FIN 353 Practice portal Questions

Using the constant growth dividend valuation model, calculate the intrinsic value of a stock that pays a dividend this year of $2.00 and is expected to grow at 6%. The beta for this stock is 1.5, the risk-free rate of return is 3% and the market return is 12%. A)$20.19. B)$28.75. C)$35.33. D)$48.27.

$20.19. RationaleUse the constant growth dividend model to solve for intrinsic value. The question does not provide the required rate of return, however the capital asset pricing model can be used to solve for required rate of return.

Tan and Chia are contemplating making a contribution to their grandchildren's education fund. They are both retired, have a significant amount of discretionary income and are concerned about estate transfer taxes. Which of the following education planning techniques would you recommend? A)Prepaid Tuition. B)Coverdell ESA. C)UGMA or UTMA. D)529 Savings Plan.

529 Savings Plan. Rationale529 Savings Plans are a good planning technique for grandparents that want to pay for their grandchildren's education. It also allows the grandparents to lower their gross estate.

Mutual fund XYZ has a beta of 1.5, a standard deviation of 12%, and a correlation to the S&P 500 of 0.80. How much return of fund XYZ is due to the S&P 500? A)20%. B)64%. C)80%. D)100%.

64%. RationaleCorrelation is 0.80, therefore r-squared is 0.64. (R-squared = correlation coefficient squared). Therefore 64% of the mutual fund's return is due to the S&P 500. Remember, r-squared measures the percentage of return due to the market.

A bond fund had the following yearly returns:Year 1 at 14%Year 2 at 7%Year 3 at -3%Year 4 at 18%Year 5 at 9%What is the standard deviation of the returns?

7.97 Rationale10BII Keystrokes14 [∑+1]7 [∑+]3[+/-][∑+]18[∑+]9[ ∑+][Orange] [Sx][Sy]Answer: 7.9712C Keystrokes14 [∑+]7 [∑+]3 CHS[∑+]18[∑+]9[ ∑+][g] [.]Answer: 7.97

Which of the following is(are) required for a CFP® professional to represent compensation as "fee-only?"1. The CFP® professional and the CFP® professional's firm receive no sales-related compensation.2. Related parties receive no sales-related compensation in connection with any professional services the CFP® professional or CFP® professional's firm provides to clients.3. The CFP® professional and the CFP® professional's firm are not compensated by payment of an hourly rate. A)1 only. B)1 and 2. C)1 and 3. D)2 and 3.

1 and 2. Rationale Both statements 1 and 2 are required for a CFP® professional to describe compensation as "fee-only." 3 is incorrect because charging and hourly rate is a form of fee.

Which of the following allow tax-free distributions to pay for college room and board?1. 529 plan.2. ESA.3. EE bonds. A)1 and 2. B)1 and 3. C)3 only. D)None of these can be tax-free to pay for college room and board.

1 and 2. Rationale Statement 3 is incorrect because EE bonds can only be redeemed tax-free to pay for tuition and fees.

Violations of the Standards of Conduct may subject a CFP® professional to discipline. Which of the following is true with respect to any such violations?1. Discipline extends to the rights of CFP® professionals to use CFP® marks.2. The rules are designed to be a basis for legal liability to any third party.3. CFP Board has the exclusive right to ensure that CFP® professionals meet and continue to meet CFP Board's initial and ongoing certification requirements. A)1 and 2. B)1 and 3. C)2 and 3. D)1, 2, and 3.

1 and 3. RationaleStatements 1 and 3 are correct regarding CFP Board's Standards of Conduct. Statement 2 is incorrect.

Ralf, a 40-year-old nurse who earns $80,000 a year, saves 14% of his annual gross income. Assume that Ralf wants to maintain his exact pre-retirement lifestyle. Calculate Ralf 's wage replacement ratio using the top-down approach (round to the nearest %) and using pre-tax dollars. A)70%. B)78%. C)86%. D)92%.

78%. Rationale Dollar ValuePercentage$80,000.00=100.00%Salary($11,200.00)=(14.00%)Less: Current Savings($6,120.00)=(7.65%)Less: Payroll Taxes$62,680.00=78.35%Wage Replacement Ratio

Margaret, a 35-year-old client who earns $45,000 a year, pays 7.65% of her gross pay in Social Security payroll taxes, and saves 8% of her annual gross income. Assume that Margaret wants to maintain her exact pre-retirement lifestyle. Calculate Margaret's wage replacement ratio using the top-down approach (round to the nearest %) and using pre-tax dollars. A)70%. B)80%. C)84%. D)90%.

84%. RationaleDollar Value Percentage $45,000.00= 100.00%Salary ($3,600.00)=(8.00%) Less: Current Savings ($3,442.50)=(7.65%)Less: Payroll Taxes $37,957.50=84.35%Wage Replacement Ratio

Which of the following is an undivided ownership in the property that, upon death of one owner, automatically passes to the surviving owner?1. Tenants by the Entirety.2. Tenants in Common.3. Community Property.4. Joint Tenancy with Rights of Survivorship. A)1 and 4. B)1 and 2. C)2 and 4. D)3 and 4.

1 and 4. RationaleTenancy by Entirety is Joint Tenancy or Joint Interest that can only exist between spouses. This and JTWROS allow for automatic passage of property rights to other owners. Tenants in Common provides for ownership to pass to the owners' heirs. Community Property has no automatic retitling feature and therefore the decedents' ½ passes through probate.

Which of the following tasks are the primary responsibilities of the personal representative of an estate?1. Inventory the estate.2. File income tax returns for all beneficiaries.3. Contest payment of all debts of the estate.4. Probate the will. A)1 and 4. B)2 and 3. C)2 and 4. D)1, 3 and 4. E)1, 2, 3 and 4.

1 and 4. RationaleThe beneficiaries file their own returns and all legitimate debts are paid without contest.

Which of the following is/are characteristics of a municipal bond unit investment trust?1. Additional securities are not added to the trust.2. Shares may be sold at a premium or discount to net asset value.3. Shares are normally traded on the open market (exchanges.)4. The portfolio is self-liquidating. A)1 only. B)1 and 4. C)2 and 3. D)2 and 4.

1 and 4. RationaleUnit investments do not make additions to investments once the trust has been structured. Shares are not bought or sold after structuring and the portfolio is self-liquidating.

Income to U.S. taxpayers is taxed in the year it is derived in which of the following situations?1. Interest earned but reinvested in a savings account in an FDIC savings bank.2. Unrealized long-term capital gains on stocks.3. Income directly earned on most municipal bonds.4. Deferral contributions are made to qualified retirement plans.5. Increased value of personal residence. A)1 only. B)1 and 3. C)2, 3, and 4. D)2, 3, 4, and 5.

1 only. RationaleAll others are forms of legal tax deferral or tax exemption.

Susie has the following expenditures during the current year: 1. Health Care $800 2. Savings $4,000 3. Travel $500 4. Gift to Grandchildren $1,000 Which of these expenditures would you expect to decrease during Susie's retirement? A)2 only. B)1 and 3. C)2 and 4. D)1, 2, 3, and 4.

2 only. RationaleSusie is likely to decrease her savings during retirement. She is likely to increase her health care expense since she will begin to age and need more medical attention. She is likely to increase her travel expense as she will have more free time available for travel. She is likely to increase the amounts she gives to her grandchildren since she will be in the distribution phase.

Calvin and Holly Burns want to plan for the education of their son, age 6. They expect to send him to college when he is 18 and may want to send him to a private high school. Their AGI is $120,000 now, and they expect it to increase by 5% annually. They want to invest so that they avoid taxes on the funds. What techniques will provide tax-free funds to finance both private school and college for the Burns' son? 1. Series EE bonds.2. Sec. 529 plan. 3. Municipal bonds in a UTMA account.4. Coverdell ESA. A)1 and 3. B)1 and 4. C)2 and 3. D)2, 3, and 4.

2, 3, and 4. Rationale Up to $10,000 can be distributed tax-free annually from a 529 plan for tuition at elementary and secondary private and public schools, and distributions from 529 plans are tax-free for qualified higher education expenses at postsecondary schools. The Coverdell ESA will allow for payment of secondary and postsecondary qualified education expenses, and the withdrawals are excluded from income. The Series EE bonds are not likely to be tax-free for post-secondary expenses because the Burns family will have an AGI over the phaseout level, and the bonds cannot be redeemed tax-free for secondary school tuition. Municipal bonds provide tax-free interest income, regardless of what the interest is used for, so they could be used for both private high school and for postsecondary education. UTMA accounts can be used for any expenses that benefit the minor beneficiary.

While he was in the hospital, Emile told his wife that if he died he wanted to give his fishing tackle to his son, Joseph; his golf equipment to his son, Joshua; his truck to his daughter, Abigail; and everything else to her (his wife). Emile died the next day without writing anything that he told his wife, but a nurse and another patient were in the room and heard his declarations. What type of will does Emile have, if any? A)Holographic. B)Nuncupative. C)Statutory. D)Emile does not have a will.

Nuncupative. RationaleEmile has an oral/nuncupative will - oral dying declarations made before sufficient witnesses. An oral/nuncupative will may or may not be valid in Emile's state of domicile.

A spendthrift clause: A)Requires the fiduciary of a trust to make small distributions. B)Protects the trust assets from the claims of the beneficiary's creditors. C)Eliminates the problems associated with multiple beneficiaries. D)Prevents the property under a general power of appointment from being distributed to the holder of the power.

Protects the trust assets from the claims of the beneficiary's creditors. RationaleAnswer b is a correct statement. The remaining answers are false statements.

Which of the following is not an available filing status? A)Qualified dependent child. B)Married filing jointly. C)Head of household. D)Surviving spouse.

Qualified dependent child. RationaleThe five types of filing status are: single, married filing jointly, married filing separately, surviving spouse, and head of household.

Shelley saves $3,000 per year, for ten years, at the end of each year starting at age 26 and ending at age 35. She invests the funds in an account earning 10% annually. Shelley stops investing at age 35, but continues to earn 10% annually until she reaches the age of 65. In contrast, Kevin saves $3,000 per year at the end of the year between the ages of 36 and 65 inclusively and invests in a similar account to Shelley, earning 10% annually. What is the value of Shelley's and Kevin's separate accounts at age 65? A)Shelley $710,861 Kevin $387,212 B)Shelley $710,861 Kevin $493,482 C)Shelley $834,296 Kevin $387,212 D)Shelley $834,296 Kevin $493,482

Shelley $834,296 Kevin $493,482

Which of the following is not "sales-related compensation" according to the Standards of Conduct? A)Referral fees. B)12b-1 fees. C)Revenue sharing. D)Soft dollars.

Soft dollars. Rationale Standards of Conduct Section A.12.b specifically excludes soft dollars (research or other benefits received in connection with client brokerage that qualifies for a safe harbor of Section 28(e) of the Securities Exchange Act of 1934) from the definition of sales-related compensation.

Steve has been married to Louise for six years. They are about to buy their first home and have come to you with some questions that they have regarding titling of the home. In your explanation of the different property ownership arrangements, which of the following titling structures can only be entered into by spouses? A)Tenancy by the entirety. B)Tenancy in common. C)Joint tenancy with rights of survivorship. D)Sole ownership.

Tenancy by the entirety. RationaleOf the property ownerships listed, tenancy by the entirety is the only one limited to married couples.

Walt Drizzly stock is currently trading at $45 and pays a dividend of $3.50. Analysts project a dividend growth rate of 5%. Your client, Toby Benjamin, requires a rate of 12% to meet his stated goal. Toby wants to know if he should purchase stock in Walt Drizzly. A)Yes, the stock is undervalued. B)No, the stock is overvalued. C)No, the required rate of return is higher than the projected growth rate. D)Yes, the required rate is higher than the expected rate.

Yes, the stock is undervalued. RationaleThe intrinsic value is: V = (D1 / r - g), therefore V = (3.50 x 1.05) / (0.12 - 0.05), V = $52.50 compared to the selling price of $45. Therefore the stock is undervalued.

In computing portfolio performance, the Sharpe index uses ______________, while the Treynor index uses ________________ for the risk measure. A)standard deviation; correlation coefficient. B)beta; standard deviation. C)standard deviation; beta. D)standard deviation; coefficient of variation.

standard deviation; beta. Rationale Sharpe may be remembered as beginning with the letter "S" as does standard deviation. This mnemonic device may be helpful.

CJ is 40 and wants to retire in 25 years. He expects to live until age 95. He currently has a salary of $100,000 and believes that he needs to accumulate a total of $1 million (future dollars) for retirement by age 65 and he will be fine. He currently has $150,000 saved for his retirement that is earning 9%. He is able to save $20,000 towards his retirement. However, he is willing to use some or all of this amount to fund education for his grandchild, Bob,who was born today, if and when his retirement objective appears to be met in terms of funding. Edward, Bob's dad and CJ's son, wants Bob to go to school for six years and expect that it will cost $50,000 per year in today's dollars. Inflation has been modest at 3%, while the cost of education has been increasing at 6% per year. Edward would like to know how much he should save every year to fund Bob's college expenses, assuming that he can max out his dad's (CJ) contribution, which would begin in one year and stop when Bob goes to school. Edward would also begin contributing in one year and stop when Bob goes to school and wants to assume he can earn 9% per year. How much does Edward need to save each year? (round answer to nearest $1,000) A)$0 - Dad has it covered. B)$4,000. C)$9,000. D)$15,000.

$0 - Dad has it covered. RationaleThe required funding for Bob's education needs can be satisfied by CJ's annual contribution of $20,000.Step 1: Determine how much his current savings will be worth at retirement. This amount will impact whether he can contribute the entire $20,000 towards the education funding for Bob.PV = $150,000N = 25i = 9FV = $1,293,462Since the FV is greater than $1 million, CJ can contribute the entire $20,000 per year towards education funding for Bob.Step 2: Determine the education needs for Bob at age 18PV = $50,000N = 18i = 6FV = $142,716.96PMT = $142,716.96N = 6i = ((1.09 ÷ 1.06) - 1) x 100FV = 0PV AD = $799,499.95Step 3: Determine how much CJ's contributions will equal at age 18PMT = $20,000N = 18i = 9FV = $826,026.76Because the expected future value of CJ's contributions exceeds the required funding for Bob's education, it means that Edward does not have to contribute any funds towards Bob's education.

Bowie, age 52, has come to you for help in planning his retirement. He works for a bank, where he earns $60,000. Bowie would like to retire at age 62. He has consistently earned 8% on his investments and inflation has averaged 3%. Assuming he is expected to live until age 95 and he has a wage replacement ratio of 80%, how much will Bowie need to have accumulated as of the day he retires to adequately provide for his retirement lifestyle? A)$726,217.09. B)$784,314.45. C)$1,050,813.28. D)$1,101,823.40.

