Unit 5
An agent must obtain written verification of an investor's net worth for which of the following investments? A) Direct participation programs B) Real estate investment trusts C) Unit investment trusts D) Variable contracts
A) Direct participation programs DPPs require complete financial disclosure because of minimum suitability standards set by the states in which they are sold. REITs, unit investment trusts, and variable contracts do not have specific net worth suitability requirements for investors.
An agent must obtain written verification of an investor's net worth for which of the following investments? A) Direct participation programs B) Unit investment trusts C) Variable contracts D) Real estate investment trusts
A) Direct participation programs DPPs require complete financial disclosure because of minimum suitability standards set by the states in which they are sold. REITs, unit investment trusts, and variable contracts do not have specific net worth suitability requirements for investors.
An investor in a high tax bracket who invested in a DPP should have which of the following characteristics? I. Need for tax benefits II. Substantial liquid assets III. Ability to identify both risks and merits of the program IV. Ability to commit money for a long time A) I, II, III, and IV B) II and III C) I and II D) II, III, and IV
A) I, II, III, and IV DPPs are appropriate for investors who can benefit from substantial tax deductions or credits, are not bothered by illiquidity, understand the business risks and benefits involved, and can stay in the program until completion.
Which of the following is not a feature of owning a limited partnership? A) Tax-free income B) Legislative risk C) Flow-through of income and expenses of a business to the individual limited partner D) An investment managed by others
A) Tax-free income The income from limited partnerships is not tax exempt. An investor, however, may use a tax loss from a partnership to offset the income from another passive investment. In limited partnerships, the investor enjoys the advantages and disadvantages of owning a business without actually having actually manage one. Limited partnerships are vulnerable to legislative changes that adversely impact ownership of such investments.
Flow-through is one of the features of A) direct participation plans. B) variable annuities. C) open-end investment companies. D) REITs.
A) direct participation plans. Flow-through is the term commonly used to describe that any income or loss generated by a direct participation program flows through to the owner(s). In the case of a real estate investment trust (REIT), the only thing that passes through is income or gains, never losses.
In a DPP, a general partner is all of the following except A) one who has limited liability. B) one who buys and sells the program's property. C) a key executive who makes day-to-day business decisions. D) one who appoints the property manager.
A) one who has limited liability. A general partner of a limited partnership is a key executive of the program who purchases and sells the property and/or appoints someone to manage the property. The general partner does not have limited liability. By not allowing the general partner to have limited liability, the program is able to rule out limited liability as a corporate characteristic.
When a client is interested in investing in commodities, you would expect to discuss A) soybeans, wheat, and corn. B) oil-drilling programs. C) museum-quality art. D) investment-grade coins.
A) soybeans, wheat, and corn. Agricultural products, including soybeans and other grains, are popular commodities.
Which of the following terms best describes ETNs and leveraged ETFs? A) Registered investment companies B) Alternative investments C) Forms of hedge funds D) Speculative investments
B) Alternative investments These are two popular alternative investments. Are they speculative? Yes, but there are many other speculative investments that are not considered alternative investments. The question asks for the best description and, although it might seem like a close call, these are "alts." The leveraged ETF is a registered investment company, but the ETN is not.
For a customer interested in buying an inverse exchange-traded fund (ETF) tracking the performance of the Standard & Poor's 500 Index, which of the following market views would make that purchase most inappropriate? A) Bearish B) Bullish C) Neutral D) Bullish or bearish
B) Bullish Inverse (short) ETFs are designed to deliver returns that are opposite of the benchmark index they are tracking. Therefore, buying an inverse ETF that tracks the S&P 500 Index at a time when the market outlook is bullish would be most inappropriate. If the index rises with the anticipated bullish market, the fund that delivers returns that are the opposite of the index would fall in value.
