Unit 17

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

A. $130,000 Explanation The balance sheet formula is assets − liabilities = net worth. Therefore, $150,000 − liabilities = $20,000, where liabilities = $130,000. Did you answer $122,000? That is the amount of the liabilities other than the revolving credit, but that is not what the question is asking for. LO 17.a

As part of your annual review for clients, you perform a net worth computation. You have computed a specific client's net worth at $500,000. This client calls you and asks what his net worth will be after withdrawing $4,000 from his savings account to pay off credit cards, taking another $6,000 to deposit to his IRA and buying a $25,000 home theater system using store credit. You would respond that the client's net worth is now A) $500,000 B) $491,000 C) $475,000 D) $466,000

A. $500,000 Explanation In each case, we have an asset offsetting a liability so there is no change to the net worth. LO 17.a

Which of the following funds would you recommend to a moderate-risk client seeking long-term capital gains who also values professional stock selection? A) A large-cap growth fund B) An international index fund C) S&P 500 Index fund D) A small-cap growth fund

A. A large-cap growth fund Explanation A large-cap growth fund is the most appropriate choice for a moderate-risk client because large capitalization stocks are generally less volatile than small-cap stocks and provide long-term capital growth. This is a more appropriate choice than the index fund because there is no stock selection there, only investing to parallel the index. LO 17.d

Among investor objectives is preservation of capital. Which of the following would be most appropriate for inclusion in the portfolio of this kind of investor? A) A money market fund B) Blue-chip stocks C) U.S. Treasury bonds D) International funds

A. A money market fund Explanation Preservation of capital means no fluctuations during the investor's holding period, whether that is one month, one year, or 10 years. Retail money market funds with their NAV pegged at $1 per share is the only logical choice here. True, the Treasury bonds do not have default risk, but because they can have maturities as long as 30 years, they are subject to interest rate risk, and that means fluctuations in market value during the holding period. LO 17.c

Myla is retiring in two years and will need income. Which of the following mutual fund types would most likely be the least desirable for her? A) A special situation fund B) A bond fund C) A growth and income fund D) A balanced fund

A. A special situation fund Explanation Special situation mutual funds are risky and would not usually be considered suitable for a potential retiree. First of all, the nature of those funds is such that they generally do not produce regular income (one of Myla's stated objectives). Secondly, with a relatively short time horizon, recommended investments should be those that tend to have greater price stability. LO 17.d

Your customer, age 60, is retired and living at home with a fully paid-off mortgage. Her portfolio contains growth stocks and high-quality bonds, and she is a longtime investor and comfortable with moderate risk. Her objective is a moderate level of current income to supplement her corporate pension plan distributions and the earnings from her IRA. Which of the following mutual funds is the most suitable for this customer? A) ABC Equity Income Fund B) LMN Stock Index Fund C) QRS Capital Appreciation Fund D) XYZ Biotechnology Fund

A. ABC Equity Income Fund Explanation An equity fund that aims to achieve both current income and growth of income best suits the objectives and investment profile of the client. A stock index fund does not offer the current income that the client requires. The capital appreciation and biotechnology funds not only fail to provide income; they are too risky for this retired person. LO 17.d

When it comes to creating a client profile, the information obtained is divided into 2 basic categories: objective and subjective. Which of the following is considered to be subjective information? A) Attitude B) IRA value C) Net worth D) Salary

A. Attitude Explanation Subjective information is that which cannot be quantified. The investor's attitude is an example of this, while the other choices are all objective (you can attach a number to them). LO 17.a

A customer who seeks to supplement his retirement income and has a high risk tolerance would find which of the following securities most suitable? A) High-yield bond funds B) Investment-grade bond funds C) Treasury receipts D) Municipal GOs

A. High-yield bond funds Explanation High-yield bonds yield more than investment-grade bonds. Because the client has a high risk tolerance, these bonds are more appropriate than investment-grade bonds that yield less. LO 17.d

Many investment advisers prepare an investment policy statement (IPS) when counseling their clients. Which of the following should least likely be included as a constraint in an investment policy statement? A) How the funds are spent after being withdrawn from the portfolio B) Asset classes the client specifically forbids or limits based on past experience C) Any unique needs or preferences an investor may have D) Constraints put on investment activities by regulatory agencies

A. How the funds are spent after being withdrawn from the portfolio Explanation How funds are spent after withdrawal would not be a constraint of an IPS. Anything that might be an obstacle to reaching the goals, such as regulatory restrictions and specific investor preferences, are considered constraints. LO 17.c

A client profile is not complete without a family income statement. A typical one would include I. dividends II. credit card debt III. autos IV. mortgage interest A) I and IV B) I and II C) III and IV D) II and III

A. I and IV Explanation Income statements reflect the family's income and expenses, not assets and liabilities. Dividends represent money received, and mortgage interest is money paid out. Credit card debt is a liability and autos are assets. LO 17.a

As part of its suitability determination, an IA firm requires that all potential nonbusiness clients complete a family balance sheet. Items that would be included are I. gold jewelry II. loan secured by the family automobile III. the amount paid thus far this year for Botox injections IV. the balance owed to the dentist for new crowns A) I, II and IV B) I and IV C) I, II, III and IV D) II and III

A. I, II and IV Explanation The balance sheet contains assets and liabilities as of a specific point in time. Personal property currently owned, such as jewelry, is an asset. A loan still outstanding, such as the car loan and the debt to the dentist, are liabilities. The amount already paid for the Botox injections is no longer on the balance sheet. LO 17.a

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

A. I, II, III and IV Explanation The investment adviser representative must consider a client's volatility tolerance, investment time frame, liquidity needs, and comfort with different types of investments. These are all elements in the understanding of a customer's attitude toward risk. LO 17.b

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

A. LMN Cash Reserves Money Market Fund Explanation These customers are preparing to make a major purchase within the next few months, so they require a highly liquid investment to keep their money safe for a short amount of time. The money market fund best matches this objective. LO 17.d

Which of the following is least likely to be considered an investment constraint when preparing an investment policy statement? A) Risk tolerance B) Tax concerns C) Liquidity needs D) Legal and regulatory factors

A. Risk tolerance Explanation The commonly tested investment constraints are: liquidity needs, time horizon, taxes, legal and regulatory factors, and unique needs and preferences. Risk tolerance is used to help determine what investment objectives will best meet the investor's goals. LO 17.c

