Olivers Flashcards
The latest impact of the baby-boomer generation on the financial industry is the:
Shift to a wealth advisory approach
The changing needs of this large segment of the population must be considered when looking at financial planning and wealth management. Baby-boomers are looking for advice when making decisions about their assets and retirement.
FATCA was enacted by the ______ and FATCA applies to ___________.
USA
All countries
Wealth management focuses on all of the following, except:
A. A deeper connection between advisor and client
B. Creating customized plans for clients
C. Offering a wide array of products and services
D. The needs of high-net-worth investors
D. The needs of high-net-worth investors
Rationale :
Wealth management has been expanded to include a broader client base, a larger variety of products, and a deeper client-advisor relationship.
What demographic sector makes up the largest portion of the population, and also has the largest net worth?
The Baby Boomers
Rationale :
Aging baby boomers (born between 1946-65) are having a major effect on the financial services industry. They make up the largest part of the demographic in Canada with about 9.5 million people. Most high-net individuals (>$1,000,000 in assets) are over the age of 55.
Identify the standard that is not included in the Registrant Code of Ethics and Standard of Conduct.
A. Fiduciary duty
B. Confidentiality
C. Duty of care
D. Professionalism
A. Fiduciary duty
Rationale :
The Registrant Code of Ethics and Standards of Conduct:
1. Registrants must use proper care and exercise independent professional judgment.
2. Registrants must conduct themselves with trustworthiness and integrity, and act in an honest and fair manner in all dealings with the public, clients, employers, and colleagues.
3. Registrants must and should encourage others to conduct business in a professional manner that will reflect positively on themselves, their firms, and their profession, and should maintain and improve their professional knowledge and that of industry colleagues.
4. Registrants must act in accordance with the Securities Acts) of their province or provinces in which registration is held and the requirements of all Self-Regulatory Organizations (SROs) of which their firm is a member.
5. Registrants must hold client information in the strictest confidence.
Identify the factor that is not listed as one of the typical strengths of codes of ethics.
A. They act as social contracts.
B. They ensure ethical conduct.
C. They provide rules for firm accountability.
D. They aid in making decisions around ethical dilemmas.
B. They ensure ethical conduct.
Rationale :
The strengths of a code of ethics:
• Provides clear guidance for the actions of the group’s members;
• Forms a “social contract” for the workplace;
• Emphasizes accountability on part of individual or firm; and
• Signals that the company or industry is prepared to state values.
In which situation might a wealth manager have to resign?
If the principal asks the agent to act in a way that compromises the best interests of the principal
Rationale :
Fiduciary duty requires agents to act in the best interest of the principal or client. If the principal asks the agent to compromise this responsibility, the agent may no longer be able to continue the professional relationship.
Canadian Securities regulators prescribe a(n):
A. Rules-based approach to regulation
& B. Ethics-based approach to regulation
C. People-based approach to regulation
D. Balanced approach to rules based versus ethics based regulation
D. Balanced approach to rules based versus ethics based regulation
Rationale :
Current Canadian securities regulations prescribe a balanced approach to rules-based regulation versus ethics-based regulation.
The Proceeds of Crime (Money Laundering) and Terrorist Financing Act:
A. Is an IIROC policy
B. Is as part of the KYC process
C. Is federal legislation
D. Is a United Nations rule
C. Is federal legislation
Rationale :
Federal and International Requirements- The Proceeds of Crime (Money Laundering) and Terrorist Financing Act
(2002) requires that the client verify their identity and report any suspicious transactions in order to protect the financial system from being used to conceal the proceeds of crime or finance terrorism. Firms can verify identify by asking to see valid ID or by having a cheque from the client clear the Canadian Clearing System.
The required return on investments must take into account the client’s:
• Current and expected financial situation;
• Current and expected spending levels:
• Investable assets;
• Expected additions to the portfolio; and
• Taxes and inflation.
Liquidity is usually required for one of three reasons:
• Ongoing income needs;
• Emergencies: the recommended reserve for emergencies is three to six months’ living expenses; and
• Anticipated significant purchases
Liquidity is more about having funds available to meet current and short-term needs, rather than future ones.
It’s important to differentiate between immediate liquidity needs (like known, pending expenses) and future planning, which does not require immediate liquidity. Remember, liquidity is about now and the near future, not the distant future.