$1,101,823.40. RationaleStep 1: Determine the funding amount in today's dollars:Step 1 Current Income$60,000Wage Replacement Ratiox 80%Present Value of Capital Needs$48,000Step 2: Inflate the needs from Step 1 to the beginning of retirement:Step 2 PV$48,000N (number of yrs until retirement)10i (inflation rate)3PMT0FV$64,507.99Step 3: Determine the amount of savings (capital balance) needed at retirement to fund expenses throughout remainder of life expectancy using an annuity due:Step 3 PMT AD$64,507.99N (retirement life expectancy)33 (95-62)i4.854 ((1.08 ÷ 1.03) -1) x 100FV0PV (capital balance need at retirement)$1,101,823.40Note: Answer c is the ordinary annuity amount!

David, age 52, has come to you for help in planning his retirement. He works for a bank, where he earns $60,000. David would like to retire at age 62 and has $443,257 in retirement savings. He has consistently earned 8% on his investments and inflation has averaged 3%. Assuming he is expected to live until age 95 and he has a wage replacement ratio of 80%, approximately how much must David save at the end of each year, from now until retirement, to provide him with the necessary capital balance? A)$2,300. B)$6,480. C)$9,300. D)$10,000.

$10,000. RationaleStep 1: Determine the funding amount in today's dollars:Step 1Current Income$60,000Wage Replacement Ratiox 80%Present Value of Capital Needs$48,000Step 2: Inflate the needs from Step 1 to the beginning of retirement:Step 2PV$48,000N (number of yrs until retirement)10i (inflation rate)3PMT0FV$64,507.99Step 3: Determine the amount of savings (capital balance) needed at retirement to fund expenses throughout remainder of life expectancy using an annuity due:Step 3PMT AD$64,507.99N (retirement life expectancy)33 (95-62)i4.854 ((1.08 ÷ 1.03) -1) x 100FV0PV (capital balance need at retirement)$1,101,823.40Step 4: Determine the requires savings amount:Step 4N10 (62-52)i8FV @62$1,101,823.39PV($443,257)PMT OA($9,999.94)

Lanie is a single mom who has 3 children, ages 1, 5 and 9. While she is struggling a bit, she would like to pay for half of their education at a public college. The annual cost of education is currently $20,000 and has been increasing at 6% and is expected to continue. Her portfolio that was established for education has $25,000 in it and earns an average rate of return of 8%. If she would like to fund half of four years of college for each of the children, how much must she save each year at the end of the year, for the next nine years (round to the nearest $100)? A)$9,400. B)$10,700. C)$12,300. D)$15,800.

$10,700. RationaleStep 1: Determine the education needs for the three children at age 18 for the 9 year old.PV = $10,000 (half of the $20,000 tuition)N = 9i = 6FV = $16,894.79PMT = $16,894.79N = 12 (4 years for each of the 3 children)i = ((1.08 ÷ 1.06) - 1) x 100FV = 0PV AD = $183,311.36Step 2: Determine how much Lanie must contribute each year.FV = $183,311.36N = 9i = 8PV = - $25,000PMT = -$10,677.53Alternative Explanation:N = 4i = ((1.08 ÷ 1.06) - 1) x 100PMTAD = $10,000PV@18 = $38,902.54For 9 year old 32,878.88For 5 year old 30,510.23For 1 year old 28,312.22Total $91,701.33N = 9i = 8.0PV = $91,701.33 - 25,000PMT = $10,677.53

Robin is planning for her retirement. She is currently 37 years old and plans to retire at age 62 and live until age 97. Robin currently earns $100,000 per year and anticipates needing 80% of her income during retirement. She anticipates Social Security will provide her with $15,000 per year at age 62, leaving her with required savings to provide $65,000 ($100,000 x 0.80 - $15,000) annually during retirement. She believes she can earn 11% on her investments and inflation will be 2% per year. How much must Robin save at the end of each year, if she wants to make her last savings payment at age 62 to meet her retirement goal? A)$10,846.78. B)$10,899.37. C)$11,861.07. D)$13,414.60.

$10,899.37. Rationale

Robin is planning for her retirement. She is currently 37 years old and plans to retire at age 62 and live until age 97. Robin currently earns $100,000 per year and anticipates needing 80% of her income during retirement. She anticipates Social Security will provide her with $15,000 per year at age 62, leaving her with required savings to provide $65,000 ($100,000 x 0.80 - $15,000) annually during retirement. She believes she can earn 11% on her investments and inflation will be 2% per year. Robin would like to preserve her capital so that the capital balance required at age 62 is maintained until age 97. How much must Robin save at the end of each year, if she wants to make her last savings payment at age 62 to meet her retirement goal and maintain her capital balance? A)$2,379.57. B)$10,899.37. C)$11,181.92. D)$11,280.51.

$11,181.92.

Robin is planning for her retirement. She is currently 37 years old and plans to retire at age 62 and live until age 97. Robin currently earns $100,000 per year and anticipates needing 80% of her income during retirement. She anticipates Social Security will provide her with $15,000 per year at age 62, leaving her with the need to save enough to provide $65,000 ($100,000 x 0.80 - $15,000) annually during retirement. She believes she can earn 11% on her investments and inflation will be 2% per year. Robin would like to preserve the purchasing power of her capital balance during retirement. How much must Robin save at the end of each year, if she wants to make her last savings payment at age 62 to meet her retirement goal and maintain the purchasing power of her retirement savings until age 97? A)$4,758.88. B)$10,899.37. C)$11,464.44. D)$11,565.52.

$11,464.44. RationaleStep #1: Determine the NPV at time period zero. .

Max, age 50, has come to you for help in planning his retirement. He works for a bank, where he earns $100,000. Max would like to retire at age 65. He has consistently earned 9% on his investments and inflation has averaged 3%. He has accumulated $355,744 towards retirement. Assuming he is expected to live until age 95 and he has a wage replacement ratio of 70%, in addition to the capital needed to fund his desired retirement income through his life expectancy, how much more will Max need at retirement to have the same amount at his death as he will have at his retirement? (i.e., capital preservation) A)$122,008. B)$278,844. C)$296,145. D)$666,908.

$122,008. RationaleStep 1: Determine the funding amount in today's dollars:Step 1Current Income$100,000Wage Replacement Ratiox 70%Present Value of Capital Needs$70,000Step 2: Inflate the needs from Step 1 to the beginning of retirement:Step 2PV$70,000N (number of yrs until retirement)15i (inflation rate)3PMT0FV$109,057.72Step 3: Determine the amount of savings (capital balance) needed at retirement to fund expenses throughout remainder of life expectancy using an annuity due:Step 3PMT AD$109,057.72N (retirement life expectancy)30 (95-65)i5.8252 ((1.09 ÷ 1.03) -1) x 100FV0PV (capital balance need at retirement)$1,618,760.76Step 4: Determine the additional funds required at retirement to preserve the capital balance:Step 4N30i9FV $1,618,760.76PMT$0PV($122,007.84)

Bruce, a single taxpayer, has been transferred by his company to Philadelphia. He sold his house for $650,000 and he had an adjusted basis of $330,000. He owned and lived in the home for 18 months. What is his capital gain from the sale of the personal residence? A)$0. B)$132,500 LTCG. C)$187,500 LTCG. D)$320,000 LTCG.

$132,500 LTCG. Rationale He gets a partial exemption of $187,500.Gain$320,000 Exemption$187,500 ($250,000 x 18/24) Equals$132,500

Julio and Glenda Garza have two children in college and a third who is taking graduate courses while working. One of the children in college is a senior and the other is a freshman. The cost of college is $12,000 annually, and the cost of the tuition for the graduate courses is $10,000. The Garzas pay half of the graduate school tuition and the child pays half from his earnings. The Garzas have an adjusted gross income of $100,000, and their filing status is married filing jointly. All three children live at home and are supported by their parents. What is the maximum amount of Lifetime Learning Credits Julio and Glenda Garza can receive on their income tax return this year? A)$1,000. B)$2,000. C)$3,000. D)$6,000.

$2,000. Rationale The Lifetime Learning Credit is 20% of the first $10,000 paid for qualified educational expenses. The expenses for any one of the children will exceed $10,000 so the Garzas can qualify with any one of the children. Of course, the Garzas cannot obtain a credit of more than $2,000 in any one year, so the maximum amount of their Lifetime Learning Credit will be $2,000. They should take the Lifetime Learning credit for the child who is enrolled in graduate courses, and they can receive the American Opportunity Tax Credit for the other two children who are in college (the AOTC is available for each student who is enrolled at least half time, and who is in their first 4 years of postsecondary education).

Greg just received his student loan statement that indicates he paid $3,000 of interest on his student loan during the tax year. How much of the interest may he deduct? A)None of the interest is deductible since it is consumer debt. B)$3,000 as an itemized deduction. C)$2,500 as an itemized deduction. D)$2,500 as an adjustment to income.

$2,500 as an adjustment to income. RationaleStudent loan interest is an "above-the-line" deduction. The amount that can be taken is limited to $2,500 of interest paid.

Brandi, age 52, has come to you for help in planning her retirement. She works for a bank, where she earns $60,000. Brandi would like to retire at age 62. She has consistently earned 8% on her investments and inflation has averaged 3%. Assuming she is expected to live until age 95 and she has a wage replacement ratio of 80%, how much more will Brandi need at retirement to have the same amount at her death with an equal purchasing power as she will have at her retirement? (i.e., purchasing power preservation) A)$82,897.54. B)$86,921.67. C)$109,496.29. D)$230,545.40.

$230,545.40. RationaleStep 1: Determine the funding amount in today's dollars:Step 1Current Income$60,000Wage Replacement Ratiox 80%Present Value of Capital Needs$48,000Step 2: Inflate the needs from Step 1 to the beginning of retirement:Step 2PV$48,000N (number of yrs until retirement)10i (inflation rate)3PMT0FV$64,507.99Step 3: Determine the amount of savings (capital balance) needed at retirement to fund expenses throughout remainder of life expectancy using an annuity due:Step 3PMT AD$64,507.99N (retirement life expectancy)33 (95-62)i4.8544 ((1.08 ÷ 1.03) -1) x 100FV0PV (capital balance need at retirement)$1,101,823.39Step 4: Determine the additional funds required at retirement to preserve the purchasing power of the retirement funds:Step 4N33i4.8544 ((1.08 ÷ 1.03) - 1) x 100FV $1,101,823.39PMT$0PV($230,545.41)

Eddie Oliveri will be starting his freshman year of college this fall. The cost of attendance at the school he would like to attend is $37,000. The expected family contribution, as calculated from Eddie's FAFSA information, is $12,000. Eddie will receive a merit scholarship of $3,000 and expects to participate in a work-study program earning $5,000. What is the amount of Eddie's financial need as calculated in the federal financial aid formula? A)$17,000. B)$22,000. C)$25,000. D)$34,000.

$25,000. Rationale Financial need is the difference between the cost of attendance and the expected family contribution.

Amita has 4 children ages 1, 3, 5, and 7. The current cost of college is $25,000. The children will begin college at age 18 and be in college for 4 years. Education inflation is expected to be 6% and the parents portfolio rate of return is 8%. How much does Amita have to save annually at year end through the education of the youngest child to pay all college costs? A)$17,418.31. B)$29,381.57. C)$29,921.11. D)$30,526.52.

$29,921.11. Rationale$29,921.11Calculated as:N = 4i = [(1.08 ÷ 1.06) - 1] x 100PMT AD = $25,000PV@18 = $97,256.35694Age: 1 3 5 7TotalN = 17 15 13 11i = [(1.08 ÷ 1.06) - 1] x 100 [(1.08 ÷ 1.06) - 1] x 100 [(1.08 ÷ 1.06) - 1] x 100 [(1.08 ÷ 1.06) - 1] x 100FV = $97,256.35694 $97,256.35694 $97,256.35694 $97,256.35694PV = 70,780.54 73,476.70 76,275.56 79,181.04$299,713.84Calculated as:N = 21PV = 299,713.84i = 8.0PMT OA = 29,921.11FV = 0

Charlie would like to retire in 11 years at the age of 66. He would like to have sufficient retirement assets to allow him to withdraw 90% of his current income, less Social Security, at the beginning of each year. He expects to receive $24,000 per year from Social Security in today's dollars. Charlie is conservative and assumes that he will only earn 9% on his investments, that inflation will be 4% per year and that he will live to be 106 years old. If Charlie currently earns $150,000, how much does he need at retirement? A)$1,955,893. B)$2,049,927. C)$3,011,008. D)$3,155,768.

$3,155,768. RationaleStep 1Salary$150,000 x 90% 135,000 (24,000) $111,000Step 2N11 years to retirement i4PV$111,000PMT0FV $170,879.40 Step 3N40 years of retirement i4.8077 [(1.09 ÷ 1.04) - 1 x 100 (the real i)PMT AD$170,879.40FV0PV $3,155,767.79Note: Answer c is the ordinary annuity amount!

Peter wants to save some money for his daughter Gwen's education. Tuition costs $12,500 per year in today's dollars. His daughter was born today and will go to school starting at age 18. She will go to school for 4 years. Peter can earn 11% on his investments and tuition inflation is 7%. How much must Peter save at the end of each year, if he wants to make his last savings payment at the beginning of his daughter's first year of college? A)$2,694.56. B)$2,789.04. C)$2,861.65. D)$3,176.43.

$3,176.43. RationaleStep 1 - NPV at Time Period 0 CF0 - 17 = 0 CF18 - 21 = 12,500 i = [(1.11 ÷ 1.07) - 1] x 100 = 3.7383 NPV = ? 24,463.6429 Step 2 - SavingsN = 18i = 11PV = NPV from Step 1 (24,463.6429)PMT = ?FV = 0<3,176.4296>

Contributing $1,500 to his retirement fund at the end of each year beginning at age 18 through age 50, with an average annual return of 12%, how much does Juan have in his retirement account at this time to use toward a possible early retirement? A)$346,766.42. B)$399,987.65. C)$457,271.58. D)$541,890.55.

$457,271.58. Rationale N = 50 - 18 = 32 i = 12PV = 0 PMT = <1,500> FV = ? <457,271.5789>

Kim and Nick are planning to save for their daughter Chloe's college education. Chloe was born today and will attend college for 4 years, starting at age 18. Tuition currently costs $15,000 per year and tuition inflation is expected to be 6%. They believe they can earn 9% on their investments. How much must Kim and Nick save at the end of each year, if they want to make their last savings payment at the beginning of Chloe's first year of college? A)$3,650.03. B)$3,892.07. C)$3,965.04. D)$3,978.53.

