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General Principles/Conduct/Psychology Flashcards

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1
Q

Behavioral Finance: Familiarity

A

E.g., familiarity with an employer and investing in ER stock because of familiarity only

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2
Q

Behavioral Finance: Loss Aversion

A

Unwillingness to sell a losing investment in the hopes it will turn around because losses are more painful than gains. (compare Prospect Theory)

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3
Q

Behavioral Finance: Affect Heuristic

A

Judging something, good or bad, pertains to likes or dislikes of a company based on non-financial issues.

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4
Q

Behavioral Finance: Anchoring

A

Attaching/Anchoring one’s thoughts to a reference point even if there is no logical relevance or no pertinence to the issue in question; aka conservatism or belief perseverance.
The investor sets a value at the initial point of information (typically their buy price)

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5
Q

Behavioral Finance: Availability Heuristic

A

Reliance on information that is readily available in one’s memory, thus overweighting recent events or patterns and ignoring longer term trends.

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6
Q

Behavioral Finance: Bounded rationality

A

Making decisions based on rationality limited by available information, tractability of decision problem, cognitive limitations, time available to make a decision. Seeking a satisfactory solution rather than an optimal one, thus additional information does not lead to an improvement in decision because investor is unable to consider significant amounts of information.

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7
Q

Behavioral Finance: Cognitive Dissonance

A

Tendency to misinterpret information that is contrary to an existing opinion or only pay attention to information that supports an existing opinion, e.g., exaggerating gains and minimizing/forgetting about losses.

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8
Q

Behavioral Finance: Confirmation Bias

A

Tendency to filter information and focus on information that supports one’s opinions.

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9
Q

Behavioral Finance: Disposition effect

A

People seek pride and avoid regret, thus

  • sell winners too quickly (confirms correct choice)
  • hold losers too long (avoids confirming incorrect choice)
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10
Q

Behavioral Finance: Familiarity Bias

A

Tendency to overestimate/underestimate the risk of investments with which one is familiar/unfamiliar.
Leads to home bias and single stock concentration.

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11
Q

Behavioral Finance: Gambler’s Fallacy

A

Based on incorrect understanding of probabilities, investors may sell stock when it has been successful in consecutive trading sessions because they may not believe it is continuing its upward trend.

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12
Q

Behavioral Finance: Herding

A

Following the herd. Finding comfort in groups/numbers.

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13
Q

Behavioral Finance: Hindsight Bias

A

Looking back after the fact is known and assuming one can predict the future as readily as the past.
When considering the past, investors tend to suffer from:
- House money effect (take more risk)
- Snakebite effect (take less risk)
- Break-evenitis (take more risk)

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14
Q

Behavioral Finance: Illusion of Control Bias

A

Tendency to overestimate ability to control events, e.g., sense of control over outcomes one can demonstrably not influence.

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15
Q

Behavioral Finance: Naïve diversification

A

Common with 401k plans or other employer sponsored retirement plans: idea that one is adequately diversified by investing an equal amount in all of the funds.
Mental accounting can lead to naïve diversification.

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16
Q

Behavioral Finance: Optimism

A

Can lead to exuberance, which can lead to market bubbles.

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17
Q

Behavioral Finance: Overconfidence Bias

A

Tendency to listen to oneself, rely on one’s own skills and capabilities to do one’s own homework or make one’s own decisions. This often leads investors to overstate their risk tolerance, overestimate their knowledge, underestimate risks, exaggerate ability to control events and predict outcomes.
Factors leading to overconfidence:
Choice
Task familiarity
Information (confirmation bias)
Active involvement
Past success

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18
Q

Behavioral Finance: Overreaction

A

Common emotion towards receipt of news or information

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19
Q

Behavioral Finance: Prospect Theory

A

Tendency to value gains and losses differently. Investors are loss averse, suffer more from a loss of $100 than they benefit from a $100 gain. Examples: Avoiding higher risk investments even if they offer strong risk adjusted returns or over insuring against risks through low deductibles.

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20
Q

Behavioral Finance: Recency

A

Focusing on short-term past performance, giving too much weight to recent events, leading to faulty predictions that this is how it is always going to be.

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21
Q

Behavioral Finance: Representativeness

A

Idea that a good company is a good investment without an analysis of the investment

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22
Q

Behavioral Finance: Similarity Heuristic

A

Used when a decision is made when an apparently similar situation occurs even though the situations may have very different outcomes

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23
Q

CFP Code of Ethics

A
  1. Act with honesty, integrity, competence, and diligence
  2. Act in the client’s best interests
  3. Exercise due care
  4. Avoid or disclose and manage conflicts of interest
  5. Maintain the confidentiality and protect the privacy of client information
  6. Act in a manner that reflects positively on the financial planning profession and the CFP certification
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24
Q

Economic Forces: Complements

A

Products that are usually consumed jointly. A decrease in the price of one will cause an increase in the demand of another, e.g., when peanut butter goes on sale, the demand for jelly will increase.

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25
Q

DEC forms of discipline : Private Censure

A

An unpublished written reproach mailed by the the DEC to a censured respondent

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26
Q

DEC forms of discipline : Public letter of admonition

A

A written reproach of the respondent’s behavior published in a press release

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27
Q

DEC forms of discipline : Revocation

A

The termination of a respondent’s right to use the CFP marks. Respondents are permanently barred from applying for or obtaining CFP certification. No appeal is possible.

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28
Q

DEC forms of discipline : Suspension

A

Respondent is prohibited from using the CFP certification marks, stating or suggesting that they are a CFP professional or holding out to the public as being certified by the CFP Board.

