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CFA iii > Priv Wealth > Flashcards

Priv Wealth Flashcards

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1
Q

What are some charecteristics that seperate Private clients from insto investors

A

Smaller investment size
Better ability to divert from a specific investment philiposphy
Tax status
Less sophisticated

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2
Q

What are the 3 roles of a wealth manager

A

Goal prioritisation
Goal quantification
Goal changing

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3
Q

What are the 3 sorts of RISK that a wealth manager need identify/gauge with a client?

A

Risk tolerance
Risk Capacity
Risk perception

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4
Q

What are some HARD skills a wealth manager must have

A 
Portfolio managemnt skills
Capital market proficiency
Lanugage skills
Tech skills
Financial planning competence (tax, legal)
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5
Q

What are some SOFT skills a wealth manager must have

A

Social skills
Sales skills
Education skills

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6
Q

What are the 2 types of capital sufficency analysis

A

Deterministic ForecastMortality Tables (probalistic approach to death and cash flows)
Monte Carlo

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7
Q

Human capital should be invested in when the client is

A

Young

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8
Q

For retirement planning, what are the 3 methods of forecasting/implementing a portfolio

A

Annuities (but care for annuity trap - desire for retirees just not to invest in annuiities because of hectic cash outflow initially)

Monte Carlo

Death/Mortality table

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9
Q

What are some behavioural biases to be concious of in retirees

A

loss aversion
Consumption gaps (thin they going to run out of cash)
Preferring income to capital appreciation

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10
Q

2 Adv of an IPS

A

Long term goaled

Keeps adviser/retiree on track

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11
Q

What are some parts of the IPS

A

Background and Investor Objectives
Parametres (Risk tolerance, asset class, ESG considerations etc.)
SAA - long term investments
Discretion of advisor to do what they think is good, and rebalancing preferences
Advisors responsbities
Appendix

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12
Q

Name 5 types of tax

A 
Property
Capital gains
Income
Inheritence
Stamp duty
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13
Q

How to reduce taxable income on real estate

A

Spend money on maintence

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14
Q

Difference between taxable, tax deferred and tax exempt accounts

A

Tax deferred means you just pay tax when the assets are accessed (like super). Taxable is just a brokerage account, and tax exempt pays no tax

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15
Q

Are divs subject to preferential treatment in the tax world

A

Yes

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16
Q

Name the 3 types of tax environments/countries/locations and explain them with an example

A

Tax haven - pay no tax on cap gains or income (Cayman)
Tax Territory - pay tax on income earned WITHIN the territory (Hongkers)
Worldwide tax area - pay tax on your income from anywhere (Australia)

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17
Q

Withholding tax, explain

A

It is the tax payable on income and divs earned within a country that is leaving to another country.

e,g. i own UBS shares, before they leave Swiss land, they get clipped with 30% tax before being patriated to Aus

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18
Q

After tax period return formula

A

Value1 - Value0 +income-tax / value0

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19
Q

After tax post liquidation formula, what is it and why use it

A

Great for mutual funds and understanding returns after crystalising UNREALISED GAINS

(1+r)*(1+r)…….(Liquidation tax / total Value)

The liquidiation tax is the capital gains tax, the total value is like the unit price (because SOME VALUE IS ALREADY CRYSTALISED AS INCOME)

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20
Q

Tax alpha / excess return formula

A

post tax return - BM post tax return

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21
Q

Tax efficiency formula and what is it

A

After tax return / pre tax return (higher is better) shows how efficient you are with reducing tax

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22
Q

When constructing a portfolio, using the tax exempt, deferred and taxable accounts, how should i allocate bonds, stocks, private equity, market neutral and hedge funds

A

Stocks and bonds recieve tax exemptions already, put them in the normal account.

