WMS

In what form of asset allocation, if any, do changes in capital market conditions consistently result in the rebalancing of assets within a portfolio?

Tactical asset allocation constantly adjusts the portfolio's asset mix to take advantage of changing capital market conditions and assumes the investor's risk tolerance and investment constraints remain constant over time.

Which of the following are possible taxable events generated from a mutual fund

Taxable dividends Exempt interest dividends Return of capital distributions Capital gain distributions

Which of the following are general forms of saving for retirement available to the individual investor? Individual savings vehicles Programs available through the individual's employer Other special and selective plans, such as nonqualified deferred compensation

1, 2, and 3

Harry and Jane consider themselves to be moderate risk tolerance investors. Which of the following asset allocations may be most appropriate for their investment portfolio?

) 50% bonds, 25% large-cap stocks, 15% international stocks, 5% small-cap stocks, 5% money market funds

Which of the following terms is defined as the acquisition of assets that have different risk characteristics to lower overall portfolio risk?

Diversification involves the acquisition of assets that have different risk characteristics to mitigate portfolio risk.

John chooses to lease a car valued at $42,000 over a 5-year period. The lease provides for an option to buy the car at the end of the lease for $28,500. If the dealer requires a 7% yield on this lease, what is John's monthly payment?

John's monthly payment is $431.05, calculated as follows: BEG mode 7 ÷ 12 = I/YR 42000 +/- PV 28500 FV 12 × 5 = N Solve for PMT

Review the sample asset allocation. 40% Bonds 5% Money markets 35% Large-cap equity 15% International equity 5% Small-cap equity Which type of investor is it most suitable for?

Moderate risk-tolerant investor -equally looking for equal high yield and capital appreciation

Assume XYZ stock has a standard deviation of 22.6% and the S&P 500 Index has a standard deviation of 17.8%. The covariance between the stock and index is +87. What is the correlation coefficient between the stock and the S&P 500?

R = 87 ÷ (22.6 × 17.8) = .2162. This result indicates that XYZ stock is not highly correlated with the movement of the S&P 500 Index.

Which of the following statements regarding systematic and unsystematic risk is NOT correct?

Systematic risk is nondiversifiable.

Nancy purchased several hundred shares of stock 3 years ago for a total of $5,000. Over the course of the next 3 years, this stock annually returned a total of $100, $150, and $250 in cash dividends. At the end of year 3, she sold the stock for $5,400. What has been Nancy's compound rate of return on this stock over the 3-year period?

The compounded rate of return on Nancy's stock is 5.80%, calculated as follows: 5000 +/- CFj 100 CFj 150 CFj 5400 + 250 = CFj shift, IRR/YR

Stock P offers an expected return of 20%, a standard deviation of 6%, and a beta of 1.3. Stock Q offers an expected return of 16%, a standard deviation of 4%, and a beta of 1.1. Which stock should be recommended?

The correct answer is "stock Q, because it has a lower coefficient of variation." Stock P has a CV of 0.30 (0.06 ÷ 0.20), whereas Stock Q has a CV of only 0.25 (0.04 ÷ 0.16). Therefore, Stock Q has a lower CV and is the better purchase on the basis of that measure only. Beta does not enter into the CV computation.

Consider a client and his spouse, both aged 62, approaching retirement within a few years. This couple comes to see you, a financial advisor, and asks for assistance in investing their substantial taxable and tax-deferred accounts. They specify their investment objective as "to provide for current income" and characterize their risk tolerance as conservative. What approximate asset allocation percentages would you recommend for this couple?

30% stocks, 60% bonds, 10% cash/cash equivalents

All of the following constitute reasons for a bond swap EXCEPT

A bond swap is an active investment strategy done for various reasons; among them, to increase bond yields, take advantage of interest rate changes, and achieve tax savings. A buy-and-hold strategy is a passive investment strategy and not a reason for a bond swap.

Which type of derivative is taxed using the mark to market tax rules?

A futures contract, or an IRC Section 1256 contract, is taxed using the mark to market tax rules. This means that such a contract is taxed on the last day of the tax year according to stipulated gain and loss provisions.

