66 Unit 17 - 20

Tenants In Common

a deceased tenant's fractional interest in the account is retained by that tenant's estate and is not passed to the surviving tenant

JTWROS

a deceased tenant's interest in the account passes to the surviving tenant

Per capita distribution

a distribution of an estate in which each grandchild and great-grandchild of the deceased inherits equally with the children of the deceased

Durable power of attorney

a specifically designated person maintains power over the account even upon the grantor's incapacitation, whether due to physical or mental causes BUT NOT DEATH

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

C Corporation

distinguishes the company as a separate entity from its owners. If a business expects to need significant capital, this form is almost always the preferred choice.

LLC, Partnership, an S Corp do not have

double taxation

General Partnerships

easy to form and easy to dissolve, but are generally not suited for raising large sums of capital. Partnerships allow the business' profits and losses to flow directly through to the investors for tax purposes, thus avoiding double taxation of profits at the business and individual levels

Efficient Frontier

graph representing a set of portfolios that maximizes expected return at each level of portfolio risk

Growth managers like to see

high P/E ratios, earning momentum

Living Will

individual's instructions for end-of-life situations

Large cap companies

$10B+

Mid cap companies

$2B - $10B

ETNs risks

- Credit Risk (they are unsecured debt obligations) - Market risk - Liquidity risk - Call, early redemption and acceleration risk (They are callable) - Conflicts of interest

Risks of Structured Products

- Little or no liquidity - Returns not realized until maturity - Credit risk - Lack of efficient pricing

General Partner

- Makes decisions that bind the partnership - Buys & Sells property for the partnership - Manages the partnership property and money - Supervises all aspects of the partnerships business - Maintains a minimum of 1% financial interest in the partnership

Risks of commodity investing

- Principal Risk - Volatility - Exposure to Foreign Markets - High Cost - Lack of Income

Capital Needs analysis

- payoff of the client's mortgage and other debts; income for the survivor(s) for a reasonable time; tuition for higher education; and estate taxes if the taxable estate will exceed $11.4 million in 2019.

Family balance sheet

-only includes assets and liabilities, not income (salary, interest or dividends)

Strategic Asset Allocation

-refers to the proportion of various types of investments that should compose a long-term investment portfolio

IRS regulations require a private foundation pay out each year an amount equal to

5% of its Net investment assets

Risk aversion means that if two assets have identical expected returns, a risk averse individual will choose the asset with the A. lower risk level B. higher standard deviation C. shorter payback period D. higher expected return

A

Which of the following best describes the steps of the asset allocation process? A. Determine the objectives and constraints; create the IPS, determine the asset allocation, allocate capital, monitor, and evaluate. B. Determine the objectives and constraints; determine the asset allocation, allocate the capital, create the IPS, monitor, and evaluate. C. Determine the objectives and constraints; perform asset allocation, create the IPS, monitor, and rebalance. D. Determine the objectives and constraints; determine capital market expectations, create the IPS, perform asset allocation, monitor, and evaluate.

A

Which of the following business structures is most appropriate for retaining money in the business? A. A C corporation B. A sole proprietorship C. An LLC D. An S corporation

A

An individual's net worth is A. the difference between the individual's assets and the individual's liabilities B. best determined by examining the individual's personal income statement C. largely irrelevant in identifying the individual's investment objectives D. another term for discretionary income

A - . An individual's net worth is the difference between the individual's assets and the individual's liabilities

A conservative client's portfolio is designed to have a 60/40 ratio of debt to equity securities. The initial investment was $250,000. One year later, the value of the portfolio is $260,000 with $90,000 of that represented by the equity portion. If the portfolio is rebalanced annually, this would require A. selling $14,000 of debt and buying $14,000 of equity B. selling $14,000 of equity and buying $14,000 of debt C. selling $6,000 of debt and buying $4,000 of equity D. buying $10,000 of equity and selling $10,000 of debt

A - A 60/40 ratio will require that debt represent $156,000 (60% of $260,000) and equity represent the balance ($104,000). Thus, this portfolio will be rebalanced by selling $14,000 of debt and purchasing $14,000 of equity

In a direct participation program, liability for the debts of the business falls upon the A. general partner(s) B. limited partner(s) C. shareholder(s) D. agent(s) selling the program

A - DPPs consist of at least one GP and one LP. The liability of the LPs is limited to their investment, including commitments made but not yet fulfilled.