All the hectic stuff, put that in the tax deferred or exempt accounts because they will probably get taxed to buggery in the normal account

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23
Q

Can some bonds be tax exempt

A

Yes

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24
Q

Explain why we would want to harvest losses

A

Listen to you sell a stock thats does poorly, bam then you just buy it again, no harm no foul, but you get the x amount in tax credits that can offset other income. Your actual position hasnt changed except for the tax credit

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25
Q

Charible giving - explain usefulness (2 situations)

A

So, 2 things. 1 . if you are a beneficiary that can earn income from a charity (LEGALLY) , you can give a cocentrated position to a charity and boom, you get income tax free.

or just give a gift to them (ussually a highly appreciated asset) and get a tax credit (bboom)

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26
Q

Name 4 basic ways to avoid tax

A

Tax exempt accounts
Tax exempt instruments
Frankking credits
Loss harvesting

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27
Q

How does deferring taxes work

A

So here i am, a 25 year old fella earning some good money in a high tax bracket - WHY SELL NOW AND GET REKT AT THE HIGHEST TAX BRACKET - wait til im old and earning no cash, then sell then boom, taxed less

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28
Q

Which 2 vechiles are most tax beneifical / flexible

A

ETF and SMA

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29
Q

What is tax lot accounting

A

FIFO, LIFO (HIFO Highest) - it is selling a stock or bond based on when you bought it (or what the price was when you bought it. If you want to get tax credits, sell the high tax base ones, if cap gains, low tax base

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30
Q

Why is selling a concentrated portfolio hard for a client

A

Emotional attachment
Liquidity
Tax bill
Time horizon of investor

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31
Q

What are the best ways to sell/dispose a concentrated portfolio - 4 ways

A

Sell it and cop the bill
Tranched selling
Gift to charity
Let owner die and inherit to children at higher tax base

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32
Q

Do you want higher or lower tax bases for assets

A

Entirely dependent on situation. If you want a heap of tax credits, then a high tax base, higher than the current price, would be best

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33
Q

What is a completion strategy for avoiding tax (concentrated position)

A

COMPLETING AN INDEX / riskreturn charecteristics around the concentrated asset, then selling down the concentrated portfolio until it is just a normal index.

Sell down by incurring losses and not paying tax

34
Q

Equity monetization - what is it (you love this)

A

So you got an asset, lets say 5m in APX.
Short it. Then borrow money using your 5m apx as collateral. THEN invest in the index. THE BETA OF YOUR PORTFOLIO IS NOW JUST 1. AWESOME

35
Q

How are premiums on options treated in tax world

A

As capital gains

36
Q

What is a tax free exchange structure

A

Pretty much where a heap of people with concentrated portfolios pool thier assets for 7 years , then at the end of the 7 years, they recieve a diversified portfolio of the combination of concerntrated assets

37
Q

How to sell a family business / exit concerntrated position there

A

IPO, trade sale, recapitalization or loan against the business

38
Q

What is recapitalisation of a business when exiting a concentrated position?

A

It is selling portion of your business to a PE firm and recieving equity ina new entity, while also reciving cash

39
Q

When you take out a line of credit against a proprty or binsess, what are you trying to do?

A

Exit a concentrated position - you can then invest the line of credit/loan in a diversified portfolio and even harvest losses to offset a full sale of your house/business

40
Q

If i a mortgage refinancing on my house/apartment building, what is the play?

A

Taking out another loan on my house, so much so that the RENTAL income on the property matches that of the interest expense, then investing the loan proceeds in the stocks market

41
Q

If i donate my house to charity what happens

A

Tax benefit

42
Q

Forced heirship meaning

A

Laws of the land that mean you must give x amount to your wife or brother or kids etc.

43
Q

Progessive inheritenve tax regimee is

A

Where you get taxed x% on first million, y% on next million etc

44
Q

Are gratuities tax free

A

Dependent on jurisdiciton, great way to avoid tax in estate planning

45
Q

Explain trusts (fixed/discretionary, revokable/non-revokable)

A

Trust is pretty much another legal entity, you can transfer your assets to it (tax free) which can then sell/give income to beneficiaries.