In a limited partnership program, which partners manage the partnership's day-to-day operations and incur unlimited personal liability for the partnership's debts? A) Both the general partners and the limited partners B) The general partners C) The limited partners D) Neither the general partners nor the limited partners
B) The general partners In a limited partnership, the general partners manage the day-to-day operations and incur unlimited personal liability. Limited partners invest money in the partnership and are liable for the partnership's debts only up to the amount invested. They are denied a voice in the management of the partnership.
A client invests $100,000 in a commercial real estate venture taking a 10% interest as a limited partner. Unfortunately, the demand for new office space deteriorates and the partnership is unable to meet the mortgage payments. The end result is foreclosure with a net loss of $2 million. This would have the effect of: A) giving the client a passive loss of $200,000. B) giving the client a passive loss of $100,000. C) a potential claim against the agent who sold the client this program. D) requiring the client to pay his share of the loss to the creditors.
B) giving the client a passive loss of $100,000.
A bullish client invests into a 3x leveraged fund based on the S&P 500 Index. If the index should rise by 10%, your client's investment would be expected to A) decrease by 30% B) increase by 30% C) increase by 20% D) increase by 50%
B) increase by 30% Although it doesn't always work out that way, a 3x leveraged fund should gain in value at a rate 3 times the reference index.
If you overheard an analyst referring to an investment's indicative value, the discussion would most likely be about A) REITs. B) TIPS. C) ETNs. D) ETFs.
C) ETNs. The calculated value, called the indicative value or closing indicative value for ETNs, is calculated and published at the end of each day by the ETN issuer.
One of your clients calls to tell you that they overheard someone at work talking about investing in NFTs. What do those initials stand for? A) Nutrition and food technology B) Neuroplastic functional training C) Nonfungible tokens D) No free ticket
C) Nonfungible tokens Nonfungible tokens (NFTs) are digital assets that reside as code on a blockchain. The owner of an NFT buys ownership of that particular bit of alphanumeric code associated with whatever has been tokenized. NFTs can be digital representations of artwork, a video, music, or even a tweet. They are not cryptocurrency but are usually paid for with that currency. Each NFT is unique, a one of a kind, making the tokens nonfungible. That means investors can't exchange one NFT for another just like it as they can with dollars or publicly traded securities. Artwork is a good example of something produced as an NFT; the digital copy owned by the investor is the only copy.
Which of the following commodities is least likely to be affected by the weather? A) Wheat B) Pork bellies C) Silver D) Orange juice
C) Silver Silver is a precious metal and its price is not influenced by the weather. Crops, such as wheat and oranges, certainly are, and livestock is affected as well.
A number of different pooled investment vehicles are included in the term alternative investment. One of them, a synthetic investment instrument that has been created to meet a specific need that cannot be met by a standardized financial instrument, is known as A) an inverse fund. B) an arbitrage. C) a structured product. D) a z-tranche CMO.
C) a structured product. Structured products are created as a tool to meet the issuer's debt financing needs when they will result in a lower cost than a standardized financial instrument available in the market place.
All of the following are considered to be equity securities EXCEPT A) exchange-traded funds B) warrants C) equity-linked notes D) unit investment trusts
C) equity-linked notes Even though the term "equity" appears in the name, equity-linked notes (ELNs) or exchange-traded notes (ETNs) are technically debt securities.
In general, an investor wishing to gain economic exposure to commodities would find it easiest to do so by A) investing in forwards contracts. B) buying the commodity directly. C) investing in futures contracts. D) growing the commodity.
C) investing in futures contracts. It is generally agreed that using commodity futures is the easiest and most common way to gain economic exposure to commodities. Forwards are more commonly used by producers or users because, unlike futures, most forwards contracts result in the delivery of the actual commodity. Only about 1% of all futures contract positions involve the delivery of the underlying commodity.
Among the differences between an investment in a limited partnership offering and in a corporation is that A) only corporations are organized to run a business. B) only corporations issue securities. C) limited partnership offerings do not pay dividends; corporations do. D) limited partners take a more active role in the management of the enterprise than do stockholders of a corporation.
