Checkpoint exam topic(s) Flashcards
Performance guarantees
Prohibited
- customer cannot lose money
Social media
LinkedIn - no endorsements
Regulatory issues regarding broker-dealers offering wrap fee programs to existing customers include
concerns that some clients put into the program would be better off paying separately for investment advice, brokerage, and other services offered under the program.
To be in compliance with the law, contracts under the USA differ from those under the Investment Advisers Act of 1940 in that under the USA they
are written
federal law does permit oral contracts, whereas the USA requires that all initial and renewal contracts be in writing.
Brochure
Whether state or federal covered, unless there have been no material changes, investment advisers must send a brochure to eligible clients within 120 days of the end of the adviser’s fiscal year.
An individual who is a proponent of the efficient market hypothesis (EMH) will likely invest in which of the following?
Explain EMH
Index funds
The closer to inside information, the stronger the information is. Anything published in widely read media would be considered very weak. An example of semi-strong would be, “information found when reading a listed company’s financial statements”. An example of strong would be, “overhearing two lawyers discussing an upcoming merger announcement they were preparing”.
bond ladder strategy is a relatively easy way to
immunize (protect) a portfolio against interest rate risk
By holding many positions across the yield curve, the individual is diversified in the event that yields behave differently in one part of the curve than in another. The laddered portfolio will generally provide higher (not lower) yields than a portfolio consisting entirely of short-term bonds. Purchasing very long-term and very short-term bonds describes the bond barbell strategy, not the bond ladder strategy.
large capitalization investing style
distinguishes between investing in a small-cap company versus a large capitalization company.
If the expected return on the market is 20% and the risk-free rate is 4%, a stock with a beta coefficient of 0.8 would have an expected rate of return under CAPM of (AND FORMULA)
CAPM formula = risk-free rate (0.04) plus the product of the stock’s beta (0.8) and the difference between the expected return on the market and the risk-free rate (0.20 – 0.04). In this case, it would be 0.04 + (0.8)(0.16) or 0.04 + 0.128 = 0.168 = 16.8%.
Bullet strategy
The least active strategy is the one requiring the lowest level of activity on the part of the investor. The bullet strategy involves investing in bonds at various intervals with all of the bonds maturing at or about the same time (such as when a child is entering college). As such, the only activity is buying bonds every couple of years. Barbell and ladder strategies have bonds maturing at regular intervals, requiring an active role in reinvesting the principal. All three of these require the investor to purchase bonds at different times, but the bullet strategy is the only one not concerned with the mechanics of collecting the matured principal and reinvesting it. Yield curve is not a specific strategy.
Bond volatility
If interest rates rise, which bond would see the greatest decrease / decline in market valueL
Longest duration has highest volatility
If similar, the one with lowest coupon is more volatile / impacted
Positive alpha
Although we could calculate the alpha, it should be clear that when one portfolio with a beta that is 50% higher than the other outperforms it by 100%, there is positive alpha.
discounted cash flow
is nothing more than taking all the money you are scheduled to receive over a given future period and adjusting that for the time value of money (the discount rate).
Alpha
is the extent to which a security’s performance exceeds (or falls short of) that of the market compared to what would be expected based on its beta.
Duration measures
a bond’s volatility with respect to a change in interest rates. The higher the duration, the greater the change in a bond’s price with respect to interest rate changes.
efficient frontier
The purpose of the efficient frontier is to plot the most efficient portfolios. An efficient portfolio is one that offers:
the most return for a given amount of risk or
the least risk for a given amount of return.
If the current risk-free rate is 5%, and the expected return from the market is 10%, what return should we expect from a security that has a beta of 1.5?
EXPECTED RETURN
15%
EXPECTED RETURN = risk free + (expected market - risk free) x beta
.05 + .05 x 1.5 = 15%
A federal covered investment adviser employs the services of a third-party promoter to solicit business for the firm. The Investment Advisers Act of 1940 would require the solicitor to deliver a copy of
the promoter’s agreement when above the de minimis compensation limit.
IRA deduction
7k cap
Anything over 80k you cannot deduct
Full deduction under 73k
investment in a qualified plan (or IRA)
1) must be for future use (or else it would be considered a distribution subject to tax)
2) real estate may be used prior to your retirement, but not by “related” parties. These are defined as your spouse and lineal members of your family (ancestor or descendant or their spouse). So, because the parents will be using the property, they are considered prohibited persons.
The main disadvantage of a contributory defined contribution pension plan is that
the actual sum an employee will receive at retirement is unknown.
A governmental Section 457 plan vs tax exempt 457 plan
must be funded—that is, it must hold plan assets in trusts or custodial accounts for the benefit of individual participants. Conversely, a tax-exempt (nongovernmental) Section 457 plan may not be funded.
One of the advantages of using a Section 529 plan rather than a Coverdell ESA to fund higher education is
there is no age limit by which time the funds must be used.
ERISA plans
ERISA serves as a basis of rules which protect the beneficiaries and plan participants.
It is permitted for a fiduciary to transfer plan income or assets for the benefit of a plan beneficiary or a plan participant which they are entitled according to the provisions within the plan.
It is not allowable for the fiduciary to transfer or loan plan assets for the benefit of a disqualified person such as the fiduciary of the plan or a person providing services to the plan.