An investment adviser representative has a 78-year-old prospect living on $26,400 per year from Social Security plus investment income. The individual's net worth is $141,000 including the equity in her primary residence. Her net worth was higher until recently, but the aggressive fund she owns in the KAPCO family of funds is down over $20,000 in value. Which of the following would you recommend to her? A) Switch to a more conservative fund in the same family of funds B) Invest in a municipal bond fund C) Sell her fund shares and reinvest in a vehicle offering her deferred accumulation D) Liquidate the fund shares and put the proceeds in a bank CD

A. Switch to a more conservative fund in the same family of funds Explanation Clearly the municipal bond fund is inappropriate because this client's income does not put her into one of the higher tax brackets where the tax exemption on the bond's interest is beneficial. Just as obvious is the poor choice of moving her assets to a deferred accumulation vehicle, such as an annuity, where there would probably be surrender charges and no income. That leaves using the exchange privilege where she can move her investment to a more conservative fund without paying a sales charge or buying a bank CD. Because this is an exam for representatives of an investment adviser and one of the requirements to be defined as an investment adviser is that advice be given on securities, the answer on the exam should be a security (bank CDs are not securities). LO 17.d

Your client is 75 years old and has $100,000 to invest. He enjoys a relatively high income and is not concerned with immediate liquidity, although he is risk averse. The most suitable asset allocation strategies listed below would be A) a 50% municipal bond fund, 40% government bond fund, 10% large-cap common stock fund B) a 50% municipal bond fund, 40% government bond fund, 10% money market fund C) a 50% municipal bond fund, 40% money market fund, 10% large-cap common stock fund D) a 50% municipal bond fund, 50% large-cap common stock fund

A. a 50% municipal bond fund, 40% government bond fund, 10% large-cap common stock fund Explanation The allocation of 50% municipal bond fund, 40% government bond fund, and 10% large-cap common stock is appropriate for a high-income person of age 75 who is not concerned with liquidity. The 10% large-cap fund provides some inflation protection with very moderate downside risk. LO 17.d

An individual investor specifies to her investment adviser representative that her portfolio must produce a minimum amount of cash each year. This would be considered A) a liquidity constraint. B) a tax constraint. C) a unique circumstance. D) a legal and regulatory constraint.

A. a liquidity constraint. Explanation Liquidity constraints arise from an investor's need for spendable cash. LO 17.c

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

A. a municipal bond fund Explanation Municipal bonds are considered second only to U.S. government securities in terms of safety. Also, interest received from the bonds is generally exempt from federal income tax. LO 17.d

In making suitable investment recommendations, the least significant element would be the client's A) educational level B) retirement needs C) death and disability needs D) current income

A. educational level Explanation A client's educational level is not as important as retirement needs, death and disability needs, and current income. However, the agent should take note of the client's educational level to ensure that the client fully understands the investments recommended. Also, a person with a professional educational background may have more employment opportunities and be able to take more risk as a result. LO 17.d

In general, the first step an investment adviser should take with a new client is A) information gathering. B) monitoring the portfolio. C) making suitable recommendations. D) explaining the risks of investing.

A. information gathering. Explanation Until the investment adviser has gathered the necessary information, no recommendations can be made. An explanation of the risks comes after gathering the information because that informs the IA of the investor's risk tolerance and investing experience. LO 17.a

A newlywed couple in their 20s with a combined annual income of $46,000 recently opened individual IRA accounts with you and deposited $100 into each to get the accounts started. One month later, you receive a call from them telling you they have received a six-figure inheritance and are now able to fully fund those IRAs. The most suitable recommendation for the couple is to A) invest $6,500 into a stock index fund in each IRA account and place the remaining funds in a money market account until their new financial situation can be evaluated. B) immediately purchase two lump-sum variable annuities to secure their retirement future. C) invest the funds in an aggressive stock fund. D) pay off all outstanding debts and invest the rest in municipal bonds.

A. invest $6,500 into a stock index fund in each IRA account and place the remaining funds in a money market account until their new financial situation can be evaluated. Explanation The couple's new IRA accounts are an indicator that retirement savings is a primary goal. That is why it makes sense and is suitable to make the maximum contributions as soon as possible. Because the funds were unexpected, it would be prudent for the couple to place the additional funds in a liquid money market account until they have time to reevaluate how this windfall may change their financial objectives and goals. There is no indication that the couple has a high risk tolerance, so an aggressive stock fund would be unsuitable, as would tax-free municipal bonds based on the couple's income level. Variable annuities may be suitable but are not the most suitable answer choice in this case because those are generally not an appropriate investment in an IRA. Please note that only earned income can be used to determine the eligible contribution to an IRA and their $46,000 is more than enough to allow $6,500 in each account. The IRS doesn't care where the money is coming from (in this case the inheritance) as long as there is enough earned income. Because of the tax-deferral on all income and growth in a variable annuity, this product is not generally recommended for an IRA. LO 17.d

Insurance agents frequently use a capital needs analysis to help determine the correct amount of life insurance needed by their clients. That analysis would look at all of these except A) market volatility B) the inflation rate C) future earnings D) life expectancy

A. market volatility Explanation Of these choices, the only one that we cannot in anyway predict is market volatility. We can factor in an estimated inflation rate, project future earnings, and look at the mortality tables to obtain life expectancy. But nothing can project market volatility with any degree of accuracy. LO 17.c

A client who states that she wants to avoid petroleum company stocks is expressing a A) non-financial consideration B) financial consideration C) form of risk avoidance D) recommendation

A. non-financial consideration Explanation In all likelihood, this is for a personal value, an environmental concern (good data gathering would probably pick that up) and values are non-financial considerations. LO 17.a

An investment adviser would be least likely to gather financial planning information about a client from A) the client's Tweets. B) a detailed financial planning questionnaire. C) an hour-long WhatsApp chat. D) a 2-hour lunch meeting.

