Unit 19 - Client Profile

Which economic concept attempts to explain why investors behave irrationally? A) Behavioral finance B) Efficient market hypothesis (EMH) C) Modern portfolio theory (MPT) D) Laffer curve

A) Behavioral finance There is a premise that investors are irrational when it comes to making investment decisions. The study of this is known as behavioral finance.

Relatively high portfolio volatility is most tolerable to investors with A) an intermediate-term time horizon B) a long-term time horizon C) a diversified portfolio D) a short-term time horizon

B) a long-term time horizon

Which of the following items is NOT necessary to establish before helping a client open an investment account? A) Established short- and long-term investment goals B) Adequate life insurance C) Emergency fund D) Zero balance on all credit cards

D) Zero balance on all credit cards

A client with 25 years until retirement should invest primarily in A) bonds B) preferred stocks C) private placements D) common stocks

D) common stocks

One of your clients has a tendency to follow the actions of a larger group of people when making financial decisions, whether those actions are rational or not. The client's behavior is an example of A) confirmation bias. B) overconfidence. C) anchoring. D) herd mentality.

D) herd mentality.

An investment adviser should develop an investment policy based on the needs and objectives of the client. When the client is a business entity structured as a general partnership, the investment policy would have to consider A) the mean requirement of the wealthiest and the poorest partner B) the liability of the general partner C) the number of limited partners D) the objectives of all the partners on a collective basis

D) the objectives of all the partners on a collective basis

A couple in their early 30s has been married for 4 years, their disposable income is relatively high, and they are planning to buy a condominium. If they need a safe place to invest their down payment for about 6 months, which of the following mutual funds is the most suitable for these customers? A) LMN Cash Reserves Money Market Fund B) ABC Growth & Income Fund C) ATF Capital Appreciation Fund D) XYZ Investment-Grade Bond Fund

A) LMN Cash Reserves Money Market Fund These customers are preparing to make a major purchase within the next few months, so they require a highly liquid investment to keep their money safe for a short amount of time. The money market fund best matches this objective.

An agent's recommendation for the purchase of a municipal security to a customer who wants fixed income and is in a relatively low tax bracket would in most cases be I. unsuitable and unethical II. a securities felony III. grounds, in extreme cases, for suspension or revocation of the agent's license IV. outside regulatory jurisdiction A) II and III B) I and III C) IV only D) I only

B) I and III

Which of the following is NOT a standard used to determine whether a particular mutual fund is suitable for an individual investor? A) Whether the investment is made directly through the fund itself or through a broker-dealer B) The investor's estimated tolerance for risk and volatility C) The amount of time elapsing between the deposit of the investment and the investor's anticipated use of the funds D) Components of an investor's current portfolio

A) Whether the investment is made directly through the fund itself or through a broker-dealer

Pemberton bought a stock share at $50 and wants to earn a profit, so he decided he will never sell it below $52. The company has now underperformed for multiple quarters as per street analysts, and the stock is down to $48. Pemberton continues to hold the stock in line with his original plan. In this case, Pemberton may be exhibiting A) anchoring bias. B) regret aversion bias. C) herding bias. D) overconfidence bias

A) anchoring bias. In behavioral finance, an anchoring bias is when people tend to base their decisions on reference points that are often arbitrarily chosen. In this case, Pemberton "anchored" his selling price to the $50 he paid for it and will not recognize changes in the market.

In projecting future cash requirements, one of the tools is a capital needs analysis. When doing one, all of the following would be considered capital needs EXCEPT A) rolling over a 401(k) into an IRA B) a $100,000 loan for law school with a due date in 10 years C) a home equity loan with a $15,000 balance D) a $20,000 loan for undergraduate school with a due date in 6 years

A) rolling over a 401(k) into an IRA A capital needs analysis attempts to determine money that would be needed in the event of an individual's sudden passing. Included would be any outstanding debt obligations, regardless of when they are due (they will have to be paid off sometime). However, an asset such as the 401(k) is not a need; it is something that will help meet the need.

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

B) a money market fund

It would be CORRECT to state that when an investor has a shorter time horizon, A) the exposure to inflation risk is increased B) the need for liquidity is more important C) the greater the duration D) the risk level is raised

B) the need for liquidity is more important

John and Jane have a net worth of $20,000 and total assets of $150,000. If their revolving credit and unpaid bills totals $8,000, how much are their total liabilities? A) $138,000 B) $122,000 C) $130,000 D) $150,000

C) $130,000 The balance sheet formula is assets − liabilities = net worth. Therefore, $150,000 − liabilities = $20,000, where liabilities = $130,000. Did you answer $122,000? That is the amount of the liabilities other than the revolving credit, but that is not what the question is asking for.

A couple, ages 63 and 66, are long-time clients of your firm and are in good health. They plan to retire from gainful employment in 4 years and wish to discuss decumulation strategies. One of the important factors to consider is the time horizon for this couple. Which of the following would be the best estimate to use? A) 4 years B) 10 years C) 25 years D) 8 years

C) 25 years

Which of the following statements about investment constraints is least accurate? A) Unwillingness to invest in tobacco stocks is a constraint. B) Diversification efforts can increase tax liability. C) Investors with short time horizons are not likely to worry about liquidity. D) Being an accredited investor increases investment opportunities.

C) Investors with short time horizons are not likely to worry about liquidity.

An investment adviser is conducting the initial meeting with a new advisory client. Which of the following is least necessary when gathering information necessary to fulfill the engagement? A) Collecting personal financial information B) Inquiring about the age or dates of birth of dependents C) Determining which securities to purchase for the client's investment portfolio D) Inquiring about the number of dependents

C) Determining which securities to purchase for the client's investment portfolio

In determining an investor's risk tolerance, an investment adviser representative must consider I. level of tolerance toward market volatility II. investment time horizon, long term or short term III. liquidity requirements IV. investment temperament A) I, II and III B) I and II C) I, II, III and IV D) I only

C) I, II, III and IV

Years ago, following your advice, a client opened a 529 Plan to save for their son's college education. The child is now about 3 years from beginning his freshman year. The client, believing that the stock market is currently undervalued, wishes to reallocate the plan assets so that most of the funds are in a broad stock market index portfolio. At this time, your advice would probably be against this allocation because of A) liquidity risk B) business risk C) market risk D) interest rate risk

C) market risk

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

C) the difference between the individual's assets and the individual's liabilities