Part 2-Practice Test Questions Flashcards
The typical bank loan fund has debt instruments with an average maturity of ___.
5.3 years or 5 years according to p. 16 of textbook
What is a SWP?
a Systematic Withdrawal Plan
What are the tax consequences of a SWP?
shares sold after 1 year of ownership qualify for Long Term Capital Gains (LTCG) taxes
True or False:
Any gift made to a custodial account is revocable as long as the child is still a minor.
False https://www.investopedia.com/terms/c/custodialaccount.asp#:~:text=Gifts%20to%20a%20custodial%20account,when%20they%20come%20of%20age.
According to a table in the CFS readings, if a client withdraws 6% of his/her nest egg each year, and the portfolio earns 5% per year, the portfolio will have a zero balance after ___ years.
32 years I ALREADY screenshotted and complained about this question to IBF
Form 1099-B is associated with ___.
the sale of fund shares
Can an individual or couple carry a capital loss BACKWARD?
No, only forward
CEF shares are listed on ___.
They can also be traded in the ___.
securities exchanges.
over the counter (OTC) market
When allocating an older client’s portfolio, think of their Social Security payments as a/an ___.
fixed-rate annuity
When analyzing an investment, what variable is very likely to be the most predictable?
Fund fees … I think. Could not find this in the textbook, but online I found this: https://www.morningstar.co.uk/uk/news/149421/how-fund-fees-are-the-best-predictor-of-returns.aspx#:~:text=If%20you’ve%20been%20following,when%20they%20run%20the%20data.
The SEC requires fund prospectuses to show ___
before- and after-tax returns P. 193
Crosby bought some stock 360 days before his death. Uma bought some stock 3 days before her death. Victor bought some stock exactly 1 year before his death. The heir to Crosby, Uma, and Victor want to know if any of these inheritances qualify for possible long-term capital gains treatment if shares are sold 1 day after death (of Crosby, Uma, and/or Victor).
all 3 holding periods qualify for long-term capital gains treatment BECAUSE inherited property is automatically treated as “long term” for capital gains purposes. P. 201
The maximum tax bracket for earned income is ___.
taxpayer’s marginal bracket
There are ___ different types of investment companies.
4- ETFs, Open end funds, closed-end funds, and UITs P. 79
True or False:
If a mutual fund shareholder opts to have automatic reinvestment of dividends, such a feature will reduce his/her income taxes (vs. taking the dividends in cash).
False https://www.investopedia.com/ask/answers/011215/if-i-reinvest-my-dividends-are-they-still-taxable.asp
From 1940 through 2019, the worst U.S. GDP cumulative loss during a recession was ___.
-13.4% or -11.6% according to Washington Post https://www.washingtonpost.com/business/2021/01/28/gdp-2020-economy-recession/
___ of risk in a 60/40 stock/bond portfolio is in the stock portion.
90% P.144
With a long-short fund, what is the worst case situation?
long positions drop in value and the short positions increase in value. P.21 implies this
On an annual basis, U.S. stocks appreciate ___ of the time.
75% of the time P.152
Which sentences are True/False-
Equity REIT dividends qualify for the same tax rate as most U.S. stock dividends. Mortgage REIT dividends qualify for the same tax rate as most U.S. stock dividends.
Both sentences are false P.126
An ETN is similar to a/an ___ issued by a corporation.
IOU P. 96
Bear markets occur about once every ___ years.
4-6 years post WWII.
P. 20
The financial services industry uses a ___ annual (real return) as an industry standard for annual withdrawals during retirement.
4-5% P. 179
EBITA (Earnings Before Interest, Taxes & Amortization) is sometimes referred to as ___.
cash flow
BUT EBITA and cash flow differ in the following ways -https://www.investopedia.com/ask/answers/012015/what-difference-between-cash-flow-and-ebidta.asp
EBITA is not used as commonly as EBITDA, which adds __ to the calculation.
depreciation
With a bank loan fund, yields are adjusted ___
adjusted quarterly P. 15
The SIPC does not provide protection for certain assets, including: _
(1) commodity futures contracts, (2) limited partnerships, and/or (3) fixed-rate annuities. P.69
___ variation in returns reduces long-term annualized returns.
Greater …. I think P.145 may imply it and this Investopedia article seems to hint at it too.
https://www.investopedia.com/terms/v/volatility.asp#:~:text=of%20options%20prices.-,Understanding%20Volatility,and%20tends%20to%20be%20steadier.&text=While%20variance%20captures%20the%20dispersion,as%20the%20annualized%20standard%20deviation.
