Unit 4 Series 65
Sector Rotation Strategy
- There are periods during which certain sectors outperform other sectors - Understanding the relationship between business cycle performance of different sectors can help in sector rotation strategies - Timing is the key TACTICAL
TOD Account
-Transfer on Death account. -allows the investor to pass, upon his/her death, the registered securities directly to a specific beneficiary -no concern about probate -beneficiary must send a death certificate to re-register their name on the account/securities -if beneficiary is a minor at the time the owner dies, securities are held in a trust by a custodian until the minor reaches 18 years old
Simple Trusts vs Complex Trusts
-simple trusts MUST distribute all income earned during the year received -complex trusts may accumulate income, permitted deductions for distributions
Bond ladder strategy
A bond ladder strategy is a relatively easy way to immunize (protect) a portfolio against interest rate risk. By holding many positions across the yield curve, the individual is diversified in the event that yields behave differently in one part of the curve than in another. The laddered portfolio will generally provide higher (not lower) yields than a portfolio consisting entirely of short-term bonds. Purchasing very long-term and very short-term bonds describes the bond barbell strategy, not the bond ladder strategy.
Private Activity Bonds
A category of municipal bonds, where the funds will generally be used for a private enterprise. The interest may (or may not) be taxable for federal income tax purposes.
Tenants in Common (TIC)
A form of joint ownership of an account whereby a deceased tenant's fractional interest in the account is retained by his estate.
The president of a business entity opens an account in the name of the business. When determining the suitability of recommendations to the account, knowing the president's personal financial condition is necessary for each of the following forms of business structure EXCEPT A) a C corporation B) an LLC C) a sole proprietorship D) an S corporation
A) a C corporation Only in the case of the C corporation are the income and losses of the investment account taxed at the corporate level rather than passed through to the owners.
Each of the following could cause an investor to be subject to the alternative minimum tax EXCEPT A) interest received on school district GO bonds B) accelerated depreciation taken on certain property C) interest received on private activity municipal bonds D) excess intangible drilling costs
A) interest received on school district GO bonds General obligation GO bonds are not subject to the AMT.
If a trust has been established under which the father is to receive income for life, and his son is to receive the trust principal on the father's death, which of the following statements is TRUE?
A. The trustee is not required to notify the son when an income distribution is made to the father.
Published studies have shown that much of the performance of a portfolio can be attributed to which of the following factors?
Asset allocation A study conducted by Sharpe and Markowitz revealed that 91.5% of the returns achieved by the average investor were based upon the allocation of assets among various investment classifications
If the expected return on the market is 20% and the risk-free rate is 4%, a stock with a beta coefficient of 0.8 would have an expected rate of return under CAPM of A) 19.2% B) 16.8% C) 12.8% D) 16.0%
B) 16.8% The formula is the risk-free rate (.04) plus the product of the stock's beta (.8) and the difference between the expected return on the market and the risk-free rate(.20 - .04). In this case, it would be .04 + .8(.16) or .04 +.128 = .168
An investment adviser registered with the SEC could have all of the following as advisory clients EXCEPT A) the DEF Life Insurance Company B) the ABC Unit Investment Trust C) Mildred, an accredited investor D) the XYZ Growth Fund
B) The ABC Unit Investment Trust Be careful—UITs do not have investment advisers. Any of the others could have advisory accounts.
A client who states that she wants to avoid petroleum company stocks is expressing a A) recommendation B) non-financial consideration C) form of risk avoidance D) financial consideration
B) non-financial consideration In all likelihood, this is for a personal value, an environmental concern (good data gathering would probably pick that up) and values are non-financial considerations.
An investment adviser representative's client lost her father to lung cancer. Among the assets bequeathed to her were 2,000 shares of a tobacco stock. Which of the following is NOT a consideration when recommending to her what to do with the stock? A) Her financial goals B) Her employment situation C) Her father's years of investment experience D) The cause of her father's death
C) Her father's years of investment experience An adviser's recommendations to a client are not impacted by the degree of someone else's investment experience or knowledge. In this case, one could expect some resentment towards holding shares of a tobacco company when the cause of a loved one's death is lung cancer.
Gathering information about a prospective advisory client would probably not be done by A) personal interview B) use of a questionnaire C) using a third party interviewer D) chat over a lunch
C) using a third party interviewer Because of the confidentiality of the kind of information an investment adviser needs to properly act as a fiduciary in handling a new client's account, it is unlikely that the role would be delegated to an outside third party.
If an investor is in the highest federal income tax bracket and is subject to the alternative minimum tax, which of the following securities should an agent recommend? A) Treasury bond B) Corporate bond C) Industrial revenue bond D) General obligation bond
D) General obligation bond Municipal bonds are suitable for the portfolio of an investor who is in a high tax bracket because the interest is exempt from federal income tax. A general obligation (GO) bond is a better recommendation than an industrial revenue bond because the interest on industrial revenue bonds is likely subject to the AMT.
