Assignment 1 - Personal Wealth Mgmt Flashcards
an arrangement for the devolution of one’s wealth
involves planning during an estate owner’s lifetime, at his/her death, and for the mgmt and devolution of his/her prop. long after the owner’s death
estate plan
**the actions of indiv. and firms in purch. and selling specific prod. and services
**measure of supply and demand for a partic. prod., serv. or industry and the price/cost setting and readjusting in these indiv. mkts.
microeconomics
the translation of personal obj. into specific plans and subsequently into financial arrangements to implement those plans
financial planning process
expenses incurred to maintain person when they are unable to perform at least several of the normal activities of daily living
custodial care expenses
the study of large econ. forces, such as overall prod., economic growth, employment, money supply, gov’t revenues and expenditures, general price levels, etc.
examples - monetary and fiscal policies
macroeconomics
fin instit. that invests other ppl’s money and pays them a rate of return on the money
financial intermediary
Wealth Mgmt Process
- ID facts about your fin. situation
- set goals on where you would like to be in the future
- put plans and fin. mechanisms into place to achieve goals
- monitor and measure progress towards the goals
- realize the risks in order to retain, reduce, insure and avoid.
Professional codes of conduct for financial professionals
- competence
- confidentiality
- compensation
- conflicts of interest
- principles of conduct
- compliance
types of behavioral finance
- anchoring
- loss aversion
- status quo
- regret theory
- type of behavioral finance
- using irrelevant info in making a fin. decision
anchoring
- type of behavioral finance
- tendency to be more disappointed by or fearful of a loss than elated for a gain
loss aversion
- type of behavioral finance
- being happy with - “how things are today”
status quo
- type of behavioral finance
- individuals fear making decision they will regret
regret theory
Competitive Models in Microeconomics
- perfect comp.
- monopoly
- natural monopoly
- oligopoly
- monopolistic comp.
- Competitive Models in Microeconomics
- most efficient mkt structure
- many indiv. buyers and sellers
- no one firm can control the price paid and qty sold as determined by law of supply and demand
- all firms are “price takers” - adjusting to mktplace
Perfect Competition
- Competitive Models in Microeconomics
- single firm supplies the entire mkt and can determine the quantity supplied and influence the price
monopoly
- Competitive Models in Microeconomics
- imperfect competition
- small # of firms act in a mkt
- each highly sensitive to the moves of the other firms
oligopoly
- Competitive Models in Microeconomics
- larger # of firms
- firms’ products are differentiated enough that each firm does not need to be concerned w/ the actions of the others (competition is limited)
Monopolistic Competition
- general increase in price levels in the econ.
- measured by CPI
inflation
- general decrease in price levels
- less common that inflation
- usually associated w/ econ. depressions and banking/credit crises
deflation
the rate in which goods and services increase period-over-period
inflation rate
this results due to the fact that because general prices in the econ. have increased, your purchasing power has decreased
inflation tax
period in which there is both high UnN and high inflation
stagflation
econ. goes through expansions, reaches peaks, retreats into recession, may reach a depression level, and then begins to expand again
business cycle
How does the Fed increase or decrease the amt of money in the econ?
- controlling level of reserves banks are required to hold
- discount rate changes
- open mkt operations
the rate at which member bank borrow funds from the Fed.
if Fed raises the rates = i/r increase
discount rate
What is the effect if the Fed increases the reserve requirements for banks?
increase in RR = decreases supply of money = increases i/r
(and vice versa)
use of federal gov’t expenditures, borrowing and tax policy to stabilize the econ, and promote steady econ. growth.
discretionary policies
types of Recession Stabilizers
- certain gov’t expenditures will automatically increase
- certain tax pmt automatically decrease
- certain benef. pmts remain fixed (SS) or increase (UnN)
(exact opposite reaction in a period of expansion)
markers that are used to measure econ. trends and predict where the econ. may be in the future
economic indicators
types of economic indicators
- GDP
- stk mkt indexes
- commodity price indx
- U of Michigan Consumer Sentiment Index
- Status of housing mkt
- type of economic indicators
- measure of value of the goods and services for a country during a period of time
GDP
the application of i/r or rate of return on money over a given period
int. is credited out and not applied to the total inv. over time
simple interest rates
type of rate that pays “interest on interest”
sum of money grows in a exponential way (not linear)
compound i/r
amt that an inv. fund will grow to, assuming a given compounded rate of return
FV
amt in today’s $’s of a sum that has been projected for some point in the future
PV
the annual avg compounded rate of return on monies starting at the beginning of a period until the end of a period
internal rate of return
pmts made regardless of whether the recipient lives or dies over the period
annuities certain
pmts are made at the beginning of each period
annuities due
periods of growth in real production of the econ.
characterized by: low UnN, rising wages, rising values/income from stk, low defualts, rising inflation, higher i/r
expansion
pmt are made for the duration of the life of the recipient
life annuities
periodic $age dollar returns on bonds, savings acct, and CDs w/o considering inflation
nominal i/r’s
periodic pmts are made at the end of each annuity period
ordinary annuity
nominal i/r returns adjusted for inflation effects (minus current rate of inflation or plus current rate of deflation)
real i/r’s
signif. decline in econ. activity arising from a decline in the real GDP for 2 consecutive qtrs
recession
The development and implemtation of total, coordinated plnas for the achievement of one’s overall fin. and personal obj.
the development of coordinated plans for a person’s overall fin. affairs based on fin. obj.
private/personal wealth mgmt
types of capital accumulation obj.
- emergency funds
- education needs
- retirement needs
- general inv. fund
wealth mgmt objs.
- income tax planning
- financing education expenses
- retirement planning
wealth mgmt obj.
income tax planning
reducing the tax burden related to income-related taxes while estate planning generally deals w/ estate, gif, and GST tax savings
wealth mgmt obj.
financing education expenses
due to the dramatically increasing costs of financing education
there are now some attractive, tax-efficient plans for financing education costs
wealth mgmt obj.
retirement planning
- life expectancy is longer
- more complex to plan
- what is sufficient saving
- recessions/depressions
steps in the financial planning process
- establishing client-planner relationships
- gathering data and determining goals and expectations
- determining the person’s financial status
- developing and presenting the financial plan
- implementing the financial plan
- monitoring the financial plan
Law of Supply and Demand
- price paid and quantity sold for a product in any mkt is = to the point where the supply and demand curves for the product intersect. - price/quantity equilibrium
- in competitve mkts, the actual price will tend to move to this price until supply demand are at the equilibrium price
- Competitive Models in Microeconomics
- exists when it would be inefficient to have 2 or more firms competing in the same mkt
natural monopoly
- this theory combines psychology w/ econ and fin
- concerned w/ how ppl actually make econ. decision
- recognizes that their decision-making process may not be entirely ‘rational’
- certain attitudes clients display in making wealth mgmt decisions
behavioral econ
Monetary Policy
- macroecon tools utilized to attempt to control the business cycle and maintain reasonable price stability
- The Fed conducts monetary policy by affecting the level of mkt i/r’s in the econ. and by controlling the money supply
Fiscal Policy
- use of fed’l gov’t expenditures, gov’t borrowing, and tax policy to attempt to stabilize the econ and promote steady econ. growth
gov’t expenditures that automatically increase, tax pmts that automatically decrease, and benef. pmts that remain fixed or increase when the econ. turns down (in an expansion, the opposite is true)
automatic stabilizers