Min. 90 days; Max 5 years

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29
Q

Duties owed to clients at all times

A
  1. Integrity
  2. Competence
  3. Diligence
  4. Sound and Objective Professional Judgement
  5. Professionalism
  6. Comply with the law
  7. Confidentiality and Privacy
  8. Duties when communicating with a client
  9. Duties when selecting, using and recommending technology
  10. Refrain from borrowing or lending money and commingling financial assets
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30
Q

Duties owed to clients when providing financial advice that requires planning

A
  1. The duties that apply when providing financial advice (without planning)
  2. The practice standards for the financial planning process
  3. Information to a client in writing
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31
Q

Duties owed to clients when providing financial advice without planning

A
  1. The Duties that apply at all times
  2. Fiduciary Duty
  3. Disclose and manage conflicts of interest
  4. Provide information to a client
  5. Duties when recommending, engaging, and working with additional persons
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32
Q

Duties owed to clients: Competence

A

With relevant knowledge and skill to apply that knowledge.
A CFP professional must bring in or advise a client go to an expert with competence in area the advisor lacks

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33
Q

Duties owed to clients: Comply with the law

A

A CFP professional must comply with the laws, rules and regulations governing professional services. Intentional violation of the Codes & Standards is not permitted

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34
Q

Duties owed to clients: Confidentiality & Privacy

A

A CFP professional must keep confidential and may not disclose any non-public personal information abut any prospective, current, or former client, except to the CFP

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35
Q

Duties owed to clients: Diligence

A

Must provide professional services, including responding to reasonable client inquires in a timely and thorough manner

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36
Q

Duties owed to clients: Disclose and Manage conflicts of interest

A

Applies to material conflicts of interest
Written consent to conflict is not required (oral is acceptable)

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37
Q

Duties owed to clients: Fiduciary Duty

A

Duty of Loyalty
Duty of Care
Duty of Following Client Instructions

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38
Q

Duties owed to Clients: Integrity

A

Centered on honesty and candor

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39
Q

Duties owed to clients: Profesionalism

A

A CFP professional must treat Clients, prospective clients, fellow provisionals, and others with dignity, courtesy, and respect.

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40
Q

Duties owed to clients: Provide information to a a client

A

Material changes and disciplinary updates/bankruptcy must be disclosed to clients within 90 days

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41
Q

Duties owed to clients: Refrain from borrowing or lending money and commingling financial assets

A

Exceptions:

  1. member of the CFP’s immediate family
  2. Lender is in the business of lending

Never permitted

Client’s financial assets may not be commingled with the CFP professionals’ assets or the firm’s assets.

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42
Q

Duties owed to clients: Selecting, Using ,and recommending technology

A

A CFP professional must use “reasonable care and judgement” when using technology in a planning engagement. The technology must produce “reliable objects, and appropriate outcomes:

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43
Q

Duties owed to clients: Sound and objective professional judgement

A

CFP professionals must exercise professional judgement on behalf of the client and may not solicit or accept any gift that could be expected to compromise objectivity

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44
Q

Duties owed to clients: When communicating with a client

A

Accurate information in a manner and format that client reasonably may be expected to understand

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45
Q

Duties owed to clients: When recommending, engaging and working with additional persons

A

Basis for recommendation must be reasonable and any conflict of interest must be properly disclosed and managed.

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46
Q

Duties owed to clients: When representing compensation method

A

Fee only - No commission, trails, etc. Flat fee, or AUM only
Fee based - primarily compensated through fees, but has some commission based products, or products that have a trail.
Sales related compensation - primarily commission based

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47
Q

Fiduciary Duty: Duty of Care

A

Act with the care, skill, prudence, and diligence that a prudent professional would exercise in light of the client’s goals, risk tolerance, objectives, and circumstances.

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48
Q

Fiduciary Duty: Duty of Loyalty

A
  1. Place the interest of the Client above the interests of the CFP professional’s firm
  2. Avoid conflicts of interest or fully disclose material conflicts of interest to the client, obtain the client’s informed consent and properly manage the conflict
  3. Act without regard to the financial or other interests of the CFP professional the CFP professional’s firm or any individual or entity other than the client which means a CFP professional acting under a conflict of interest continues to have a duty to act in the best interests of the Client and place the client’s interest above the CFP professsional.
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49
Q

Fiduciary Duty: Duty to Follow Client Instructions

A

Comply with the terms of the client engagement and follow all directions of the clients that are reasonable and lawful.

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50
Q

Financial Advice

A

A. Communication that, based on its content, context, and presentation, would reasonably be viewed as a recommendation that the client take or refrain from taking a particular course of action with respect to:

  1. The development or implantation of a financial plan
  2. The value of or the advisability of investing in, purchasing, holding, gifting, or selling financial assets
  3. Investment policies or strategies, portfolio composition, the management of financial assets, or other financial matters
  4. The selections and retention of other persons to provide financial or professional services to the client

B. Exercise of discretionary authority over the financial assets of a client.

Exam Tip: the more individually tailored the communication, the more likely you are giving Financial Advice and are thus bound by Fiduciary Duty!

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51
Q

Financial Planning

A

Collaborative process that helps maximize a client’s potential for meeting life goals through financial advice that integrates relevant elements of the client’s personal and financial circumstances.

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52
Q

Heuristic

A

Any approach to problem-solving that employs a more practical method that is not guaranteed to be optimal or rational, but is sufficient for reaching short-term goals or an approximation, such as rules of thumb, educated guesses, trial & error.
Heuristics reduce the cognitive load of decision making, which allows biases to cloud objectivity.

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53
Q

In which step of the financial planning process do you analyze the client’s current course of action?

A

Step 3: Analyzing the client’s current course of action and potential alternative course(s) of action.

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54
Q

Behavioral Asset Pricing Model

A

Determines the expected returns of a stock using Beta, book to market ratios, market capitalization ratios, stock momentum, the investor’s likes and dislikes about the stock or company, social responsibility factors, status factors, and more.

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55
Q

Marginal utility

A 
Additional benefit (utility) received from consumption of an additional unit of a good. 
As the rate of consumption increases, the marginal utility derived from consuming additional units will decline. “Diminishing marginal utility”
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56
Q

Mental accounting

A

the different values a person places on the same amount of money, based on subjective criteria, often with detrimental results (e.g., tax refund is often treated as “found” money rather than a “refund” that belonged to the taxpayer all along)

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57
Q

Price elasticity

A

Measures the quantity demanded of a good in response to changes in that good’s price

A good is elastic when its quantity demanded responds greatly to price changes (consumer discretionary)

A good is inelastic when its quantity demanded responds little to price changes (gasoline)

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58
Q

Real GDP excludes

A

Imports
Inflation
Transactions where money changes hands but no new goods or services are produced
Income of US citizens working abroad
Profits earned by US companies in foreign countries

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59
Q

Real GDP includes

A

Market value of all final goods and services produced within an economy

Income of foreigners working in the US

Profits that foreign companies earn in the US

GDP = C + I + G + (X-M)
Or GDP = C + I + G + NE
Where C = consumer spending
I = investments
G = government spending
X-M = excess of exports over imports (also referred to as NE for Net Exports)

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60
Q

Standards of Conduct - Duties owed to Firms and Subordinates

A
  1. Use reasonable care when supervising
  2. Comply with lawful objectives of CFP Professional’s firm
  3. Provide notice of public discipline
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61
Q

Standards of conduct: Duties owed to the CFP board

A
  1. Refrain from adverse conduct
  2. Reporting
  3. Provide Narrative statement
  4. Cooperation
  5. Compliance with Terms and Conditions of
  6. Certification and Trademark License
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62
Q

Substitutes

A

Increase in the price of one will cause an increase in the demand for the other, e.g., sharp increase in price of oil, gas, or propane would likely cause increase in price of firewood.