Methods to improve cash flow include:
Tenancy in Common
Land owned by two or more individuals. On death of one owner, the interest of that party passes to their heirs and not to the other owners) of the property.
If a borrower defaults on a Canada Mortgage and Housing Corporation (CMHC)-insured mortgage, the lender has the option to:
- retaining the property,
- calling on a personal covenant of the borrowers,
- claiming under the insurance policy.
When the purchaser of a home takes over the existing mortgage, the mortgage is said to be:
Assumable;
Occasionally it may be possible for a buyer to take over an existing mortgage from the seller if it is an assumable mortgage and they qualify. This may be a desirable feature if the mortgage has a low interest rate, which would improve the liquidity of the house if interest rates have increased.
CMHC is only available to ________________
approved lenders;
Authorized by the National Housing Act (NHA), CMHC (a Crown corporation owned by the federal government) provides insurance to lenders against principal and interest losses arising from mortgage default on various types of loans. A significant player in the multi-unit residential market, CMHC insures mortgage loans made for the purchase, repair, and conversion or refinancing of existing rental housing projects. CMHC insurance is available only to approved lenders
Mortgage-backed securities are associated with:
Life insurance companies;
Life insurance companies are involved in the residential mortgage market through mortgage-backed securities (MBS). MBS offer attractive yields and liquidity.
When a debtor defaults on a mortgage in Québec, there are two means of legal recourse.
Taking in Payment: The property is taken as full payment of the claim and the creditor becomes the owner of the property.
Sale by Judicial Authority: A formal process, whereby the court determines the terms of sale.
What is the result of semi-annual compounding of interest rates on mortgages?
The effective interest rate is slightly higher than the nominal rate;
Rationale:
Semi-Annual Compounding: This means that the interest portion of the mortgage can only be compounded semi-annually. For example, a 10% nominal rate is really a 5% rate compounded twice per year for an effective rate of 10.25%.
What mortgage feature allows the borrower to take an existing mortgage with them when moving to a new home?
Portable;
a CMHC mortgage may even be transferred to a new home and subject to an appraisal of the new property without having to pay a premium.
If the borrower defaults on a mortgage, which remedy is quick, does not involve the courts, and does not require that the lender take possession of the property?
Power of sale:
Once the borrower is notified, the lender is able to sell off the property without taking possession, usually by offering it for sale. Any excess is used to satisfy other creditors, and the balance paid to the borrower. This remedy is quick, does not involve the courts, and does not require taking title.
To ensure borrowers are able to meet payments if the economic situation changed; mortgages must be stress-tested. What parameters are used to test mortgage applicants of high-ratio mortgages before approving them?
All high-ratio borrowers are required to meet TDS and GDS ratios using the Bank of Canada’s 5-vear posted rate.
- All conventional borrowers are required to meet the TDS and GDS ratios using the higher of:
- The Bank of Canada **5-vear posted rate: and
- The lender’s contract rate + 2%**.
Under what jurisdiction does divorce fall?
Divorce is the exclusive jurisdiction of the federal government. The Divorce Act was most recently updated in 1985
What is the solemnization of marriage?
Legal marriage ceremony;
Every province has legislation dealing with the “solemnization of marriage” within that province, enabling provinces and territories to determine some of their own requirements to become legally married.
How is “separation of property regime” best defined?
The spouse who holds title on it owns property.
An __________ declares that a marriage was null and void for a reason existing at the time of the marriage and is regarded as having never occurred.
annulment
A ___________ marriage is based on facts discovered subsequent to marriage, but existing at the time of marriage.
Reasons for __________ marriages include impotence, non-consummation of the marriage, non-consent, noncompliance with statutory formalities
voidable
_______________ are used by couples who choose to cohabit and are not legally married.
Cohabitation agreements
What is the purpose of a judicial separation?
To allow a couple to separate without the permanency of divorce
- A decree of judicial separation is similar to that of a divorce as it relates to the division of property and responsibilities. Such decrees are not issued in Ontario.
- This decree does not affect the status of either party, and so provides for the possibility of reconciliation.
- Judicial separation allows for interim support and custody; disposition of property is best dealt with via divorce.
What asset is considered the most valuable and important asset to most families for most of their lives?
Human capital
defined as the present value of future earnings, net of taxes and deductions. Protecting and enhancing the value of human capital is the most important task of wealth preservation
What is the efficient frontier?