C) limited partnership offerings do not pay dividends; corporations do. One of the key features of a limited partnership investment is the concept of flow-through of operating results. If the business operates at a loss, the limited partner's share of that loss is treated as a passive loss on the investor's tax return. If the business is profitable, the limited partner's share of the profit is treated as passive income. Corporations issue securities, primarily stocks and bonds, while limited partnerships issue units representing the limited partner's interest in the venture. Those units are investment contracts and, as taught in Unit 4, LO4, securities. Limited partners who take an active role in the partnership lose their limited status.
Commodities contracts are available on A) emeralds. B) pearls. C) platinum. D) diamonds.
C) platinum. You might like diamonds, pearls, emeralds, and rings with those stones mounted in a platinum setting. Only platinum is a precious metal with commodity contracts available.
Commodity futures contracts are available on all of the following except A) eggs. B) industrial metals. C) single-family homes. D) soybeans.
C) single-family homes. Commodity futures contracts are available on metals, both precious and industrial; animal products, such as eggs; and agricultural crops, such as soybeans. Single-family homes are not a tradable commodity.
A high-net-worth client of yours invested $250,000 into an oil and gas limited partnership drilling program for which she received a 10% interest in the project. Unfortunately, after two years of drilling without success, the project was foreclosed with outstanding debt of $4 million. Your client is liable to the partnership's creditors for A) $400,000. B) $150,000. C) $250,000. D) $0.
D) $0. Explanation One of the benefits of being a limited partner is that the most you can lose is your investment. Just as it would for a stockholder in a corporation, the concept of limited liability applies. You can lose your entire investment, but you have no liability for debts of the business. This question describes a direct participation program (DPP) that has gone bankrupt (liabilities exceed the assets) and wants to know the share of the $4 million in outstanding debt that is the responsibility of this investor. Even though she owns 10% of the partnership, as a limited partner, she has no liability for any of that debt.
A client with limited assets seeking additional income in retirement would probably find which of the following investment choices to be the least suitable? A) Insured bank CDs B) ETFs C) Treasury bonds D) ETNs
D) ETNs Explanation The question describes an individual with a low risk tolerance, so the Treasury bonds and CDs would certainly be considered appropriate. Because ETNs are a debt security backed solely by a single issuer while an ETF based on a specific index of debt securities represents a large group of issuers, ETNs are only suitable for those who can understand and take the risks involved.
Regarding the use of the term direct participation programs, when referring to tax-sheltered investments, which of the following is not a DPP? A) Oil and gas limited partnership B) Equipment leasing limited partnership C) Real estate limited partnership D) Real estate investment trust
D) Real estate investment trust Explanation DPPs include any form of business that allows for the direct pass-through of tax consequences to participants. REITs do not allow for the pass-through of losses.
A number of different pooled investment vehicles are included in the term alternative investment. One of them, a synthetic investment instrument that has been created to meet a specific need that cannot be met by a standardized financial instrument, is known as A) an arbitrage. B) an inverse fund. C) a z-tranche CMO. D) a structured product.
D) a structured product. Explanation Structured products are created as a tool to meet the issuer's debt financing needs when they will result in a lower cost than a standardized financial instrument available in the market place.
An investment adviser who is discussing forward contracts with a client would most likely be referring to an investment in A) a diversified portfolio. B) puts and calls. C) an equity index annuity. D) an agricultural commodity.
D) an agricultural commodity. Explanation Forward contracts are available on commodities, such as agricultural products (e.g., corn, wheat, and soybeans). Puts and calls are options, not forward contracts; although this could be a way to diversify the portfolio, that does not directly answer the question.
The term digital assets would include all of the following except A) cryptocurrency. B) stablecoins. C) nonfungible tokens. D) electronic communications such as email.
D) electronic communications such as email. Explanation Although email is a digital form of communication, there is nothing about it that makes it an asset. One cannot invest in someone's emails. The other three items are included in the definition of a digital asset.