Simply adding more securities to a portfolio does not necessarily reduce portfolio volatility. For example, if the beta of a portfolio was 1.1, adding which of the following stocks would most likely increase the overall portfolio volatility? A. Stock A, beta 1.5 B. Stock B, beta 1.1 C. Stock C, beta 1.0 D. Stock D, beta 0.7

A - The addition of a security with a beta higher (Stock A) than that of the current portfolio will increase overall portfolio volatility

A client has an account where, upon her death, she desires that her only son will receive 50% of account value and her 4 daughters will receive 12.5% each. The easiest way to accomplish this would be to title the account A. TOD B. JWTROS C. tenants in common D. in trust for the children

A - Transfer on death (TOD), choice A, requires no additional legal work and allows the account owner to designate beneficiaries in whatever percentages she wants. Furthermore, changes can be made at any time before death.

Which of the following statements is correct regarding a portfolio manager employing a tactical style? A. The commission expense will likely be higher than one employing a passive style B. The portfolio will be rebalanced more often that would be the case with a passive style C. The manager is looking to create a positive beta D. The portfolio will contain a high percentage of index ETFs

A - tactical style is an active one with frequent trading. As such, commissions will be a larger portion of the operating expenses

Complex Trust

A trust that accumulates income over time and is not required to make scheduled distributions to its beneficiaries.

Structured Notes with Principal Protection

Any structured product that combines a bond with a derivative component and offers a full or partial return of principal at maturity.

A socially responsible mutual fund would probably invest in companies A. generating high returns B. acting with high ethics and morality C. located in a single geographic area D. with a major presence on social media

B

An 83-year-old widower explains to you that he is risk averse and wishes to find an investment that will provide him with preservation of capital. Which of the following might you recommend? A. An index fund B. Bank-insured CDs C. Long-term U.S. government bonds D. Preferred stock

B

If 3 individuals have a tenants in common account with a firm and one individual dies, then A. the account must be liquidated and the proceeds split evenly among the 2 survivors and the decedent's estate B. the 2 survivors continue as cotenants with the decedent's estate C. probate is avoided on the estate of the deceased cotenant. D. the account is converted to joint with rights of survivorship

B - . In the case of a TIC account, the decedent's estate, choice B, becomes a tenant in common with the survivors.

Three friends plan to start a new business. It is anticipated it will be several years before the business turns a profit. Which of the following types of business organization would be best if they wish to limit their liability while, at the same time, being able to receive favorable tax treatment for the expected losses? A. C corporation B. S corporation C. General partnership D. Sole proprietorship

B - B. The only way to limit liability is through a corporation (or LLC or limited partnership—neither of which is offered here as a choice). The S corporation allows for the flow-through of operating losses to the shareholders while the C corporation does not

Sam Jones has been a successful businessman and is concerned that his youngest daughter will not be able to live within her means. To protect this from happening, Jones places a large sum of money into a trust for the benefit of the daughter. Because Jones knows he won't live forever, he arranges for the Fourth Fidelity Bank and Trust Company to have control over the assets. Which of the following statements is NOT true? A. Sam Jones is the grantor. B. Sam Jones is the trustee. C. Fidelity Bank and Trust Company is the trustee. D. Sam Jones's daughter is the beneficiary.

B - The person (A) who funds the trust is the grantor or settlor. The bank has been appointed to be trustee (C), and the daughter is the beneficiary (D) of the trust.

Among the reasons for investors to consider investing in real estate would be all of the following EXCEPT A. the ability to increase returns through leverage B. a high correlation with stock market returns C. possible tax advantages D. potential appreciation

B - ne of the investment advantages of real estate is that returns are generally negatively correlated with those of the stock market

Bank Insured CDs

Bank CDs eliminate interest rate risk They would be included on the family balance sheet Capital preservation with no risk of loss Insured by FDIC

Preservation of capital

Bank insured CDs, savings accounts, money market funds

In designing an investment portfolio for a new client, one of the first things to do is determine the client's A. home address B. Social Security or tax ID number C. risk tolerance D. beneficiary

C

When an agent with a broker-dealer opens a new options account for a client, in which order must the following actions take place? I. Obtain approval from a qualified supervisor. II. Obtain essential facts from the customer. III. Obtain a signed options agreement. IV. Enter the initial order. A. I, II, III, and IV B. I, II, IV, and III C. II, I, IV, and III D. II, I, III, and IV

C

An investor has a portfolio diversified among many different asset classes. If there was an immediate need for cash, which of the following would probably be the most liquid? A. Cash value from a universal life insurance policy B. CDL Common Stock Mutual Fund C. QRS Money Market Mutual Fund D. XYZ International Stock Mutual Fund

C - , generally come with a check-writing privilege offering investors the opportunity to convert the asset to cash at once. Although all mutual funds are readily redeemable, under the Investment Company Act of 1940, the fund has 7 days to redeem. One must request the cash value from the insurance company and, in many cases, that can take 30 days or longer.