$3,978.53. RationaleUsing the Uneven Cash Flow Method:Step #1: Determine the NPV at time period zero:10BII Keystrokes12C Keystrokes0 [CFj]0 [CFj]17 [ORANGE][Nj]15,000 [+/-] [CFj]4 [ORANGE][Nj]1.09 ÷ 1.06 - 1 x 100 = [I/YR][ORANGE][NPV]Answer: 34,834.550 [g] [CF0]0 [g] [CFj]17 [g] [Nj]15,000 [CHS] [g] [CFj]4 [g] [Nj]1.09 [ENTER] 1.06 [÷] 1 [-] 100 x [i][f ] [NPV]Answer: 34,834.55Step #2: Determine the annual savings required to amortize that amount:10BII Keystrokes12C Keystrokes 18 [N]9 [I/YR]34,834.55 [PV]0 [FV][PMT]Answer: <3,978.53>18 [n]9 [i]34,834.55 [PV]0 [FV][PMT]Answer: <3,978.53>

What is the present value of the cost of college education for 4 children ages 1, 3, 5, and 7. The current cost of college is $25,000. The children will begin college at age 18 and be in college for 4 years. Education inflation is expected to be 6% and the parents portfolio rate of return is 8%. A)$294,000. B)$295,000. C)$300,000. D)$305,000.

$300,000. Rationale$299,714 (rounded to nearest thousand)Calculated as:N = 4i = [(1.08 ÷ 1.06) - 1] x 100PMT AD = $25,000PV@18 = $97,256.35694 Age: 1 3 5 7TotalN = 17 15 13 11i = [(1.08 ÷ 1.06) - 1] x 100 [(1.08 ÷ 1.06) - 1] x 100 [(1.08 ÷ 1.06) - 1] x 100 [(1.08 ÷ 1.06) - 1] x 100 FV = $97,256.35694 $97,256.35694 $97,256.35694 $97,256.35694 PV = 70,780.54 73,476.70 76,275.56 79,181.04 $299,713.84

Isaac is a middle school teacher with gross income this year of $35,000. Based on the following, what is Isaac's adjusted gross income?1. $4,000 qualified education interest expense.2. $2,000 alimony received (divorce prior to 2019).3. $1,000 contribution to a traditional IRA.4. $750 in educator expenses. A)$27,250. B)$28,750. C)$29,500. D)$31,250.

$31,250. RationaleIsaac's adjusted gross income is his total gross income of $35,000 - $2,500 in qualified education interest expense (the deductible amount is limited to $2,500) - $1,000 contribution to a traditional IRA - $250 in educator expenses (the deductible amount is limited to $250) = $31,250. The alimony is RECEIVED , which is included in determining his gross income of $35,000. If it was paid then we would have a deduction but that is not the case.

Sam's Turbo Repair, Inc. (STR) purchased a new machine for cleaning and retooling the turbo blades on semi-trucks. The machine cost was $30,000, 10% sales tax, and $1,000 delivery and setup fee. What is STR's basis in the new machine? A)$30,000. B)$31,000. C)$33,000. D)$34,000.

$34,000. RationaleThe machine cost of $30,000 plus the sales tax of $3,000 plus the $1,000 freight is the basis for depreciation.

George has been in academia his entire career and wholeheartedly believes that education is the key to success. He has two daughters, Cindy and Susie. Cindy is a lingerie and swimsuit model who also believes in education, as well as fashion. Cindy has two children, Red and Mauve, who are ages 4 and 2 today. She is also headed to the hospital at this very moment to deliver her third child, who will be named Olive. Susie is an engineer, who used to play rugby in college and also believes in education. Her children, Copper and Mercury, are ages 3 and 5 today, respectively. George believes that with $100,000, a student should be able to obtain a great education, even if it is not the exact amount necessary to fund all of a student's time in college. George would to provide each of his grandchildren with the ability to have $100,000 of purchasing power when they turn 18. Education costs are approximately $30,000 per year at private schools and about $15,000 at public schools. Education costs have been increasing at a consistent rate of 7% per year and are expected to continue, while inflation has been at a steady 3% per year. How much should he set aside today to fund his goal for his grandchildren if he can earn a rate of return of 9%? A)$136,383. B)$179,983. C)$212,444. D)$377,520.

$377,520. Rationale

Roshan is a freshman at Florida State University where his tuition is $4,000. Shante, his older sister, is a graduate student at Expensive University, where tuition is $25,000. What is the maximum tax credit Roshan and Shante's parents can take? A)$2,000. B)$3,650. C)$3,800. D)$4,500.

$4,500. Rationale Roshan is in his first four years of college so he is eligible for the AOTC ($2,500 calculated as ($2,000 x 100%) + ($2,000 x 25%)). Shante is only eligible for the Lifetime Learning Credit since she is in graduate school ($2,000 calculated as $10,000 x 20%). $2,500 + $2,000 = $4,500.

Tyrone, age 25, expects to retire at age 60. He expects to live until age 90. He anticipates needing $45,000 per year in today's dollars during retirement. Tyrone can earn a 12% rate of return and he expects inflation to be 4%. How much must Tyrone save, at the beginning of each year, to meet his retirement goal? A)$3,980.76. B)$4,585.46. C)$4,879.29. D)$5,132.33.

$4,585.46. Rationale $41,987.10 represents the amount necessary for retirement in today's dollars. Note: For the HP10BII, the first 35 cash flows may have to be split into the initial $0 cash flow followed by 34 more $0 cash flows. This change depends on the age of the calculator.

Jim and Betsy Grove want to take tax-free withdrawals from accounts established to pay for their daughter Candy's qualified education expenses when she attends college. Which of the following withdrawals would be taxable? A)$8,000 from a Sec. 529 plan to pay for apartment rent, which is equal to the cost of housing provided by the school. B)$1,000 from a Coverdell ESA to pay for books. C)$6,000 from a Section 529 plan to pay for a car that Candy will use to commute to college her freshman year. D)$15,000 from Jim's Roth IRA to provide Candy with spending money (the value of the Roth IRA is $30,000; total contributions were $20,000).

$6,000 from a Section 529 plan to pay for a car that Candy will use to commute to college her freshman year. Rationale The purchase of a vehicle is not a qualified expense for a 529 plan, even if the student is commuting. A is a qualified expense because Section 529 plans permit tax-free withdrawals for room and board, either on-campus or off-campus. B is qualified because books are qualified expenses for tax-free distributions from ESAs. D is a tax-free distribution because contributions to a Roth IRA can be withdrawn tax-free at any time and for any purpose.

Kwame and Rosa, both age 40, have $80,000 of combined retirement assets. They both expect to retire at the age of 65 with a life expectancy of 100 years old. They expect to earn 10% on the assets within their retirement accounts before retirement and 8% during their retirement. If they did not make any additional contributions to their account and they receive a fixed monthly annuity benefit for life, what is the monthly benefit (annuity due) amount they will receive during retirement? A)$4,775.30. B)$4,984.20. C)$6,115.60. D)$6,156.37.

$6,115.60. Rationale PV = $80,000.00 N = 25 i = 10 FV = $866,776.48 PV = $866,776.48 N = 420 (12 x 35) i = 0.6667 (8/12) PMT AD = $6,115.60 Note: Answer d is the ordinary annuity amount!

Steve and Roslyn are retiring together today and they wish to receive $40,000 of income (in the equivalent of today's dollars) at the beginning of each year from their portfolio. They assume inflation will be 4% and they expect to realize an after tax return of 8%. Based on life expectancies, they estimate their retirement period to be about 30 years. They want to know how much they should have in their fund today. A)$698,457.24. B)$728,299.37. C)$731,894.20. D)$813,529.88.

$731,894.20. RationaleBEGIN ModeN = 30i = [(1.08 ÷ 1.04) - 1] x 100 = 3.8462PV = ?PMT = 40,000FV = 0<731,894.1954>

In May of this year, Gonzo inherited a vacation home from his friend Kermit who passed away unexpectedly. Kermit had paid $200,000 to purchase the property, and it was valued in his estate at $325,000. In December of this year, Gonzo sold the property for $410,000. Which of the following best describes the tax treatment for Gonzo regarding the sale of the vacation home? A)$0 gain. B)$85,000 short-term capital gain.. C)$85,000 long-term capital gain. D)$210,000 long-term capital gain.

$85,000 long-term capital gain.RationaleThe basis of inherited property is equal to the fair market value on the date of death, and the holding period is always long-term. $410,000 sale price - $325,000 cost basis = $85,000 long-term gain

Roy and Barbara are near retirement. They have a joint life expectancy of 25 years in retirement. Barbara anticipates their annual income in retirement will need to increase each year at the rate of inflation, which they assume is 4%. Based on the assumption that their first year retirement need, beginning on the first day of retirement, for annual income will be $85,000, of which they have $37,500 available from other sources, and an annual after-tax rate of return of 6.5%, calculate the total amount that needs to be in place when Roy and Barbara begin their retirement. A)$743,590.43. B)$859,906.74. C)$892,478.21. D)$906,131.31.

$906,131.31. Rationale BEGIN Mode N = 25 i = [(1.065 ÷ 1.04) - 1] x 100 = 2.4038 PV = ? PMT = 85,000 - 37,500 = 47,500 FV = 0 <906,131.3080>

Jason has three capital transactions for the current year:• Short-term capital loss of $5,000• Short-term capital gain of $3,000• Long-term capital loss of $2,000What is the net effect on Jason's taxes if he is in the 32% tax bracket? A)$1,280 tax reduction. B)$960 tax reduction. C)$800 tax reduction. D)$450 tax reduction.

$960 tax reduction. RationaleNet the STCG and STCL = $2,000 STCL.The $2,000 LTCL plus the $2,000 STCL = Total Loss of $4,000.He can only utilize $3,000 to offset ordinary income at 32% = $3,000 x 0.32 = $960. The remaining $1,000 is a long-term capital loss carryover.

Sammy failed to file his tax return from a few years ago and pay the $5,000 tax liability that was owed at the time. Sammy's new tax advisor prepares and files the return in the current year, 21 and half months late. How much is his:1. Failure to pay penalty,2. Failure to file penalty, and3. Total penalty? A)(1) $550; (2) $1,125; (3) $1,675. B)(1) $425; (2) $1,250; (3) $1,675. C)(1) $550; (2) $700; (3) $1,250. D)(1) $1,250; (2) $550; (3) $1,800.

(1) $550; (2) $1,125; (3) $1,675. Rationale Failure to pay 22 x 0.005 x 5,000= 550Failure to file 25% x 5,000 = 1,250 - (0.005 x 5 x 5,000) = 1,125Note: The failure to file penalty only applies to the first five months.

The ideal correlation for portfolio construction is: A)+1.0. B)-1.0. C)0.0. D)+0.70.

-1.0. RationaleGraphically depicted, a correlation of negative one (-1) means that any two investments move exactly opposite from one another.

The Performance Fund had returns of 19% over the evaluation period and the benchmark portfolio yielded a return of 17% over the same period. Over the evaluation period, the standard deviation of returns from the Fund was 23% and the standard deviation of returns from the benchmark portfolio was 21%. Assuming a risk-free rate of return of 8%, which one of the following is the calculation of the Sharpe index of performance for the Performance Fund over the evaluation period? A)0.3913. B)0.4286. C)0.4783. D)0.5238.

0.4783. Rationale(0.19 - 0.08) ÷ 0.23 = 0.4783.

Angela, a CFP® professional, has determined that the financial advice she is to provide to a prospective client, Howard, will require financial planning in compliance with the Practice Standards. However, Howard does not wish to engage her for financial planning. Which of the following courses of action is (are) available to Angela?1. Do not enter into the engagement.2. Limit the scope of the engagement to services that do not require application of the Practice Standards.3. Enter the engagement noting, in writing, that the engagement is outside the scope of Angela's duties as a CFP® professional. A)1 only. B)1 and 2. C)2 and 3. D)1, 2, and 3.

1 and 2. Rationale 1 and 2 are options that are available to Angela. Angela could also provide the requested services after informing the client how financial planning will benefit the client and how the decision not to enter the financial planning engagement may limit the financial advice.

A tenancy by the entirety may be terminated in which of the following ways?1. Death, whereby the survivor takes the entire tenancy.2. Mutual agreement.3. Divorce, which converts the tenancy into a tenancy in common or a joint tenancy.4. Severance, whereby one tenant transfers his or her interest to a third party with or without the consent of the other tenant. A)1 and 2. B)3 and 4. C)1, 2 and 3. D)1,2, 3 and 4.

1, 2 and 3. RationaleIn a tenancy by entirety, the interest of one spouse cannot be terminated or severed without the consent of the other spouse.

According to Standard C.2, identifying and selecting a client's goals, which of the following are necessary inputs to determine a client's goals?1. The effect a goal may have on another goal.2. Reasonable assumptions. 3. The client's expectations regarding future inheritances. 4. A determination of whether the goals are realistic. A)1 and 2. B)2, 3, and 4. C)1, 2 and 4. D)1, 2 and 3.

1, 2 and 4. Rationale When assisting the client with defining goals, the CFP® professional must apply reasonable assumptions and estimates, consider the effect a goal may have on another goal, and determine whether the goals are realistic based on an assessment of the client's personal and financial circumstances. Option a is incorrect because it is lacking the determination of whether the CFP® professional believes the goals are realistic. Option b and d are incorrect because using a client's expectations regarding future inheritances is not one of the variable outlined for determining goals.

Which of the following is/are considered a disadvantage(s) of probate?1. The process can result in delays.2. The process may be expensive.3. The process provides clear title to heirs and legatees.4. The process is open to public scrutiny. A)1 only. B)1 and 2. C)1, 2 and 4. D)1, 2, 3, and 4.

1, 2 and 4. RationaleThe fact that probate provides clear title to heirs and legatees is an advantage, not a disadvantage, of the process. All of the other options are disadvantages of the probate process.

Which the following is a risk of failing to plan for the estate?1. Property transfers contrary to the client's wishes.2. The client's family may not be provided for financially.3. The estate suffers liquidity problems at the client's death.4. The estate may bear higher transfer costs. A)2 only. B)2 and 3. C)1, 3, and 4. D)1, 2, 3, and 4.

1, 2, 3, and 4. RationaleAll the risks listed are risks of not planning for the estate. Proper estate planning can transfer property per a decedent's desires, develop a plan for continued family support, create liquidity at death, and potentially reduce transfer costs.

Under CFP Board's Code and Standards, which of the following is (are) required under the fiduciary duty:1. The duty of loyalty.2. The duty of care.3. The duty to follow client instructions. A)1 and 2. B)1 and 3. C)2 and 3. D)1, 2, and 3.

1, 2, and 3. Rationale CFP® professionals are fiduciaries who must act in the best interest of their clients. The fiduciary duty includes the duty of loyalty, the duty of care, and the duty to follow client instructions.

Which of the following are "financial advice" as defined in the Code and Standards?1. A recommendation that a client refrain from investing in a particular financial asset.2. A recommendation regarding portfolio composition.3. A recommendation regarding the selection of other persons to provide professional services to the client.4. Executing stock trades under the direct order of the client. A)1 and 2. B)2 and 4. C)1, 2, and 3. D)2, 3, and 4.