Consider the following terms used in the taxation of corporate and government bonds. Which one best describes a corporate bond that experiences a decrease in value after its issue date because of a subsequent increase in interest rates?

A market discount arises when the value of a corporate bond decreases after its issue date, usually because of an increase in interest rates. Accordingly, such an event causes a bond to be referred to as a market discount bond for tax purposes.

Which of the following statements regarding original issue discount (OID) and a market discount bond is/are CORRECT? When a market discount bond is purchased, the investor may either elect to accrue the amount of this discount as interest income over the period he owns the bond or treat the amount of accrued market discount as ordinary interest income upon later sale of the bond for a gain. OID is the difference between the stated redemption price of the bond at maturity (i.e., face value) and the issue price.

Both I and II

Which of the following riders increases the disability benefit amount received by the insured each year on the basis of some preapproved index, typically the Consumer Price Index?

Cost of living rider

Jerome Jacobson wants to withdraw $15,000 annually from an investment at the end of each year for the next 15 years. He can earn 9% on the funds over this period. How much does Jacobson need in his investment before he begins withdrawals? (Remember, this question is asking for the present value of the future cash flows.)

The correct answer is "$120,910.33." Keystrokes: END mode 15000 +/- PMT 9 I/YR 15 N PV

In allocating assets within a portfolio, what is the fundamental risk experienced with an overallocation of bonds or a fixed-income type of investment?

The fundamental risk that is encountered with an overallocation of bonds within a portfolio is the erosion of purchasing power. This risk, which all fixed-income types of investments experience, is also known as inflation risk.

An investor wants to have $150,000 available at the end of 15 years. He plans to make equal year-end payments into an investment that is expected to yield a 7.5% annual rate of return. What is the annual amount of each of these required payments?

This is the future value of an ordinary annuity problem. Accordingly, the annual payment at the end of each year is $5,743 (rounded). (150000 FV; 15 N; 7.5 I/YR; solve for PMT.)

Two assets exhibit a correlation coefficient of -1. This means that these assets

Two assets with a correlation coefficient of -1 are said to exhibit perfect negative correlation. As such, they move in exactly opposite directions, and to the same extent. They are also good diversifiers within the overall portfolio.

Which of the following are client considerations in developing the proper asset allocation strategy? Level of investment risk Tax status Past investment experience level Required rate of return for the portfolio

all

One of your clients is interested in a mutual fund as a long-term investment with the possibility of significant capital appreciation. You should recommend

A growth mutual fund focuses on stocks that have significant potential for capital appreciation. Such a fund is a long-term investment that may experience volatility over short periods of time and, therefore, should only be used to satisfy long-term financial goals.

Which of the following are steps in the wealth management process?

Establishing and defining the client-planner relationship Developing and communicating financial planning recommendations Implementing the recommendations Monitoring the plan Gathering client data and analyzing and evaluating the client's current financial status are the other steps in the process.

Geoff invests $12,000 annually for 12 years at an after-tax rate of return of 4.25%. Assume he makes these deposits at the beginning of the year. What is the balance in the account at the end of 12 years?

Geoff will have $190,691 in his account after 12 years, calculated as follows: BEG Mode 0 PV 12000 +/- PMT 12 N 4.25 I/YR Solve for FV

Earnings typically exceed expenses and individuals are past the midpoint of their working careers during which of the following phases of the financial life cycle?

The conservation phase of the financial life cycle describes the period where individuals are typically past the midpoint of their working careers and have an excess of earnings to invest to meet their retirement or estate planning goals.

Consider an investment in which Deborah Klaussen deposits $1,200 annually for 35 years at a 7% growth rate. If the deposits are made at the end of the year, what is the balance at the end of 35 years?

The correct answer is "$165,884.25." Keystrokes: END mode 0 PV 1200 +/- PMT 35 N 7 I/YR FV

Makayla wants to add some money to the college education fund she has for her daughter. She would like to save an additional $60,000 over the next 15 years and believes she can earn 6% per year on her money. How much does she need to save at the beginning of each year to accumulate the $60,000?