A new account is opened for joint tenants with rights of survivorship. All of the following statements are true EXCEPT A. orders may be given by either party B. mail can be sent to either party with the permission of the other party C. checks can be drawn in the name of either party D. in the event of death, the decedent's interest in the account goes to the other party

C - . Although either party may enter an order, any money or securities delivered out of the account must be in the names of both owners

An investor in debt securities might elect to use any one of the following techniques to limit interest rate risk EXCEPT A. barbells B. bullets C. increasing the duration D. laddering

C - . The longer the duration, the greater the interest rate risk (choice C), so the investor would not want to do that.

Benefits of investing in a DPP would include I. high liquidity II. flow-through of operating losses III. limited liability IV. immunization against tax audit A. I and II B. I and IV C. II and III D. III and IV

C - DPPs are structured as flow-through entities, giving their investors the opportunity to receive income without the partnership being taxed first

For which of the following types of clients would the suitability requirements be somewhat more relaxed? A. A guardian for an orphan B. A charity C. A foundation D. An executor

C - Guardians and executors are fiduciaries controlling assets of those who cannot speak for themselves. Charities raise funds from donors expecting that the money will be invested wisely

An investor is reading a report that industrial demand for copper is expected to double in the next five years. This might lead the investor to A. buy corn futures B. sell copper futures C. invest in several copper mining companies D. modify the investor's portfolio to take a larger cash position

C - If the demand for copper increases, those companies producing the commodity should find their stock prices increase nicely

Investors interested in adding precious metals to their portfolios would likely consider A. coal B. diamonds C. gold D. tin

C - Of these choices, only gold, (C) is considered a precious metal. Diamonds are certainly precious, but they are not a metal. Tin, is a metal, but is not considered precious

According to modern portfolio theory, the optimal portfolio is one that A. lies above the efficient frontier B. lies below the efficient frontier C. lies on the efficient frontier D. provides the lowest return for the highest risk

C - The efficient frontier is a curve representing the amount of return for a specified risk. Portfolios residing on that curve provide the highest return for that level of risk and are considered optimal or efficient portfolios

When performing a life insurance needs analysis, all of the following would be evaluated EXCEPT A. projected future earnings B. mortgage amortization schedule C. stock market volatility D. anticipated inflation rate

C - a life insurance policy has a guaranteed death benefit, so even with a variable life policy, market fluctuations will not lead to a benefit below that minimum

An investor looking for an open-end investment company with an objective of providing current income to its shareholders, would most likely choose A. a common stock fund B. a growth fund C. an income fund D. a venture capital fund

C - have the goal of producing income; that is why they are named as such

CAPM

Capital Asset Pricing Model, a linear model that relates risk and return: Re = Rf + Beta(Rm-Rf).

Tenants By Entirety

Co-ownership form that can only be used by married couples. Created by express wording. Surviving spouse has right of survivorship. Neither spouse may sell, gift, devise, or otherwise transfer property without permission of other spouse.

Capital Growth Vehicles

Common stock

Investor Objective:: Growth

Common stock or common stock mutual funds

Weak Form Market Efficiency

Current security prices fully reflect all currently available security market data

. Several investors open an account in joint tenancy. For suitability purposes, financial information is required on which of the following investors? A. The majority of the investors B. The largest investor only C. Only the one authorized to trade the account D. All of the investors

D

A living will is used to: A. avoid the cost and time of probate B. eliminate, or at least reduce, estate taxes C. ensure that the author's assets are properly distributed after death D. express the author's end-of-life wishes

D

Barbell Strategy

Funds are allocated to bonds with a short term to maturity as well as to bonds with a long term to maturity.

Which of the following individuals may not open a joint account? A. Two spouses B. Three sisters C. Two friends D. Parent and a minor child

D

Which of the following statements regarding a bond ladder strategy is CORRECT? A. A bond ladder strategy involves the purchase of very long-term and very short-term bonds. B. A laddered portfolio of bonds will provide lower yields than a portfolio consisting entirely of short-term bonds. C. A bond ladder strategy is generally more aggressive than a bond barbell strategy. D. A bond ladder strategy is a relatively easy way to immunize a portfolio against interest rate risk.

D - A bond ladder strategy, choice D, is a relatively easy way to immunize a portfolio against interest rate risk.