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63
Q

The Financial Planning Process Step 1

A

Understanding the client’s personal and financial circumstances

  • obtain quantitative and qualitative information
  • analyze information
  • address incomplete information
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64
Q

The financial planning process step 2

A

Identifying and selecting goals

  • Identify potential goals
  • help the clients select and prioritize goals
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65
Q

The financial planning process step 3

A

Analyzing the client’s current course of action and potential alternative course(s) of action

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66
Q

The financial planning process step 4

A

Developing the financial planning recommendations

For each recommendation the financial professional must consider

  • Assumptions and estimates used to develop the recommendations
  • Basis for making the recommendation
  • timing and priority of the recommendation
  • whether the recommendation is independent or must be implemented with another recommendation
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67
Q

The financial planning process Step 5

A

Presenting the financial planning recommendation(s)

For each recommendation the CFP professional must:
- present to the clients the selected recommendations and information that was required to consider when developing the recommendations

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68
Q

The financial planning process step 6

A

Implementing the financial planning recommendations

  • address implementation responsibilities
  • identify, analyze, and select actions, products, and services
  • recommend one or more actions, products, and services for implementation
  • select and implement actions, products, or services
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69
Q

The financial planning process step 7

A

Monitoring progress and updating

  • establish monitoring and updating responsibilities
  • monitor the client’s progress
  • obtain current qualitative and quantitative information
  • update goals, recommendations, or implantation decisions
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70
Q

What are the three categories of adverse conduct that relate to CFP certification fitness standards?

A
  1. Conduct Deemed Unacceptable
  2. Conduct Deemed A Presumptive Bar
  3. Other Adverse Conduct
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71
Q

What category of adverse conduct would a felony conviction for tax fraud or other tax-related crimes be subject to?

A

Conduct deemed unacceptable

Unacceptable

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72
Q

What category of adverse conduct would a felony conviction for non-violent crimes (including perjury) within the last five years be subject to?

A

Presumptive Bar

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73
Q

What category of adverse conduct would a Felony conviction for any degree of murder or rape be subject to?

A

Conduct deemed unacceptable

unacceptable

74
Q

What category of adverse conduct would a felony conviction for violent crimes other than murder or rape that occurred more than 5 years ago be subject to?

A

Presumptive Bar

75
Q

What category of adverse conduct would a Felony conviction for any other violent crime within the last five years be subject to?

A

Conduct deemed unacceptable

unacceptable

76
Q

What category of adverse conduct would a Revocation of a financial professional license (unless the revocation is administrative in nature) be subject to?

A

Conduct deemed unacceptable

unacceptable

77
Q

What category of adverse conduct would suspension of a financial license (unless due to administrative issues)
be subject to?

A

Presumptive Bar

78
Q

What category of adverse conduct would a Felony conviction for theft, embezzlement, or other financially based crimes be subject to?

A

Conduct Deemed Unacceptable

Unacceptable

79
Q

What category of adverse conduct would two or more personal or business bankruptcies be subject to?

A

Deemed to be a presumptive bar

presumptive bar

80
Q

What consequence will be issued for conduct deemed unacceptable?

A

The individual is permanently barred from becoming certified with no possibility for appeal.

81
Q

What constitutes other adverse conduct?

A

Customer complaints
Arbitrations and other civil proceedings
Felony convictions for non-violent crimes that occurred more than 5 years ago
Misdemeanor convictions
Employer investigations and terminations

82
Q

What decision will be issued for conduct presumed to be unacceptable?

A

An individual is barred from becoming certified unless they petition the Disciplinary and Ethics Commission (DEC) and the DEC grants the petition or permits the individual to reapply for certification later.

83
Q

What does GDP measure?

A

Measures economy on a quarterly basis
Measures total market value of a country’s income and output of goods and services produced by all the people and companies in the US

84
Q

What happens if a complaint for the CFP Board Counsel is not responded to in the required time frame

A

Failure to answer a complaint will result in CFP Board Counsel delivering an Administrative Order of Suspension or an Administrative Order of Revocation.

If conduct is unacceptable the revocation order is used, if conduct is deemed to be presumed unacceptable the order of Suspension is used.

Mandatory timeframe for suspension is 1 year and 1 day.

85
Q

What is the CFP Board Disciplinary Hearing Process

A

CFP Board Counsel delivers complaint
Either Settlement without investigation or respondent answer due within 30 days
- Respondent pays hearing/settlement review fee or requests waiver. Due within 30 days of assessment
Hearing documents, witness list, written statements, and stipulations
- docs due 45 days after delivery of complaint
- witness list due 30 days after delivery of complaint
Notice of hearing from CFP Board Counsel
- due not less than 30 days before hearing
Hearing before hearing panel
Hearing panel recommendations
Disciplinary and Ethics Commission (DEC) reviews hearing panel recommendation
DEC Final order
Appeal to the Board of Directors’ Appeals Committee
- must be filed within 30 days of issuance of DEC final order

86
Q

What is the DEC

A

The _D_isciplinary and _E_thics _C_ommission

87
Q

What step of the financial planning process do you address incomplete information provided to you by your client(s)?

A

Step 1: Understanding the Client’s personal and financial circumstances

88
Q

What step of the financial planning process do you analyze the information you collected from your client(s)?

A

Step 1: Understanding the Client’s Personal and Financial Circumstances

89
Q

What step of the financial planning process do you help the client(s) select and prioritize their goals?

A

Step 2: Identifying and Selecting Goals

90
Q

What step of the financial planning process do you identify potential goals

A

Step 2: Identifying and Selecting Goals

91
Q

What step of the financial planning process do you obtain quantitative and qualitative information?

A

Step 1: Understanding the Client’s personal and financial circumstances

92
Q

When investors consider the past, they tend to suffer from:

A

House money effect - take more risk
Snakebite effect - take less risk
Break-evenitis - take more risk

93
Q

What category of adverse conduct would a Revocation or suspension of a non-financial professional license (unless due to administrative issues) be subject to?