The correct answer is "$2,431.85." Keystrokes: BEG mode 60000 FV 6 I/YR 15 N PMT

Jessica has $25,000 that she has saved for the purchase of a new home. She believes that she can afford a monthly payment of $1,000. Interest rates are currently 3.9% for a 30-year mortgage. What is the maximum purchase price of the home that Jessica can afford? (Assume she has other funds for closing costs, property taxes, and insurance.)

The correct answer is "$237,013.44." This includes the $212,013.44 PV and the $25,000 down payment. Keystrokes: END mode 1000 +/- PMT 12 × 30 = N 3.9 ÷ 12 = I/YR PV

Christy wishes to lease an automobile valued at $25,000 over a 3-year period. The lease provides for an option to buy the auto at the end of 3 years for $20,000. If the dealer needs to yield a return of 8% on this lease, what is Christy's monthly lease payment?

The correct answer is "$288.09." Keystrokes: BEG mode 8 ÷ 12 = I/YR 25000 +/- PV 20000 FV 12 × 3 = N PMT

Jesse wants to save over the next 25 years by depositing $3,000 at the beginning of each year in an investment earning 8% per year. He expects an annual inflation rate of 3% per year and will be increasing his annual contributions by that rate. How much will he accumulate over the period?

The correct answer is "$308,104.38." Keystrokes: BEG mode 3000 +/- PMT 25 N 1.08 ÷ 1.03 - 1 × 100 = I/YR (this determines the inflation-adjusted rate of return for the annual investments) PV = 44,988.7565 (this gives us a lump sum present value of all 25 years of inflation-adjusted payments in today's dollars; now we are ready to take this PV and compound it for 25 years at 8% to its future value) 8 I/YR (we do not need to reenter 25 for N because the calculator still has that value stored) 0 PMT (this clears out the previously stored value of 2,000) FV

Caren is projected to have an annual retirement income deficit of $24,000 in first-year retirement dollars and expects to be in retirement for 25 years. She believes that she can earn an 8% annual after-tax rate of return on her current investments and that inflation will average 3% annually over this period. What is the total amount of savings needed to provide for Caren's retirement income deficit?

The correct answer is "$359,910." The total amount of savings Caren will need to provide for the deficit is $359,910. Keystrokes (HP 10BII/10BII+): BEG mode 24,000 +/- PMT 25 N [(1.08 ÷ 1.03) - 1] × 100 = 4.8544 I/YR Solve for PV = 359,910, or $359,910

Alex and Rachel want to add $100 at the beginning of each month to their current $5,000 education fund for their 5-year-old daughter. If they can earn 7% per year, how much will the fund be worth when she is ready to go to college at age 18?

The correct answer is "$37,869.67." Keystrokes: BEG mode 13 × 12 = N 5000 +/- PV 100 +/- PMT 7 ÷ 12 = I/YR FV

Joe, age 56, is provided with $200,000 of group term life insurance by his employer. The cost of protection per month from Section 79 Table I for his age bracket is $.43 per thousand. If he contributes $350 annually toward the cost of coverage, how much will be included in his annual gross income?

The correct answer is "$424.00." Calculation: Excess coverage (in thousands)$150Cost per $1,000 of coverage× .43Monthly cost of coverage$64.50Multiply by number of months covered× 12Annual cost of coverage$774.00Less: Employee contribution- 350.00Amount included in gross income$424.00

Peggy purchased a nonqualified deferred annuity for $15,000. The terms of the annuity state that she will receive payments of $150 per month beginning at age 65. At that time, Peggy will have a life expectancy of 26 years. How much of Peggy's monthly payment will be excluded from her taxable income at age 65?

The correct answer is "$48." The excludible amount from taxation is $48 per month calculated as follows: exclusion ratio = $15,000 ÷ (12 mos./yr × 26 yrs × $150 pmt) = .3205. Amount excluded from income = exclusion ratio × actual annuity pmt: .3205 × $150 = $48. The taxable amount of the monthly payment is $102 ($150 - $48).

Steven owns an investment currently producing a 7% annual rate of return. He is in the 33% marginal income tax bracket, and inflation is currently 2.5% per year. What is the fund's after-tax inflation-adjusted rate of return?