A. the client's Tweets. Explanation There are a number of ways to gather information about your client's financial resources, but it is highly unlikely that a social media page would be one of them. LO 17.a

A business organized as a sole proprietorship wishes to open an advisory account. When preparing an investment policy statement, the IA would have to consider the objectives of A) the sole proprietor B) the members C) the partners D) the stockholders

A. the sole proprietor Explanation A sole proprietorship only has one owner. Therefore, the account would focus on the needs of that individual. LO 17.a

A customer within 1 year of retirement informs his agent that he wants to use the equity in his house to make enough money within the year to fully fund his retirement. According to the Uniform Securities Act, the agent should A) urge the customer to reconsider his investment strategy B) construct a growth-oriented portfolio C) invest in an ultraconservative portfolio of municipal bonds D) invest the money in high-tech securities because of their unlimited potential

A. urge the customer to reconsider his investment strategy Explanation Making unsuitable recommendations to customers is prohibited, and this investor's time frame is unrealistic because the customer cannot meet his objectives in the time allotted. Investment in high-tech securities is unsuitable. Advising the customer to invest in an ultraconservative portfolio of municipal bonds will not meet the customer's objective of capital growth. The agent should advise the customer to reconsider his investment objectives. LO 17.d

Which of the following will most likely be the most volatile investment over a short-term period? A) An intermediate-term municipal bond fund B) A growth-oriented common stock fund C) An intermediate-term corporate bond fund D) A money market fund

B. A growth-oriented common stock fund Explanation Because stocks are more volatile than bonds, a growth-oriented stock fund will be more volatile than bond funds. If the question asked for the least volatile, the answer would definitely be the money market fund. LO 17.d

A client is risk averse and is planning on retiring in 16 years. The client is rolling over $100,000 from his 401(k) plan, all of which is currently invested in his former employer's stock. As the client's investment adviser, which of the following would you recommend? A) Highly rated preferred stocks paying liberal dividends B) AAA-rated zero-coupon bonds maturing in 16 years C) Laddering U.S. Treasury bills D) Keeping the money in the employer's stock

B. AAA-rated zero-coupon bonds maturing in 16 years Explanation Because the assets are in a rollover IRA, the "phantom" tax on zero-coupon bonds is not an issue here. Being risk averse, the safety of AAA bonds with the guaranteed return of increased principal in 16 years makes this the most appropriate investment. The T-bills will probably not offer as much return and will be subject to continual reinvestment risk. Dividends on preferred stock are not guaranteed, even with a highly rated company, and the current tax advantage offered to dividends is wasted in an IRA. Most would agree that the worst option would be to keep the money in one single stock. LO 17.d

An individual has just received a bonus of $12,473 and wishes to generate some income without risking loss of capital. Assuming the client is in a low tax bracket, which of the following would be the most suitable choice? A) Public utility stocks B) Bank-insured CDs C) Insured municipal bonds D) Growth stocks

B. Bank-insured CDs Explanation The only choice here with no risk to capital is the bank-insured CD. Although the insured municipal bond is guaranteed to repay principal at maturity, the bond will still be subject to interest rate risk and, with the client in a low tax bracket, municipal bonds are generally unsuitable investments. LO 17.d

An investment adviser cannot adequately advise a client without knowing the client's financial status. When determining that status, it is important to differentiate between financial and nonfinancial considerations. Which of the following would be considered a financial consideration rather than a nonfinancial one? A) Client's marital status B) Client's stamp collection C) Client's membership in Greenpeace D) Fact that both parents were smokers who died of lung cancer

B. Client's stamp collection Explanation Financial considerations are those which can be categorized as an asset or a liability (something that can be assigned monetary value). Although a stamp collection would not be considered a very liquid asset, it is nonetheless something of monetary value. The other choices are nonfinancial because you really can't put a number on them. The Greenpeace membership and the lung cancer deaths of the parents are likely indicators of certain investments that would probably not be suitable due to the values of the client. LO 17.a

Which of the following would be most useful information for an IAR attempting to determine the ability of a client to have the necessary funding to purchase an investment with a $25,000 minimum entry level? A) Cash flow statement. B) Family balance sheet. C) Marginal tax bracket. D) Income tax return.

B. Family balance sheet. Explanation Some clients invest in a lump sum, others with periodic payments and others do both. Since this is lump sum question, the balance sheet indicates the ability to commit funds at one time. LO 17.a

Which of the following types of mutual funds would be most likely to have capital appreciation as its stated objective? A) Balanced B) Growth C) Municipal bond D) Income

B. Growth Explanation As the name implies, a growth fund looks for growth of capital (capital appreciation). Income funds are looking for income, municipal bond funds for tax-free income, and balanced funds for both income and growth with minimal risk to capital. LO 17.d

For a trust account not seeking appreciation, which of the following would be recommended? A) Common stock in small, highly profitable companies B) Highly rated, fixed-income securities C) Common stock, preferred stock, and debentures D) Large-cap common and preferred stocks

B. Highly rated, fixed-income securities Explanation The only choice that is prudent and does not have a goal of appreciation is the purchase of highly rated, fixed-income securities. LO 17.d

Which of the following investment strategies would be appropriate for an advisory client with a 20-year time horizon before retirement? I. Holding more stock II. Holding less cash III. Holding fewer bonds A) II and III B) I, II, and III C) I only D) II only

B. I, II, and III Explanation With a long time horizon before retirement, equity securities such as common stock would offer the highest potential return and cash would be least suitable. Given purchasing power risk, bonds would not provide the returns associated with common stock. LO 17.c

When performing a capital needs analysis for a client, factors to be considered would include I. the client's projected earnings II. the projected inflation rate III. projected market volatility IV. the client's age A) III and IV B) I, II, and IV C) I, II, III, and IV D) I and II

B. I, II, and IV Explanation A capital needs analysis is used to help determine the proper amount of life insurance that will provide for the family's needs in the event of premature death of the primary breadwinner. The agent would factor in the client's projected earnings until retirement and, in order to do that, would need to know the current age. In addition, to be sure to allow for enough to keep up with the rising cost of living, the projected inflation rate is needed. However, market volatility does not impact the analysis because the amount of the selected death benefit will remain constant, regardless of changes to the market. LO 17.c

An investor purchases zero-coupon bonds issued by the U.S. Treasury due to mature in 18 years at $100,000. Which of the following might describe the primary reason for selecting that investment vehicle? I. The investor is 65 years old and needs the reliability of current income. II. The investor is 45 years old and has purchased these in an IRA rollover account and wants the assurance of funds for retirement. III. The investor is 30 years old and has a newborn child and wishes to assure funds for a college education. IV. The investor is 20 years old, has just received an inheritance, and wishes to shelter income for as long as possible. A) I and IV B) II and III C) III and IV D) I and II

B. II and III Explanation Zero-coupon bonds maturing in 18 years would assure the 45-year-old of the face value at age 63. Being in an IRA, there would be no current taxation and, upon maturity, if desired, the funds could be distributed without the 10% penalty. Zero-coupon bonds are one way to guarantee funds for college education. However, with no current income, they would not be suitable for the 65-year-old and would not offer any tax shelter to the 20-year-old. LO 17.d

If a customer is in the 15% federal income tax bracket and his main investment objective is current income, which of the following securities should the agent recommend? A) U.S. government bond. B) Investment-grade corporate bond. C) Zero-coupon bond. D) City of Milwaukee GO bond.