The set of portfolios with the greatest return for a given standard deviation (SD)
The efficient frontier is the level of highest expected return for the level of risk.
the difference between pure risk and speculative risk.
Speculative risk is an investment concept (loss or gain)
pure risk is an insurance concept. (no gain possibility)
The concept of diversification involves the strategic distribution of different assets or asset classes in a portfolio.
What does the concept of time diversification attempt to distribute?
Years
Time diversification is based on the premise that returns equal to the average over time, so that standard deviation and risk both fall as a function of time. As a result, it is safer to hold debt over the short term and equities over the long term
Positive correlation ____________ risk when it is between two assets, but ___________ risks when it is between an asset and a liability or expense.
increases
decreases
The two most valuable assets when evaluating an individual’s net worth are:
Human capital (1st) and the family home (2nd most valuable)
What is the fundamental weakness of every measure of risk?
Risk data is historical
What type of distribution is typical of equity returns on a major stock exchange?
Lognormal distribution is the concept that many financial assets cannot lose more than 100% of their value, whereas the upside is theoretically unlimited. Equity returns on major stock exchanges are usually lognormally distributed.
What is an alternative risk measure to standard deviation (SD)?
Shortfall risk
Shortfall risk is the risk of not meeting a goal. It may be related to standard deviation, but not necessarily. Shortfall risk is more comprehensive than standard deviation because it includes the risk of not reaching one’s objectives.
Shortfall risk can be expressed as the likelihood of failure of a financial or investment plan as a whole.
With what asset class is diversification most effective?
Common shares
On what type of risk, are the mortality and disability tables used by insurance companies, based?
Pure risk
Pure risk is quantified as the likelihood of loss in relation to value based on statistical research. Insurance companies use mortality and disability tables to measure the pure risk.
If a taxpayer is not able to claim a tax credit for the full amount of a charitable donation in the current year, the excess can be carried forward for the next:
5 years
Adam received a T3, T4, T4A, and T5 in the mail early in the year. When completing his income tax return, what slip will provide Adam with information on income paid to him from the income trust he holds in his non-registered investment account?
T3
T3 slip: which reports Trust Income Allocations and Designations (e.g., interest, dividends and capital gains) earned on investments held by the taxpayer. Unit holders of unincorporated mutual funds held outside a registered plan receive this slip.
When calculating taxable income, a taxpayer begins with their gross earned income and subtracts allowable deductions, special deductions, and then applies any allowable tax credits. Identify the expense, that if applicable, would be considered an allowable deduction.
Allowable deductions include:
RRSP and PP contributions,
professional and union dues,
childcare expenses,
moving expenses,
investment management fees,
deductible interest,
and oil and gas flow-through expenses.
Identify the easiest and most commonly used income-splitting strategy for spouses.
The higher-income spouse pays all family living expenses.
To save taxes, the higher-income spouse should pay all the family’s expenses and the lower-income spouse should invest as much of his or her income as possible. Investment income earned by the lower-paid spouse will be taxed at a lower rate than that earned by the higher-income spouse
Income splitting means diverting income from a family member in a high tax bracket to a family member in a lower tax bracket. Income splitting can legitimately be accomplished by:
- Paying a Salary (or Profits) to Family Members
- Paying Allowance to Working Child
- Transferring Money to Cover Interest on Investment Loans
- Swapping Assets with Family Member
- Splitting Investment Income among Family Members
- Generating Capital Gains in Hands of Children
- Giving Funds to Adult Child
- Using Inter Vivos / Living Trusts
- Making Corporate Loan to Related Student
- Transferring Assets before Leaving the Country
- Using a Loan or Transfer to a Spouse-Controlled Corporation
- Small Business Corporations
- Transferring Capital Losses to Spouse
- Transferring Personal Tax Credits
- Investing Inheritances in the Right Name
- Investing Government Benefits Paid to Child in Child’s Name
- Reporting the Spouse’s Dividends on the Client’s Tax Return
- Splitting Retirement Income
- Sharing CPP/QPP Income Between Spouses
Identify the taxable employee benefits.
- Part of the personal use of a company car
- A recreational or fitness club if the membership does not pertain to business
- Interest-free or low-interest loans to an employee when the interest paid by the employee within 30 days of year-end is greater than the prescribed interest rate for the year
- Costs related to financing a home in a new location and employee that is moving for the sake of work.
