using this structure would be A) substantial capital can be raised with little effort and low cost B) ease of formation C) limited liability D) the 50% dividends received exclusion
A) deferred compensation plans Deferred compensation plans are NOT qualified and MAY be discriminatory *Think paying top execs more
Under ERISA, all of the following retirement plans must set standards for vesting, eligibility, and funding EXCEPT A) deferred compensation plans B) Keogh plans C) corporate pension plans D) profit-sharing plans
B) Weak The weak form holds that current stock prices reflect all historical market data and that historical price trends are, therefore, of no value in predicting future prices. However, this form holds that credible fundamental analysis and insider information may produce above-market returns.
Which form of the efficient market hypothesis (EMH) suggests that fundamental analysis and insider information may produce above-market returns? A) Random walk B) Weak C) Strong D) Semi-strong
A) Rebalancing Because the passive (strategic) style of investing does not involve frequent trading (as does the tactical or active style), periodically the portfolio will be rebalanced to insure that the asset mix is at the desired level. This style may be used for either income or growth objectives.
Which of the following is a characteristic of the passive investment style? A) Rebalancing B) High portfolio turnover C) Income rather than growth objective D) Tactical management
B) a money market fund A money market fund is the most appropriate for an elderly person seeking preservation of capital and some income on a regular basis. A T-bill, although safe, provides interest income only at maturity.
Your elderly client has $10,000 to invest and seeks preservation of capital and a moderate income stream. If she has never invested in mutual funds before and all of her savings are in bank CDs and saving accounts, you should recommend A) a T-bill B) a money market fund C) a tax-exempt bond fund D) a government bond fund
D) Execute a rollover into an IRA in her name. By executing a rollover into an IRA in her name, tax deferral of the assets continues and RMDs are not required until after Mrs. Samuels turns 72. If she disclaimed, the assets would then go to the children, but they would have to begin taking RMDs over a 10-year period.
Mr. Adam Samuels suffers a massive heart attack and dies at the age of 62. As part of his estate, there is an IRA with a current value of $170,000. A review of the IRA documents reveals that Mrs. Eve Samuels, the wife, is the primary beneficiary and their 2 children have been named as contingent beneficiaries. Eve is 50 years old and does not need the income from the IRA and would like to preserve the IRA for her children to inherit. Which of the following steps would you recommend Mrs. Samuels take? A) Disclaim the IRA and let it pass to the contingent beneficiaries. B) Cash in the IRA because as a spouse of a deceased, she will avoid the 10% tax penalty. C) Execute a rollover into an inherited IRA. D) Execute a rollover into an IRA in her name.
B) a Totten trust. A Totten trust allows for the transfer of ownership of a bank account to a beneficiary or beneficiaries after the owner's death. It is the predecessor of today's POD (pay on death) and TOD (transfer on death) accounts.
One of your customers has a substantial savings account at the local S&L. The customer has several grandchildren and wants the flexibility of being able to change the beneficiary allocations as their financial conditions change. You should recommend that the customer investigate the use of A) an irrevocable trust. B) a Totten trust. C) a durable power of attorney (POA). D) a Uniform Transfers to Minors Act (UTMA) account.
C) The CAPM assumes that the optimal portfolio should be the one with the highest Sharpe ratio of all possible portfolios. The CAPM assumes that investors should construct a portfolio with the highest Sharpe ratio because that offers the highest risk-adjusted return.
The capital asset pricing model (CAPM) is based on several limiting assumptions. Which of the following statements is correct regarding the CAPM? A) The CAPM does not assume that investors have access to the same information. B) The CAPM assumes that investors' expectations regarding risk and return are not identical but normally distributed. C) The CAPM assumes that the optimal portfolio should be the one with the highest Sharpe ratio of all possible portfolios. D) The CAPM does not assume that the expected excess returns for the market are known.
D) 10.0% Market return - risk-free rate = 10% 0.8 (beta) x 10% = 8% 8% + 2% (risk-free rate) = 10%
The capital asset pricing model (CAPM) is used by many to assess the expected return of a security. If the current risk-free rate is 2%, the current return on the market is 12%, and a particular stock's beta is 0.8 with a correlation coefficient of 0.60, the expected return would be A) 7.2% B) 9.6% C) 11.6% D) 10.0%
C) Segment rotation Segment rotation, more commonly known as sector rotation, involves altering portfolio composition based on which sectors are poised to outperform as the business cycle is changing phases.