1, 2, and 3. Rationale Financial advice also includes the development or implementation of a financial plan and the exercise of discretionary authority over the client's financial assets.

Which of the following is included in the definition of estate planning?1. Asset management.2. Accumulation of wealth.3. Asset preservation. A)1 only. B)1 and 2. C)2 and 3. D)1, 2, and 3.

1, 2, and 3. RationaleAll of the items listed are included in the definition of estate planning. Estate planning is the process of accumulation, management, conservation, and transfer of wealth considering legal, tax, and personal objectives.

Which of the following are true with respect to the Practice Standards?1. Each Practice Standard makes up one of seven steps in the financial planning process.2. Includes monitoring responsibilities after a financial plan is implemented.3. The scope of the engagement does not have to be in writing when providing financial advice that does not require financial planning. A)3 only. B)1 and 3. C)1, 2, and 3. D)None of the above.

1, 2, and 3. RationaleAll three statements are correct.

Of the following types of ownership, which is available for married couples?1. Tenancy by the entirety.2. Tenancy in common.3. JTWROS.4. Tenants by marriage. A)1 only. B)1 and 3. C)1, 2, and 3. D)1, 2, 3, and 4.

1, 2, and 3. RationaleOf the property types listed, tenancy by the entirety is an ownership form exclusive to married couples. Tenants in common and JTWROS are available to anyone, including married couples. Tenants by marriage is not a form of property ownership.

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. A)1 and 5. B)2 and 5. C)1, 3 and 4. D)2, 3 and 4.

1, 3 and 4. RationaleOption 2 is false because systematic risk cannot be diversified away. Option 5 is false because beta measures systematic risk, and not all risk inherent (in this case diversifiable risk) is measured by beta.

What is the weighted average beta of the following portfolio?• Stock L has a beta of 1.45 and constitutes 10% of the portfolio;• Stock M has a value of $120,000, with a beta of 0.93;• Stock N makes up 40% of the portfolio with a beta of 0.65• Stock O, with a 2.2 beta, has a dollar value of $180,000. A)1.25. B)1.31. C)1.54. D)1.76.

1.25. RationaleStock L = 10%; Stock M = $120,000; Stock N = 40%; Stock O = $180,000L + N = 50%; therefore M + O = 50% or $300,000. Thus the total portfolio value is $600,000.Stock M = 20% of the portfolio ($120k/$600k). Stock O = 30% of the portfolio ($180k/$600k).Stock L = 10% x 1.45 = 0.145.Stock M = 20% x 0.93 = 0.186.Stock N = 40% x 0.65 = 0.260.Stock O = 30% x 2.2 = 0.660.The weighted portfolio beta equals the sum = 1.251

Using the CAPM formula, what return should a client expect from a security with a standard deviation of 6% and a beta of 1.5, when the overall market return has been 8%, and the risk-free rare is around 2%? A)8%. B)9%. C)10%. D)11%.

11%. RationaleUsing the CAPM, one can calculate this answer. Standard deviation and last years return are merely distractors.ER = Rf + B (Rm - Rf )ER = 0.02 + 1.5 (0.08 - 0.02)ER = 0.02 + 0.09ER = 0.11

What is the return that a client should expect from a security that last year returned 11.7% with a standard deviation of 14.6%, a beta of 1.2, when the overall market return is expected to be 10.93%, and U.S. Treasury Bills are expected to earn 3.56%? A)11.7%. B)12.4%. C)13.3%. D)14.6%.

12.4%. Rationale Using the CAPM one can calculate this answer. Standard deviation and last years return are merely distractors.ER = Rf + B (Rm - Rf )ER = 0.0356 + 1.2 (0.1093 - 0.0356)ER = 0.0356 + 0.0884ER = 0.1240 = 12.4%

The following investment return will result in what dollar weighted return? An initial outlay of $50,000, with three years of additional outflows of $10,000 each, and inflows as follows: $0 the first year, $20,000 in years 2 and 3, and sale of the property at the end of year 3 for $75,000. A)27.64%. B)14.04%. C)18.32%. D)20.67%.

18.32%. RationaleCF0 = <50,000>CF1 = 0 - 10,000 = <10,000>CF2 = 20,000 - 10,000 = 10,000CF3 = 20,000 - 10,000 + 75,000 = 85,000IRR = 18.32%

Under which of the following circumstances must a taxpayer itemize his deductions?1. When the taxpayer has been married for less than one year.2. When the taxpayer is married and files a separate return and the taxpayer's spouse itemizes his or her deductions.3. When the taxpayer is a nonresident alien. A)1 and 2. B)1 and 3. C)2 and 3. D)1, 2, and 3.

2 and 3. RationaleA married individual who files a separate return (married filing separately filing status) cannot use a standard deduction if that person's spouse itemizes his or her deductions. Nonresident aliens are not eligible to use the standard deduction, and therefore must itemize

Which of the following are advantages of allowing property to pass through the probate process?1. Assets do not need to be retitled if they pass though probate.2. There are limitations on creditors' time to make claims against the estate.3. There is stricter supervision of the disposition and management of assets.4. The probate process is private. A)1 and 2. B)2 and 3. C)3 and 4. D)1, 2 and 3.

2 and 3. RationaleAssets should be properly retitled regardless of in or out of probate. The probate process is open to public scrutiny.

Under the Candidate Fitness Standards, the following conduct is unacceptable and will always bar an individual from becoming certified:1. Two or more personal or business bankruptcies.2. Felony conviction for any degree of murder or rape.3. Felony conviction for any other violent crime within the last five years. A)3 only. B)1 and 2. C)2 and 3. D)1, 2, and 3.

2 and 3. RationaleStatements 2 and 3 are all correct. Additional unacceptable conduct includes felony conviction for theft, embezzlement, tax fraud, or other financially-based or tax-based crimes.

Custodial arrangements are usually preferable to the direct transfer of property to a child to fund his or her education, for which of the following reasons?1. There are no restrictions on permissible investments under a UGMA custodial account.2. Almost any type of property may be placed in a UTMA custodial account.3. The UTMA and UGMA arrangements assure that the funds will be used for the educational purpose intended. A)1 only. B)2 only. C)3 only. D)Neither 1, 2, nor 3.

2 only. Rationale Statement 1 is incorrect because Uniform Gifts to Minors Accounts are restricted to investment in cash and securities. Statement 3 is incorrect because the child-beneficiary must be given the right to possession of the property upon reaching the age of majority, which is usually 18. The child may then use the funds for purposes other than paying for education.

Which of the following is true with respect to forms of discipline? 1. If the Disciplinary and Ethics Commission orders revocation of a certificant's or Professionals Eligible for Reinstatement's right to use the marks, the revocation is permanent until after a period after five years, at which time a request for reinstatement can be made.2. All revocations issued by the Commission are permanent.3. The Commission may order suspension for an unspecified period of time. A)2 only. B)1 and 3. C)1, 2, and 3. D)None of the above.

2 only. RationaleStatement 2 is correct. Revocation is permanent, and suspensions must be specified for five years or less.

Kim and Warren are both 67 years old and healthy. They are filing their tax return and want to know what their standard deduction amount will be. You correctly inform them that their standard deduction will be: A)14,800. B)24,400. C)25,700. D)27,000.

27,000. RationaleThe standard deduction is $24,400 for married filing jointly (in 2019) + $1,300 additional for Kim (age 65 or over) + $1,300 additional for Warren (age 65 or over) = $27,000.

Which of the following loans will likely be available to pay for college expenses for the children of parents with an adverse credit history and high debt-to-income ratio?1. Parent PLUS loan.2. HELOC.3. Life insurance cash value loan.4. 401(k) loan. A)1 and 2. B)1 and 3. C)3 and 4. D)1, 2, 3, and 4.

3 and 4. Rationale Parent PLUS loans require that there is no adverse credit history, so the parents will not qualify There are no credit checks or debt-to-income ratio limitations on loans from the cash value of life insurance or on loans from a 401(k), so the parents will qualify for these loans in spite of their adverse credit history and high debt-to-income ratio. The HELOC would require a good credit history and that debt-to-income ratios be within specified levels, so a parent with an adverse credit history and high debt-to-income ratio will not be likely to qualify.

Which of the following statements regarding investment risk is correct?1. Beta is a measure of diversifiable risk.2. Rational investors will form portfolios and eliminate systematic risk.3. Systematic risk is the relevant risk for a well-diversified portfolio.5. Beta captures all the risk inherent in portfolios. A)2 only. B)3 only. C)2 and 3. D)1, 2, 3, and 4.

3 only. RationaleStatement 1 is incorrect as beta measures systematic risk, which is non-diversifiable. Statement 2 is untrue because systematic risk cannot be diversified away. Statement 3 is correct. Statement 4 is untrue because beta measures systematic risk, and not all risk inherent (in this case diversifiable risk) is measured by beta.

Given a mean of 13% and a deviation of 9%, what is the range for 99% of all possible results? A)1 standard deviation (68%) -4% to 22%. B)2 standard deviation (95%) -5% to 31%. C)3 standard deviation (99%) -14% to 40%. D)None of the above.

3 standard deviation (99%) -14% to 40%. Rationale

Tiffany, a self-employed dentist, currently earns $100,000 per year. Tiffany has always been a self proclaimed saver, and saves 25% per year of her Schedule C net income. Assume Tiffany paid $13,000 in Social Security taxes. Tiffany plans to pay off her home mortgage at retirement and live debt free. She currently spends $25,000 per year on her mortgage. What do you expect Tiffany's wage replacement ratio to be at retirement based on the above information? A)37.00%. B)59.70%. C)65.30%. D)84.70%.

37.00%. RationaleThe answer is calculated as follows: Dollar ValuePercentageSalary$100,000100%Self Employment Taxes($13,000)(13%)Savings($25,000)(25%)Mortgage($25,000)(25%) $37,00037%37,000 ÷ 100,000 = 37.00% WRR

An investor purchased a bond for $980, received $75 in interest, and then sold the bond for $950 after holding it for seven months. What is the holding period return? A)4.6%. B)4.7%. C)4.8%. D)4.9%.

4.6%. Rationale Holding Period Return = ($950 - $980 + $75) / $980 = 4.6%

What is one of the primary differences between a Coverdell ESA and a 529 Savings Plan? A)A Coverdell has contribution limits far below those of 529 Savings Plans. B)A Coverdell does not have a phase-out limit for participation. C)A 529 Savings Plan has a phaseout limit for participation. D)A Coverdell allows 5-year proration of contributions.

A Coverdell has contribution limits far below those of 529 Savings Plans. Rationale A 529 Savings Plan does not have a phase-out limit. Only a 529 Savings Plan is permitted to use front-loading, in which contribution may be prorated over 5 years for gift tax purposes. Coverdell contributions are limited to $2,000 per year per beneficiary while 529 Savings Plan contributions limits are much higher (the limit varies by state plan but is typically $250,000 - $500,000).

This estate planning tool will cause assets to be included in non-grantor holder's gross estate: A)A limited power of appointment. B)A special power of attorney. C)The exercise of a nuncupative will. D)A general power of appointment that is unexercised.

A general power of appointment that is unexercised. Rationale A limited power of appointment limits the power to appoint the property to a group that does not include the holder of the power, his estate, or his creditors, or limits the holder's ability to appoint the property to himself to that which is needed for health, education, maintenance, or support. A limited power of appointment does not cause inclusion in the holder's estate.The power of attorney, as well as the attorney-in-fact, will not move the corpus to the holder's estate, nor will a nuncupative will. Only a general power of appointment can cause the corpus to be included in the holder of the power's estate. This result can happen when a general power of appointment is given to a child by a parent and subsequently the child predeceases the parent. Inclusion occurs even though the child has not exercised the power. Keep in mind that a GPOA should generally only be given to a spouse.

The unrestricted ability to ultimately name beneficiaries of income and corpus of a trust is known as: A)A HEMS power. B)A special power of attorney. C)A crummey power. D)A general power of appointment.

A general power of appointment. RationaleThe unrestricted ability to name the ultimate beneficiaries is a general power of appointment.

Which of the following would meet the requirements for the annual exclusion under the gift tax rules? A)A gift to a trust, to be distributed to a beneficiary contingent upon the beneficiary's survivorship. B)A gift to a trust in which the income is distributed to the grantor's daughter each year and the principal is distributed to the grantor's grandson upon the death of the daughter. C)A gift to a secular (not a 2503c trust) trust that does not require annual income distribution to be beneficiary.. D)A gift to a trust where the grantor can benefit from current income.

A gift to a trust in which the income is distributed to the grantor's daughter each year and the principal is distributed to the grantor's grandson upon the death of the daughter. Rationale This answer represents a present interest to the grantor's daughter who receives the income from the trust. To qualify for the gift tax annual exclusion, the gift must be of a present interest. All of the other choices are a "future interest."

Which of the following items will be retitled through probate? A)A house subject to a mortgage and owned fee simple (sole ownership) by the decedent. B)1/2 of real estate held tenancy by the entirety. C)Bank accounts titled as joint tenants (JTWROS). D)None of the above will be retitled through probate.

A house subject to a mortgage and owned fee simple (sole ownership) by the decedent. Rationale Options b and c will not pass through probate because they pass by operation of law or state contract law. Option a will pass through probate because it is owned fee simple by the decedent. The fact that the house is subject to a mortgage does not affect whether it passes through probate.

Which of the following is not a form of discipline under the Disciplinary Rules? A)Private censure. B)Public letter of admonition. C)Suspension. D)A monetary fine.

A monetary fine. RationaleA monetary fine is not a Disciplinary Rules form of discipline. An additional form of discipline is the revocation of the right to use the marks.

Which of the following statements concerning educational tax credits and savings opportunities is correct? A)The Lifetime Learning Credit is equal to 10% of qualified educational expenses up to a certain limit. B)The American Opportunity Tax Credit (AOTC) is only available for the first 3 years of postsecondary education. C)A parent who claims a child as a dependent is entitled to take the AOTC credit for the educational expenses of the child. D)The contribution limit for Coverdell Education Savings Accounts is applied per year per donor.

A parent who claims a child as a dependent is entitled to take the AOTC credit for the educational expenses of the child. Rationale • The Lifetime Learning Credit is equal to 10% of qualified educational expenses up to a certain limit - 20% up to $10,000 in expenses.• The AOTC is available for the first 3 years of postsecondary education - first four years only.• A parent who claims a child as a dependent is entitled to take the AOTC for the educational expenses of the child.• The contribution limit for Coverdell Education Savings Accounts is applied per year per donor - per student, not per donor.

Which of the following statements will have the LEAST negative impact on need-based financial aid? A)A qualified distribution from a Section 529 plan with the parent as the owner and the child as beneficiary. B)A distribution of income from a trust established for the student. C)A distribution of income from a UTMA account of the student. D)A distribution of contributions made from a Roth IRA.