The correct answer is "2.13%." Keystrokes: .67 × .07 = .0469 + 1 = 1.0469 ÷ 1.025 = 1.0213 - 1 = .0213, or 2.13%

Eugene has purchased a bond for $1,016.50 with a coupon rate of 2.5%. The bond matures in 10 years and pays interest semiannually. What is the yield to maturity on his bond?

The correct answer is "2.31%." Keystrokes: 1016.50 +/- PV; 1000 FV; 12.50 PMT; 20 N; I/YR × 2 = 2.3142, or 2.31%

A client wants to know much additional life insurance is needed to cover his dependents' (nonworking spouse and 1 child) cost of living. The client currently has a $150,000 life insurance policy. After evaluating the client's financial status, the following needs are revealed to the advisor: $30,000 emergency fund $50,000 educational fund Total income needs, net of Social Security, for the dependents are as follows: $60,000 during the period the child is under age 16 $80,000 during the blackout period (time from the child reaching age 16 until the surviving spouse reaches age 60) $500,000 spouse's age 60 through retirement (remaining life expectancy) What is the additional need?

The correct answer is "$570,000." To determine the additional amount of life insurance needed, the financial advisor should total the desired dollar amount of each need and subtract the amount of existing life insurance from this result. ($30,000 + $50,000 + $60,000 + $80,000 + $500,000 - $150,000 = $570,000)

Ellen would like her daughter, Madison, who was just born, to attend a private university for 5 years beginning at age 18. Tuition is currently $25,000 per year and has increased an annual rate of 5%. She can earn an after-tax rate of 9%. How much must Ellen save at the end of each year if she would like to make her last payment at the end of the last year before Madison's first year of college?

The correct answer is "$6,768.43." Note: For the following calculation, use the 4 decimal place number (rounded off), as shown, to determine the required deposits. Step 1: Determine the present value of the 4 years of tuition. PMT = 25,000 N = 5 I/YR = 3.8095 [(1.09 ÷ 1.05) - 1] × 100 PV = -111,893.6891 Step 2: Determine the present value of the lump sum calculated in Step 1, assuming that 5 years of the tuition is the future value. FV = 111,893.6891 N = 17 I/YR = 3.8095 [(1.09 ÷ 1.05) - 1] × 100 PV = -59,261.8091 Step 3: Determine the annual payments needed to fund tuition costs. PV = 59,261.8091 N = 18 I/YR = 9 PMT = -6,768.4270 Therefore, Ellen must save $6,768.43 at the end of each year.

Caren is projected to have lump-sum retirement deficit of $200,000. She believes that she can earn an 8% annual after-tax rate of return on her investments. If she has 15 years until her retirement, what is the annual end-of-year level savings deposit required to accumulate the necessary funds?

The correct answer is "$7,366." Caren needs to save $7,366 per year. Keystrokes (HP 10BII/10BII+): END mode 200,000 FV 15 N 8 I/YR Solve for PMT = -7,365.9090, or $7,366

If $5,000 is placed in an account that pays 8% interest compounded monthly, how much will be in the account after 5 years?

The correct answer is "$7,449.23." Keystrokes: 5000 +/- PV 12 × 5 = N 8 ÷ 12 = I/YR FV

f $4,000 is invested at 7% annually, how much will be in the account after 10 years?

The correct answer is "$7,868.61." Keystrokes: 4000 +/- PV 10 N 7 I/YR FV

Nate wants to establish a fund over the next 5 years for his daughter's college education. Nate figures that the $15,000 annual cost today will increase by 6% each year, but he can earn 9% on the funds set aside for his daughter. How much money does Nate need to set aside today to fund his daughter's college education?

The correct answer is "$70,983.63." Keystrokes: BEG mode 15000 +/- PMT 5 N 1.09 ÷ 1.06 - 1 × 100 = I/YR (this calculation determines the inflation-adjusted rate of return for the annual investments) PV

Olivia finances the purchase of a new car priced at $47,000 with a 5% down payment and a 6-year loan at a 7% annual interest rate. What is the amount of her monthly payment?

