Bonus Flashcards
Determining a client’s retirement objectives requires the following information:
- The age at which the client wants to retire
- The amount of income they hope to have in retirement
- Whether they hope to travel during retirement
- Where they want to live in retirement
- How they will occupy their free time during retirement, such as with part-time work, hobbies, or looking after grandchildren
How is a guaranteed minimum withdrawal benefit product different from an annuity?
A GMWB resembles an annuity in that it provides a predictable, steady stream of income for a specified term or for the life of the annuitant. However, the two products differ in that, with an annuity, the investor gives a lump-sum premium to the insurance company in exchange for a guaranteed income that is calculated based on the premium amount, age of the annuitant, and interest rates at the time of purchase. With a GMWB, the investor retains control of the investment and has the option to cash out the market value at any time, forfeit all guarantees, and terminate the contract.
What is the guaranteed withdrawal balance under a guaranteed minimum withdrawal benefit product?
The guaranteed withdrawal balance under a GMWB product is 100% of the initial deposit amount, which represents the base on which income and bonuses are calculated.
What is correct regarding segregated funds and guarantees?
Guarantees do not apply to amounts that are withdrawn or redeemed from a segregated fund contract prior to the maturity date. The value of the guarantees is reduced by the withdrawal amounts, and the insurance company tracks the ongoing value of the guarantees.
Mutual funds vs segregated funds
Like mutual funds, segregated funds offer investors professional investment management, diversification, and the ability to invest small amounts. Segregated funds, however, also have unique features that enable them to meet special client needs, such as maturity guarantees, death benefits, and creditor protection.
Which organization is responsible for ensuring that federally regulated insurance companies are adequately capitalized?
Under the requirements of the federal Insurance Companies Act, OSFI (Office of the Superintendent of Financial Institutions) is responsible for ensuring that federally regulated insurance companies are adequately capitalized.
What impact does the reset provision have on the cost of operating and managing a segregated fund?
It raises the cost because resetting the guaranteed amount at a higher level increases the maturity and death benefit guarantees the issuer is liable for.
What are the tax considerations specific to a deferred annuity?
A deferred annuity can be surrendered at any time, and income tax is payable only on accumulated interest that has not been included in income. Contributions to an unregistered deferred annuity are not tax-deductible. Accrued investment income must be included in taxable income either annually or every three years, depending on the date the annuity was bought.
The real return is equal to?
(1 + the nominal return) ➗ (1 + the inflation rate) - 1
Example: Tammy’s portfolio had a nominal return of 7% last year. If the inflation rate last year was 1.5%, what was the real return on Tammy’s portfolio?
In this case, the real return is 5.42%, calculated as: [(1.07) / (1.015)] - 1 = 0.0542 = 5.42
If contested, which optional clause in a will is likely to be set aside by a court?
Although all clauses could be contested, the one of special interest to the court and most likely to be set aside is the guardian appointment clause. It is viewed by the court only as an expression of the testator’s wishes, but it is not binding on the court; the court will look out for the best interests of a minor child.
Which clause of a will would give the executor or liquidator discretion to use assets for the benefit of beneficiaries who are minors?
Under normal circumstances, beneficiaries who are minors are not entitled to estate assets until they become adults. A discretionary encroachment clause allows the executor to decide otherwise.
How can a beneficiary for an RRSP be normally designated in Quebec?
In Quebec, designating beneficiaries for an RRSP or a RRIF is generally allowed only in a will or marriage contract.
What is the main objective of an estate freeze?
To freeze the value of growth assets so that future growth occurs in the hands of the taxpayer’s children or spouse.
Identify the assumptions of mean-variance optimization.
- All investors are risk-averse;
- Investors have access to information on expected returns, standard deviations, and correlation of all assets;
- Investors build their portfolios using only the expected returns, standard deviations, and correlation of assets;
- There are no transaction costs or taxes.
What does the portfolio opportunity set represent?
The portfolio opportunity set represents the risk return trade-off between stocks and bonds, given their expected returns, standard deviations, and correlation.
What is the beta of a risk-free asset?
The risk-free asset, by definition, has no risk and therefore has a beta of 0.
Calculate the expected rates of return for Portfolio A and Portfolio B.
The expected rates of return are calculated as follows: Portfolio A:
E(RP) = RF + βP × [E(RM) - RF]
E(RP) = 2.5% + 0.62 × (7.6% - 2.5%)
E(RP) = 5.66%
Portfolio B:
E(RP) = 2.5% + 1.25 × (7.6% - 2.5%) E(RP) = 8.88%
The asset mix of Simero’s portfolio is 25% real estate, 35% bond and 40% equities. The expected returns are 10% for real estate, 4% for bonds and 7.5% for equities. Calculate the expected return of Simero’s portfolio.
Expected return = (0.25 x 10%) + (0.35 x 4%) + (0.40 x 7.5%) = 6.9%
Identify the correct relationship between the asset class’s correlation to the remainder of the portfolio and the relative width of the asset class’s tolerance band.