A

Presumptive Bar

examples: Real Estate license

94
Q

What body has the authority to investigate and file a complaint against a respondent for alleged violations of the Code of Ethics and/or the Standards of Conduct?

A

The CFP Board Counsel

95
Q

Who has the authority to issue a final order for violations of the Code of Ethics and/or Standards of Practice?

A

The Disciplinary & Ethics Committee (DEC)

96
Q

How soon must a CFP professional respond to a complaint delivered by the CFP Board Counsel?

A

30 Days or an Administrative Order or Suspension that suspends the respondent’s certification and license for one year and one day. Or a Administrative order of revocation that revokes the respondent’s certification and License.

97
Q

GDP Formula

A

Y=C + I + G+ (X-M) Where: Y = GDP C= Consumer Spending I = Investment made by industry G = Governmental Spending X-M = excess of exports over imports. Also listed as NE or Net Exports

98
Q

Component of GDP: Personal Consumption Expenditures

A

Durable Goods: Cars, furniture large appliances Non-Durable Goods: Clothing, food, fuel

99
Q

GDP Components: Business Investments

A

Fixed Investment Change in private inventory

100
Q

Business consists of which 2 general phases

A

Expansion: increasing GDP

Contraction: decreasing GDP and increasing unemployment

101
Q

Define GDP

A

Market value of all goods and services produced by labor and property in the U.S.

102
Q

Define recession

A

2 consecutive quarters of negative GDP growth. Not every contraction is a recession, but every recession is a contraction.

103
Q

Put the phases of the business cycle in the right order

A

Peak

Expansion

Trough

Contraction

104
Q

How is trend growth defined?

A

long term non-inflationary increase in GDP (caused by increase in a country’s productive capacity)

average sustainable rate of economic growth over time

105
Q

Define characteristics of early signs of an expansion

A

activity rebounds (GDP, employment)

credit begins to grow

rapid growth of profits

low inventories, sales improving

stimulative policy

106
Q

What are the characteristics during the mid-phase of an expansion?

A

Growth peaking

Strong credit growth

Profit growth peaks

Neutral policy

Inventories and sales grow; equilibrium reached

107
Q

What are the characteristics of a late cycle expansion?

A

Growth is moderating

Credit tightens

Earnings are under pressure

Policy is contractionary

Inventories grow, sales growth declines

108
Q

What are characteristics of a contraction?

A

Falling activity

Credit dries up

Profits decline

Policy eases

Inventories and sales fall

Unemployment rates rise

109
Q

Leading indicators

A

Yield curve

S&P 500

new private housing starts

money supply (M2) growth rate

consumer confidence

Manufacturers’ new orders

average weekly hours of production workers (manufacturing)

initial claims for unemployment

percentage of companies reporting slower deliveries

new orders of non-defense capital goods

110
Q

Lagging indicators

A

average duration of unemployment

CPI

commercial and industrial loans outstanding

ratio of consumer installment credit outstanding to personal income

ratio of trade inventories to sales

change in index of labor cost per unit of output

average prime rate

111
Q

Coincident indicators

A

employees on non-agricultural payroll

personal income minus transfer payments

industrial production / average weekly hours worked in manufacturing

turnover

manufacturing and trade sales

112
Q

Define fiscal policy

A

Interventions by the federal government / Congress to influence the economy, such as:

taxation (increase: reduces disposable income; decrease: increases disposable income)

Government spending (increase to promote growth/recovery; decrease = tightening policy)

debt management

113
Q

Deficit spending

A

Government expenditures > revenues generated

Government will sell Treasuries

Treasuries will compete with other issuers of debt securities and drive values lower

114
Q

Define monetary policy

A

Federal Reserve Bank (Fed) controls monetary policy to control money supply, influence lending rates, slow down or stimulate economy.

115
Q

Fed mandates

A

sustainable long term growth

stable prices

full employment

116
Q

Fed monetary policy tools

A

Discount rate: rate at which banks borrow from government

Reserve requirement: percentage of deposits that must be held on reserve

Open market activities: Fed buys and sells securities in the open market

117
Q

Contractionary Monetary Policy Action

A

increase discount rate (increases cost of borrowing)

increase reserve requirements

sell securities to the market

118
Q

Standards of Conduct: Prohibition on Circumvention

A

No third parties can be used to go around and violate the guidelines provided in the Code of Ethics & Standard of Conduct.

119
Q

Standards of Conduct

A

A. Duties Owed to Clients (Focus Area!)

B. Financial Planning and Application of the Practice Standards for the Financial Planning Process

C. Practice Standards for the Financial Planning Process (Focus Area!)

D. Duties Owed to Firms and Subordinates

E. Duties Owed to CFP Board

F. Prohibition on Circumvention

120
Q

Conduct deemed unacceptable

A
  • felony conviction for theft, embezzlement, or other financially based crimes
  • felony conviction for tax fraud or other tax related crimes
  • revocation of a financial professional license unless administrative in nature
  • felony conviction for any degree of murder or rape
  • felony conviction for any other violent crime within last 5 years
121
Q

Conduct presumed unacceptable

A
  • 2 or more personal or business bankruptcies
  • revocation of a non-financial, professional license unless administrative in nature
  • suspension of a financial, professional license unless administrative in nature
  • felony conviction for non-violent crimes within last 5 years (including perjury)
  • felony conviction for violent crimes other than murder or rape more than 5 years ago
122
Q

What authority does the CFP Board Counsel have?

A

To investigate and file a complaint against a respondent for alleged violations against the Code of Ethics and Standards of Conduct

123
Q

What authority does the DEC have?

A

issue a final order that finds facts, determines whether a violation has occurred, and imposes discipline in the form of sanction where appropriate

DEC reviews Hearing Panel’s recommendation and approve or remand to Hearing Panel for further consideration

within 45 calendar days of the hearing DEC must mail by certified mail to respondent a final order containing DEC’s findings of fact and sanction imposed if any

124
Q

What authority does the Hearing Panel have?

A

Conduct a hearing

(must consist of at least 3 persons, mostly CFP professionals and a majority must be DEC members - DEC member must serve as chair)

125
Q

What does the CFP Board Designated Counsel do?

A

outside attorney who represents the case to the Hearing Panel as an advocate for the CFP Board

126
Q

What does the CFP Board Advisory Counsel do?

A

attorney who acts in advisory capacity in providing advice on the Standards of Professional Conduct and hearing procedures to the Hearing Panel and the DEC during ratification meeting

127
Q

When will the DEC issue an Interim Suspension?