B. Investment-grade corporate bond. Explanation The investor is in a low tax bracket, so the tax-exempt municipal bond is not a suitable investment. To maximize income, the best recommendation is the corporate bond which offers a higher yield than a government bond with a similar maturity. LO 17.d

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

B. Investors with short time horizons are not likely to worry about liquidity. Explanation Investors with a time horizon constraint may have little time for capital appreciation before they need the money. The need for money in the near term is a liquidity constraint. Time horizon and liquidity constraints often go hand-in-hand. Diversification often requires the sale of an investment and the purchase of another. Those transactions may trigger tax liability. Attitudes are unique to the client and one of those could be an aversion to certain "sin" products. As an accredited investor, the law permits one to participate in many offerings not available to others. LO 17.c

An investor is in a low tax bracket and wishes to invest a moderate sum in an investment that will provide some protection from inflation. Which of the following should you recommend? A) Money market mutual fund B) Mid-cap common stock mutual fund C) Municipal unit investment trust D) Ginnie Mae fund

B. Mid-cap common stock mutual fund Explanation Mid-cap stocks (see Glossary of Terms) have historically provided good hedges against inflation making them appropriate for an investor seeking long-term growth and inflation protection. There are several key words here to remember for the exam. Whenever you see "low tax bracket," the answer cannot be a municipal bond. Likewise, whenever you see "inflation protection," the answer will be common stock (unless a TIPS is given as a choice). LO 17.d

Which of the following mutual funds should an investment adviser representative recommend to a client whose objective is current income with moderate risk? A) High-yield bond fund B) Preferred stock fund C) Aggressive growth fund D) Money market fund

B. Preferred stock fund Explanation Preferred stock generates current income in the form of dividends. Aggressive growth funds strive for capital appreciation rather than current income. Money market funds have low yields, not the high yields that an income investor wants. While high-yield bonds provide current income, they entail a high, rather than a moderate, degree of risk. LO 17.d

An IAR has set up the initial meeting with a prospective advisory client. An important part of that meeting is gathering client data. Of the following items, which is generally considered to be the most important for preparing suitable recommendations? A) Age of the prospect B) Risk tolerance C) Life stage D) Assets available for investment

B. Risk tolerance Explanation Although each of the choices represents information that is part of the data gathering process, an IA cannot make suitable recommendations without knowing the investor's risk tolerance. LO 17.b

A man divorces his spouse after 10 years of marriage and remarries. If the man is the sole provider, what part of the worker's Social Security benefits is the new spouse entitled to? A) The new spouse is entitled to splitting the benefits with the ex-spouse. B) She is entitled to the same Social Security benefits as the ex-spouse. C) She will be entitled to the same Social Security benefits as the ex-spouse after 10 years of marriage. D) The new spouse is entitled to more benefits than the ex-spouse.

B. She is entitled to the same Social Security benefits as the ex-spouse. Explanation When an individual remarries, the new spouse is entitled to full Social Security benefits. As long as the previous marriage lasted at least 10 years, that ex-spouse (if not remarried) is also entitled to full benefits. That means it is possible for 2 people to receive full benefits at the same time. LO 17.c

Parker and Mary have recently divorced. For Mary to receive Social Security benefits based on Parker's earnings, which of the following conditions must exist? A) Mary must have worked at least 40 quarters to be eligible for benefits. B) The marriage must have lasted at least 10 years. C) Parker must already be at full retirement age. D) Parker must not be remarried.

B. The marriage must have lasted at least 10 years. Explanation The marriage of these two must have lasted at least 10 years. In addition, Mary cannot be remarried (Parker can be). It is Parker who must have at least 40 quarters to earn Social Security benefits. As long as Parker is drawing benefits, and one can start before full retirement age, benefits will be available as long as all of the conditions are met. LO 17.c

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

B. Whether the investment is made directly through the fund itself or through a broker-dealer Explanation Whether a mutual fund is offered through the issuer or through broker-dealer channels is not a suitability determinant. However, time horizon, risk tolerance, and existing portfolio components help determine investment suitability. LO 17.d

An investment company that invests in common stock, preferred stock, and bonds would most likely be classified as A) a growth fund. B) a balanced fund. C) an income fund. D) a sector fund.

B. a balanced fund. Explanation Balanced funds spread the risk of their investments among different types of securities, such as common stock, preferred stock, and bonds. Growth funds concentrate more on growth than balance. As a result, they will have a higher concentration of common stock. Income funds will consist mostly of bonds and some preferred stock. Finally, sector funds will focus on specific industries or technologies. LO 17.d

A retired person seeking to maximize income with reasonable safety and liquidity should most likely consider investing in A) a large-cap growth fund B) an intermediate-term, high-grade corporate bond fund C) a long-term government bond fund D) an intermediate-term government bond fund

B. an intermediate-term, high-grade corporate bond fund Explanation In all of these cases, liquidity should not be a problem because mutual funds have a 7 day redemption requirement. However, interest rate risk increases as the maturities lengthen, so the intermediate-term portfolio offers that benefit, albeit at a slight reduction in income. The high-grade corporate bonds will offer a greater return with slightly more risk than the government bonds. If the question had said the investor wished to minimize risk, then the government bond fund would have been a better selection. LO 17.d

Tamika is an investment adviser representative with Financial Engineers, LLC, a covered investment adviser. The firm uses an investment policy statement to help design financial plans for their clients. One of Tamika's current clients plans to purchase a new boat 7 months from now. When using the IPS, this would be considered A) a financial objective B) an investment constraint C) a capital need D) an investment goal

B. an investment constraint Explanation Investment constraints are obstacles or restrictions that must be met in order to meet objectives. In this case, we are dealing with a liquidity constraint—in 7 months, cash will be necessary to make the purchase. LO 17.c

Your client often makes irrational financial decisions because she bases her decisions on information that should have no influence on the decision at hand. The client's behavior is known as A) herd mentality. B) anchoring. C) overconfidence. D) confirmation bias.