In a portfolio of highly correlated asset classes, the relative weights of each class are not likely to stray far from their targets, and tolerance bands can be wider. When correlation between a portfolio’s asset classes is low, it is possible for one asset class to move quite a distance from its target allocation. A narrow tolerance band is needed to control that class’s relative weight in the portfolio.
Identify the cost of rebalancing that is not as visible to clients.
Market impact.
Feedback: Trading involves other, less visible costs that many investors do not fully understand. Market cost, for example, is the effect of a buy or sell order on the market price of a security. It is rarely a factor for liquid stocks of large Canadian companies. But for most Canadian small-cap stocks, and for infrequently traded large-cap stocks, a large market order to buy or sell can affect the market price.
Identify the term that refers to strategic asset allocation.
Several terms are used in the investment industry to describe the steps in the asset allocation process. Strategic asset allocation is also called policy, passive, or benchmark asset allocation.
Identify a current valuation measure used by analysts to calculate expected risk premiums.
Price-earnings ratio and yield to maturity for debt.
Some analysts calculate expected risk premiums based on current valuation measures, such as the price-earnings (P/E) ratio for stocks and the yield to maturity for debt securities. For example, the stocks/bonds risk premium can be measured as the earnings yield on stocks (the inverse of the P/E ratio) minus the yield to maturity on long-term bonds.
Simplified Example:
Think of the P/E ratio like the price tag on a T-shirt relative to its quality, and YTM like the interest rate your bank gives you for a savings account. If the quality-to-price ratio for the T-shirt is a lot higher than the interest rate for saving your money, the difference is like the extra value you get for buying the T-shirt instead of saving the money.
Visual Tip for a Visual Learner:
Imagine a balance scale. On one side, there’s the earnings yield of stocks (like a pile of coins representing the earnings per share you buy). On the other side, there’s the YTM of bonds (like a different pile of coins representing the return on bonds). The side that tips lower shows you where the higher return is, and the difference in height between the two sides is the risk premium.
Identify a characteristic of preferred shares.
Because of their fixed claim on company assets and their fixed dividend rate, preferred shares are sensitive to interest rates. They tend to fall in value when interest rates go up and rise in value when interest rates go down
What is the key to successful sector rotation timing?
Identifying the industry leaders at each stage of the market cycle.
Feedback: Most industries move in the same direction at the same time, but the amount of movement is often quite different for different industries. The key to industry timing is to identify the industry leaders at each stage of the market cycle. Advisors can select industry groups on the basis of factors such as type of business, degree of economic sensitivity and exposure to international markets.
What is the name of a short research report on a company?
Flash
Feedback: Shorter, more frequently released research reports are often called comments, notes, or flashes. Analysts produce these brief reports in response to new information about a company. They may be released to publish an announcement made by the company or a rumour in the market, or to update investors during a quiet period.
Identify the type of valuation model that makes use of the dividend discount model.
Absolute valuation models determine a precise value (called a point estimate) for the intrinsic value of a stock based on a set of forecast company fundamentals. In the securities industry, the two most widely used absolute valuation models are the dividend discount model and discounted cash flow model.
Identify a characteristic of an option-free bond’s convexity.
For an option-free bond, the change in value resulting from the convexity term is always positive.
Identify the type of bond that has a Macaulay duration equal to its term to maturity.
The Macaulay duration of a zero-coupon bond (including strip bonds) is equal to the bond’s term to maturity (in years).
Last year an investor’s portfolio returned -3%. The portfolio had a strategic asset allocation of 5% cash, 35% debt securities and 60% equity securities. Last year the benchmark indexes for each of these asset classes had the following returns:
Asset Class
Benchmark Return
FTSE Canada 91-Day T-Bill Index 1% FTSE Canada Universe Bond Index 5%
Cash
Debt Securities
Equity Securities S&P/TSX Composite Total Return Index -9%
Calculate how much the investor’s portfolio outperformed or underperformed its benchmark.
Feedback: Benchmark return: (5% × 1%) + (35% × 5%) + (60% × -9%) = -3.6% The investor’s portfolio outperformed the benchmark by 0.60%.
Reference | Chapter 23: Portfolio Monitoring and Performance Evaluation
According to the Life Cycle Hypothesis,
The family life cycle argues that the demand on goods and services that an individual requires does not depend solely on his or her age but where he or she is in the family life cycle.
Note the following about the eight categories:
• No distinction between married and unmarried couples.
• No distinction between opposite-sex and same-sex couples.
How is the marginal tax rate calculated?
The marginal tax rate represents the tax rate applicable to each additional dollar of income a taxpayer earns. It is calculated by dividing the change in tax payable by the change in income.
Your clients Eartha and Vanya opened a registered education savings plan for their newborn son, Michael. Over the next three years, Eartha and Vanya plan to make the following contributions: $1,000, $1,500, and $2,500. What amount of cumulative Canada Education Savings Grant will they be able to carry forward at the end of the three years?