A

When CFP Board receives evidence that professional has engaged in conduct that poses an immediate threat to the public and the gravity of conduct significantly impinges upon stature and reputation of the marks.

Professional must show cause in form of a written response why he/she should continue to have the right to use the marks while case is pending.

128
Q

Automatic issuance of interim suspension

A

failure to respond to show cause within 20 calendar days

felony conviction for any crime

misdemeanor conviction for fraud, misrepresentation or crimes of moral turpitude

revocation of financial professional license unless administrative

Filing certificate with DEC demonstrating that criminal convictions or professional discipline has been reversed will lead to automatic reinstatement but has no effect on any proceedings pending against the professional

129
Q

What happens if CFP professional does not send written response within 30 calendar days to notice of investigation?

A

CFP Board Counsel gives 2nd request for information via certified mail, and professional has 20 calendar days to respond

Failure to provide requested information gives rise to adverse inference

130
Q

Does the CFP Board Counsel have the right to reopen an investigation after dismissal of the case?

A

Yes

131
Q

How many days to respond to being served a Complaint by the CFP Board Counsel?

A

20 calendar days from the date of service of the complaint to respondent

Failure to respond or failure to pay the hearing cost assessed by CFP Board lead to admission of the allegations set forth in the complaint, and CFP Board issues Administrative Order of Revocation

132
Q

How many days to provide documents, witnesses, and counsel for consideration to the DEC for an investigation?

A

No evidence may be accepted less than 45 calendar days prior the scheduled hearing

Documentation must not exceed 100 pages

witnesses shall be identified no later than 45 calendar days prior to the hearing

Respondent’s counsel must be identified to CFP Board no later than 45 calendar days prior to hearing

133
Q

How many calendar days to submit an appeal to CFP Board’s Appeals Committee?

A

30 calendar days after notice of order

134
Q

Duty to report criminal conviction or profession discipline applies in which cases?

A
  1. conviction of a crime other than minor traffic offenses
  2. being subject of professional discipline
  3. upon notification of a change to a matter previously disclosed under 1 & 2 to CFP Board
135
Q

What action is required after revocation suspension?

A

Respondent must provide evidence within 30 days of receiving an order of suspension that he/she ceased all use of the marks by providing copies of documents requested by DEC.

136
Q

Reinstatement after suspension

A

Suspension for one year or less: automatic reinstatement

Suspension for longer than one year: respondent must file request for reinstatement within 30 calendar days of expiration of suspension (petition DEC for a reinstatement hearing within 6 months of end of the suspension) - failure to do so leads to permanent bar from using CFP certification

137
Q

Ways to prove rehabilitation to DEC after suspension

A

maintained competence and learning in the are of financial planning

respondent’s conduct has been exemplary and beyond reproach since issuance of DEC’s order

respondent made restitution or settled all claims from persons injured or harmed by misconduct

documentary evidence of all business activities conducted during suspension period

138
Q

Balance Sheet / Statement of Financial Position

A

financial position at a point in time

items on personal balance sheets are reported at FMV

items on corporate balance sheets are reported at the lower of cost or FMV

every asset on balance sheet = source for risk management

assets on left side, top to border in order of liquidity

liabilities and net worth on right side: ST, LT, net worth

total liabilities = ST + LT liabilities

balance sheet equation: Assets = Liabilities + Net Worth

measures assets, liabilities, shareholder’s equity

starts with cash balance and ends with retained earnings

139
Q

Statement of Cash Flow

A

cash inflow and outflows during reporting period - cash movements (increases and decreases) over a period of time

assists in reconciling ending cash from prior year with ending cash during reported period

breaks cash into sources and uses

details where cash comes from (earnings, investments, loans, gifts)

starts with net income and ends with cash balance

140
Q

4 basic types of financial ratios

A

Liquidity ratios: determine ability to meet ST obligations

Activity ratios: determine relative efficiency of financial management

Profitability ratios: measure relative profitability

Debt ratios: determine ability to meet LT obligations

141
Q

Liquidity ratios

A

Current Ratio (Liquid Ratio): Current Assets / Current Liabilities

Quick Ratio: (Current Assets - Inventories) / Current Liabilities

Working Capital: Current Assets - Current Liabilities

142
Q

Activity Ratios

A

Inventory Turnover: Cost of Goods Sold / Average Inventory

Days to Sell Inventory: 365 / Inventory Turnover

Accts Receivable Turnover: Sales (credit) / Avg. Accts. Rec.

Receivable Collection Period: 365 / Accts. Rec. Turnover

143
Q

Profitability Ratios

A

Gross Profit Margin: Gross Profit / Sales (or Net Earnings / Total Sales)

Operating Profit Margin: Operating Income / Revenue

Return on Assets: EAT (Earnings after tax) / Total Assets

Return on Equity: EAT / Equity

Price to Earnings Ratio: Market Cap / Net Earnings

144
Q

Debt Ratios

A

Debt to Equity: Total LT debt / Equity

Times Interest Earned: EBIT / Interest Expense

Debt Ratio: Total Debt / Total Assets

145
Q

Emergency Fund Ratio

A

Monetary Assets / Monthly Living Expenses

(Target = 3-6+ months - depending on HH earners; single: 6 mo; 2 earners: 3-6 mo)

146
Q

Emergency Fund Acceptable Investments

A

Cash

Checking and savings account

Money market mutual funds

T-Bills

CDs

Cash value life insurance

Lines of credit

Home equity loans

Assets must be liquid and marketable!

Exam tip: client with children but no will establishing guardianship - will has priority; disability insurance for single earner supersedes emergency fund!

147
Q

FDIC Insurance

A

Single accounts

Joint accounts (2 or more persons)

Revocable Trust accounts

Irrevocable Trust accounts

Certain Retirement accounts

Corporation, Partnership, and Unincorporated Association accounts

Employee Benefit Plan accounts

Government accounts

$250k per person, per ownership category, per bank (not per branch)

RTFQ: is question testing total coverage or individual coverage?

148
Q

Which rate do banks charge their most creditworthy customers?