Investors who have sufficient assets for the remainder of their lives have no ___ risk.
actuarial P.133
___ risk is associated with developing countries.
Economic
What asset category is most associated with bankers’ acceptances?
money markets P.41
The acronym SWP is associated with ___.
mutual funds seems to be the answer the prompt wants (see P. 61-62) (but there are many other vehicles not mentioned in the question options but are still mentioned on P. 62 from what I can gather from this article: https://www.investopedia.com/terms/s/systematicwithdrawalplan.asp
About 90% of day-to-day ETF trading is done by ___ with ___ of outstanding shares owned by individuals.
institutions; 85% P. 88
Depending on the state of residency, how are accounts set up for minor children?
UGMA (Uniform Gifts to Minors Act) and UTMA (Uniform Transfers to Minors Act) P. 54
What is a disadvantage of a c/p account?
either spouse can leave his/her share to anyone P.54
The phrase glide through is most closely associated with ___ funds.
target date P. 7
Focused funds with a low turnover tend to also have ___.
low volatility P. 10
Which of the following is a feature of using a SWP?
- small cost to set up and low annual costs
-tax inefficiency
-locked in
-complete flexibility
complete flexibility P.61
What asset category is closely associated with the phrase shadow pricing?
Shadow pricing is the ____.
There is a ___ delay in disclosure.
money market funds
actual market value of fund money market fund holdings as opposed to the $1 NAV investors pay for shares. Shadow prices were murky until 2011 when SEC required 2X per year disclosure.
2 month
ETNs are ___.
prepaid forward futures contracts P. 96
In the U.S., CEFs first began trading in ___.
1893
Is there a strong correlation between inflation and the value of real estate?
No? Yes & it’s moderate? P. 109 I’m asking IBF for clarification on this one.
Describe the typical money market fund.
short-term IOUs P. 35
Ben and Cathy set up a joint tenants with rights of survivorship account. Ben invests $20,000 and Cathy invests $10,000. What is the ownership?
½ Ben and ½ Cathy
Ryan and Catherine set up a Tenants in Common account. Ryan invests $20,000 and Catherine invests $10,000. What is the ownership?
2/3 Ryan and 1/3 Catherine
The last time U.S. inflation was negative for a calendar year was ___.
1954 P. 18
True or False:
Banks can pay whatever rate they wish on their money market fund accounts. Principal in a money market fund never decreases; only yields fluctuate.
Both are true P. 37
___ is the only vehicle allowing its creator to control the estate “from beyond the grave.”
A trust P.55
Public REITs own ___ of all industrial real estate.
1%
P.112
In general, compared to government bond funds, a high-yield bond fund has ___ maturity.
a higher coupon rate and several years less
P. 15
In the ideal portfolio whose objective is risk reduction, the investor should seek asset categories that have ___.
a low or negative correlation coefficient
I think P. 242 hits this home
This article is consistent with this: https://www.investopedia.com/terms/n/negative-correlation.asp#:~:text=A%20diversified%20portfolio%20often%20aims,offset%20by%20gains%20in%20another.
T-bills are subject to these risks: ___.
(1) opportunity, (2) purchasing power, (3) reinvestment, and/or (4) taxation. P.132
The relationship between expected return and expected risk (using efficient portfolios and mean return) is known as ___.
Capital Asset Pricing Model (CAPM) P.132
Commercial paper has original-issue maturities ranging from ___.
30-270 days
P.41
True or False:
A mutual fund with a very high turnover rate can be very tax efficient.
True P.205
With sector funds, you can select from ___ representing ___.
several hundred funds / over 45 industry segments.
P. 11ish
Tenants in common accounts are___
much less popular than JTWROS. P. 54
On an annual basis, U.S. stocks appreciate ___ of the time.