Commodity futures contracts are available on all of the following except A) eggs. B) industrial metals. C) soybeans. D) single-family homes.
D) single-family homes. Commodity futures contracts are available on metals, both precious and industrial; animal products, such as eggs; and agricultural crops, such as soybeans. Single-family homes are not a tradable commodity.
One reason for including commodities in an investment portfolio is because they have a high correlation to A) the stock market. B) the U.S. dollar. C) the bond market. D) the inflation rate.
D) the inflation rate. Explanation Commodity prices tend to have a high correlation with the inflation rate. As inflation goes up, the value of the dollar generally falls. The relationship is inverse, a characteristic of negative correlation. As inflation increases, interest rates invariably do the same, leading to a decrease in bond prices. Stock prices have a random correlation to commodities—generally negative.
Regarding the use of the term direct participation programs, when referring to tax-sheltered investments, which of the following is not a DPP? A) Real estate investment trust B) Equipment leasing limited partnership C) Real estate limited partnership D) Oil and gas limited partnership
A) Real estate investment trust DPPs include any form of business that allows for the direct pass-through of tax consequences to participants. REITs do not allow for the pass-through of losses.
If an investor was of the opinion that the market was going to have a bad day, to maximize that investor's gains, you might recommend A) a leveraged ETF. B) an inverse leveraged ETF. C) an inverse ETF. D) selling a call option on the S&P 500 Index.
B) an inverse leveraged ETF. An inverse ETF should go up if the market goes down. Adding leverage to it means moving by a factor of 2x or 3x, so to maximize the potential gain, we combine leverage to the inverse and suggest the inverse leveraged ETF.
What is the maximum amount of bitcoin that will ever be in circulation? A) 21 billion coins B) Indefinite number of coins C) 194,425 coins D) 21 million coins
D) 21 million coins Explanation The maximum amount of bitcoin that will ever be in circulation is 21 million coins. This is a feature of the bitcoin protocol, which is designed to create a finite supply of the cryptocurrency, which will prevent inflation on BTC.
Inverse ETFs are suitable primarily for investors A) with a very short time horizon. B) wishing to leverage their income. C) who follow a passive investment strategy. D) who are bullish on the market's future.
A) with a very short time horizon. Inverse and leveraged ETFs are structured in such a manner that makes holding them for more than a few days or a week become unattractive. They are for bearish investors, which is why they are often referred to as short funds. They are purchased for short-term capital gains; there is no income. The passive strategy is for the long term, not the short term.
All of the following are considered to be equity securities EXCEPT A) exchange-traded funds B) equity-linked notes C) warrants D) unit investment trusts
B) equity-linked notes Even though the term "equity" appears in the name, equity-linked notes (ELNs) or exchange-traded notes (ETNs) are technically debt securities.
It would be correct to state that an inverse ETF A) is a form of private equity fund. B) utilizes derivatives to achieve its objectives. C) moves in tandem with the index being tracked. D) is suitable for sophisticated investors with a long time horizon.
B) utilizes derivatives to achieve its objectives. Inverse, or short, ETFs move in the opposite direction of the index being tracked. To achieve their goals, various types of derivatives are used. This type of ETF is used only for short-term investments, rarely as long as a single month. These are registered investment companies, not private.
Investing in commodities could involve investing in any of these except A) industrial metals. B) animals. C) consumer durables. D) agricultural items.
C) consumer durables. Commodity contracts are not available on consumer durables such as refrigerators and washing machines. They are available on agricultural items, such as corn, wheat, and soybeans. Likewise, investing in animal items such as cattle and pork bellies is possible. Finally, industrial items—primarily metals such as lead, zinc, and aluminum—are popular investments.
In search of higher returns, many investors have turned to alternative investments, such as structured products. Non-exchange-traded structured securities products (SSPs) typically have A) FDIC insurance coverage. B) some form of embedded derivatives. C) a place in the portfolio of conservative investors. D) moderate liquidity.