A

Prime rate

149
Q

Debt resolution rule

A

Repay all outstanding debt every 4 years

150
Q

Chapter 13 bankruptcy

A

requires debtor and attorney to draw up repayment plan based on debtor’s income/wages/benefit/payments/rental income

151
Q

Chapter 7 bankruptcy

A

liquidation procedure: eliminates consumer debt by having a trustee sell some of the debtor’s personal property to repay their creditors (unsecured debt is eliminated, nonexempt assets are sold to pay off secured debt)

Eligibility: income must be under a certain amount

most debts are discharged after 115 days from the day of filing for Chapter 7

debts that cannot be erased: income taxes less than 3 years past due, alimony and child support, student loans, secured debts; furniture and personal belongings, cars and house are usually kept

cannot stop foreclosure but delay it

usually takes 4-6 months

stays on credit reports for 10 years

152
Q

Chapter 11 bankruptcy

A

generally best for businesses but also accommodates those who exceed Chapter 13 debt limitations or lack regular income

reorganize debts to pay them more in line with income: unsecured debt is reorganized and paid back over time, secured debt is restructured and paid back over time

Mortgage debt is frequently rewritten under Chapter 11 to give smaller payments, and there is often a “breathing spell” provided in Chapter 11 so that payments don’t have to be made for many months.

Can stop foreclosure

usually takes 6 mo - 2 yrs

Stays on credit reports for 10 years

153
Q

Chapter 12 Bankruptcy

A

permits restructuring of farm, reorganization of debt

like Chapter 13, but for farmers only, and with a higher amount of debt allowed.

very strict eligibility requirements: available only to family farmers with regular annual income

primary advantage: ability to reorganize debt without the complex procedures involved in a Chapter 11.

154
Q

Chapter 13 Bankruptcy

A

wage earner plan: allows debtors to keep personal assets, but obligated to repay unsecured and secured debt in full over a period

Eligibility: no more than $419,275 in unsecured debt (credit cards, personal loans); no more than $1,257,850 in secured debt (incl. mortgages and car loans)

good chapter to use if behind on house payments: instantly stops foreclosure

good for paying state and federal taxes without having to pay interest

debtor will pay more every month to make payments on overdue debt along with current monthly payments

one payment each month to the court appointed trustee, who pays all creditors according to the plan. Chapter 13 can also protect people who co-signed with you

usually takes 3-5 yrs

stays on credit reports for 7 years

155
Q

Consumer Credit Protection Laws

A

Consumer Credit Protection Act: right to know costs and terms of credit

Equal Credit Opportunity Act: right to fair opportunity to obtain credit

Fair Credit Reporting Act: right to know what is in your credit file

Fair Credit Billing Act: right to have billing mistakes resolved

Fair Debt Collection Practices Act: right to be protected from collection agencies

Consumer Financial Protection Bureau: implements and enforces Federal consumer financial law and ensures that markets for consumer financial products are fair, transparent, and competitive

156
Q

Credit Score

A

FICO scores estimate level of future credit risk, how likely a person is to repay a loan on time

comprised of:

  1. payment history - 35%
  2. amounts owed - 30%
  3. length of credit history - 15%
  4. new credit - 10%
  5. credit mix - 10%

<580 Poor (well below average, risky borrower)

580-669 Fair (below average, many lenders will approve loans)

670-739 Good (near/slightly above average, most lenders consider this a good score)

740-799 Very good (above average, very dependable borrower)

800+ Exceptional (well above average, exceptional borrower)

Missed payment: 7 years until removed from credit report!

157
Q

Mortgage Financing - rates

A

Fixed rate: when rates are low and/or home owner is going to stay in the home for a long period of time

Variable rate: when rates are high (expected to go down) or homeowner is not planning on keeping the home long-term

158
Q

Mortgage origination points

A

borrowers can pay origination points to lower rate or improve terms otherwise

points = percentage of mortgage borrowed, can be added to mortgage

159
Q

Mortgage conventional vs. jumbo

A

Conventional mortgage: below $647,200

Jumbo mortgage: above $647,200 - higher interest rate

160
Q

When do you have to pay Private Mortgage Insurance?

A

Down payment < 20%

PMI can be eliminated after homeowner reaches 20% equity and makes 2 years of on-time payments

161
Q

Balloon mortgage

A

Large portion of principal is repaid in a single payment at the end of the loan period

162
Q

Government mortgage programs are available through:

A

Federal Housing Administration

Veterans Administration

United States Department of Agriculture

163
Q

Mortgage Financing Compared

A

Down Payment Terms Insurance Fixed or Adjustable Funding fees

Conv. 3-20% 15-30yrs DP<20% Either None

VA 0 15-30yrs None Either 2.3-3.6% waived

disab. vet.

FHA 3.5-20% 15-30yrs 11yrs of loan Either None

USDA 0 15-30yrs None Fixed only 1% upfront, 0.35%/yr

164
Q

Education Funding Options - 529 Plan vs. Coverdell ESA

A

Contributions to both a 529 and a Coverdell ESA can be made in the same year for the same beneficiary

529 Plan:

  • no income restrictions for contributions
  • distributions tax free if used for qualified education expenses
  • non-deductible contributions (some states give state income tax deduction, some states give tax credit)
  • contributions = completed gifts (annual exclusion $16,000 or up to $80,000 with 5-year election)
  • maximum investment is established by program, many > $400,000 per beneficiary
  • can change beneficiary to other family member
  • no time/age restrictions
  • for federal aid purposes counted as parental asset if owner is parent or dependent student
  • use for nonqualifying expenses: earnings withdrawn subject to federal tax and 10% penalty
  • Qualified expenses: tuition, fees, books, computers & related equipment, supplies, special needs, room & board for maximum half-time students, up to $10,000 private school tuition, up to $10,000 student loan payment
165
Q

Education Funding Options - Coverdell ESA

A
  • non-deductible contributions, withdrawn earnings excluded from income for qualified higher education expenses and qualified K-12 expenses
  • contribution = completed gift, annual exclusion $16,000
  • value removed from donor’s gross estate
  • maximum contribution: $2000 per beneficiary per year from all sources
  • beneficiary can be changed to other family member
  • contributions are allowed until beneficiary reaches age 18, must use account by age 30
  • contribution phase-out between $190-220K (MFJ) or $95-110K (single)
  • counted as parental asset for federal aid purposes
  • if used for non-qualifying expenses, earnings subject to federal tax and 10% penalty
  • Qualified expenses: tuition, fees, books, computers & related equipment, supplies, special needs, room & board for maximum half-time students, up to $10,000 private school tuition, up to $10,000 student loan payment
166
Q