The correct answer is "$761.24." Keystrokes: END mode 47000 - 2350 = 44650 PV (price - down payment) 6 × 12 = N 7 ÷ 12 = I/YR PMT Note: the calculator will display the answer as a negative number, as each month's payment amount is a cash outflow.

Last year's risk-free rate was 5.2% and the market return was 14.4%. Using the following data, what is the Treynor ratio for the ABC Fund? Rate of return = 16.8% Standard deviation = 10.5% Beta = 0.90

The correct answer is "0.1289." The Treynor ratio is a standard risk-adjusted measure of portfolio performance determined by (average rate of return - risk-free rate of return) ÷ beta. For ABC Fund, the calculation is (0.168 − 0.052) ÷ 0.90 = 0.1289.

Which of the following are forms of returns provided by an investment in common stock?

The correct answer is "1 and 2." The 2 primary forms of returns to an owner-shareholder in common stock are dividend payments and capital appreciation. Investments like savings and bonds pay interest. Mark-to-market is a term associated with futures contracts.

Assume the standard deviation of Stock X is 15%, and the standard deviation for the respective market index is 10%. The correlation coefficient between Stock X and the index is .85. What is the beta of Stock X?

The correct answer is "1.275." Beta is 1.275, calculated as follows: βi = (.85 × 15) ÷ 10 = 1.275. Hence, Stock X is more volatile (risky) than the overall market.

Observe the following information: Portfolio actual return: 9% Market actual return: 12% Portfolio standard deviation: 4% Market standard deviation: 7% Portfolio beta: 0.65 Risk-free rate of return: 3% What is the portfolio's Sharpe ratio?

The correct answer is "1.50." Sharpe = (rp- rf) ÷ σp = (.09 - .03) ÷ .04 = 1.50

Assume ADM stock had the following series of annual returns for the past 4 years: Year 1: -8% Year 2: 15% Year 3: -5% Year 4: 2% What is the standard deviation of these returns?

The correct answer is "10.23%." The standard deviation for this series of returns is 10.23%. An easy and fast way to calculate standard deviation of historical returns is to use the sigma register (Σ+) on your financial calculator. The keystrokes provided are for the HP 10BII/10BII+ calculator: 8 [+/-] [Σ+] 15 [Σ+] 5 [+/-] [Σ+] 2 [Σ+] [shift] [Sx,Sy]

Jose invested $5,000 in a mutual fund 1 year ago. The fund paid dividends of $100, $125, $130, and $90 at the end of each quarter, all of which were distributed to Jose. At the time of the last dividend payment, the mutual fund had grown to a value of $5,125. What was the compound internal rate of return (IRR) for the fund?

The correct answer is "11.30%." Keystrokes: 5000 +/- CFj; 100 CFj; 125 CFj; 130 CFj; 5215 CFj; shift, IRR/YR × 4 = 11.3028, or 11.30%

One year ago, Paige bought 200 shares of ACME Corp. at $8.50 per share. During the past year, the stock has paid dividends of $.90 per share. What is Paige's 1-year holding period return, if the stock's current price per share is $9.10? (Round to the nearest percent.)

The correct answer is "18%." Holding period return = (ending value − beginning value ± cash flows) ÷ beginning value. Calculated as: ($9.10 − $8.50 + 0.90) ÷ $8.50 = 0.1765, or 17.65%, rounded to 18%.

Marcy earns a 5% annual nominal rate of return on her investment, and inflation has averaged 2.5% over this same period. What has been the investment's real rate of return?

The correct answer is "2.43%." Keystrokes: 1.05 ÷ 1.025 = 1.0243 - 1 = .0243, or 2.43%

Assume Tammy has a 2.5% rate of return on an investment that she has held for 270 days. What is her annualized rate of return?

The correct answer is "3.38%." Calculation: [(2.5 ÷ 270) × 365] ÷ 100 = .0338, or 3.38%

Richard has a corporate bond with a coupon rate of 3.75% that is currently trading at $990. What is the bond's current yield?

The correct answer is "3.79%." Keystrokes: 37.50 ÷ 990 = .03787, or 3.79%

JEM portfolio has a realized rate of return of 6.5%. The portfolio's expected performance, based on the CAPM, is 2.5%. What is the alpha of DEF portfolio?