A qualified distribution from a Section 529 plan with the parent as the owner and the child as beneficiary. Rationale Qualified distributions from a Section 529 with the parent as custodian and the child as beneficiary are not treated as income of either the parent or the child on the FAFSA. Distributions of income from trusts and from UTMA accounts are counted as income for the student. Distributions from a Roth IRA are counted as income of the parents.

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

A sensitivity analysis helps the advisor determine the single most effective factor in a retirement plan. RationaleNo one factor is the most important factor in a retirement plan. Sensitivity analysis gives the planner an understanding of how each factor affects the overall retirement plan.

CFP Board's Practice Standards are intended to: A)Assure that the practice of financial planning by CFP® professionals are based on established norms of practice. B)Enhance the value of the financial planning process. C)Advance professionalism and financial planning. D)All of the above.

All of the above. RationaleAll of the statements regarding the Practice Standards are correct.

Which of the following are a category of rules within CFP Board's Standards of Conduct? A)Obligations to prospective clients and clients. B)Obligations to employers. C)Obligations to CFP Board. D)All of the above. E)None of the above.

All of the above. RationaleCFP® professionals have obligations to prospective clients and clients, employers, and to CFP Board.

A person or entity entitled to act on behalf of another is known as: A)A principal. B)A curator. C)An attorney-at-law. D)An attorney-in-fact.

An attorney-in-fact. Rationale The power of attorney appoints an attorney-in-fact. This is the non-lawyer (agent) who acts on behalf of the principal. This is not an "attorney at law" although it may be.

Which of the following is not a Practice of Standards for the financial planning process? A)Identifying and selecting goals. B)Developing the financial planning recommendations. C)Analyzing business plans for the client's largest business. D)Implementing the financial planning recommendations.

Analyzing business plans for the client's largest business. Rationale While analyzing a business plan could be useful to a client, that is not one of the seven Practice of Standards for the financial planning process under CFP Board's Standards of Conduct Section C.1-7.

Which of the following reveals the relationship of a given security's movement relative to that of the market? A)Beta. B)Correlation coefficient. C)R-Squared. D)Standard deviation.

Beta. Rationale Correlation coefficient and covariance measure two stocks movements relative to one another. Standard deviation measures a security's performance relative to expectations of performance. R-squared measures what percentage of return is explained by the market.

William has an investment with the following annual returns for four years:• Year 1: -2%• Year 2: 9%• Year 3: 15%• Year 4: 5%What is the Arithmetic Mean (AM) and the Geometric Mean (GM) for William's investment? A)AM = 6.12%, GM = 6.57%. B)AM = 6.12%, GM = 6.02%. C)AM = 6.75%, GM = 6.02%. D)AM = 6.75%, GM = 6.57%.

AM = 6.75%, GM = 6.57%. RationaleAM = (-0.02 + 0.09 + 0.15 + 0.05) / 4 = 6.75GM =4 / [(0.98) x (1.09) x (1.15) x (1.05) ] - 1x100GM = 1.0657 - 1 x 100GM = 6.57

Michael has an investment with the following annual returns for four years:Year 1: 12%Year 2: -5%Year 3: 8%Year 4: 18%What is the arithmetic mean (AM) and what is the geometric mean (GM)? A)AM = 8.25%, GM = 7.91%. B)AM = 8.25%, GM = 10.64%. C)AM = 10.75%, GM = 7.91%. D)AM = 10.75%, GM = 10.64%.

AM = 8.25%, GM = 7.91%. Rationale

Which of the following is not an itemized deduction from adjusted gross income? A)Alimony paid (divorce prior to 2019). B)Medical expenses in excess of 10% of AGI. C)Charitable contributions. D)Home mortgage interest.

Alimony paid (divorce prior to 2019). RationaleAlimony paid is a deduction FOR AGI (for pre 2019 divorces) not FROM AGI. All of the other items are itemized deductions from adjusted gross income.

Which of the following does not need estate planning? A)Tom, age 30, married with two minor children, and a net worth of 375,000. B)Carly, age 35, never been married, one son with a severe disability. C)Michelle, age 45, single, has a net worth of $450,000 and two dogs. D)All of the above need estate planning.

All of the above need estate planning. RationaleAll of the people listed need a will, a plan for incapacity, and a plan for dependents and/or to care for animals.

CFP Board is a certification and standard-setting organization that: A)Establishes and enforces education requirements for CFP® professionals. B)Establishes and enforces examination requirements for CFP® professionals. C)Establishes and enforces ethics requirements for CFP® professionals. D)All of the above.

All of the above. RationaleAll of the above statements are correct regarding CFP Board. CFP Board establishes and enforces education, examination, and ethics requirements for CFP® professionals.

Which factors may affect an individual's retirement plan?1. Work life expectancy.2. Retirement life expectancy.3. Savings rate.4. Investment returns.5. Inflation. A)1 and 2. B)1, 2, and 3. C)1, 2, 3, and 4. D)All of the above.

All of the above. RationaleAll of the factors listed may affect an individual's retirement plan - either positively or negatively. Reduced work life expectancy may provide an insufficient savings period while an increased retirement life expectancy increases capital needs. A low savings rate or poor investment returns may create an inability to meet capital requirements. Increased inflation rates will reduce purchasing power.

Angie and Patrick were married on September 1 of this year. Following a honeymoon in Hawaii, Patrick died of a heart attack. Neither Angie nor Patrick had any dependents. What filing status can Angie use this year? A)Angie must use the single filing status because she was not married as of the end of the year. B)Angie will be able to file as married filing jointly as long as she would have qualified for this filing status if Patrick had survived. C)Angie may use the head of household filing status. D)Angie will be eligible to file as a surviving spouse.

Angie will be able to file as married filing jointly as long as she would have qualified for this filing status if Patrick had survived. RationaleAngie is not eligible for head of household or surviving spouse status because she does not have any dependents or persons living in her house.

The Code and Standards establishes a fiduciary duty for CFP® professionals. When does the fiduciary duty apply? A)At all times when providing financial advice. B)When providing financial planning, but not when providing financial advice that does not require financial planning. C)When providing marketing materials to a prospective client. D)Both b and c.

At all times when providing financial advice. Rationale The cornerstone of the Code and Standards is the fiduciary duty, which applies at all times when providing financial advice. When the CFP® professional is not providing financial advice, the fiduciary duty does not apply; however, the CFP® professional must continue to abide by the Code of Ethics and Standards of Conduct. Examples of situations where the CFP® professional is not providing financial advice include 1) communications that, based on content and context, would not be viewed as a recommendation, 2) responses to direct orders, and 3) marketing or general education materials that a reasonable CFP® professional would not view as financial advice.

Joe is 45 years old and has always managed his credit well, allowing him to maintain a high credit score and receive the best terms on loans. Joe's son Frank is 25 years old and recently married Brenda. Frank would like to go to graduate school and will need to borrow money via a private student loan to do so. Unfortunately, Frank and Brenda both have a few negative items on their credit reports and cannot qualify for any loans at a rate that they can afford. Frank has asked Joe to cosign on a loan. Which of the following statements is(are) true if Joe agrees to cosign the loan?1. If Frank and Brenda cannot make the payments, Joe will be responsible for making them or his credit score could be negatively impacted.2. If Joe applies for a loan a few years later, the remaining balance of the loan will show up as a debt that he is responsible for on his credit report. A)1 only. B)2 only. C)Both 1 and 2. D)Neither 1 nor 2.

Both 1 and 2. RationaleBoth statements are true Cosigning on the debt makes Joe responsible for that debt and can impact his credit score.

Match the investment characteristic(s) listed below which describe(s) a unit investment trust. A)Passive management of the portfolios. B)Self-liquidating investments usually holding bonds. C)Both a and b. D)Neither a nor b.

Both a and b. Rationale Both statements are correct because a UIT typically holds municipal bonds until maturity. UITs can also own equities.

The Commission may make one of the following decisions regarding a petition for reconsideration by a candidate for certification: A)Grant the petition after determining the conduct does not reflect adversely on the individual's fitness as a candidate for CFP® certification, or adversely upon the profession or the CFP® certification marks (and certification should be permitted). B)Deny the petition after determining the conduct does reflect adversely on the individual's fitness as a candidate for CFP® certification, or does reflect adversely upon the profession or the CFP® certification marks (and certification should be barred). C)Both a and b. D)Neither a nor b.

Both a and b. RationaleStatements a and b are both correct.

The type of risk which may be eliminated through diversification is: A)Market Risk. B)Purchasing Power Risk. C)Interest Rate. D)Business Risk.

Business Risk. RationaleBusiness risk may be eliminated through diversification. All others are systematic risks which cannot be diversified away.

An investor with a required rate of return of 12.5% is looking at a stock that currently pays a $3.75 dividend per share, has a dividend growth rate of 6%, and is selling in the market for $60.00 per share. What would you recommend? A)Buy; it meets the buyer's return requirements and is underpriced. B)Buy; it does not meet the buyer's return requirements, but it is underpriced. C)Do not buy; it does not meet the buyer's return requirements and is overpriced. D)Do not buy; it meets the buyer's return requirements, but is overpriced.

Buy; it meets the buyer's return requirements and is underpriced. RationaleUse the constant growth dividend discount model to arrive at the correct solution for this problem.Therefore, the stock is under valued since it is trading at $60.

Match the investment characteristic(s) listed below which describe(s) closed-end investment companies. A)Passive management of the portfolios. B)Shares of the fund are normally traded in major secondary markets. C)Both a and b. D)Neither a nor b.

Shares of the fund are normally traded in major secondary markets. Rationale Close-end funds are traded on the secondary markets but are not always passively managed.

Cathy and her twin sister Carley, both age 25, each believe they have the superior savings plan. Cathy saved $5,000 at the end of each year for ten years then let her money grow for 30 years. Carley on the other hand waited 10 years then began saving $5,000 at the end of each year for 30 years. They both earned 9% on their investment and are 65 years old today and ready to retire. Which of the following statements is correct? A)Both strategies are equal as they have equal account balances at age 65. B)Cathy's strategy is better because she has a greater account balance at age 65. C)Carley's strategy is better because she has a greater account balance at age 65. D)Neither strategy is better because Carley has a greater account balance but Cathy contributed less.

Cathy's strategy is better because she has a greater account balance at age 65. RationaleNot only is Cathy's account balance greater, but she has also contributed less money. See the following table for reconciliation.

The primary difference between open-end and closed-end investment companies is: A)Closed end funds always sell at par value. B)Open-end funds do not charge sales fees. C)Closed-end funds guarantee the Net Asset Value (NAV) at the time of sale or purchase. D)Closed-end funds sell only a limited number of shares.

Closed-end funds sell only a limited number of shares. Rationale Closed-end funds offer a limited number of shares, while open-end funds continually create new shares as new monies are obtained. Closed-end funds offer no price guarantees and do not always sell at net asset value.

Which of the following is not specifically addressed in CFP Board's Standards of Conduct? A)Conflicts of interest. B)Care of a Fiduciary. C)Implementing and monitoring a financial plan designed for a client. D)Comparing rates of return for exchange traded funds.

Comparing rates of return for exchange traded funds. RationaleStatement d, comparing rates of return for exchange traded funds, is not addressed in CFP Board's Standards of Conduct.

Jill, a prospective client, recently approached Mike, a CFP® professional, with significant estate planning needs. Mike does not feel like he can adequately fulfill all of Jill's needs so he refers Jill to a colleague who specializes in estate planning. According to the Code and Standards, what concept or principle did Mike most clearly demonstrate? A)Conflicts of Interest. B)Honesty. C)Professionalism. D)Competence.

Competence. Rationale A competent financial planner focuses on maintaining and applying adequate skills and knowledge when providing services to clients. Competence also includes the planner's ability to recognize his or her limitations. Option b is incorrect because honesty is about providing professional services objectively and Mike did not perform any services. Option a is incorrect because this scenario does not involve a conflict of interest. The question asks what principle did Mike MOST clearly demonstrate. Option c is incorrect because competence is most clearly demonstrated over professionalism.

Which of the following does NOT apply to Standard C.6, which provides that the CFP® professional shall select appropriate products and services that are consistent with the client's ______ ? A)Goals. B)Desires. C)Needs. D)Priorities.

Desires.RationaleThe products or services selected to implement the recommendation(s) must be suitable to the client's personal and financial circumstances and consistent with the client's goals, needs, and priorities.

Which index should Jan use as a benchmark when evaluating the performance of her XYZ mutual fund? Index 1 Beta 0.75 r-squared 0.800 Index 2 Beta1.1r-squared.900 Index 3 Beta 1.25r-squared .950 Index 4 Beta 1.5 r-squared .50 A)Index 1. B)Index 2. C)Index 3. D)Index 4.

Index 3. RationaleAlways select the index that explains "the most" of a funds return. 95% of the return, as measured by r-squared, for fund XYZ is explained by Index 3.

Amy filed her tax return on April 15. At that time, she owed $800 on a total tax liability of $10,000 and she submitted a check for $800 with her tax return. Which of the following penalties will apply to Amy? A)Failure to file. B)Failure to pay. C)Both failure to file and failure to pay. D)None of the above.

None of the above. RationaleAnswer a is incorrect because Amy filed her return on time. Answer b is not correct because Amy paid her tax liability when she filed her return

If Priscilla died with each of the following property interests, which will be excluded from her probate estate? A)Property owned as community property. B)Property held tenancy in common. C)Death proceeds of life insurance payable to a living stranger. D)Property owned fee simple (sole ownership).

Death proceeds of life insurance payable to a living stranger. Rationale All except c are included in a decedent's probate estate. Life insurance and other death proceeds are included in the decedent's gross estate, but are not included in the decedent's probate estate.

The risk which a firm may not be able to meets its debt obligations is known as: A)Business risk. B)Interest rate. C)Default risk. D)Financial risk.

Default risk. Rationale Default risk is the risk that a firm may not meet its debt obligations. D)

Tom Taylor wants to accumulate wealth, but he has told his financial planner that he is risk-averse. What should the financial planner advise Tom to do regarding his current asset investment choices, considering his risk tolerance and his goal of accumulating wealth? A)Invest in products which bring the highest return regardless of risk. B)Invest in products producing high income because fixed income products are generally safe. C)Put Tom's assets in 100% cash equivalents because he is risk-averse. D)Determine Tom's true risk tolerance.

Determine Tom's true risk tolerance. RationaleOption c should be considered, but first a financial planner should determine a client's true risk tolerance before taking any action. Therefore, option d is the correct choice.

Which of the following is not excluded from gross income? A)Gifts. B)Scholarships. C)Interest income from municipal bonds. D)Dividend income.

Dividend income. RationaleDividend income is specifically included in gross income. All of the other items are specifically excluded from gross income.