Education Funding Options - UGMA/UTMA

A
  • earnings and gains taxed to minor; first $1150 of unearned income is tax exempt; unearned income over $2,300 for certain children under 24 is taxed at parents highest marginal rate
  • transfers = completed gift (annual exclusion applies)
  • value removed from donor’s estate unless donor remains custodian
  • no maximum limit
  • funds can be used for any purpose
  • no change of beneficiary possible: irrevocable gift to child
  • custodianship terminates when minor reaches age of majority (18 or 21)
  • no income restrictions
  • for federal aid purposes counted as student’s asset
  • investments as permitted under state lawas
  • funds must be used for benefit of minor
167
Q

Education Funding Options - Series EE and Series I Bonds

A
  • tax deferred for federal, tax free for state; certain post-1989 Series EE and I bonds may be redeemed federal tax free for qualified higher education expenses
  • NO gift - qualifying bond must be owned by the parent!
  • value included in owner’s gross estate
  • maximum investment: Series EE: $10,000/yr, per owner Series I: $10,000 (digital); $5000 (paper) per year, per owner
  • qualified expenses: tuition and fees
  • bond purchaser must be at least 24 years old at time of bond issuance
  • income phaseout: $128,650-$158,650 (MFJ), $85,800-$100,800 (single)
  • for federal aid purposes asset of bond owner
  • investments: interest-earning bond backed by full faith and credit of US Government
  • no penalty for use for nonqualifying expenses, interest on redeemed bonds included in federal income

Calculation of tax free interest:

Example: receipt of $3000 interest, $6000 principal, tuition and fees are $7650

3000 x (7650/9000) = $2550 = tax free interest; $3000 - $2550 = $450 taxable interest

168
Q

Education Funding Options - Alternate Sources

A
  • Roth IRA (tax free withdrawals at 59 ½ and after 5 years! - not counted as asset for federal aid, taxable portion of withdrawal prior to 59 ½ subject to 10% penalty - waived if used for qualified education expenses; value included in owner’s gross estate
  • Traditional IRA- not counted as asset for federal aid, taxable portion of withdrawal prior to 59 ½ subject to 10% penalty - waived if used for qualified education expenses; value included in owner’s gross estate
  • Mutual funds: earnings and gains taxed in year realized; direct payments of tuition not considered gifts; no restrictions for non-qualified education expenses
169
Q

Financial Aid Alternatives

A
  • Home Equity Loan
  • Life Insurance Cash Values (low coast loan)
  • Qualified Plans (may allow to borrow for educational expenses)
  • Defer Admission (some colleges allow students to defer admission while students work and live at home)
  • Community College (2-year program, then transfer to 4-year college)
170
Q

529 ABLE Plans

A

for eligible individual with disability or who is blind, and who is designated beneficiary and owner of the account (provides for qualified disability expenses)

  • ABLE account may be established if blindness or disability occurred before age 26; condition must be expected to last at least 12 consecutive months; must be receiving benefits under SSI and/or SSDI or be able to obtain disability certification from a doctor
  • only ONE ABLE account per beneficiary
  • earnings in an ABLE account are not taxed unless a distribution exceeds a designated beneficiary’s qualified disability expenses
  • Qualified expenses: any expenses incurred relating to blindness or disability, including expenses for maintaining or improving health, independence, or quality of life (no restrictions)
  • total annual contributions (including rolled from a 529 account) are limited to annual gift tax exclusion
  • Contributions are not tax deductible and must be in cash or cash equivalents
  • distributions may be used for any qualified expense
  • rollovers allowed from a section 529 tuition account or a section 529 ABLE account
  • upon death of beneficiary, ABLE account balance is included in his/her gross estate; amounts paid for outstanding qualified expenses and to state for claims under Medicaid program may be deductible for federal estate tax purposes
  • maximum investment = subject to individual state and their limit for education-based 529 savings accounts (many > $400,000). Only the first $100,000 is exempt from the SSI $2000 limit.
  • beneficiary cannot be changed
  • for financial aid purposes, account balances ≤ $100,000 are disregarded; would also not be reported on sibling’s FAFSA
  • use for non-qualifying expenses will result in taxation and penalties and could affect the beneficiary’s eligibility for public benefits
171
Q

Types of Student Aid

A

Grants:

  • Pell Grants: undergraduates, exceptional financial need, not earned bachelor’s, graduate, or professional degree
  • Federal Supplemental Educational Opportunity Grant (FSEOG): undergraduates, exceptional financial need (lowest EFC), prioritizes students who receive Pell Grants, does not need to be paid back

Scholarships: tax-free if full- or part-time student for a degree at an accredited post-secondary institution

Loans:

Federal Direct / Stafford Loans

(a) Direct Subsidized Loans (need-based, undergrad only): help students with financial needs; US Department of Ed pays interest on a Direct Subsidized Loan

  • while in school at least half-time
  • for first 6 months after you leave school (“grace period”)
  • during “deferment”

(b) Direct Unsubsidized Loans (need-based, undergrad, grad, & professional student)

  • no requirement to demonstrate financial need
  • students pay interest on a Direct Unsubsidized Loan during all periods

Direct PLUS / PLUS Loans:

  • non-need based, undergrad, grad, & professional student (“Parent PLUS loan when made to parent; grad PLUS loan when made to graduate or professional student)
  • US Department of Ed is lender
  • CANNOT have adverse credit history
  • maximum PLUS loan: cost of attendance - financial aid received

Work-Study:

  • funded by federal, state, and/or institutional allocations; employers must match federal and state monies
  • School’s office of financial aid administers work-study programs
172
Q

Financial Aid and EFC

A

Financial Need Formula:

  • cost of attendance - EFC = Financial Need

EFC = calculated based on financial resources that students and parents own:

income (parents & students) + assets (parents & students)

Income:

  • parents: AGI - allowance for taxes + living expenses (22% to 47%)
  • students: amount over protected amount ($7040) (50%)

Assets:

  • Cash, savings, checking, MMKT funds, CDs
  • Investments (mutual funds, stocks, stock options, bonds, commodities)
  • Rental real estate equity, businesses, investment farms, trust funds
  • College savings plans, CESAs, 529s

Retirement assets and home equity do NOT count towards EFC

Accounts held/owned by:

  • parents or in dependent child’s name = parent assets (5.64%) - distributions no impact to aid
  • independent students / spouses = student assets (20%)
  • others (aunts, grandparents) = excluded - distributions impact aid up to 50%
173
Q

Education Tax Credits (not available for MFS!)