Which of the following is the form of portfolio management that rotates between sectors based on changes to the business cycle? A) Cyclical rotation B) Tactical portfolio management C) Segment rotation D) Strategic portfolio management
A) I, II, and III A buy and hold strategy doesn't tell us the client's objective or risk-tolerance (you can hold anything in a portfolio)
Which of the following statements are generally TRUE of the buy-and-hold strategy? I. Equities would grow relative to fixed income II. Lower taxes and transactional costs III. Easy to manage IV. The portfolio would more accurately demonstrate the client's investment objectives and risk tolerance A) I, II, and III B) II, III, and IV C) I and II D) III and IV
D) The Coverdell offers greater investment flexibility. A Coverdell ESA works similar to a self-directed IRA where stocks, bond, mutual funds, ETFs, and other investment vehicles are options. With a 529 plan, the donor is limited to whatever is available in the state plan chosen.
Which of these is an advantage of using a Coverdell ESA rather than a 529 plan to fund a child's future education? A) The Coverdell has greater tax advantages. B) Contributions to the Coverdell are eligible for the annual gift tax exclusion. C) The Coverdell allows for transfer of beneficiary. D) The Coverdell offers greater investment flexibility.
D) RMDs may be deferred only from the plan sponsored by the current employer. The rule is that you can only defer RMDs in the plan of the employer where you are currently employed.
Your client's wife retired as a 3rd grade teacher in 2009, where she was covered under the school system's 403(b) plan. If she resumes employment with a corporate employer, and that new employer has a 401(k) plan, is she entitled to defer RMDs from the 403(b) plan past the regular age 72 date? A) RMDs may be deferred as long as the individual is employed on a full-time basis. B) RMDs may be deferred only if the current employer offered a 403(b) plan. C) RMDs may never be deferred for those who were participants in a 403(b) plan. D) RMDs may be deferred only from the plan sponsored by the current employer.
D) The original value plus any appreciation is taxed as part of the grantor's estate. One of the risks in setting up a GRAT is that if the grantor dies during the term of the trust (usually 3-10 years), the assets put in the GRAT, plus any appreciation, are included in her estate.
A wealthy individual has set up a GRAT. Should she die during the time the trust is active, how are the remaining assets in the trust taxed? A) No tax is due if the grantor should die during the term of the trust. B) The original value plus any appreciation passes to the beneficiaries and is taxed as ordinary income. C) The original value plus any appreciation passes to the beneficiaries but is subject to gift tax. D) The original value plus any appreciation is taxed as part of the grantor's estate.
D) any losses flow through to the investors An S corporation offers the benefit of flow-through of both income and losses (losses being a particular benefit for a start-up because they usually take some time to become profitable). It is the S corporation rather than the C corporation that is limited to 100 investors. Both offer the benefit of limited liability. The C corporation is superior for raising large amounts of capital.
Among the advantages of forming an S corporation rather than a C corporation for a new business enterprise is A) shareholders' losses are limited to the amount of their investment B) the ease in raising substantial amounts of capital. C) unlike the C corporation, which is limited to 100 investors, there is no such limit for an S corporation D) any losses flow through to the investors
B) employees who leave the company prior to retirement would not receive benefits Deferred compensation plans are usually structured so that if the employee leaves prior to retirement or is terminated with cause, benefits are forfeited. These plans are discriminatory and there is no current tax saving, hence the term "deferred." As nonqualified plans, they do not have to comply with ERISA.
Among the reasons why a corporation might choose to utilize a deferred compensation plan for retirement planning would be A) current tax savings on money contributed to fund the plan B) employees who leave the company prior to retirement would not receive benefits C) the plans are nondiscriminatory D) compliance with ERISA
B) an investment constraint If a $ amount is stated, it's a capital need. Otherwise, it's an investment constraint.
An investment adviser representative meets with a couple who explains that they wish to be able to pay for their daughter's college education. The IAR is told that the child will be starting school in 5 years. This 5-year time period would be considered A) the present value needed B) an investment constraint C) an investment policy statement (IPS) D) a capital need
D) buy an XYZ 35 call He is temporarily bullish.. he buys a call. When it comes to hedging a short stock position, buying a call is always the best strategy.
An investor is short stock at 60. The current market price of the stock is 35, and he anticipates it will continue to decline. If he thinks the price will rise temporarily and if he does not wish to close out his short position, his best strategy to prevent a loss would be to A) sell an XYZ 35 call B) sell an XYZ 35 put C) buy an XYZ 35 put D) buy an XYZ 35 call