A 45-year-old investor wants the greatest possible monthly income with the preservation and stability of capital as secondary objectives. Which of the following investments would you recommend? A) Money market mutual fund B) Growth and income fund C) Growth mutual fund D) Long-term bond fund
D) Long-term bond fund The only choice that provides stability of capital is the money market fund, but that is not one of the investor's objectives and the monthly income is quite low. Although the 2 other funds don't offer stability, they certainly don't provide a high income (even the growth and income fund). If you want income, you invest in bonds, especially those with longer maturities.
One of the asset allocation classes is fixed income securities. When an IAR is determining which securities to fill that portion of the client's portfolio, which of the following would NOT be included? A) Municipal bonds B) Mortgage-backed securities C) Treasury bonds D) Preferred stock
D) Preferred stock
Which of the following statements about S corporations is NOT correct? A) An S corporation may have only 1 class of stock. B) An S corporation may have no more than 100 shareholders. C) Stockholders of S corporations are taxed on the net profits of the corporation, even if they do not receive taxable dividends. D) S corporation status offers greater opportunity for raising additional capital than do other forms of business structure.
D) S corporation status offers greater opportunity for raising additional capital than do other forms of business structure. S corporations are flow-through vehicles, so any earnings are taxable to shareholders, whether or not they are paid out as dividends. An S corporation may have no more than 100 shareholders and may issue only 1 class of stock so its ability to raise large amounts of capital is rather limited.
When opening an account for a trust, which of the following sets of terms are synonymous? A) Grantor - trustee. B) Trustee- settlor. C) Beneficiary - trustee. D) Settlor - grantor.
D) Settlor - grantor. The settlor, sometimes referred to as the grantor, is the person who establishes the trust. The trustee administers the trust and could be the grantor but does not have to be.
A deceased individual with 2 surviving children and a spouse, had established a trust for his family. The trust document appointed both children as co-trustees. The surviving spouse is to receive current income, and his 2 children will receive equal shares of the remaining principal upon the spouse's death. As the adviser to the account, you A) focus on generating income for the spouse B) focus on increasing principal for the children C) attempt to generate reasonable income while keeping the principal intact for the children D) follow the instructions of the trustees
D) follow the instructions of the trustees The responsibility of following the trust's instructions is that of the trustee(s). Should they attempt to deviate from that, the adviser should inform them that they face potential liability under trust law. However, in all cases, the adviser must follow the direction of the trustees. As a practical matter (not tested), if the trustees appear to violate the trust's instructions, many advisers would terminate their relationship to avoid any potential liability.
An example of an interest-on-interest reinvestment program is A) reinvesting the earnings on a bond UIT B) reinvesting the interest received on a bond C) reinvesting the dividends distributed on a bond fund D) interest left to compound on a bank-insured certificate of deposit
D)interest left to compound on a bank-insured certificate of deposit Interest-on-interest reinvestment is, as the term implies, the practice of compounding earnings by reinvesting them. This is traditionally the way a bank savings account or certificate of deposit builds in value. Reinvesting the dividends on a bond fund is dividend reinvestment, even though most, if not all, of the fund's income is generated by interest. Same with the UIT and there is no program for reinvesting bond interest similar to a DRIP for reinvesting dividends.
Strong Form Market Efficiency
Security prices fully reflect all information from both public and private sources
bullet bond strategy
The bullet strategy involves investing in bonds all maturing at or about the same time (such as when a child is entering college). As such, once the portfolio is established, the investor basically sits and waits for the bonds to mature. Barbell and ladder strategies have bonds maturing at regular intervals requiring an active role in reinvesting the principal.
Which of the following best describes the determination of a client's risk tolerance?
The client's ability and willingness to take risk Risk tolerance is a combination of two factors. One is the emotional willingness to face a loss and the other financial capacity to absorb a loss without a change in lifestyle. The client's net worth gives an indication of the capacity, but says nothing about the emotion.
Using industry jargon, the tax on the last dollar of income is at
The marginal Rate The IRA defines marginal tax rate as "the highest rate that you will pay on your income." Basically, as you make more money, you pay tax at a higher rate incrementally. The effective tax rate is the average that you pay on all of your income.