B. anchoring. Explanation Making irrational decisions based on information that should have no influence on the decision at hand is known as anchoring. Herd mentality is the tendency to follow the actions of a larger group, whether rational or not. Confirmation bias is the tendency to pay attention to information that supports one's preconceived opinions while disregarding accurate, unsupportive information. Overconfidence occurs when an investor considers her abilities to be much better than they actually are. LO 17.a

When attempting to determine the appropriate life insurance coverage to meet a client's goals and objectives, a tool that is frequently used is a: A) current rate book. B) capital needs analysis. C) irrevocable life insurance trust. D) Monte Carlo simulation.

B. capital needs analysis. Explanation One of the more popular tools used to determine how much life insurance is needed to meet the client's goals and objectives is the capital needs analysis. LO 17.c

In making suitable investment recommendations, the least significant element would generally be the client's A) retirement needs B) educational level C) current income D) death and disability needs

B. educational level Explanation A client's educational level is not as important as retirement, death and disability, and current income. However, the adviser should take note of the client's educational level to ensure that the client fully understands the investments recommended. Also, a person with a professional educational background may have more employment opportunities and be able to take more risk as a result. LO 17.d

All of the following are characteristics typical of a money market fund except A) it is offered as a no-load investment. B) it has a high beta and is safest in periods of low market volatility. C) the underlying portfolio consists of short-term debt instruments. D) its net asset value normally remains unchanged.

B. it has a high beta and is safest in periods of low market volatility. Explanation A money market fund has almost no price volatility, because the underlying portfolio consists of low-beta instruments, and the fund is deliberately managed for low beta (see the Glossary of Terms if you are not familiar with beta). LO 17.d

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

B. rolling over a 401(k) into an IRA Explanation A capital needs analysis attempts to determine money that would be needed in the event of an individual's sudden passing. Included would be any outstanding debt obligations, regardless of when they are due (they will have to be paid off sometime). However, an asset such as the 401(k) is not a need; it is something that will help meet the need. LO 17.c

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

B. the difference between the individual's assets and the individual's liabilities Explanation An individual's net worth is the difference between the individual's assets and the individual's liabilities. It is determined from the personal balance sheet rather than the personal income statement. Net worth is relevant in determining an individual's investment objectives. LO 17.a

An investment advisory firm requires all new clients to complete a 4-page questionnaire before conducting the first meeting. This would be known as A) the investment adviser's brochure. B) the information-gathering stage. C) the client disclosure document. D) fulfilling the requirements of the CIP.

B. the information-gathering stage. Explanation The first step in any adviser's relationship with a client is information gathering. A popular way of doing this is by using a questionnaire. LO 17.a

Your 30-year-old client has $100,000 to invest and willing to assume a moderate amount of risk, but she would also like to have $10,000 available for a down payment on a home in 6 months. Which of the following asset allocation strategies would best suit her situation? A) 50% large-cap stock fund, 40% municipal bond fund, 10% money market fund B) 50% government bond fund, 50% large-cap fund C) 70% large-cap stock fund, 20% balanced fund, 10% money market fund D) 70% high-yield corporate bond fund, 20% growth fund, 10% government bond fund

C. 70% large-cap stock fund, 20% balanced fund, 10% money market fund Explanation This question is dealing with 2 different time horizons. First we have the short-term of 6 months for the home down payment, so she'll need capital preservation and liquidity. That is accomplished with the money market fund. Then, being 30 years old, she has a long-term time horizon that necessitates investing for growth and inflation protection. That is where the 70% in large-cap securities is the most appropriate asset allocation for her. The 20% in the balanced fund helps keep the overall risk level on the moderate side. One point to remember is that municipal bonds (or municipal bond funds) will never be the correct investment choice unless the question states that the client is in a high tax bracket or is looking for tax-free income. LO 17.d

From the standpoint of diversification, which of the following would be considered the most conservative? A) A growth fund B) A sector fund C) A balanced fund D) An income fund

C. A balanced fund Explanation Balanced funds invest in a variety of investment vehicles; therefore, they have more diversification. Because of the diversification, they are better protected against downturns in the financial markets and are more conservative than the other choices listed. LO 17.d

Which of the following is a factor that must be considered when constructing a portfolio? A) Category of investment service required B) Verification of the client's identity C) Client's risk tolerance D) Performance measurement

C. Client's risk tolerance Explanation While forming a portfolio or investment policy statement (IPS), gauging a client's risk tolerance is the key task. LO 17.b

Tammy has a strong feeling about a particular investment's future performance. She is constantly seeking information to validate her belief that this investment will greatly appreciate. However, she is dismissing any information which is contradictory to this stance. This is an example of which of the following? A) Prospect theory B) Anchoring effect C) Confirmation bias D) Herd theory

C. Confirmation bias Explanation This scenario is an example of the confirmation bias which states that investors tend to look for information that supports their previously-established decisions and beliefs. Herd theory, or "following the herd", is when an investor jumps on the bandwagon following the lead of others. The anchoring effect is when you base your decisions on initial information received and find it difficult to move away from that decision. LO 17.a

When dealing with suitable recommendations to clients, it is important to distinguish between investment objectives and investment constraints. Which of the following would be an investment objective rather than a constraint? A) Need for liquidity B) Tax considerations C) Current income D) ESG investing

C. Current income Explanation The objective is the route you wish to take. The constraints are what might keep you from getting there. The client who has current income as an objective needs to consider the potential obstacles (constraints) in the way. ESG (environmental, social, and corporate governance) represent attitudes. The investor's personal attitude towards certain industries may limit the universe of potential investments. The same is true when the need for liquidity is high. Taxes are another potential roadblock to overcome. LO 17.c

For which of the following business entities would suitability be based on the objectives of all the owners on a collective basis? A) Pension plan B) C corporation C) General partnership D) Sole proprietorship

C. General partnership Explanation Because all the partners in a general partnership share collective liability, the investment policy to be followed in the business's account is based on the collective suitability of all partners. Although the suitability is based on the owner of a sole proprietorship, there is only one owner, so a question asking about collective suitability doesn't ring true for that. LO 17.a

Any recommendations made to customers by a broker-dealer must be suitable for the customer on the basis of an investigation of the customer's I. investment objectives II. financial status III. ability to pay high commissions IV. desirability as a customer A) III and IV B) I and III C) I and II D) II and IV

C. I and II Explanation Recommendations must meet the needs of the customer, not necessarily those of the agent or the broker-dealer firm. LO 17.d

When preparing a client profile, it is prudent to investigate the prospect's non-financial considerations. Included would be that client's: I. age. II. attitudes. III. experience with investments. IV. values. A) I and III. B) II and IV. C) I, II, III, and IV. D) I, II, and IV.