A

AOTC

  • up to $2,500 per eligible student (100% of first $2000 + 25% of next $2000)
  • 40% of credit is refundable (i.e., up to $1,000)
  • limit MAGI (MFJ): $180,000; (single, HH, qual. wid.) $90,000
  • cannot claim if someone else can claim you as dependent on their return
  • cannot be non-resident alien
  • first 4 years of post-secondary education
  • 4 tax years per eligible student
  • must be pursuing degree or recognized education credential
  • at least half-time for at least one academic period
  • NO felony drug convictions
  • qualified expenses: tuition, enrollment fees, materials needed - does NOT cover ROOM & BOARD!!!!

LLC

  • Up to $2,000 credit per return (20% of up to $10,000 in expenses)
  • not refundable
  • Limit on MAGI (MFJ): $180,000; (single, HH, qual. wid.) $90,000
  • cannot claim benefit if someone else can claim you as dependent on their return
  • cannot be non-resident alien
  • all years of post-secondary education and for courses to acquire/improve job skills
  • benefit available unlimited number of tax years
  • no need to pursue degree or other recognized education credential
  • available for one or more courses
  • felony drug conviction restriction does not apply
  • qualified expenses: tuition and enrollment fees only
  1. Start with student’s level education/year of enrollment to determine which credit can be used
  2. Look at types of expenses covered to ensure they are qualifying costs
  3. Observe filing status and MAGI
174
Q

Behavioral Finance: Affluenza

A

affects young people from affluent households

Outcomes include guilt, low motivation, a sense of entitlement, and isolation.

175
Q

Behavioral Finance: Endowment Effect

A

Individuals value something that they already own more than something they don’t yet own. Sometimes referred to as divestiture aversion.

Perceived greater value occurs only because the individual possesses the object in question.

Investors tend to hold certain assets because of familiarity and comfort, even if the assets are inappropriate or become unprofitable.

Endowment effect = example of emotional bias

176
Q

Behavioral Finance: Enabling Behavior

A

one person shields another person or persons from experiencing the impact of behavioral outcomes

177
Q

Joaquin is the owner of a 529 account for his daughter, Jolene, a junior at Calisto Tech. Over the years, Joaquin made $50,000 of contributions to the account. Today, the balance is $92,500. Shortly after the academic year started, Joaquin used $25,000 from the 529 account to purchase a new car which he and Jolene use as needed. Joaquin is in the 32% marginal tax bracket.

Calculate the tax and penalty due on the $25,000 withdrawal.

A

Transportation is not a qualified educational expense, therefore the portion of account gains on the $25,000 distribution is considered ordinary income. In addition, a 10% penalty is applied to the gain portion. Joaquin is in the 32% marginal tax bracket.

The taxation & penalty is calculated as follows:

Gains: $92,500 - $50,000 = $42,500

Percentage of Gains in Balance: $42,500 ÷ $92,500 = 0.4595

Portion of Gains in Distribution: $25,000 × 0.4595 = $11,487.50

Tax Due on Gains: $11,487.50 × 0.32 = $3,676

10% Penalty on Gains: $11,487.50 × 0.10 = $1,148.75

Tax Due + Penalty: $3,676 + $1,148.75 = $4,824.75

178
Q

When calculating the includible student and parent assets and income for the Expected Family Contribution (EFC), both parents and students are offered

  1. Income Protection Allowances
  2. Asset Protection Allowances

I only

II only

Both I and II

Neither I nor II

A

Both parents and students are offered an Income Protection Allowance as they determine the EFC on the FAFSA form.

The Asset Protection Allowance is only available to parents. It allows parents to exclude certain portions of their assets from consideration when calculating the Expected Family Contribution (EFC).

179
Q

Jonah and Janelle are in the process of compiling information for the completion of their daughter Vivian’s FAFSA form. Vivian will be attending Upstate University in the coming academic year. Tuition and fees are $55,000. The following income and assets have been documented:

$100,000Equity in primary residence$15,000Brokerage account (Jonah & Janelle)$80,000AGI [after allowances, over protection amount] (Jonah & Janelle)$50,000529 in Vivian’s name (Jonah & Janelle)$250,000IRA (Jonah)$10,000Earned income (Vivian)$7,500Joint checking account (Jonah & Janelle)$5,000UTMA (Vivian)

Assume the rate of income inclusion for the parents is 24% & the maximum asset inclusion rate applies for the parents. Assume $0 in asset protection for the parents. Calculate the financial need using the EFC formula.

A

Equity in a primary residence and retirement assets are non-includible in the EFC + Financial Need calculations. Thus, the home equity and IRA are omitted.

  • $80,000 AGI → Parent Income (24% rate) = $80,000 x 0.24 = $19,200
  • $7,500 [Joint Checking] → Parent Asset (5.64%) = $7,500 x 0.0564 = $423
  • $15,000 [Brokerage Acct.] → Parent Asset (5.64%) = $15,000 x 0.0564 = $846
  • $50,000 [529] → Parent Asset (5.64%) = $50,000 x 0.0564 = $2,820
  • $10,000 [Income] → Student Income (50% above protected amt.) = $10,000 - $7,040 = $2,960 x 0.50 = $1,480
  • $5,000 [UTMA] → Student Asset (20%) = $1,000

EFC = $19,200 + $423 + $846 + $2,820 + $1,480 + $1,000 = $25,769

Cost of Attendance (COA) = $55,000

COA – EFC = Financial Need → $55,000 - $25,769 = $29,231

180
Q

On September 15th, 2021, Tucker purchased a speedboat for $95,000. On October 1st, 2022, he gifted the speed boat to his cousin Pierre. At the time of the gift, the speedboat was valued at $150,000. After utilizing the annual exclusion amount, Tucker paid $4,250 in gift taxes.

Select Claude’s basis in the speedboat.

A

To calculate the adjusted basis to the donee, first calculate the gift tax adjustment:

Step 1: Calculate the ‘Appreciation Factor’ [(FMV – Basis) ÷ (FMV – Annual Exclusion)]

[{$150,000 - $95,000) ÷ ($150,000 - $16,000)] = [$55,000 ÷ $134,000] = 0.4104

Step 2: Multiply the ‘Appreciation Factor’ by the Gift Tax Paid

0.4104 x $4,250 = $1,744

Next, add the gift tax adjustment to the original basis to find the adjusted basis.

$1,744 + $95,000 = $96,744

181
Q

Which bias leads investors to sell winners too quickly and hold on to losers for too long?

A

The disposition effect causes investors to sell winners (confirms correct choice) and to avoid selling losers (confirms incorrect choice).

CFP (6 decks)

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