- Employer-paid premiums for group term life insurance.
- Disability income insurance benefits received by the employee in excess of his contributions are taxable as employment income
- Employer-paid premiums for group term life insurance are a taxable benefit.
Self-improvement courses paid by the employer on behalf of the employee
Joe can pass his canola farm to his grandson, Gary, on a tax-free basis, if:
Joe is farming on the property.
A tax-free rollover of a qualified farm property to a child or grandchild is allowed if the property was used for farming prior to the transfer by the taxpayer.
Amanda’s employer provides her with a car to visit clients on-site, which is a requirement of her job. Amanda’s employer owns the car, calculated the standby charge for her based on the kilometres she drove, and applied the appropriate reductions. The total came to $1,400 for the year. Select the statement that is true concerning how the $1,400 standby charge is treated for tax purposes.
Amanda is required to add $1,400 to her taxable income.
Rationale
A standby charge must be included in the employee’s income when an employer-owned car is provided for an employee’s personal use.
Select the statement that is true regarding defined-contribution plans.
The employer matches the contributions of the employee to the plan.
From what factor is a company’s value derived, according to Miller and Modigliani?
Cash flow
For what reason should a portfolio manager or advisor rebalance an asset mix?
The advisor’s risk tolerance changes
Identity the statement that is correct concerning taxation when an employer pays an employee’s long-term disability (LTD) premium.
The LTD benefits paid to the employee are taxable.
Spouses can apply to share their _____ retirement pension payments if both partners are at least _____ years old and each has applied for a pension.
CPP
60
What two accounting standards are considered acceptable for listed companies to use when preparing their financial statements?
Global Accepted Accounting Principles (GAAP) and International Financial Reporting Standards
Calculate the time-weighted return for the following portfolio.
8.47%
What amount of tax is applied when benefits are paid to a beneficiary of a Retirement Compensation
Arrangement (RCA)?
Marginal Tax Rate (MTR)
Identify the statement that is true regarding the secondary mortgage market.
NHA-insured mortgages trade near the level of government bond interest rates.
What type of account provides the highest level of functional integration for an individual account?
Unified managed account (UMA)
What additional guarantee do Guaranteed Minimum Withdrawal Benefit (GMWB) products offer that segregated funds do not?
Income guarantee
Valesquez is most interested in the earnings of the companies in which he holds shares. Select the statement that is true of Valesquez.
He is interested in growth stocks and he is interested in stocks with high price-to-book (P/B) ratios.
A taxpayer earning $50,000 a year donates $9,000 to a qualified charitable organization. Calculate her federal
tax credit.
Rationale:
Charitable donations entitle the taxpayer to a two-tier credit. The first $200 of donations provide a 15% federal tax credit and the balance provides 29%.
15% × $200 = 30
29% × $8,800 = 2,552
Total = $2,582
Which tvoe of asset allocation is the most important investment decision of the entire investment process?
Tactical
What is the difference between efficient diversification and naive diversification?
Efficient diversification focuses on selecting securities based on correlation, whereas naive diversification believes that the greater the number of any types of securities, the greater the diversitication.
What is the downcide of a low.turnover mutuel fund?
Deferred tax liability
Identify the statement that is true regarding Workers’ Compensation?
It covers work-related injuries onlv.
Gerald’s pre-retirement expenses are around $150,000 per year. What would his estimated retirement budget be?
Rationale:
70-80% of Gerald’s pre-retirement budget is $105,000-$120,000.
What is terminal funding?
Additional voluntary funding of an IPP at retirement
The Retained Earnings statement links the bottom line on the
_________ with the bottom line of the __________
at a specific point in time
Balance sheet
Income statement
In order to be eligible for the Lifetime Capital Gains Exemption (LCGE) upon the disposition of a Canadian Controlled Private Corporation (CCPC), the CCPC must have been held by the taxpayer or a relative to the taxpayer thru the ___
months immediately preceding disposition.
24
A blend-and-extend option is best in periods of _____
interest rates.
Low
Identify the statement that is true with regard to annuities.
A straight life annuity provides the largest amount of guaranteed income per dollar of premium paid.
Identify the appropriate investment goal.
To pay off the mortgage on the principal property within 10 years
An advisor calculates the Sharpe ratio for one of their clients’ equity allocations and determines that it is positive. Select the statement that correctly describes the meaning of a positive Sharpe ratio.