The correct answer is "4%." The alpha is 4% (6.5% - 2.5%), meaning that JEM's portfolio manager has outperformed the market index by this percentage.

Brian and Jenny Larson would like to accumulate $75,000 for a down payment on a new home. If they are able to save $1,000 at the end of each month and these funds earn 6.5% per year, how many years will it take to accumulate the $75,000?

The correct answer is "5.26 years." Keystrokes: END mode 75000 FV 1000 +/- PMT 6.5 ÷ 12 = I/YR N 63.11 ÷ 12

Amy purchased a $10,000 zero-coupon bond 12 years ago for $5,235. The bond has now matured. What is Amy's compound rate of return on the bond?

The correct answer is "5.54%." Keystrokes: 5235 +/- PV; 10000 FV; 12 N; I/YR = 5.5416, or 5.54%

Elayne is earning a pretax rate of return of 9% on her investment. She is in a 28% federal and 2% state marginal income tax bracket. What is her after-tax rate of return on this investment?

The correct answer is "6.30%." Calculation: .09 × [1 - (.28 + .02)] .09 × .7 = .0630, or 6.30%

The investor's investment time horizon and risk tolerance are linked in the asset allocation decision. Which of the following statements correctly illustrate(s) why this distinction is important in determining the proper asset allocation?

The correct answer is "I and II." The investor's investment time horizon and risk tolerance are linked in the asset allocation decision. For example, an investor with a short-term investment horizon will be most likely concerned with safety of principal. Therefore, he will be less likely to take on significant risk and will tend toward fixed-income investments. Conversely, an investor with a long-term investment horizon will be more concerned with capital appreciation and may be willing to incur more risk.

Troy needs a 15% return to meet his financial goals. He is interested in a mutual fund with a beta of 1.3. If the market return has averaged 11% over the past 10 years and the U.S. Treasury bill rate (risk-free rate) is currently 4%, should Troy invest in this fund?

The correct answer is "No, as the fund's expected rate of return is less than Troy's required rate of return." Expected rate of return for the mutual fund using CAPM: ri = rf + (rm - rf) βi = 4% + (11% - 4%) 1.3 = 13.1%. Because the expected rate of return is less than Troy's required rate of return, he should not purchase the fund.

What is the definition of a money market security in the financial services industry?

The correct answer is "a debt issue with a maturity date of 1 year or less." In the financial marketplace, a money market security is a debt issue with a maturity date of 1 year or less. This may be contrasted with a capital market security, which serves as a source of financing with a maturity of more than 1 year. A debt instrument used to raise working capital is a bond, and stocks represent ownership interests in a company.

In what step of the wealth management process is it necessary to consider an individual's current position in the financial life cycle?

The correct answer is "analyzing and evaluating the client's current financial status." In the wealth management process, an individual's current position in the financial life cycle should be considered as part of this step. An advisor should consider the client's financial life cycle phase because this will likely provide help in understanding the client's short-term and long-term financial goals.

Of the 4 pairs of assets below, which pair provides the highest level of diversification?

The correct answer is "assets 7 & 8: with a correlation coefficient of −0.78." The highest level of diversification will occur when the correlation coefficient is closest to −1. Of the 4 pairs of assets, assets 7 and 8 offer the highest level of diversification because the correlation coefficient of −0.78 is closest to −1. The returns on assets 7 and 8 should generally move in opposite directions because they are negatively correlated.

Review the sample asset allocation. 40% Bonds 30% Money markets 20% Large-cap equity 5% International equity 5% Small-cap equity Which type of investor is it most suitable for?

The correct answer is "conservative risk-tolerant investor." This allocation is appropriate for an investor seeking a balance between yield and capital appreciation.

20% Bonds 50% Large-cap equity 20% International equity 10% Small-cap equity Which type of investor is it most suitable

The correct answer is "high risk-tolerant investor." This allocation is appropriate for an investor seeking higher capital appreciation and lower yields.

Review the sample asset allocation. 20% Bonds 50% Large-cap equity 20% International equity 10% Small-cap equity Which type of investor is it most suitable for?