B) some form of embedded derivatives. It is commonplace for SSPs to use derivatives, such as options. There is no insurance coverage and, unless listed for trading such as an ETN, low or no liquidity. These are highly complex products and would not be suitable for the average conservative investor.
Which of the following commodities is least likely to be affected by the weather? A) Orange juice B) Pork bellies C) Wheat D) Silver
D) Silver Silver is a precious metal and its price is not influenced by the weather. Crops, such as wheat and oranges, certainly are, and livestock is affected as well.
Which of the following is not a characteristic of owning a limited partnership? A) Legislative risk B) An investment managed by others C) Flow-through of income and expenses of a business to the individual limited partner D) Tax-free income
D) Tax-free income Explanation The income from limited partnerships is not tax exempt. An investor, however, may use a tax loss from a partnership to offset the income from another passive investment. In limited partnerships, the investor enjoys the advantages and disadvantages of owning a business without having to actually manage one. Limited partnerships are vulnerable to legislative changes that adversely affect ownership of such investments.
One of your clients approaches you and is looking for an investment that will provide ready marketability and income. Which of the following would be the least appropriate recommendation? A) A limited partnership in rental real estate B) A money market mutual fund C) U.S. Treasury notes D) NYSE-listed preferred stock
A) A limited partnership in rental real estate The key is meeting both needs—marketability and income; each of the choices supplies both except the limited partnership. The client could expect income from a direct participation program (DPP) investing in rental real estate, but the liquidity would be missing.
Which of the following is true regarding ETNs? A) They are suitable for conservative investors seeking income. B) Their value can be impacted by changes in the issuer's credit rating. C) As fixed-income investments, they do not have market risk. D) They are noncallable prior to maturity.
B) Their value can be impacted by changes in the issuer's credit rating. ETNs are unsecured debt obligations carrying credit risk based on the issuer's credit rating. Fixed-income investments have the market risk more commonly referred to as interest rate risk, and they are usually callable. These are sophisticated instruments that are not suitable for conservative investors.
Which of the following is NOT registered with the SEC under the Investment Company Act of 1940? A) Unit investment trusts B) Open-end investment companies C) Exchange-traded funds D) Exchange-traded notes
D) Exchange-traded notes Explanation Exchange-traded notes (ETNs) register as debt securities under the Securities Act of 1933.
A client wishing to invest in precious metals could consider each of the following except A) gold. B) silver. C) lead. D) platinum.
C) lead. Although it has always been the alchemist's dream to convert lead into gold, until that becomes a reality, lead is not considered a precious metal.
In search of higher returns, many investors have turned to alternative investments, such as structured products. Non-exchange-traded structured securities products (SSPs) typically have A) moderate liquidity. B) a place in the portfolio of conservative investors. C) some form of embedded derivatives. D) FDIC insurance coverage.
C) some form of embedded derivatives. It is commonplace for SSPs to use derivatives, such as options. There is no insurance coverage and, unless listed for trading such as an ETN, low or no liquidity. These are highly complex products and would not be suitable for the average conservative investor.
All of the following would flow through as a loss to limited partners except A) accelerated depreciation. B) interest payments on partnership debt. C) depletion. D) principal repayment on partnership debt.
D) principal repayment on partnership debt. Explanation Principal repayments are not an expense for tax purposes. The interest on the debt is an expense and, along with depletion and depreciation expenses, does flow through to the limited partners as passive loss.
Which of the following would not be considered an agricultural commodity? A) Soybeans B) Aluminum C) Coffee D) Oats
B) Aluminum Aluminum is traded as an industrial commodity; all of the others are agricultural.
The price of which of the following commodities is most likely to be impacted by weather? A) Gold B) Orange juice C) Lead D) Livestock
B) Orange juice If you ever saw the movieTrading Places with Eddie Murphy and Dan Aykroyd, you would certainly know that weather can have a major impact on the orange crop. Metals are not affected by heat, cold, rain, or snow. Years ago, before heated/air-conditioned barns and other protective devices, livestock would freeze in a bad winter, but that is no longer much of an issue.