The client’s equity return was greater than the risk-free return
Martha has set a goal to have $50,000 saved up for a new car in five years. At an interest rate of 5% annually, what will Martha’s monthly payments need to be to achieve her goal?
Rationale
P/Y = 12;
N = 60 (5 x 12);
I= 5;
PV = 0;
FV = 50000.
Solve for PMT = -735.23.
What type of asset allocation adjusts the portfolio, either on a set regular basis or after a major change in the market?
Rebalancing
Sandra’s investment portfolio had a market value of $57,000 at the end of June this year and a market value of $88,000
at the end of December. What is the six-month return on Sandra’s portfolio?
54.39%
gpt explain - Three banks offer three different nominal rates on advertised savings accounts. Which bank offers the highest effective annual interest rate (EAR)?
gpt
A debt security has an expected return of 7.0%, and the return rate on T-bills is 3.5%. What is the risk premium for this security?
What is not a tax-planning opportunity of flow-through shares?
What is the name of the measurement that equates the end value of a portfolio, the beginning value, and all cash fows?
Performance appraisal involves:
The average return on a portfolio is 11%, with a standard deviation of 9%. T-bills have an average return of 2.5%.
The benchmark for this portfolio has a Sharpe ratio of 0.65. The portfolio:
Is outperforming the benchmark on a risk-adjusted basis
Performance benchmarks are typically:
A basis of comparison and portfolio index.
The portfolio report generally includes:
A good benchmark has the following characteristics:
What calculations are used to measure risk-adjusted return?
Sharpe ratio and alpha
What information is not required to calculate the holding-period return of a security or a portfolio?
The ___________ measures the excess average return per unit of total risk for a given time period.
Sharpe ratio
Dante’s portfolio returned 8% last year. The T-bill rate was 2%. Dante’s portfolio had a beta of 1.1. Calculate the Treynor ratio on Dante’s portfolio.
_________ represents the return that exceeds the risk taken to earn it.
Alpha
Three Major Hedge-Fund Categories
What category does not represent a relative-value hedge fund strategy?
Merger arbitrage
Identify the type of dynamic portfolio hedge.
Constant proportion portfolio insurance structure
Calculate the market model alpha for a hedge fund that has a market model beta of 1.25, and average return of 9%.
Assume the average return on the benchmark index is 7.5%.
-3.75%
What hedge-fund trading strategy invests simultaneously in long and short positions in companies involved in a merger or acquisition?
Risk arbitrage
Define ETF roll risk.
An ETF uses futures contracts to replicate the performance of the underlying index or reference asset.
What is a common characteristic of synthetic, leveraged and inverse ETFs?
The differences between a standard ETFs and a leveraged ETF structure include:
How are commodity-based ETFs created and redeemed?
Select the statement that is true regarding tax implications on the distribution of foreign income.
Nancy has a bond with embedded options in her portfolio. The bond’s yield has been dropping steadily. Identify the statement that is true concerning Nancy’s bond.
The lower the yield, the more likely it is that the bond will be called.
Bond A and Bond B are both three-year bonds with the same yield; however, Bond A has a coupon rate of 5% and Bond B has a coupon rate of 3.5%. Which bond is a more volatile investment?
Bond B
A two-year strip bond was purchased on October 12, 2020, for $92.25 to yield 7%. Calculate the interest on the bond for 2020.
$1.42
A four-year, 4%, semi-annual bond, yielding 6.5%, has Macaulay duration of 7.8. What is its modified duration?
A 7%, $1,000-face-value bond is purchased for $1,045.50. Calculate the current yield.
Calculate the taxable interest on a four-year strip bond that was purchased at $76.98 to yield 4%. Assume tha it was bought at the beginning of the tax year.
$3.08
What term is used to describe the deviation of the gross return of an index mutual fund relative to its index?
Tracking error
What is the minimum rating required the by Dominion Bond Rating Service (DBRS) for debt securities to be considered investment grade?
BBB (low)
Typical terms to maturity for Bankers’ Acceptances (BAs) are:
Stock ABC has a high price-to-book ratio and large market capitalization. What type of stock is ABC?
Large-cap growth
Identify the objective that technical analysis cannot fulfill.
To indicate causes for price fluctuations
Voting Privileges
A feature of holding common shares include voting privileges:
What is a benefit of a rebalancing strategy when the asset mix drifting away from the target mix?