The correct answer is "high risk-tolerant investor." This allocation is appropriate for an investor seeking higher capital appreciation and lower yields.

What is the relationship between the price of a bond and a change in market interest rates?

The correct answer is "inverse." There is an inverse relationship between the price of a bond and the direction of interest rates. As interest rates rise, the market value of bonds decreases; conversely, if interest rates fall, the market value of bonds increases.

40% Bonds 30% Money markets 20% Large-cap equity 5% International equity 5% Small-cap equity Which type of investor is it most suitable for?

he correct answer is "conservative risk-tolerant investor." -investor seeking higher yields lower capital appreciation

A person in the conservation/protection phase of the financial life cycle is likely to have which of the following goals?

The correct answer is "long-term goals, such as investing for retirement." In the accumulation phase of the financial life cycle, individuals have only limited discretionary income and, as a result, they are likely to focus on short-term, cost-of-living goals. In the conservation/protection phase, individuals' financial goals are likely to change to longer-term goals, such as investing to provide for future retirement income. Finally, in the distribution/gifting phase, estate planning and preservation of capital become most important.

Which of the following is NOT considered a constraint when developing an investment policy statement?

The correct answer is "market conditions." An investment policy statement is a written document that sets forth a client's objectives and certain limitations on the investment manager. The following are constraints of the investment policy statement: time horizon, liquidity, taxes, laws and regulations, and unique circumstances/preferences. Market conditions are not a constraint when developing an investment policy statement.

Review the sample asset allocation. 40% Bonds 5% Money markets 35% Large-cap equity 15% International equity 5% Small-cap equity Which type of investor is it most suitable for?

The correct answer is "moderate risk-tolerant investor." This allocation is appropriate for an investor seeking a balance between yield and capital appreciation.

What is the primary difference between a money market mutual fund and a money market deposit account?

The correct answer is "money market deposit accounts are federally insured; money market mutual funds are not." The primary difference between a money market mutual fund and a money market deposit account is that only the latter is federally insured. In addition, an investment company—more specifically, an open-end investment company or mutual fund—typically offers a money market mutual fund, whereas a financial institution such as a bank or savings and loan offers a money market deposit account. Both of them typically require a minimum deposit.

Which of the following is NOT a characteristic of a mutual fund?

The correct answer is "mutual funds are easily available but require a significant initial investment." Mutual funds are available for a low minimum investment. The other statements are characteristics of mutual funds.

All of the following are tax advantages to investors who are involved in rental real estate EXCEPT

The correct answer is "rents are taxed as capital gain income." Rents are taxed as ordinary income to the owner. Owners of rental real estate may deduct not only interest on any mortgage incurred to finance the purchase, but also are afforded a depreciation deduction on the building(s) that is/are rented. In the first few years of ownership, the investor generally has no reported income from the rental real estate activities because of these tax-deductible expenses.

All of the following are methods by which a taxpayer may treat a premium paid to purchase a taxable corporate bond EXCEPT

The correct answer is "the amount of bond premium will be subtracted from the taxpayer's basis in the bond and added back upon sale." The amount of bond premium may either be amortized by the taxpayer over the remaining life of the bond or be added to the taxpayer's basis in the bond and recovered upon sale. If the taxpayer elects to amortize the bond premium, she applies the part of the premium attributable to a given year as an offset against the interest payments received.

What are debentures?

The correct answer is "unsecured notes backed by the general credit of the issuing corporation." Debentures are unsecured promissory notes backed by the general credit of the issuing corporation. Such debentures can also be subordinated to the claims of the other general creditors of the corporation and paid off after regular unsecured debt in the event of bankruptcy.

A conservative investor interested in equities would prefer which of the following investment styles?

The correct answer is "value." A conservative investor interested in equities would likely prefer the value style of investing. Stocks selected under this method do not generally experience as much volatility as those chosen under the growth style. In addition, value stocks will also increase in price during the best years of the market, although the increase is less than with growth stocks.

Bonds that do NOT make regular interest payments are known as

The correct answer is "zero-coupon bonds." Bonds that do not make regular interest payments are known as zero-coupon bonds. These types of bonds are frequently issued by the U.S. government (U.S. Treasury bills), municipalities, and corporations. Zero-coupon bonds are issued at a deep discount and mature at their par value.