Which of the following documents appoints a surrogate decision-maker for health care? A)Durable power of attorney for health care. B)General power of appointment. C)Life insurance beneficiary designation. D)All of the above.

Durable power of attorney for health care. RationaleA durable power of attorney for health care appoints a surrogate decision-maker for health care decisions. A general power of appointment gives the power holder the ability to appoint the principal's assets to anyone and for whatever reason. It does not give any powers related to health care decisions. A life insurance beneficiary designation only designates the beneficiary of life insurance proceeds.

Which of the following statements is the best definition of estate planning? A)Estate planning is the process of accumulation, management, conservation, and transfer of wealth considering legal, tax, and personal objectives. B)Estate planning is the management, conservation, and transfer of wealth considering estate tax transfer costs. C)Estate planning is the management, conservation, and transfer of wealth considering legal, tax, and personal objectives. D)Estate planning is the process of accumulation, management, conservation, and transfer of wealth considering estate and generation-skipping transfer tax costs.

Estate planning is the process of accumulation, management, conservation, and transfer of wealth considering legal, tax, and personal objectives. RationaleThe best definition of estate planning includes the accumulation of wealth and the consideration of all legal, tax, and personal objectives. Estate planning is the process of accumulation, management, conservation, and transfer of wealth considering legal, tax, and personal objectives.

Eugenia, a CFP® professional, has a client who is struggling with budgeting. She would like to recommend that the client try using the You Need a Budget (YNAB) phone app. What are Eugenia's responsibilities regarding the recommendation? A)Since YNAB is a third-party app which she does not control, she has no responsibilities when making the recommendation. B)Eugenia must have a reasonable understanding of the assumptions and outcomes of the app before making the recommendation. C)Eugenia is not permitted to recommend such technology to a client unless she will personally oversee the inputs. D)Eugenia is not permitted to recommend such technology to a client.

Eugenia must have a reasonable understanding of the assumptions and outcomes of the app before making the recommendation. Rationale Standards of Conduct Section A. 14 (Duties when Selecting, Using, and Recommending Technology) requires that Eugenia exercise reasonable care and judgment when selecting, using, or recommending any software, digital advice tool, or other technology while providing professional services to a client, that she have a reasonable level of understanding of the assumptions and outcomes of the technology employed, and that she have a reasonable basis for believing that the technology produces reliable, objective, and appropriate outcomes.

The type of risk which measures the extent to which a firm uses debt securities and other forms of debt in its capital structure to finance its assets is known as: A)Business risk. B)Systematic risk. C)Default risk. D)Financial risk.

Financial risk. RationaleFinancial risk has to do with the amount of leveraging or use of borrowed funds a firm utilizes to structure its investment and finance its assets.

Which of the following is not in the Code of Ethics? A)Frugality. B)Integrity. C)Competence. D)Avoid or disclose and manage conflicts of interest.

Frugality. Rationale Frugality is not in the Code of Ethics.

Given the following diversified mutual fund performance data, which fund had the best risk-adjusted performance if the risk-free rate of return is 5.7%?• Fund A: Average rate of return = 7.82%, Standard deviation of annual return = 7.60% and Beta = 0.950• Fund B: Average annual return = 12.87%, Standard deviation of annual return = 15.75% and Beta = 1.250• Fund C: Average annual return = 10.34%, Standard deviation of annual return = 18.74% and Beta = 0.857• Fund D: Average annual return = 7.50%, Standard deviation of annual return = 8.10% and Beta = 0.300 A)Fund B, because the annual return is highest. B)Fund C, because the Sharpe ratio is lowest. C)Fund D, because the Treynor ratio is highest. D)Fund A, because the Treynor ratio is lowest.

Fund D, because the Treynor ratio is highest. RationaleChoice a does not make sense as the question asks about risk-adjusted return. Choices b and d do not make sense because investors look for high Sharpe and Treynor ratios, not low ones. If a fund is diversified, use the Treynor model which uses Beta as the measure of risk. In this case, fund D has the highest risk adjusted rate of return. Treynor = [(rp - rf) / (Bp)]. In this case, the result is (0.0750 - 0.057) ÷ 0.3000 = 0.06.

John is a client and seems to be suffering from dementia and wants to remove his children from his will and give all of his wealth to Marie, a neighbor who periodically visits John and delivers him groceries. What should the CFP® professional do? A)He should contact John's children to let them know. B)He should do what John asks. C)He should contact the doctor to confirm if he is suffering from dementia or not. D)He should contact John's lawyer.

He should contact John's lawyer. Rationale The CFP® professional owes a duty of confidentiality to his client. However, speaking to John's lawyer, who also owes a duty of confidentiality, to seek legal advice is the best answer choice. Option a is incorrect because the CFP® professional owes the duty of confidentiality to his client. Option b is incorrect because CFP® professional owes a fiduciary duty to the client to act in their best interest. Prior to suffering from dementia, the client intended to transfer assets to his children. Therefore, the planner should seek legal advice before proceeding. Option c is incorrect, the CFP® professional owes the duty of confidentiality, as does the doctor, who will not be able to disclose medical conditions to the planner.

Which of the following is considered an advantage of the probate process? A)The probate process creates delays. B)The probate process is costly. C)Heirs receive property with clear title. D)Information that is filed with the court becomes public information.

Heirs receive property with clear title. RationaleA definite advantage to the probate process is that the heirs are able to secure clear title to assets. Answers a, b, and d are all disadvantages to the probate process.

Claude decides to prepare his will, but does not want to seek the help of an attorney. Claude handwrites, signs and dates all of the provisions of the will but does not have it witnessed by anyone. What type of will does Claude have, if any? A)None. B)Nuncupative. C)Self Prepared. D)Holographic.

Holographic. Rationale A holographic will is one that is handwritten, signed and dated. Option b is incorrect because a nuncupative will, which is not valid in all states, is an oral will. Option c is incorrect because there is no category "self prepared."

Which type of will is handwritten and does not generally require a witness? A)Holographic. B)Oral. C)Nuncupative. D)Statutory.

Holographic. RationaleHolographic wills are handwritten. The material provisions of the will must be in the testator's handwriting. The will must be dated and signed by the testator, and does not generally need to be witnessed.

William, a CFP® professional, has been working with his new client Cole. He has completed all required disclosures and provided all written documents required for a financial planning engagement. Cole is 42, divorced, and has one child. William discussed Cole's insurance coverage following a thorough review of Cole's policies and recommended Cole purchase a disability policy and additional term life insurance through his employer. William also performed a retirement needs analysis and developed an investment plan he believes will help Cole achieve his goals. While presenting the retirement and investment plan, Cole mentioned that he was rejected for the life insurance for medical reasons that he does not wish to discuss with William.To comply with the Standards of Conduct, William should: A)Gather appropriate information from Cole's prior spouse to determine if Cole's condition may affect the retirement and investment plan. B)Inform Cole that without more information on his medical condition William will not be able to properly address his situation and he would have to restrict the scope of the engagement to the already completed insurance review. C)Inform Cole that without more information on his medical condition William will not be able to properly address his situation and he would have to restrict the scope of the engagement to the already completed insurance review and retirement and investment analyses. D)Inform Cole in writing that his medical condition could affect William's conclusions and recommendations.

Inform Cole that without more information on his medical condition William will not be able to properly address his situation and he would have to restrict the scope of the engagement to the already completed insurance review. Rationale Code and Standards Section C.1.c. requires practitioners unable to obtain sufficient information to form a basis for recommendations to either restrict the scope of the engagement to matters for which sufficient and relevant information is available; or terminate the engagement. Since the insurance review has already been completed, this restriction would amount to terminating the engagement. Option a is incorrect because Cole is the client, not Cole's former spouse and contacting her without Cole's permission would violate the client confidentiality standards. Option c is incorrect because the medical condition could be significant enough to warrant a revision to the life expectancy included in the retirement and investment analyses and therefore the recommendations should not be relied upon due to the lack of appropriate information. Option d: William should definitely communicate the potential impact on his recommendations, but that alone is insufficient to qualify as the best answer.

A fixed income security whose price has fallen as a result of an increase in interest rates in the market place is said to be subject to: A)Interest rate risk. B)Reinvestment rate risk. C)Purchasing power risk. D)Exchange rate risk.

Interest rate risk. Rationale A fixed income security whose price has fallen as a result of an increase in interest rates in the market place is said to be subject to interest rate risk. Interest rate risk refers to the inverse relationship between changes in interest rates and the price of the fixed income security.

Twenty-two years ago, Kyle and John began dating, and 19 years ago, they began living together. Last year, Kyle inherited over $9,000,000 from his grandfather. He wants to ensure that if he dies first, John will be taken care of for the rest of his life. Despite your insistence, Kyle does not have a will, and you have advised him previously that state intestacy laws do not protect unmarried partners. Which of the following asset ownership options would fulfill Kyle's goal of transferring assets to John at his death? A)Community property. B)Tenancy in common with each other. C)Joint tenancy with rights of survivorship. D)Tenancy by the entirety.

Joint tenancy with rights of survivorship. Rationale When one owner dies owning property held as a joint tenancy with the right of survivorship, his interest is transferred to the other remaining property owners. In this case, if Kyle and John own property JTWROS, John will inherit Kyle's interest in the property if Kyle dies first. When property is owned JTWROS, the property does not pass through probate and the transfer is automatic at death. John and Kyle cannot own property via community property or tenancy by the entirety as they are not a married couple. Tenancy in common does not have an automatic survivorship feature and would not accomplish Kyle's and John's goals.

Rose is employed as a loan officer at a bank. Rose recently sat down and visited with her financial planner, Julie, a CFP® professional. Rose was in need of cash and borrowed $15,000 from Julie. Based on the Standards of Conduct (A CFP® professional shall not lend money to a client.), which of the following statements is accurate? A)Julie is not in violation of the rule because Rose is in the business of lending money. B)Julie is in violation of the rule because a CFP® professional must never lend money to a client. C)Julie is not in violation since she loaned Rose less than $20,000. D)Julie is in violation of the rule.

Julie is in violation of the rule. Rationale Julie has violated the Standards of Conduct which states a CFP® professional shall not lend money to a client UNLESS, the client is a member of the certificant's immediate family or the certificant is an employee of an institution in the business of lending money and the money lent is that of the institution, not the certificant. In this instance neither of the exceptions apply and Julie is in violation of the rule. Option a is incorrect because Julie does not meet one of the exceptions that will allow her to lend money to her client. Rose being in the business of loaning money has no effect on Julie's ability to lend money. Option b is incorrect because there are exceptions as stated above. Option c is incorrect because it does not matter how much money is being lent.

Which of the following is not a "client" to whom the CFP® professional owes a fiduciary duty? A)Judy, an individual the CFP® professional assists with selecting the asset allocation for her 401(k) assets. B)Amy, an individual for whom the CFP® professional has discretionary control over her brokerage account. C)Ken, the CFP® professional's brother, who the CFP® professional had a conversation with over Thanksgiving dinner regarding Roth IRAs. D)The owners of Tables Factory, Inc., with whom the CFP® professional discussed the advantages of a succession plan based on their ownership situation.

Ken, the CFP® professional's brother, who the CFP® professional had a conversation with over Thanksgiving dinner regarding Roth IRAs. Rationale A client is defined as a person to whom the CFP® professional has agreed to provide professional services pursuant to an engagement (an oral or written agreement, arrangement, or understanding). The CFP® professional owes a fiduciary duty when providing financial advice or financial planning to a client. Financial advice is a communication that, based on the content, context, and presentation would reasonably be viewed as a recommendation that a client take or refrain from taking a particular course of action with respect to:a) the development or implementation of a financial plan,b) the advisability of investing in, purchasing, holding, gifting, or selling a financial asset,c) investment policies or strategies, portfolio composition, the management of financial assets, or other financial matters, or d) the selection and retention of other persons to provide financial or professional services to the client; or the exercise of discretionary authority over the client's financial assets.A casual conversation with a relative is not considered providing financial advice to a client.

Sylvia has a two assets in her portfolio, asset A and asset B. Asset A has a standard deviation of 40% and asset B has a standard deviation of 20%. Fifty percent of her portfolio is invested in asset A and 50% is invested in asset B. The correlation for asset A and asset B is 0.90. What is the standard deviation of her portfolio? A)Greater than 30%. B)Less than 30%. C)Equal to 30%. D)Not enough information to determine.

Less than 30%. Rationale It is not necessary to use the standard deviation of a two asset portfolio formula to answer this question. Since there is a 50/50 weighting for each asset, simply take a simple average of the standard deviations (0.40 + 0.20) ÷ 2 = 0.30. Since the correlation is less than 1, the standard deviation for the portfolio will be less than the simple average. If correlation was equal to 1, then the standard deviation would be equal to 30%.

Maxine is terminally ill. Her doctors gave her twenty-four months to live thirty-six months ago. Maxine has decided that she does not want to be placed on life support. Which document will direct Maxine's doctors to refrain from putting her on life support? A)Living will. B)Power of attorney. C)Durable power of attorney. D)General power of appointment.

Living will. Rationale Only a living will would give the doctors the ability to refrain from placing her on life support. A living will, also known as an advance medical directive, is an individual's written last wishes regarding sustaining life. It establishes the medical situations and circumstances in which the individual no longer wants life-sustaining treatment. Neither a power of attorney nor a durable power of attorney would give the ability to end life-sustaining treatment.

Which of the following would be considered a systematic risk? A)Business Risk. B)Financial Risk. C)Country Risk. D)Market Risk.

Market Risk. Rationale All of the others are unsystematic risks, or diversifiable risks. These are the direct result of limited diversification, but can be eliminated through the broadening of the client's portfolio.

All of the following statements regarding information that must be provided to a client are correct EXCEPT: A)A written privacy policy must be provided to a client when the CFP® professional is providing financial advice and when the CFP® professional is providing financial planning. B)Material conflicts of interest must be provided in writing when the CFP® professional is providing financial planning, but may be provided orally when the CFP® professional is providing financial advice that does not require financial planning. C)A description of how the planner, firm, and related parties are compensated must be provided in writing when the CFP® professional is providing financial planning. D)Disclosure of public discipline and bankruptcy must be provided to a client orally or in writing when the CFP® professional is providing financial advice, but must always be in writing when the CFP® professional is providing financial planning.

Material conflicts of interest must be provided in writing when the CFP® professional is providing financial planning, but may be provided orally when the CFP® professional is providing financial advice that does not require financial planning. Rationale Material conflicts of interest may be provided orally or in writing both when providing financial advice and when providing financial planning. Although CFP Board recommends, as a best practice, to provide all disclosures in writing, it is not required for disclosing conflicts of interest.

The first step in the estate planning process includes: A)Meeting with the client and discussing the client's assets, family structure, and desires. B)Prioritizing the client's goals. C)Developing a formal written estate plan. D)Identifying key areas of concern in relation to the client's plan - taxes, cash on hand, etc.