C. I, II, III, and IV. Explanation These are included in the list of non-financial considerations when constructing a client profile. LO 17.a

Which of the following should be considered by an investment adviser in determining whether a specific investment is suitable for an individual investor? I. The past performance of the investment II. The investor's anticipated time horizon III. The amount of remuneration to the broker-dealer and to the agent IV. The level of the investor's acceptance of risk and volatility A) I and IV B) II and III C) II and IV D) I and III

C. II and IV Explanation Time horizon and risk tolerance are essential factors that advisers must consider to determine whether an investment is suitable for a given individual investor. Although past performance is important to know, it cannot be used to indicate future results. LO 17.c

Which of the following are nonfinancial considerations that need to be factored into a client's investment profile and recommendations? I. Sources of income. II. Age of dependent children. III. Real estate holdings. IV. Investment experience. A) I and IV. B) II and III. C) II and IV. D) I and III.

C. II and IV. Explanation Sources of income and real estate holdings are financial considerations. Age of dependent children and investment experience are also important, but they are included in the category of nonfinancial considerations. LO 17.a

Your firm's market analyst believes the current bullish market in equities will continue. Which of the following would be most suitable for a growth-oriented investor? A) Bond fund B) GNMA fund C) Large-cap stock fund D) Preferred stock fund

C. Large-cap stock fund Explanation A mutual fund investing in large-cap stocks (see Glossary of Terms) would be a reasonable investment for a growth-oriented investor in a bullish economic environment. Bonds are not a growth-oriented investment vehicle, GNMAs provide monthly income (not the growth that the client seeks), and preferred stocks are appropriate for income-oriented investors. LO 17.d

Liquidity risk is the risk that when an investor wishes to dispose of an investment, no one will be willing to buy it, or that a very large purchase or sale would not be possible at the current price. With that in mind, which of the following would likely have the lowest degree of exposure to liquidity risk? A) Investment-grade municipal bonds​ B) RELPs C) Money market mutual funds D) REITs

C. Money market mutual funds Explanation RELPs (real estate limited partnerships) would have high liquidity risk because there is generally no secondary market for them. Municipal bonds, even highly rated ones, can have liquidity issues. Even though many REITs are listed on exchanges, there are a growing number of non-traded ones where liquidity can be an issue. However, money market funds with their check-writing privilege, are about as liquid as you can get. LO 17.c

A private foundation is required by statute to pay out a minimum percentage of its asset value each year as qualifying distributions. This investment constraint is best classified as A) liquidity. B) time horizon. C) legal and regulatory. D) unique circumstances.

C. legal and regulatory. Explanation Legal and regulatory constraints are those that apply to an investor by law. We haven't heard of it being tested, but IRS requirements are that a foundation must generally payout 5% of its assets each year as qualifying distributions. This legal requirement to make distributions places constraints on how the foundation's money is to be invested. LO 17.c

A client excitedly calls his investment adviser with the news that he is now going to handle his own investments. "I just read some great investment books and now I know what to do." Based on the study of behavioral finance, it would appear that this individual is A) conservative. B) anchored. C) overconfident. D) following the herd.

C. overconfident. Explanation The behavioral finance bias of overconfidence refers to the observation that experienced (and even some rookie) investors tend to overestimate their ability and the accuracy of the information available to them. LO 17.a

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

C. the need for liquidity is more important Explanation When the time horizon is short, there is a greater need for access to the funds now. Therefore, liquidity is a major consideration. With a short time horizon, the investor can take less risks (and won't have to because there will be less exposure to inflation risk). LO 17.c

Which of the following would be the most appropriate portfolio mix for an aggressive investor? A) 20% cash equivalents, 30% bonds, and 50% stocks B) 30% cash equivalents, 50% bonds, and 20% stocks C) 60% cash equivalents, 25% bonds, and 15% stocks D) 10% cash equivalents, 20% bonds, and 70% stocks

D. 10% cash equivalents, 20% bonds, and 70% stocks Explanation Assuming that an aggressive investor typically is willing to assume the most risk, it would be logical for him to have the largest allocation in equities. LO 17.d

Clients should be aware of the potential effects of volatility on their portfolios. Which of the following would most likely have the lowest volatility? A) A government bond fund B) A large-cap fund C) A balanced fund D) A money market fund

D. A money market fund Explanation Money market funds traditionally maintain a stable net asset value, resulting in no market volatility. LO 17.d

Rendering investment advice requires knowing certain information about your client. Which of these would be the least reliable source of that information? A) Your firm's confidential planning questionnaire B) Face-to-face meeting with the client C) Client's income tax returns D) Client's Facebook page

D. Client's Facebook page Explanation There are a number of ways to gather information about your client's financial resources, but it is highly unlikely that a social media page would be one of them. LO 17.a

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

D. Determining which securities to purchase for the client's investment portfolio Explanation Before making any investment recommendations, the IAR must obtain basic information about the client. Only after evaluating the needs and objectives can the IAR begin to create an investment plan. LO 17.a

Which of the following is the least significant consideration in making an investment recommendation to a client? A) Net worth B) Age C) Investment objectives D) Education

D. Education Explanation When making suitable investment recommendations, agents must take the client's age, net worth, and investment objectives into consideration. A client may not have a college education, but may be more sophisticated financially than someone holding a PhD in English literature. LO 17.a

Which of the following would be most suitable for a young couple investing the assets of their IRAs? A) Call options on large-cap stocks B) Oil and gas exploration programs C) Penny stocks D) Growth mutual funds

D. Growth mutual funds Explanation IRA accounts are designed to provide for future retirement needs. An IRA is a personal pension plan for anyone who receives earned income. While the rules are fairly liberal regarding suitable investments for IRAs, penny stocks, options, or oil and gas programs would not likely be suitable because of the high risks inherent in these securities. However, growth mutual funds are suitable. LO 17.d

An investment adviser representative's client lost her father to lung cancer. Among the assets bequeathed to her were 2,000 shares of a tobacco stock. Which of the following is most likely not a consideration when recommending to her what to do with the stock? A) Her employment situation B) Her financial goals C) The cause of her father's death D) Her father's years of investment experience

