Mnemonic Deck

Question 1

How is an investment adviser defined (for purposes of the Investment Advisors Act of 1940)?

Answer 1

“an advisor knows his ABC’s!” A - Advice (providing advice on securities) B - Business (In the business) C - Compensation (for compensation)

Question 2

EXCEPTIONS to Registration with the SEC?

Answer 2

TABLEs are incidental! T - Teachers (advice solely incidental) A - Accountants (advice solely incidental) B - Brokers (broker/dealter, advice solely incidental) L - Lawyers (advice solely incidental) E - Engineers (advice solely incidental)

Question 3

EXEMPTIONS from SEC Registration?

Answer 3

“VIPs are SaFE from exemptions” V - Venture Capital I - Insurance Companies P - Private funds of < $150M S - home State F - Foreign advisors E - secs not on a national Exchange

Question 4

What is the definition of an accredited investor?

Answer 4

“to be an accredited investor you must meet the 1,2,3,4 test!” 1 - $1M ($1M net worth, reassessed every 4 years) 2 - $200k (if single, make $200k per year on avg) 3 - $300k (if married, make $300k per year on avg) 4 - reassessed every 4 years

Question 5

What are the requisites for an Insurable Risk?

Answer 5

“Insurable Risks are CHAD” C - not Catastrophic H - Homogeneneous exposure A - Accendital D - Determinable

Question 6

What are the elements of a valid contract?

Answer 6

“A legal contract requires COALL!” C - Competent parties O - Offer A - Acceptance L - Legal consideration L - Lawful purpose

Question 7

What are the dividend options for a Whole life participating policy?

Answer 7

“dividends are CRAP-O” C - Cash option R - Reduce premiums A - Accumulate at interest P - Paid-up additional insurance O - Term (one-year) AKA the 5th option on CPA exam

Question 8

Components of an Investment Policy Statement

Answer 8

“The IPS establishes RR TTLLU”

Objectives:

Risk Tolerance - important so universe of investment alternatives can be narrowed

Return Requirements - can be specific to a goal

Constraints:

Taxes - taxable, tax-deferred or tax-free account

Timeline (horizon) - ties to risk tolerance

Liquidity - ties to time horizon

Legal - if assets held in a custodial account or trust

Unique Circumstances - to the client

Question 9

What is the mnemonic for Systematic Risk?

Answer 9

PRIME

• Purchasing Power Risk*
• Reinvestment Rate Risk*
• Interest Rate Risk*
• Market Risk
• Exchange Rate Risk

*Most likely to be tested

Question 10

What is the mnemonic for Unsystematic Risk?

Answer 10

ABCDEFG

• Accounting Risk
  
  • Audit firm too closely tied to company (Arthur Anderson/Enron)
• Business Risk**
  
  • inherent to operating in a particular industry
• Country Risk**
  
  • Doing business in a particular country
• Default Risk**
  
  • defaulting on debt payments
• Executive Risk
  
  • moral and ethical character of company management
• Financial Risk**
  
  • Financial leverage deployed by firm, ratio of debt vs. equity
• Government/Regulation Risk**
  
  • Tariffs/Restrictions placed on firm/industry affecting company’s ability to compete

**MOST LIKELY TO BE TESTED

Question 11

What is the Exam Tip for the yield ladder or order of yields for a bond selling at a discount?

Answer 11

“When shopping, if you see a discount “Call Mom’s Cell Now”

Yield to Call

Yield to Maturity

Current Yield

Nominal Yield

Question 12

What is the mnemonic for calculating gain/loss on an option position?

Answer 12

STOPS

St: Stock gain or loss - if you own the underlying stock

O: Options gain or loss

P: Premium paid or received

S: Shares controlled or owned

Examples on p.123 of blue IP book

Question 13

What is not a Capital Asset, as defined by Section 1221(a) of the IRC?

Answer 13

A2:

Accounts and notes receivable

Copyrights and creative works (if held by the creator of such works)

Inventory

Depreciable property used in a trade or business

EXAM TIP: “All assets are capital assets except ACID