Meeting with the client and discussing the client's assets, family structure, and desires. Rationale Initially, a financial planner must meet with the client and gather information regarding the client's assets, family structure, current estate planning documents, and desires for the estate plan. Without this information, the financial planner cannot properly begin the estate planning process. Next, the financial planner would prioritize the client's goals. Based on the information gathered during the initial meeting, the financial planner would identify key areas of concern and utilize this information during the remainder of the estate planning process. The financial planner would then develop a formal written estate plan. The financial planner would review the formal written estate plan with the client to ensure that the client's goals have been properly identified and that the formal written estate plan includes the transfer of all of the client's assets. The final steps are to implement the estate planning recommendations, and monitor and update the plan as needed.

Match the investment characteristic(s) listed below which describe(s) an open-end investment company. A)Only passive management of the portfolios. B)Shares of the fund are normally traded in major secondary markets. C)Both a and b. D)Neither a nor b.

Neither a nor b. RationaleOption a is incorrect because open-end funds are both passively and actively managed. Option b is incorrect because open-end fund shares are traded directly with the fund, not on the secondary market.

Which of the following definitions best defines a fiduciary under CFP Board's Standards of Conduct? A)One who acts in utmost good faith, in a manner he or she reasonably believes to be in the best interest of the client. B)One who acts in the best interests of the financial planner. C)One who acts in the utmost good faith in a manner he or she reasonably believes to be in the best interest of the profession. D)One who acts in the best interests of the public.

One who acts in utmost good faith, in a manner he or she reasonably believes to be in the best interest of the client.RationaleStatement a, one who acts in utmost good faith, in a manner he or she reasonably believes to be in the best interest of the client, is the best definition of a fiduciary as defined by CFP Board's Standards of Conduct.

Mitch and Jennifer have AGI of $125,000 and have not planned for their children's education. Their children are ages 17 and 18 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's education? A)529 Savings Plan. B)PLUS Loan. C)Pell Grant. D)Coverdell ESA.

PLUS Loan. RationaleIt's too late for the parents to begin savings for their children's education so that eliminates the 529 Savings Plan and Coverdell ESA. Their AGI is too high for a Pell Grant.

Which of the following types of aid are not need based? A)Pell Grant. B)Parent Plus Loan. C)FSEO Grant. D)Subsidized Stafford Loan.

Parent Plus Loan. RationaleParent Plus loans are based on a parent's credit score.

The following type of financial aid is awarded to students with a low EFC, and funds are guaranteed to be available if a student qualifies: A)Pell Grant. B)Plus Loan. C)Work-Study. D)Stafford Loan.

Pell Grant. RationalePell Grants are always available if a student qualifies.

If the risk/return performance of a stock lies above the Security Market Line, the stock is said to have a: A)Positive correlation coefficient. B)Positive alpha. C)Positive expected return. D)Positive covariance.

Positive alpha. Rationale Performance of a stock above (below) the SML is a positive (negative) alpha. Again, the Jensen formula can be used for this calculation.

Donald agreed to sell his house to his brother, but could not attend the closing date of the sale (act of sale). Of the following options, which would allow Donald's mother to attend the closing and sign the necessary documents on Donald's behalf? A)Living will. B)Advanced real estate directive. C)Power of attorney. D)Side instruction letter.

Power of attorney. RationaleDonald could give his mother a power of attorney to sign the documents at the closing date of the sale. None of the other options would be appropriate in this case. An advanced real estate directive does not exist.

Bob, a CFP® professional, has developed a comprehensive financial plan for his client, Sue. Based on CFP Board Practice Standards, which of the following should Bob do next? A)Review the plan with Sue's CPA. B)Implement the financial plan with Sue. C)Present the financial plan to Sue. D)Develop financial planning recommendations.

Present the financial plan to Sue. Rationale Based on the Practice Standards, the next step for a CFP® professional after developing the financial plan is presenting the plan. Option a is incorrect because reviewing the plan with the client's CPA and attorney is not required in the Practice Standards. Option b is incorrect because Bob must first present the plan to the client before implementing the plan. Option d is incorrect because Bob would have already developed financial planning recommendations at this point of the financial planning process.

Which of the following is not a party to a trust? A)Trustee. B)Income beneficiary. C)Grantor. D)Principal.

Principal. RationaleThe parties to a trust are the grantor, who creates the trust and contributes the property; the trustee, who manages the trust and holds the legal title to the trust assets; and the beneficiary, who holds the beneficial title to the property. The principal of the trust is the property contributed to the trust; it is not a party to the trust.

What is the present value of all college education for 5 children ages 0, 1, 1, 3, and 5 if the cost of education is today's dollars is $17,000 per year, education inflation is 5%, and the parents expected portfolio rate of return is 8.5%? The children are expected to be in college 4years and they will each start at age 18. A)$88,775.02. B)$148,958.22. C)$192,007.89. D)$203,085.22.

Rationale$192,008 (rounded)Calculated as:N = 4i = [(1.085 ÷ 1.05) - 1] x 100PMT AD = $17,000PV@18 = $64,779.86643 Age: 01 135 TotalN = 1817171513 i = [(1.085 ÷ 1.05) - 1] x 100 [(1.085 ÷ 1.05) - 1] x 100 [(1.085 ÷ 1.05) - 1] x 100 [(1.085 ÷ 1.05) - 1] x 100 [(1.085 ÷ 1.05) - 1] x 100 FV = 64,779.8664364,779.8664364,779.8664364,779.8664364,779.86643 PV = 35,901.4637,098.18 37,098.18 39,612.6142,297.47$192,007.89

Which of the following statements is true regarding refundable tax credits? A)There are more refundable tax credits than nonrefundable credits. B)Refundable tax credits can be used only to reduce or eliminate the current year's tax. C)Refundable tax credits can generate a tax refund. D)For federal income tax purposes, refundable credits are used before nonrefundable credits.

Refundable tax credits can generate a tax refund. RationaleRefundable credits are far fewer in number than nonrefundable credits. In addition to reducing or eliminating the current year's tax, refundable tax credits can generate a tax refund. Furthermore, nonrefundable credits are used before refundable credits for federal income tax purpose.

Municipal bonds that are backed by the income from specific projects are known as: A)Income bonds. B)Revenue bonds. C)General obligation bonds. D)Debenture bonds.

Revenue bonds. Rationale Revenue generated from the project, such as a toll to pay for the bridge, that is used to repay such municipal obligations are known as revenue bonds. The other municipal bonds, general obligation bonds, are backed by the taxing power of the issuing body.

A number of years ago Ron was divorced and subsequently had severe financial issues. Two years ago, he filed for bankruptcy. After getting back on his feet financially, he decided to become a CFP® professional. Today (after October 1, 2019), he made his application to CFP Board for certification. Which of the following is correct under the Board's policy regarding bankruptcy? A)Ron will be denied the right to use the marks unless he files a successful consideration request with CFP Board. If he is approved to use the CFP® marks, he will be required to disclose the bankruptcy to his clients, along with the location of the relevant public websites of any authority that sets forth the bankruptcy. B)Ron's bankruptcy falls on the always bar list because it is within five years preceding his application. He will be denied the right to use the marks. C)Ron's bankruptcy is no longer a concern of the CFP Board as long as he discloses it in writing to all potential clients for the five year period following the bankruptcy. D)Ron's bankruptcy will not prevent him from becoming a CFP® professional, but it will be disclosed on the CFP® professional's public profile displayed on CFP Board's website for 10 years.

Ron will be denied the right to use the marks unless he files a successful consideration request with CFP Board. If he is approved to use the CFP® marks, he will be required to disclose the bankruptcy to his clients, along with the location of the relevant public websites of any authority that sets forth the bankruptcy. Rationale Option d is incorrect because it is the rule that was in place between July 2012 and September 2019. Option a describes the treatment of bankruptcies beginning October 1, 2019. Option b is incorrect because bankruptcies will not always bar certification. The Standards of Conduct do allow an opportunity for the candidate or CFP® professional to demonstrate to the Disciplinary and Ethics Commission that the bankruptcy was not a result of the inability to responsibly manage financial affairs. Option c is incorrect because the Board must be informed and will take the proactive measures listed in option a to ensure that the bankruptcy does not reflect adversely on the CFP® marks or on the profession, and will require disclosure to clients.

Trina gave her nephew Roy 100 shares of HLM Corporation stock that she purchased 6 months ago for $10,000. At the time of the gift, the fair market value of the stock was $12,000. Which of the following statements concerning the stock is correct? A)If Trina sold the stock, she would have realized a long- term capital gain. B)Roy's basis in the stock is $10,000. C)Roy's basis in the stock is $12,000. D)If Roy sells the stock immediately after the gift, he will realize a long-term capital gain.

Roy's basis in the stock is $10,000. RationaleSince Trina transferred appreciated property to Roy by gift, her basis carries over to Roy. Roy has a $10,000 basis in the stock.

On September 20 of Year 1, Sean purchased 1,000 shares of Austin Enterprises, Inc. common stock for $25,000. He sold the shares for $35,000 on September 20 of Year 2. Which of the following statements correctly identifies the tax consequences of this transaction? A)Sean will recognize a $10,000 ordinary gain on the sale. B)Sean will recognize a $10,000 short-term capital gain on the sale. C)Sean will recognize a $10,000 long-term capital gain on the sale. D)Sean will not be required to recognize the gain on the transaction.

Sean will recognize a $10,000 short-term capital gain on the sale. RationaleSean's holding period equals one year. Since it is not more than one year, it does not qualify for long-term capital gain treatment.

As a measure for risk, the Capital Market Line (CML) uses the: A)Risk-free rate of return. B)Beta of the market. C)Standard deviation of the market. D)Portfolio weighted beta.

Standard deviation of the market. Rationale The CML (Capital Market Line) uses standard deviation, while the SML (Security Market Line) uses the beta as its risk measurement.

Which type of will complies with the statutes of the domiciliary state and is drawn by an attorney? A)Holographic. B)Oral. C)Nuncupative. D)Statutory.

Statutory. RationaleStatutory wills are generally drawn by an attorney, complying with the statutes for wills of the domiciliary state. They are usually signed in the presence of two witnesses.

Bob Conrad's investment portfolio consists of several types of stocks, bonds, and money market instruments. The portfolio has an overall standard deviation of 12%, a beta of 1.06, and a total return for the year of 11%. Bob is considering adding one of two alternative investments to his portfolio. Stock A has a standard deviation of 13%, a beta of 0.87, and a correlation coefficient with the portfolio of 0.6. Stock B has a standard deviation of 11%, a beta of 0.97, and a correlation coefficient of 0.95. Which stock should Bob consider adding to his portfolio, and why? A)Stock A because it has a lower correlation coefficient. B)Stock A because it has a lower beta than that of the portfolio. C)Stock B because it has a lower standard deviation than that of the portfolio. D)Stock B because it has a higher correlation coefficient.

Stock A because it has a lower correlation coefficient. RationaleIn the process of adding new investments to a portfolio, the lowest correlation coefficient makes the best addition to a portfolio from a risk perspective. Closest to negative one (-1) is always best.

The type of risk which CANNOT be eliminated through diversification is: A)Unsystematic Risk. B)Company Specific Risk. C)Systematic Risk. D)Business Risk.

Systematic Risk. Rationale Unsystematic risk, company specific risk and business risk can all be eliminated through diversification.

Reba has a son, Chad (age 18), a freshman at Tulane University with tuition of $30,000 per year. Reba's AGI is $45,000. She takes a withdrawal of $20,000 from her 529 Savings Plan and pays the remaining $10,000 in tuition out of her checking account. Which of the following would you recommend? A)Take a Lifetime Learning Credit of $2,000. B)Take a American Opportunity Tax Credit (AOTC) of $2,500. C)Cannot take AOTC or Lifetime Learning Credit because she took a 529 distribution. D)Take AOTC and Lifetime Learning Credit totaling $4,500 ($2,000 + $2,500).

Take a American Opportunity Tax Credit (AOTC) of $2,500. RationaleTaking the AOTC is a better choice because it offers a higher tax credit. Reba is entitled to take an AOTC because it is paying for different expenses than the 529 Savings Plan distribution. A taxpayer cannot claim both the AOTC and Lifetime Learning Credit for the same child in the same year.

Danny would like to determine his financial needs during retirement. All of the following are expenditures he might eliminate in his retirement needs calculation except: A)The $200 per month he spends on drying cleaning for his work suits. B)The $1,500 mortgage payment he makes that is scheduled to end five years into retirement. C)The FICA taxes he pays each year. D)The $2,000 per month he puts into savings.

The $1,500 mortgage payment he makes that is scheduled to end five years into retirement. Rationale Danny would not eliminate his mortgage since it will not be paid off at retirement. He would eliminate the dry cleaning expense, FICA taxes, and savings expense since he would most likely no longer have these expenditures during retirement.

What does a CFP® professional have to disclose to the client when providing financial advice that does not require financial planning? A)The CFP® professional's areas of expertise. B)CFP® professional's income. C)CFP® professional's involvement in community activities. D)10 years of the CFP® professional's employment history.

The CFP® professional's areas of expertise. Rationale The planner's expertise (or lack of expertise) could reasonably be expected to materially affect the client's decision to engage the CFP® professional and should be disclosed. Option b is incorrect because the CFP® professional does not have to disclose income, only the compensation arrangement for this client. Options c and d are incorrect because the CFP® professional's community activities and employment history are not required disclosures.

Which method of portfolio evaluation allows the comparison of a portfolio manager's performance to the expected return, using Beta as the measure of risk?

The Jensen Model. RationaleTreynor and Sharpe are relative measures of risk-adjusted return and therefore, must be compared to the performance of other investment alternatives. Information ratio compares actual performance to that of the market, using standard deviation.

All of the following statements are true, except: A)The American Opportunity Tax Credit is only available for the first four years of post-secondary education. B)The Lifetime Learning Credit is only available for the first two years of postsecondary education. C)The American Opportunity Tax Credit is awarded on a per student basis. D)The Lifetime Learning Credit is awarded on a per family basis.

The Lifetime Learning Credit is only available for the first two years of postsecondary education. RationaleAOTC is good for the first four years. Lifetime is available throughout your lifetime. AOTC is per student, lifetime is per family.

Which of the following expenditures will most likely increase during retirement? A)Clothing costs. B)Travel. C)FICA. D)Savings.

Travel. RationaleTravel is the most likely expenditure to increase during retirement. Many other costs will likely be reduced after the retiree leaves the workforce, including a reduction in clothing expenses and the elimination of payroll taxes. An individual's savings may also be eliminated because a retirement plan requires the use of the accumulated savings during retirement.