D. Her father's years of investment experience Explanation An adviser's recommendations to a client are not impacted by the degree of someone else's investment experience or knowledge. In this case, it is not unreasonable to expect some resentment towards holding shares of a tobacco company when the cause of a loved one's death is lung cancer. LO 17.a

Your retired 72-year-old client still lives in the home he purchased 35 years ago for $40,000. It is currently valued at $700,000 and there is no mortgage. The client has almost $500,000 in his self-directed IRA rollover account. When determining suitable investments for this client, you would base your recommendations on the fact that I. the client is an accredited investor having a net worth in excess of $1 million II. a home equity loan could more than double the amount of funds available to invest III. as a retiree, any losses suffered cannot be made up from current income IV. the client's time horizon could be as long as 20 years A) I and IV B) II and III C) I and II D) III and IV

D. III and IV Explanation One of the risks facing senior investors who are retired is that, unlike those still employed, loss of principal can be devastating. With today's medical advances, a 72-year-old can be looking at 15 to 20 additional years of life. Therefore, recommendations must be made to maximize the probability of the client's assets lasting that long. Effective with the Dodd-Frank Act of 2010, this investor is no longer accredited because the value of the primary residence must be excluded from the net worth computation. And, even if he were, eligibility does not equal suitability. LO 17.c

A new client indicates a desire to avoid investing in mid-cap stocks because of large losses suffered several years ago. What type of consideration would this be? A) Financial B) Systematic C) Unsystematic D) Nonfinancial

D. Nonfinancial Explanation There are 2 basic investment considerations, financial and nonfinancial. The former deals largely with quantifiable items and the latter with attic attitudinal ones. Wanting to avoid a certain type of asset is generally considered to be attitudinal. The fact that the mid-cap stocks lost money is probably a systematic risk, but that isn't what the question is asking. LO 17.a

An investor who purchases stock in two technology companies with high projected earnings and growth potential but little performance history is considered A) a defensive investor B) a passive investor C) a conservative investor D) an aggressive investor

D. an aggressive investor Explanation An investor is taking an aggressive investment posture in investing in a growth company with little history and is willing to take on high risk for high potential returns. LO 17.d

An investment adviser has a client who wants to save for college for her child. The child will be entering college in 5 years. This would be an example of A) tactical asset allocation B) a capital need C) planning too late D) an investment constraint

D. an investment constraint Explanation The goal is having money for college. The investment constraint (obstacle in the way of meeting the goal) is the short time horizon. It may be true that the client has started too late, but that is not what the exam would be looking for as the correct answer. LO 17.c

An investment adviser representative is preparing a financial plan for a new client. As part of the data collection process, the IAR needs to collect the relevant information to analyze the client's cash flow. Included in the cash flow statement would be all of the following except A) salary B) income taxes C) interest on savings D) assets

D. assets Explanation The income statement is the basis for an individual's cash flow statement. Rather than assets and liabilities, as would be found on a balance sheet, the concern is measuring income and expenses. LO 17.a

When making a customer profile, one of the documents created is a family balance sheet. Among other items, your client's balance sheet would include A) interest expense. B) salary or wages. C) accumulated depreciation. D) assets.

D. assets. Explanation A balance sheet, whether for an individual, a family, or a business, is a listing of assets and liabilities. Interest expense and salary go on the income statement. Accumulated depreciation is a balance sheet item, but only for a business. LO 17.a

John and his sister, Alice, open a margin account as JTWROS. John contributes $50,000, and Alice contributes $25,000. They have agreed that Alice will trade the account, and they will share in the profits and losses equally. As their agent, you would gather information regarding suitability for A) either, because in a JTWROS account the owners share equally. B) Alice, because she will be trading the account. C) John, because he has made the larger contribution. D) both, because information regarding all owners is relevant.

D. both, because information regarding all owners is relevant. Explanation When determining suitability and making recommendations to the owners of a joint account, it is the agent's responsibility to know each and every customer, regardless of their contribution or participation level. LO 17.a

One of your new clients has only been working for 3 years but is already interested in retirement planning. In order to be fully eligible for Social Security, the client must A) have at least 40 years of employment. B) have minimum credited earnings of at least $20,000 per year. C) be at least age 62. D) have a minimum of 40 covered quarters of employment.

D. have a minimum of 40 covered quarters of employment. Explanation Current Social Security requirements are a minimum of 40 covered quarters of employment (10 years). A covered quarter is a calendar quarter during which the worker earned a minimum amount ($1,510 in 2022) which is indexed and, therefore, would never be tested. Reduced retirement benefits may begin as early as age 62, but disability payments can begin much, much earlier, as long as there have been 40 covered quarters. There is no minimum annual earnings limit. LO 17.c

An adviser always inquires into her clients' investment objectives, financial situations, and needs. The investment adviser is A) giving herself an unethical advantage regarding how much the client can afford to spend on an advisory fee. B) violating her ethical obligation regarding confidentiality of client information. C) determining whether she has any inherent conflicts of interest with her clients. D) obtaining the information required to fulfill her professional obligation regarding suitability.

D. obtaining the information required to fulfill her professional obligation regarding suitability. Explanation Investment advisers are under a professional obligation to inquire into a client's investment objectives, financial situation, and needs, and to make recommendations consistent with that information. Conflicts of interest would not arise based on an individual client's suitability profile. Conflicts of interest result from actions of the adviser, regardless of the needs of the client. LO 17.a

A 78-year-old retiree has a $100,000 CD maturing and is dissatisfied with current yields on CDs. Aside from Social Security and a monthly pension, the $100,000 is his total liquid net worth. The agent recommends investing the funds in a single premium immediate variable annuity and allocating funds to the separate account as follows: Medical Technology − $10,000 High Yield Corporate − $40,000 Growth & Income − $50,000 The agent's recommendation is A) suitable because it appears probable to increase the value of his holdings, as well as to generate increased income B) suitable, provided the customer agrees with the recommendation C) unsuitable primarily because of the customer's probable liquidity needs D) unsuitable primarily because of the customer's age, objectives, and risk tolerance

D. unsuitable primarily because of the customer's age, objectives, and risk tolerance Explanation With half of the investment allocated to medical technology and high-yield separate accounts, which carry a higher risk, the allocation seems unsuitable for a 78-year-old needing this monthly income. LO 17.d

An individual owns assets worth $500,000 and has debts of $300,000. What is the individual's net worth? A) $200,000 B) $800,000 C) $500,000 D) $300,000