70-80%
Lou and Maude have a c/p account and 3 adult children. What happens to the account if either Lou or Maude die?
the account receives a 100% step-up in basis
P.54
An ETF is a type of ___.
investment company
P.88
As of 2019, institutions owned ___ of all equity REITs.
85%
P. 109
Market risk is also known as ___.
systematic risk
P. 137
The 10 largest individual ETFs account for ___ of all ETF assets.
40%
P. 88
By far, the most popular type of money market fund is ___.
general purpose
P. 38
The bid/ask spread of the world’s most popular ETF (symbol SPY) is ___ per share.
.01% per share P. 94
What is the maximum amount of a money market fund’s portfolio that can be in what is called second-tier paper?
5%
P.43
According to SEC guidelines, a mutual fund’s total assets invested in illiquid securities or thinly-traded securities is ___ or less.
15%
https://www.sec.gov/about/divisions-offices/division-investment-management/fund-disclosure-glance/accounting-disclosure/valuation-portfolio-securities-other-assets-held-registered-investment-companies-select#:~:text=Addresses%20factors%20that%20funds%20consider%20in%20determining,securities%20is%20ten%20percent%20of%20fund%20assets.
Describe the return of a long-short fund over the past 10 years.
About 5.1% (p. 21)
very similar to the returns of long term government bonds (currently around 4.7% as of 11/18)
https://www.bloomberg.com/markets/rates-bonds/government-bonds/us
Market setbacks of 10% are referred to as ___.
corrections
https://www.investopedia.com/terms/c/correction.asp
The maximum amount of SIPC coverage for cash is ___.
$250,000
P. 69
The biggest problem with target date funds is ___.
allocations among different fund groups are all over the board.
P. 7
Why do small cap stocks have a wide spread between their simple return and compounded (annualized) return?
high SD
P. 223
Describe gifts made to a minor’s account.
irrevocable.
P.55
The 3 essential determinants of real estate risk are ___.
leverage, diversification, and quality of management
P. 107
When money market shares are redeemed, there is no ___
(1) cost, (2) fee, and/or (3) penalty.
p. 36
R-squared for the S&P 500 is 100; for utilities it is ___.
43%
p. 14
A SWP is most closely associated with ___.
income
P. 61
Another name for target retirement funds is ___ funds.
life-cycle
P.6
When selling fund shares, the IRS recognizes ___ methods to determine cost basis.
3
P. 194
One requirement of a c/p account is ___.
marriage
P. 54
The average maturity for junk bond funds is ___.
several years less than typical government or investment-grade bond funds.
P. 15
Back-to-back negative annual returns for equity REITs ___.
are rare
P. 125
True or false:
Uncertainty is the measurable possibility of losing or not gaining in value. Uncertainty is differentiated from risk, which is not measurable.
False- Risk instead of uncertainty
False-Risk is differentiated from uncertainty
P.132
Sector funds can make a nice alternative to investing in ___.
a few stocks
P. 11
Another aspect of selling short is ___.
you are paying an interest charge
Your client is withdrawing 7% of her portfolio’s value each year. This same portfolio averages a 3% total return every year. How long until the portfolio has a zero balance?
18 years
P. 178
What is the weakest, least reliable of MPT’s 3 components: 1) asset class returns
2) Asset category risk levels (SD)
3) asset class correlation coefficients
?
asset class returns
P. 220
If a client takes out 5% of his/her account balance and the portfolio also averages 5% total return each year, the portfolio will have a zero balance after ___ years.
62 years
P. 178
As of 2019, there were ___ U.S. corporations with a AAA rating.
2
https://www.thewallstreetinsider.com/trends/why-only-two-companies-are-left-with-the-aaa-rating#:~:text=AAA%20bonds%20are%20considered%20the,of%20getting%20such%20a%20rating.
Reinvestment risk is greatest for ___
high-yielding long-term bonds.
P.140
True or False:
ETF shares can be traded using stop orders. ETFs can be traded using limit orders.
Both are true.
P. 93
Return correlation between equity REITs and long- and medium-term government bonds from 1972-2018 was ___.
zero.
P. 108
Up until 2020, a U.S. stock market drop of 5% or more occurred roughly ___ times a year.
3
P.156
During most periods, U.S. stocks have greatly outperformed ___.
inflation.
P. 20