If grandparents contributed $150,000 to a 529 Savings Plan for their grandchild, elected to split the gift and treat it ratably over a 5-year period, and one of the grandparents died during the next year, which of the following statements is correct? A)The grandchild would have to return a portion of the contributions to the 529 plan. B)The gross estate of the deceased grandparent would have to include $45,000 of the contributions to the 529 plan. C)A gift tax return would have to be filed for one half of the gift to the 529 plan in the year of death. D)The entire gift by the deceased to the 529 plan would be brought back into the deceased's gross estate.

The gross estate of the deceased grandparent would have to include $45,000 of the contributions to the 529 plan. Rationale When a taxpayer elects front-loading of a gift of 5 times the annual exclusion to a 529 Savings Plan and then the taxpayer dies within the 5 years, the taxpayer will be required to include a portion of the gift in his or her gross estate. In this case, the gift to the 529 plan by the decedent was $75,000, and the deceased could be eligible only for two years of annual exclusions (the year of death and the year of the gift). The deceased's gross estate must, therefore, include 3/5 of the $75,000, which is $45,000.

Gretchen, who is age 30 and not a dependent of her parents, has incurred several expenses this year related to her pursuit of a bachelor degree. Which of the following may she deduct above-the-line on her tax return? A)Moving expenses from her previous apartment 100 miles from campus to an apartment 2 miles from campus. B)A charitable contribution to the college's alumni club. C)The cost of an electric scooter used exclusively to get from her apartment to her classes on campus. D)The interest paid in the current year on her student loans that were taken out in previous years.

The interest paid in the current year on her student loans that were taken out in previous years. Rationale Qualified student loan interest is deductible above-the-line (subject to certain limitations). Moving expenses are an above-the-line deduction, but are only deductible by active duty military personnel for tax years 2018 - 2025. Charitable contributions are below-the-line deductions. The cost of the electric scooter is not a deductible expense.

Which of the following assets will be countable in the financial aid formula for a college student? A)The cash value in life insurance policies owned by the student's parents. B)The balances in IRA accounts owned by the student's parents. C)The investments in a 529 Savings Plan owned by the student's grandparents. D)The investments in a 529 Savings Plan owned by the student's parents.

The investments in a 529 Savings Plan owned by the student's parents. Rationale The investments in a 529 Savings Plan owned by a third party such as the child's grandparents will not be countable, but the investments in a 529 Savings Plan owned by the student or parent will be countable as parent assets. The cash value of life insurance policies and IRA account balances owned by the student's parents are not countable assets.

Which of the following is a disadvantage of the probate process? A)The decedent's heirs and/or legatees are given clear title to property. B)The probate process requires several court filings. C)The probate process provides for an orderly distribution of the decedent's assets. D)The decedent's creditors are protected.

The probate process requires several court filings. RationaleThe probate process requires several court filings which create additional costs and becomes public information. This is a definite disadvantage to the probate process. Answers a, c, and d are all advantages of the probate process.

Bob Johnson established a Section 529 Savings Plan for his son Robert several years ago. It is now time to pay Robert's first-year college costs. The current value of the fund is $80,000. If Bob withdraws $20,000 to pay qualified tuition expenses, how will the distribution be taxed? A)To Bob. B)To Robert. C)Only the earnings will be taxed, to Bob. D)There will be no federal taxes.

There will be no federal taxes. RationaleWithdrawals from Section 529 plans to pay qualified higher education costs are income tax-free.

Jack and Jill are 41 years old and plan on retiring at age 65 and expect to live until age 95. They currently earn $200,000 and expect to need $100,000 in retirement. They also expect that Social Security will provide $24,000 of benefits in today's dollars at age 65. They are saving $20,000 each in their 401(k) plans and IRAs. Their son, Parker, is expected to go to college in 10 years. They want to save for Parker's college education, which they expect will cost $25,000 in today's dollars and they are willing to fund 4 years of college. They were told that college costs are increasing at 6% per year, while general inflation is 3%. They currently have $500,000 saved in total and they are averaging an 8% rate of return and expect to continue to earn the same return over time. Based on this information, what should they do? A)They have saved enough to fund retirement and Parker's education and can stop saving if they wish. B)They are doing just fine and should continue doing what they are doing. C)They need to increase their annual savings by about $12,000 now if they want to fund college in addition to retirement. D)They should increase their annual savings by about 10 percent and they should be fine.

They have saved enough to fund retirement and Parker's education and can stop saving if they wish. RationaleUse the present value of all goals approach (from chapter 3) to combine the retirement and education needs.Calculate the present value needed to meet the retirement goal:RatesEarnings Rate8.0% Inflation Rate3.0%Current Age41 Retirement Age65Life Expectancy95Step 1: Determine the funding amount in today's dollars:Step 1Stated Expected Need$100,000Less Social Security($24,000)Present Value of Capital Needs$76,000Step 2: Inflate the needs from Step 1 to the beginning of retirement:Step 2PV$76,000N (number of yrs until retirement)24i (inflation rate)3PMT0FV$154,492.35Step 3: Determine the amount of savings (capital balance) needed at retirement to fund expenses throughout remainder of life expectancy using an annuity due:Step 3PMT AD($154,492.35)N (retirement life expectancy)30i4.8544 ((1.08 ÷ 1.03) -1) x 100FV0PV (capital balance need at retirement)$2,532,092.35Step 4: Determine the retirement need in today's dollars:Step 4FV$2,532,092.35N (number of years until retirement)24i8PMT0PV($399,309.29)Calculate the present value needed to meet the education goal.Step 1: Inflate the education costs:Step 1PV$25,000N (number of years until college)10i (inflation rate)6 PMT0FV$44,771.19Step 2:Determine the amount of savings (capital balance) needed at the start of college to fund tuition for 4 years using an annuity due:Step 2PMT AD($44,771.19)N (years in college)4i (inflation rate)1.8868 ((1.08 / 1.06)-1) x 100FV0PV (capital balance need at start of college)$174,171.31Step 3: Determine education need in today's dollars:Step 3FV$174,171.31N (number of years until college)10i8PMT0PV ($80,675.02)Total Goals in Today's Dollars Converted to Annual Savings Amount:PV of Retirement Need$399,309.29Plus PV of Education Need$80,675.02Total$479,984.31Less Investment Assets$500,000.00Surplus$20,015.69

Mark and Caren are 36 years old and plan on retiring at age 62 and expect to live until age 95. They currently earn $250,000 and expect to need $200,000 in retirement. They also expect that Social Security will provide $40,000 of benefits in today's dollars at age 62. They are saving $15,000 each in their 401(k) plans and just had a baby boy they named Albert Rufus or AR for short. They want to save for AR's college education, which they expect will cost $20,000 in today's dollars and they are willing to fund 4 years of college. They were told that college costs are increasing at 7% per year, while general inflation is 3%. They currently have $150,000 saved in each of their 401(k) plans and they are averaging a 9% rate of return and expect to continue to earn the same return over time. Based on this information, what should they do? A)They are currently saving more than they need and can reduce their annual savings. B)They are doing just fine and should continue doing what they are doing. C)They need to increase their annual savings by about $6,400 now that AR is born and they want to fund his college in addition to retirement. D)They should increase their annual savings by about 7.5 percent and they should be fine.

They should increase their annual savings by about 7.5 percent and they should be fine. RationaleUse the present value of all goals approach (from Chapter 3) to combine the retirement and education needs. Calculate the present value needed to meet the retirement goal:RatesEarnings Rate$100,000 Inflation Rate3.0%Current Age36 Retirement Age62Life Expectancy95Step 1: Determine the funding amount in today's dollars:Step 1Stated Expected Need$200,000Less Social Security($40,000)Present Value of Capital Needs$160,000Step 2: Inflate the needs from Step 1 to the beginning of retirement:Step 2PV$160,000N (number of yrs until retirement)26i (inflation rate)3PMT0FV$345,054.60Step 3: Determine the amount of savings (capital balance) needed at retirement to fund expenses throughout remainder of life expectancy using an annuity due:Step 3PMT AD($345,054.60)N (retirement life expectancy)33i5.8252 ((1.09 ÷ 1.03) -1) x 100FV0PV (capital balance need at retirement)$5,300,844.73Step 4: Determine the retirement need in today's dollars:Step 4FV$5,300,844.73N (number of years until retirement)26i9PMT0PV($563,970.17)Calculate the present value needed to meet the education goal.Step 1: Inflate the education costs:Step 1PV$20,000N (number of years until college)18i (inflation rate)7 PMT0FV$67,598.65Step 2:Determine the amount of savings (capital balance) needed at the start of college to fund tuition for 4 years using an annuity due:Step 2PMT AD($67,598.65)N (years in college)4i (inflation rate)1.8692 ((1.09 / 1.07)-1) x 100FV0PV (capital balance need at start of college)$263,043.17Step 3: Determine education need in today's dollars:Step 3FV$263,043.17N (number of years until college)18i9PMT0PV (capital balance need at retirement)($55,763.51)Total Goals in Today's Dollars Converted to Annual Savings Amount:PV of Retirement Need$563,970.17Plus PV of Education Need$55,763,51Total$619,733.68Less Investment Assets$300,000.00Net PV of All Goals$319,733.68Net PV of All Goals$319,733.68N (number of years until retirement)26i9FV0PMT($32,202.09)Current Savings: $30,000.00Increase in Savings: $2,202.09

Which of the following returns do mutual funds use when reporting a five-year historical return? A)Time-Weighted Return. B)Dollar-Weighted Return. C)Arithmetic Mean. D)Holding Period Return.

Time-Weighted Return. RationaleMutual funds use the security's cash flow, which is a time-weighted return. An investor is concerned about a dollar-weighted return.

Which of the following best describes the intent behind CFP Board's Code of Ethics and Standards of Conduct? A)To avoid getting sued by clients. B)To make more money as a financial planner. C)To establish the highest principles and standards that are mandatory and provide a source of guidance for CFP® professionals. D)To assist candidates in getting certified.

To establish the highest principles and standards that are mandatory and provide a source of guidance for CFP® professionals. RationaleCFP Board's Code of Ethics and Standards of Conduct is intended to establish the highest principles and standards that are mandatory and provide a source of guidance for CFP® professionals.

What is the client's responsibility during the financial planning process? A)To interpret all the information that is gathered. B)To provide the professional with all requested information. C)To pay their fees. D)To implement the financial plan.

To provide the professional with all requested information. Rationale A planner is required to limit the scope of an engagement or disengage a client, if a client does not provide all of the necessary documents and information. This is the primary responsibility of a client during the financial planning process. Option a is incorrect as that describes the planner's responsibility during the financial planning process. Option c is incorrect because paying fees is not detailed as a requirement of the client during an engagement. Although there is a moral and legal obligation to pay the fees, it's not a responsibility during the financial planning process. Option d is incorrect because the client and planner will decide the extent to which the client will assist with implementation of the plan.

Tyrone does not want to write a will. It upsets him to contemplate his own death and he simply desires to avoid the estate planning process. All of the following are risks Tyrone's estate may face due to Tyrone's inaction, except: A)Tyrone's property transfers contrary to his wishes. B)Tyrone's estate may face liquidity problems. C)Tyrone's estate faces increased estate administration fees. D)Tyrone's estate faces increased debt payments for outstanding debts at death.

Tyrone's estate faces increased debt payments for outstanding debts at death. RationaleTyrone's inaction will cause him to die intestate and be subject to the intestacy laws of his state. Tyrone's inaction will also cause him to die without an estate plan. There is no risk that his estate will be subject to increased debt payments for outstanding debts at death simply because he dies intestate or without an estate plan. All of the other options are risks when someone dies intestate or without an estate plan.

Which statement regarding financial aid is not correct? A)Assets held in a student's name, such as UGMA and UTMA accounts, should be spent first because they have a greater impact on financial aid. B)Pell Grants are awarded to undergraduate students based on need and are not repaid. C)Unsubsidized Stafford loans are need-based loans, and the government pays the interest until 6 months after a student leaves school. D)Perkins loans are no longer being awarded, but for students who have existing loans repayment begins 9 months after a student leaves school.

Unsubsidized Stafford loans are need-based loans, and the government pays the interest until 6 months after a student leaves school. Rationale Unsubsidized Stafford loans are not need-based loans and interest accrues from the date of disbursement. However, subsidized Stafford loans are need-based loans, and the government pays the interest until 6 months after a student leaves school. A, B and D are correct statements.

Jose created a joint bank account for himself and his friend, Amparo. At what earliest point has a gift been made to Amparo? A)When the account is created. B)When Jose notifies Amparo that the account has been created. C)When Amparo withdraws money from the account for her benefit. D)When Jose dies.

When Amparo withdraws money from the account for her benefit. Rationale One of the requirements for a gift is that the donor must actually part with dominion and control over the gifted property (the gift must be "completed"). A completed gift does not occur until the donee withdraws money from the account for her own benefit.

Arturo, a consultant, uses the cash method of accounting for his business. Arturo recently provided consulting services to his best customer, Sergio. When should Arturo recognize income from this service? A)When Sergio writes a check, made out to Arturo. B)When Arturo deposits Sergio's check. C)When Sergio gives the check to Arturo. D)When Sergio receives an invoice from Arturo for the service.

When Sergio gives the check to Arturo. RationaleCash accounting recognizes income upon either actual or constructive receipt. Actual receipt occurs when the taxpayer has received the cash directly. Constructive receipt occurs when, though not having received the money in hand, the taxpayer has immediate access to the money (e.g., savings account interest.). When Sergio gives the check to Arturo, Arturo has constructively received the income and must therefore recognize the income at that time.

You are a CFP® professional working at a firm that describes its compensation as fee-only, even though a related business receives compensation from commissions if the client implements certain recommendation with them. You are not a control person in the firm. What is your responsibility regarding the compensation disclosures you make to your clients? A)Since you are an employee and not a control person, you must follow the guidelines set forth by your firm and describe your compensation as "fee-only." B)You must accurately represent compensation as "fee and commission" in your client disclosures. C)You need not do anything because the use of the term "fee-only" is an accurate description of your compensation. D)You must contact CFP Board to voluntarily suspend your use of the CFP® marks until you resolve the situation with the firm's misleading description of compensation.

You must accurately represent compensation as "fee and commission" in your client disclosures. Rationale Standards of Conduct Section A.12 requires that the CFP® professional not make any false or misleading representations regarding the CFP® professional's or CFP® professional's firm's compensation. Section A.12.a specifies that, to represent compensation as "fee-only:" a) the CFP® professional and the CFP® professional's firm receive no sales-related compensation, and b) related parties receive no sales-related compensation in connection with any professional services the CFP® professional or CFP® professional's firm provides to clients. Section A.12.f requires that, when the CFP® professional is not a control person of the firm and the firm misrepresents the method of compensation, the CFP® professional must correct the misrepresentation by accurately representing the CFP® professional's compensation method to the CFP® professional's clients.