Exam 1

Question 1

Financial Planning Process Steps:

Answer 1

1) understanding the clients personal and financial circumstances
2) identify and select goals
3) analyze current course of action
4) develop FP recommendation
5) present FP recommendation
6) implement FP
7) monitor progress and update

Question 2

Financial Planning documents:

Answer 2

1) Balance Sheet
2) Cash Flow Statement

Question 3

3 steps for preparing the balance sheet:

Answer 3

1) Items owned
2) Items owed
3) Net worth = Owned - Owed

Question 4

Cash Surplus or Deficit Formula:

Answer 4

Cash Received - Cash Paid

Question 5

Budgeting Process:

Answer 5

1) estimate family income
2) develop expense breakdown
3) determine excess or shortfall of income
4) consider ways to increase/decrease I/E

Question 6

Emergency Fund

Answer 6

need 3-6 months of expenses
-Clients w/ irregular income may need more

Question 7

Investment Planning Process:

Answer 7

1) develop a plan based on clients goals
2) determine asset allocation
3) construct diversified investment strategy
4) agree to investment policy statement
5) implement w/ securities
6) continue monitoring

Question 8

Major Asset Classes:

Answer 8

1) Money Market/ Cash
2) Bonds
3) Common Stock
4) Alt. Assets
5) Real Assets

Question 9

Money Market/Cash

Answer 9

short return time, very liquid, low return, secure, dry powder
ex: cash, tbills, demand deposit, time deposit, CDs, commercial paper, repo agreement

Question 10

Bonds

Answer 10

a loan to a corporation, fed government or municipality
-receive semi annual interest rate payments
-inverse relationship with interest rates

Question 11

Tax exempt yield formula

Answer 11

Taxable Yield * (1 - TR)

Question 12

Taxable equivalent yield formula

Answer 12

(Tax exempt yield / (1-tax rate))

Question 13

Common Stock

Answer 13

-Ownership of company
-Voting rights
-Source of return
-Proxy rights

Question 14

Preferred Stock

Answer 14

-Dividend priority
-no voting rights
-no claim on companies assets

Question 15

Alternative Assets

Answer 15

Real estate, commodities, derivatives, crypto, private equity

Question 16

Real Assets

Answer 16

Real estate, commodities
-Hedge against inflation

Question 17

Factors affecting investment choices

Answer 17

1) risk factors
2) risk return trade off
3) investment income vs growth
4) risk tolerance

Question 18

Risk Return Trade Off

Answer 18

Higher risk investments, expect higher returns

Question 19

Asset Allocation

Answer 19

Allocated to stocks, bonds or cash
-willingness/ability to assume risk
-most important factor

Question 20

Investment Policy Statement Includes:

Answer 20

-return objective
-risk tolerance
-constraints: time, liquidity, tax, legal, unique factors

Question 21

Rate of Return Formula:

Answer 21

(P1-P0)/P0

Question 22

Direct Investing Options:

Answer 22

Stocks

Question 23

Indirect Investing Options:

Answer 23

Mutual funds, ETFs, Hedge funds, Annuities

Question 24

Arithmetic Return Formula:

Answer 24

(Sum of each years returns) / # of years

Question 25

Geometric Return Formula:

Answer 25

([(1+r) x (1+r) x (1+r)]^(1/n)) - 1

Question 26

Holding Period Return Formula:

Answer 26

[(1+r) x (1+r)] - 1

Question 27

Dollar Return Formula:

Answer 27

Income from investment + Capital Gain/Loss

Question 28

Dividend Yield Formula:

Answer 28

Income / Beginning Price

Question 29

Capital Gain Yield Formula:

Answer 29

(P1-P0)/ P0

Question 30

Total Percentage Return Formula:

Answer 30

Dividend Yield + Capital Gain Yield

Question 31

3 types of Stock Trade Orders:

Answer 31

1) Market Order
2) Limit Order
3) Stop/Loss Order

Question 32

Market Order

Answer 32

Buy/sell at current market value

Question 33

Limit Order

Answer 33

Buy/sell at specified price

Question 34

Stop/Loss Order

Answer 34

Sell at a specified price

Question 35

Mutual Funds:

Answer 35

Investors money pooled and invested by a fund manager
-Prices set at EOD
-3 types of funds

Question 36

3 types of MF:

Answer 36

1) Open - End
2) Close - End
3) ETF

Question 37

Open End Mutual Fund:

Answer 37

Can issue new shares whenever
-priced 1x a day based on NAV
-NAV = (value of fund port. - liabilities) / # of shares outstanding

Question 38

Close End Mutual Fund:

Answer 38

Can only buy shares when initially issued
-Can buy shares off of other investors if they’re willing to sell

Question 39

Exchange Traded Funds(ETFs):

Answer 39

Invests in stocks in a specific stock or security index
-not actively managed by portfolio manager

Question 40

Expense Ratio for MF fees Formula:

Answer 40

Management Fees + Operation Costs

Question 41

Separately Managed Accounts(SMA):

Answer 41

Investment firm directly manages the portfolio

Question 42

Private Equity Fund:

Answer 42

-Private equity company buys and sells other businesses for profit `

Question 43

Hedge Funds:

Answer 43

unregulated limited investors
-very risk
-need high minimum investment amount

Question 44

4 Ps of Due Diligence:

Answer 44

1) Philosophy
2) Process
3) People
4) Performance