A. $200,000 Explanation An individual's net worth equals the individual's assets minus his liabilities. Therefore, if someone has assets of $500,000 and debts of $300,000, the person's net worth is $200,000. LO 17.a

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

A. Zero balance on all credit cards Explanation Although credit card debt may carry a high interest rate, no investment plan should be started without an emergency fund, adequate life insurance, and a set of goals. In fact, it is possible that the client is carrying the balance because of a very low promotional rate. LO 17.a

One problem facing agent and client alike is determining how much life insurance is necessary to meet future needs. One tool that is useful for making that determination is A) a life insurance capital needs analysis B) a statement of beneficiary needs C) a premium purchase analysis D) a mortality table

A. a life insurance capital needs analysis Explanation A life insurance capital needs analysis takes into consideration the future needs of the insured and family and then factors in how much needs to be filled in by life insurance. LO 17.c

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

B. Behavioral finance Explanation There is a premise that investors are irrational when it comes to making investment decisions. The study of this is known as behavioral finance. LO 17.a

Which of the following items would be found on a family balance sheet? A) Dividends and interest received B) Spouse's engagement ring C) Annual salary D) Income taxes paid

B. Spouse's engagement ring Explanation A balance sheet, whether for a family or a business, shows assets and liabilities, not income and expenses. The ring is certainly an asset; the others are income or expenses. LO 17.a

Among the options available to replace the lost income of an employed individual who becomes unable to work due to a disability would be any of these except A) disability income insurance B) proceeds of a life insurance policy C) workers' compensation D) Social Security disability payments

B. proceeds of a life insurance policy Explanation Those injured on the job are usually eligible for workers' compensation. Those who have enough eligible credits may apply for Social Security disability benefits. If the individual owns private disability insurance and/or is covered under an employer-sponsored policy, he may claim benefits. Although there is a trend toward making life insurance benefits available for use in certain instances, for test purposes the proceeds are generally only available upon the death of the insured. LO 17.c

A 74-year-old widower has been your client since his early 50s. He is a well-informed investor and has always seemed capable of understanding most investment concepts you have presented. At least twice a year, the 2 of you meet to evaluate his current financial situation and objectives. In your last meeting, it seemed to you that he was distracted and somewhat forgetful. It would be appropriate for you to do all of the following except A) inform your supervisor of your concerns about his memory loss B) wait to see if there are further causes for concern about his capabilities C) ask him to invite a friend or family member to accompany him to appointments with you D) take detailed notes on future conversations and meetings with him

B. wait to see if there are further causes for concern about his capabilities Explanation Taking action in advance could help protect you and your firm should a client subsequently indicate that he does not remember having agreed to a recommendation. Taking detailed notes can help verify what has been discussed in conversations or at meetings. Having others present may help to verify what has been discussed and agreed upon. LO 17.c

It would be correct to state that when an investor has a longer time horizon, A) the risk level is lowered B) the greater the initial deposit to reach a projected future goal C) the need for liquidity is less important D) the exposure to inflation risk is lessened

C. the need for liquidity is less important Explanation When the time horizon is long, there is little need for access to the funds now. Therefore, liquidity is a minor consideration. With a long time horizon, the investor can take greater risks (and should because it will be necessary to combat the higher inflation risk). LO 17.c

A client is interested in investing in a mutual fund that will provide current income without the risk of large swings in the portfolio's value. The client is in a high-income tax bracket and has a moderate risk tolerance. Which of the following funds is most appropriate for this client? A) Long-term municipal bond fund B) High-yield bond fund C) Money market fund D) Intermediate-term municipal bond fund

D. Intermediate-term municipal bond fund Explanation When the question states a high-income tax bracket, the answer will almost always be municipal bonds. An intermediate-term municipal bond fund will experience less price fluctuations when interest rates change than would a long-term municipal bond fund due to its shorter duration. Even if the high-yield bond fund might produce a greater yield after taxes, it would not be suitable for an investor with a moderate risk tolerance. Money market funds will provide safety from large swings, but even if it is a municipal money market fund where the income would be tax-exempt, the current income would be too low to be attractive to this investor. LO 17.d

What would be the time horizon for a 65-year-old client who has just retired? A) It depends on the individual's available assets. B) It depends on the individual's insurance company's actuarial tables. C) None, because 65 is the age for retirement. D) It depends on the individual's life expectancy.

D. It depends on the individual's life expectancy. Explanation The time horizon for an individual who has just retired is the balance of expected life. LO 17.c

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

D. a long-term time horizon Explanation Relatively high portfolio volatility is generally associated with stocks whose long-term returns outpace less volatile investments. Therefore, high portfolio volatility is suitable for investors with a long-term time horizon. LO 17.c

An investment adviser representative (IAR) prepares a comprehensive financial plan for a new client. Part of the plan includes detailed portfolio recommendations. Seeing a negative reaction from the client, it becomes obvious to the IAR that he is dealing with an ignorant person who is filled with many market misconceptions. It would be reasonable for the IAR to A) drop the client B) prepare a new portfolio that is more in line with what the customer has indicated he is comfortable with C) tell the client he will make some changes, but keep the original portfolio because that really is in the client's best interest D) attempt to educate the client to correct those misconceptions, but leave the final decision up to the client

D. attempt to educate the client to correct those misconceptions, but leave the final decision up to the client Explanation All decisions are ultimately up to the client, but there is nothing wrong with the IAR attempting to educate the client, especially when it could lead to greater investment success. LO 17.d

The study of why people often make decisions using rules of thumb rather than rational analysis, basing those decisions on factors economists traditionally don't consider, such as fairness, past events, and aversion to loss, is known as A) risk tolerance B) systematic risk C) irrational finance D) behavioral finance

D. behavioral finance Explanation Today, through the study of behavioral finance, it is accepted that behavioral biases can cause investors to make financial decisions that are irrational. LO 17.a

A benefit of waiting until the age of 70 to claim Social Security benefits is that A) the income tax rate is reduced once the claimant reaches 70. B) Medicare benefits are increased. C) a higher percentage of the monthly benefit is exempt from income taxes. D) benefits are increased by 8% for each year from the full retirement age.

D. benefits are increased by 8% for each year from the full retirement age. Explanation If an individual delays taking Social Security until age 70, the benefit is increased by 8% for each year from the full retirement age. If full retirement age is 66, four years at 8% means the payout is 132% of the base amount. Medicare (Part A) goes into effect at 65 and income tax rates do not change at 70. LO 17.c