Followers of the efficient market hypothesis believe that A. following the business cycle is the best way to maximize returns B. concentration rather than diversification will produce superior returns C. by following the pundits on TV, you'll wind up rich D. an efficient market is one that produces random results

D - EMH is really just an extension of the Random Walk Theory

. If ABC Fund pays regular dividends, offers a high degree of safety of principal, and appeals especially to investors in the higher tax brackets, ABC is A. an aggressive growth fund B. a corporate bond fund C. a money market fund D. a municipal bond fund

D - Municipal bonds are considered second only to U.S. government securities in terms of safety. Furthermore, whenever you see a question about an investor in a high tax bracket, always look for the answer choice with municipal bonds; the tax-free income is the key

A married couple is 55 and 57 years old. The older of the two plans to retire at 62 and the younger at 65, and both are healthy. What is the most appropriate estimate of the time horizon for their retirement portfolio? A. 5 years B. 7 years C. 8 years D. More than 20 years

D - me horizon does not end at retirement age. The portfolio will have to last them throughout their retirement until their death. On the basis of current life expectancy tables, the money will have to last them at least 20 years

Exchange Traded Notes

Debt instruments in which the issuer promises to pay a return based on the performance of a specific debt index.

Parnerships & LLCs are generally easier to form and dissolve than

a C corporation

Current Income Vehicles

Gov bonds and notes Agency bonds Corporate bonds Preferred stock Utility company common stock

Speculation Vehicles

Highly volatile stocks High yield bonds options commodity futures

Investor Objective: Preservation of capital;safety

Insured Bank CDs, money market instruments or funds and T Bills

DPPs disadvantages

Liquidity Risk Legislative Risk RIsk of Audit Depreciation Recapture

Small Cap companies

Market cap between $300M - $2B

Investor Objective: Liquidity

Money market funds

2 methods of passive real estate investing

REITs and RELPs

Investment Objectives

Return Requirements & Risk Tolerance

Modern Portfolio Theory

a concept and procedure for combining securities into a portfolio to minimize risk

Strong Form Market Efficiency

Security prices fully reflect all information from both public and private sources

Easiest business structure to set up

Sole propreitorship

Weak Form Market Efficency

TA - Doesnt Work FA, and Inside Info - Does Work

Semi Strong Market efficiency

TA and FA - Doesnt work Inside information does work

Strong form market efficiency

TA and FA and Inside Info does not work Random walk does work

Testamentary Trust

The individual's will stipulates that, at death, the testator's property is to be placed in trust for the benefit of one or more beneficiaries.

Capital Market Line

The same thing as a capital allocation line but the risky portfolio is now a portfolio of all the investable assets available in the market - Includes standard deviation but not alpha or beta

Investment Constrainsts

Time Horizon Liquidity Taxes Laws & regulations Unique circumstances and or preferances

Investor Objective: Income

US gov bons Muni or muni bond funds Corp or corp bond funds Pref stock and utility stock

Investor Objective: Speculation

Volatile stocks, high yield bonds, options, and leveraged/inverse ETFs

Tactical Asset Allocation

When a manager varies from the strategic allocation weights when attractive opportunities are present

Limited power of attorney

allows entering of buy and sell orders but not the withdrawal of funds

Fidicuary

anyone legally appointed and authorized to represent another person, act on that person's behalf, and make decisions necessary to the prudent management of that person's account.

On the exam, the first choice for preservation of capital should always be

bank-insured CDs

Bullets Strategy

bonds purchased at different times but all maturing at the same time. This tends to allow the investor to capture current interest rates as they change rather than having the entire portfolio locked into one rate.

LLC

combines benefits of incorporation (limited liability) with the tax advantages of a partnership (flow-through of taxable earnings or losses). The LLC owners are members

Semi Strong Form Market Efficency

current stock prices not only reflect all historical price data but also reflect data from analyzing financial statements, industry, or current economic outlook.

Full power of attorney

deposit or withdraw cash or securities; and/or make investment decisions for the account owner

Value managers like to see

low P/E ratios

Optimal Portfolio

makes the best trade-off between risk and reward for a given investor's investment profile.

S corporation

offers investors the limited liability associated with corporations in general. The profits and losses are passed through directly to the shareholders in proportion to their ownership in the S corporation. Unlike an LLC, which can have an unlimited number of members, an S corporation may not have more than 100 shareholders

Only the sole proprietorship and C corp are taxed

on their income

Limited partner

passive investors with no management or day-to-day decision-making responsibilities; therefore, they usually are not held personally responsible for the partnership's indebtedness.

Benefits of investing in commodities

potential hedge against inflation diversification potential returns

Limited Partnership

the management (and liability) is assigned to the general partner(s) while the limited partner(s) are passive and have liability limited to their investment

Per Stirpes

the method of proportionately dividing an estate between beneficiaries

Ladder Strategy

the portfolio is constructed to have approximately equal amounts of each maturity

Viatical Settlement

the sale of a life insurance policy by a terminally ill insured to another party, typically to investors or investor groups, who hope to profit by the insured's early death

GPs assume

unlimited liability