Adam and Elise have recently financed the purchase of a new home with a $180,000 mortgage at a 3.75% annual interest rate over 15 years. How much will they have repaid on their original mortgage balance after making their 24th monthly payment?

The correct answer is"$18,574.87." Keystrokes: END mode 180000 PV 15 × 12 = N 3.75 ÷ 12 = I/YR PMTDo not clear calculator 1 INPUT 24 Shift AMORT Press =

XYZ stock has had the following annual rates of return for the past 5 years: Year 1: 10% Year 2: 20% Year 3: -3.5% Year 4: -6% Year 5: 8%. What is the standard deviation of Stock XYZ for the 5-year period? (Round your answer up to the nearest decimal place.)

The standard deviation is 10.6%, calculated as follows: 10 Σ+ 20 Σ+ 3.5 +/- Σ+ 6 +/- Σ+ 8 Σ+ shift, Sx,Sy

The asset allocation strategy that attempts to find an optimal balance of assets generating a maximum rate of return for a minimum level of risk over a long-term investment horizon is referred to as

The strategic asset allocation strategy attempts to find an optimal balance of assets generating a maximum rate of return for a minimum level of risk over a long-term investment horizon

Kevin and Carol took out a 30-year, 5.5%, $100,000 mortgage note when they purchased their home. Their monthly payment is $567.79. They plan to sell the home in 7 years. What will be the balance of their remaining mortgage at that time?

This is a balance of a mortgage due problem. The correct answer is $88,816. (END mode, 100000 PV; 567.79 +/- PMT; 5.5 ÷ 12 = I/YR; 7 × 12 = N; solve for FV.)

If $1,000 is placed in an account that pays 5% interest compounded monthly, how much will be in the account after 2 years?

This is a future value of a single sum problem. The interest is compounded monthly, requiring 24 payments. The value of the account after 24 months is $1,105 (rounded). (1000 +/- PV; 5 ÷ 12 = I/YR; 12 × 2 = N; solve for FV.)

An individual bought 100 shares of stock 10 years ago at $25 per share and liquidated the position today for $50 per share. The stock did not pay any dividends during this time. What is the annual rate of return on this investment?

This is a future value problem stated in terms of today's dollars. The annual rate of return on the stock is 7.18% over the 10-year period. (25+/- PV; 50 FV; 10 N; solve for I/YR.)

Charles is expecting to receive an inheritance of $125,000 from his parent's trust in 5 years. If Charles had this money today, he believes he can earn an after-tax rate of return of 8%. What is the present value of these funds to Charles?

This is a present value of a single sum problem using a discount rate of 8%. The future value of $125,000 is discounted back to a present value of $85,073 (rounded). (125000 FV; 5 N; 8 I/YR; solve for PV.)

Gilbert has determined that he will need a lump sum of $600,000 in today's dollars to retire at his desired standard of living in 20 years. He currently has saved $150,000 (in current dollars) toward this goal. Gilbert assumes the annual inflation rate over the 20-year period until he retires will be 3% and that he can earn an after-tax rate of return of 6% on any invested funds. How much does Gilbert need to save on an annual basis if he makes the deposits at the beginning of each year?

This is an annuity due problem using an inflation-adjusted rate of return. The annual payment required to achieve a value of $600,000 in today's dollars is $12,173 (rounded). (BEG mode: 600000 FV; 20 N; [(1.06 ÷ 1.03) − 1] × 100 = I/YR; 150000 +/- PV; solve for PMT.)

George and Barbara would like to save $30,000 for a down payment on a home they are planning to buy in 5 years. Their financial planner tells them they could earn a 4% after-tax rate of return on these funds by investing in a government bond fund. If this is correct, how much will George and Barbara need to save at the end of each year to accomplish their goal?

This is an ordinary annuity payment for a future sum problem. The annual payment is $5,539 (rounded). (END Mode; 30000 FV; 5 N; 4 I/YR; solve for PMT.)

Frequently used in the time value of money, discounting

determines the value of funds to be received in the future in terms of their present value