If near-term liquidity is the only objective for a client, which of the following pairs of investments represents the most/least liquid? A) Variable annuity accumulation unit/money market mutual fund shares B) 10-year corporate bonds/U.S. T-bills C) Annuity units of a variable annuity/unit in a direct participation program (DPP) D) Common stock listed on the New York Stock Exchange/unit in a direct participation program (DPP)
D) Common stock listed on the New York Stock Exchange/unit in a direct participation program (DPP) Explanation Stock listed on the NYSE is considered highly liquid, while ownership units in a DPP are generally illiquid. Once a variable annuity's accumulation units have been exchanged for annuity units (payout time), there is no liquidity. The corporate bonds and T-bills have the order reversed; it is the T-bills with high liquidity and corporate bonds have the lower liquidity. Variable annuity accumulation units are liquid and so are money market mutual fund shares. However, because the fund shares have check-writing privileges, they are the more liquid of the choices, so the order is reversed from what the question seeks.
An investor owns a 2x leveraged inverse ETF. If the underlying index should decrease in value, A) the fund shares will also decrease in value. B) there is no correlation between the fund and the value of the index. C) the ETF shares will increase in value by a factor of 2. D) the fund shares will increase in value.
C) the ETF shares will increase in value by a factor of 2. An inverse, or short, ETF will move in the opposite direction of the underlying index. It is known as a short fund because as the underlying index goes down, the value of the shares increases. Because this is a 2x (2 times) leveraged fund, it will move at a rate that is twice that of the index. Although the choice, "the fund shares will increase in value" is a true statement, it is not the most accurate answer to the question because it ignores the 2x leverage.
A client was reading an offering document for an oil and gas drilling limited partnership program and noticed that one of the features was flow-through benefits. How would you explain this? A) Once the program has paid taxes on its income, the entire remaining balance passes-through to the investors. B) Losses generated by the program pass-through to the investor and may be deducted in full against ordinary income. C) Investors in the program are assured of a steady flow of income if the drilling is successful. D) Rather than being a separate taxable entity, the program's income or losses pass-through directly to the investors.
D) Rather than being a separate taxable entity, the program's income or losses pass-through directly to the investors. Explanation The philosophy behind flow-through is that any income or losses generated by a program of this type (a direct participation program or DPP) flow directly to the investors; there is no tax at the entity level. If there are losses, they may be deducted only against passive income (e.g., income from other partnerships). No assurances can ever be given.
If near-term liquidity is the only objective for a client, which of the following pairs of investments represents the most/least liquid? A) Common stock listed on the New York Stock Exchange/unit in a direct participation program (DPP) B) Annuity units of a variable annuity/unit in a direct participation program (DPP) C) Variable annuity accumulation unit/money market mutual fund shares D) 10-year corporate bonds/U.S. T-bills
A) Common stock listed on the New York Stock Exchange/unit in a direct participation program (DPP) Stock listed on the NYSE is considered highly liquid, while ownership units in a DPP are generally illiquid. Once a variable annuity's accumulation units have been exchanged for annuity units (payout time), there is no liquidity. The corporate bonds and T-bills have the order reversed; it is the T-bills with high liquidity and corporate bonds have the lower liquidity. Variable annuity accumulation units are liquid and so are money market mutual fund shares. However, because the fund shares have check-writing privileges, they are the more liquid of the choices, so the order is reversed from what the question seeks.
One type of alternative investment considered to be a pooled investment vehicle is the inverse exchange-traded fund (ETF). Inverse ETFs, also known as bear or short funds, are managed to A) outperform a benchmark market index such as the S&P 500. B) be profitable only when interest rates are rising. C) be used only by professional traders and market makers. D) perform contrary to a benchmark market index such as the S&P 500.