CAPM (Capital Asset Pricing Model)
Theory of the relationship between risk and return which states that the expected risk premium on any security equals its beta times the market risk premium
optimal portfolio
Where frontier of risky assets intersects capital market line
Efficient Market Hypothesis
argument that stocks are always priced about right, and that bargains are hard to find because they are closely watched by so many investors
Short Hedge
sale of a futures contract to hedge against a decrease in the price of the asset that exposes you to a risk
value stocks
stocks that tend to have lower price-earnings ratios and are priced low in relation to current earnings This is an example of the kind of company appealing to those who follow a value style of portfolio management. The company is selling at a low P/E ratio of 7 to 1 ($21/$3) with a liberal dividend yield of 3.62% (.76/$21). The high cash balance only adds to the value.
Long Hedge
the buy of a futures contract to hedge against an increase in the price of the asset that exposes you to a risk
Capital Asset Pricing Model (CAPM)
the equation of the SML showing the relationship between expected return and beta
interest on interest
the interest that is earned upon the re-investment of interest payments
When are estate taxes due?
9 months after death
S corporation
corporation taxed as though it were a partnership with restrictions on shareholders
Efficient Frontier
graph representing a set of portfolios that maximizes expected return at each level of portfolio risk
Capital Market Line
the line on a graph of return and risk (standard deviation) from the risk-free rate through the market portfolio The CML provides an expected return for a portfolio based on the expected return of the market, the risk-free rate of return, and the standard deviation of the portfolio in relation to the standard deviation of the market. The equation for the CML uses the: expected return of the portfolio; risk-free rate; return on the market; standard deviation of the market; and standard deviation of the portfolio.
Random Walk Hypothesis
the theory that stock price movements are unpredictable, so there's no way to know where prices are headed
tenants with rights of survivorship
A joint tenancy or joint tenancy with right of survivorship (JTWROS) is a type of concurrent estate in which co-owners have a right of survivorship, meaning that if one owner dies, that owner's interest in the property will pass to the surviving owner or owners by operation of law, and avoiding probate.
Testamentary Trust
A trust created by will.
complex trust
A trust that accumulates income over time and is not required to make scheduled distributions to its beneficiaries.
An investor is long 100 shares of XUZ common stock. If the investor wishes to generate some additional income while also creating a partial hedge, the recommended strategy would be to A) go short an XUZ put B) buy additional XUZ stock C) go long an XUZ call D) go short an XUZ call
D) go short an XUZ call The only way to generate income with options is to sell them (take a short position). Selling the call brings in a premium which creates a partial hedge.
Living Trust (Inter Vivos)
a trustor creates the trust to be effective during his or her lifetime
Weak Form Market Efficiency
If an investor can use historical news, or historical price and volume information, to consistently predict future stock price changes then the markets are not weak form efficient
Per Stripes Division
Inheritance is divided equally among branches of the family
TENANTS ENTIRETY (ONLY CREATED BY MARRIED PERSONS)
WHAT IS THE BEST WAY TO TAKE TITLE FOR A MARRIED COUPLE SO THAT 1. THEY MAY NOT SELL OR GIVE AWAY HIS/ HER PORTION WITHOUT CONSENT OF THE SPOUSE 2. WILL NOT GO TO HEIRS OF DECEASED SPOUSE BUT RATHER TO THE REMAINING SPOUSE
simple trust
a trust that requires all of the trust income to be distributed on an annual basis to the beneficiaries and does not have a charitable organization as one of its beneficiaries
semi-strong form efficiency
all public information is reflected in a stock's current price
Dividend Reinvestment Plan (DRIP)
an investment plan that allows the investor to automatically reinvest stock dividends in the same company's stock without paying any brokerage fees
large-cap stock
any company with a market cap of at least $10 billion to be large-cap.
An investor purchases 100 shares of ABCE common stock at $70 per share. Thirteen months later, the stock is sold when the market price is $50 per share. Which of the following activities made 20 days after the sale of the stock at $50 per share, would NOT violate the wash sale rule? A) Purchasing 5 ABCE convertible bonds with a conversion price of $50 B) Purchasing 100 shares of ABCE common stock C) Purchasing an ABCE put option D) Purchasing an ABCE call option
C) Purchasing an ABCE put option The wash sale rule applies when the same or substantially identical security as a stock sold at a loss is acquired within the 30 day period prior to and after the sale. Buying a put is not a problem because the put only allows the holder to sell the stock, not buy it. Please note that a bond convertible at $50 is convertible into 20 shares, so 5 bonds will enable the investor to convert into 100 shares.
An estate planning tool that may be used to take advantage of the lifetime estate tax exclusion is the A) complex trust B) bypass trust C) testamentary trust D) living trust
B) bypass trust The bypass trust is most commonly used to maximize estate tax savings by having the first to die of a married couple leave the lifetime exclusion ($11.4 million for 2019) to their children with the balance taken against the unlimited marital deduction. This results in saving estate taxes on that $11.4 million. With the "portability" provisions of the tax law signed on December 17, 2010, this is of limited value.