D) perform contrary to a benchmark market index such as the S&P 500. Inverse funds, also known as short or bear funds, try to deliver returns that are the opposite of the benchmark index they are tracking. When they are exchange traded, they can be bought on margin and are priced throughout the trading day like other exchange-traded funds.
Your customer is asking if either exchange-traded funds (ETFs) or exchange-traded notes (ETNs) might be suitable investments for his portfolio. The customer makes several statements regarding his understanding of the products, but only one of them is accurate. Which is it? A) ETFs have a fixed coupon rate that I should expect to realize when they mature. B) ETNs are equity securities because they trade on exchanges. C) If I want to sell my shares of an ETF, I have to wait until the next price is calculated to value the portfolio of securities. D) ETNs are issued by financial institutions; therefore, I should be concerned about the credit worthiness of the issuer.
D) ETNs are issued by financial institutions; therefore, I should be concerned about the credit worthiness of the issuer. Explanation The only accurate statement is the one expressing that ETNs are issued by financial institutions and, therefore, the credit worthiness of the issuer should be a concerning factor. ETNs are debt instruments, not equity instruments. ETNs have a final payment at maturity based on the return of a single stock, a basket of stocks, or an equity index. Although ETF prices fluctuate based on the value of the securities within the fund portfolio throughout the trading day, they are priced by supply and demand, like all exchange-traded products. They are not forward priced like open-end mutual fund shares are.
Your customer is interested in a leveraged fund and makes the following statements about leveraged funds to you. All of the statements regarding leveraged funds are true except A) there are no unusual risks associated with these funds other than those one would incur with any index tracking fund. B) some leveraged funds are exchange-traded products. C) the funds attempt to return a multiple of the return of a benchmark index they are tracking, perhaps two or three times. D) these funds sometimes use derivatives products to achieve their stated goals.
A) there are no unusual risks associated with these funds other than those one would incur with any index tracking fund. Because the fund's objective is to achieve returns that are a multiple of the returns of the benchmark index, the result could be a multiple of any loss incurred by the benchmark index as well. In addition, because these funds utilize derivatives products to achieve their stated objectives, they may not be suitable for anyone who derivatives products are not suitable for, given the additional risks associated with those products.
One of the benefits of being a limited partner in a direct participation program is that A) the general partner is the only person liable for the debts of the business. B) any losses generated by the partnership flow through to the limited partner and can be used against ordinary income in an amount up to $3,000 per year. C) any income generated by the partnership flows through to the limited partner and is treated as a long-term capital gain. D) the limited partner can make certain management decisions.
A) the general partner is the only person liable for the debts of the business. In a DPP, it is only the general partners who have full liability; limited partners are liable only to the extent of their investment plus any future commitments. Limited partners lose their status if they undertake any management responsibility. Losses are passive losses and can be deducted only against passive income, not ordinary income. It is capital losses that are subject to the $3,000 limit. Any income is treated as passive income, and that is taxed at ordinary income tax rates, not the lower capital gains rate.
One of your clients is considering allocating about 10% of her portfolio to commodities. Her current portfolio is a mix of stocks, bonds, and broad market index ETFs. Relative to her existing portfolio, you would explain to her that the primary benefit of the commodity investment is most likely A) lower trading costs. B) an increase in the reliability of income generated in the portfolio. C) commodity returns have a low or negative correlation to the other assets in her portfolio. D) increased short-term performance.
C) commodity returns have a low or negative correlation to the other assets in her portfolio. The returns on commodities exhibit low or even negative correlation with stock and bond returns. This is generally cited as a major advantage to investing in commodities. Commodities do not generate income; there are no dividends or interest paid on them—the investor recognizes a gain or a loss, but no income. In general, allocating a small percentage of the portfolio to commodities should be viewed as a long-term, not short-term, strategy. There is no evidence that trading costs on commodities are lower than on traditional investments. In fact, it seems likely the opposite is true.