Splitting your assets in half generally means you are taxed at a lower effective rate

Revokable means that the person who grants the assets to the trust still has legal ownership (and can rup thier assets from the trust) non-revokable means they cant

Fixed trust means a fixed amount is paid to beneficiaries each period - discresionary means the trustees decide

46
Q

Foundation is a …….

A

Charity created for a person, similar to a trust

47
Q

How to determine the premium for an life insurance package (3 things)

A

Mortality %
Discount rate
Loading (Margin for insurance firm)

48
Q

Joint annuity plans - what are they

A

So the annuity continues for as long as 2 people are alive

49
Q

What is an advanced life annuity

A

An annuity for in 40 years or so that has the best income

50
Q

Can you withdraw variable annuities?

A

Yes

51
Q

Features of fixed annuities

A

No vol, higher costs

52
Q

In an inflationary envuronment, would you want fixed or variable annuities

A

Variable

53
Q

If i work in a cyclical industry, making 1m a year (a lot), do i want a high or low risk approach to my retirement planning

A

Low risk, cyclical industry means you could get rekt if the busienss cycle goes sour

54
Q

What is a target/life cycle fund?

A

A fund that changes through the lifecycle of a person to match thier circumstances as they change with age (Lifestage)

55
Q

What is an asset only approach to asset allocation

A

This only takes the asssets themselves into consideration, not the individual in question

56
Q

What is a liability driven approach to asset allocation

A

It takes assets into consideration

57
Q

Which ratio is trying to be maximised in MVO and asset based approaches to asset allocation

A

Sharpe Ratio

58
Q

The risk of a Liability driven approach to asset allocation is …..

A

The inability to pay the laibility itself and the risk or SD associated with the surplus of assets over the PV of the liability

59
Q

What is the main goal of SAA?

A

To get a predetermined exposure to systematic risk through pairing of assets

60
Q

What are the 4 criteria for asset classes

A 
Assets can only be in one asset class
Assets should have similar attributes
All assets in the world should have an asset class
There should not be a 1 correlation between 2 asset classes
61
Q

SAA = Capital market expectations + IPS (True False?

A

True

62
Q

9 steps in SAA

A 
Determine objextive
Determine risk
Determine horizon
Determine constraints
Which approach to asset allocation will you use
Specifiy and test portfolio
Reevaluate
63
Q

What do you need in your portfolio (charecteristic) for short term goals

A

Liquidity

64
Q

Active approach to asset allocation means what happens to your portfolio’s charecteristics

A

Higher active share
Higher tracking error
Higher fees

65
Q

What is mean variance optimisation

A

It is getting a computer to run simulations to determine the set of assets that has the highest sharpe ratio for your investor

66
Q

What is the formula used for MVO (Certainty Equivilent Return)

A

Expected Return on Asset + (.0005 * Investor risk coefficient * Variance of asset)

Asset can be a portfolio of assets that comes out of the MVO
The higher the better

67
Q

What are 2 prerequistes to the output of MVO

A

The portfolio MUST sum to 100%%

NO Negative positions

68
Q

Issues with MVO (IMPORTANT)

A

It makes concentrated portfolios (investing in just one asset class or subsets)
Garbage in garbage out in the MVO formula
Does not take FUTURE into consideration - cash flows, changes in market etc.
Assumes returns on stocks are normally distributed
Ignores investors liabilities or goals

69
Q

Explain the Black Litterman model for asset allocation

A 
So, what you do is reverse optimise the portfolio.
What that means is that you get a market portfolio, and get the expected returns on each asset class within it - THEN you utilize your capital market expectations and increase or decrease the expected returns - you then push that expected return data through a MVO, and it spits out the ideal portfolio
70
Q

Advantages of the black litterman to the MVO (importants)

A

Less likely to get concentrated portfolios

Takes the investor and future expectations into consideration

71
Q

What other contraints (apart from Budget 100 and non negativity) can you add to MVO to make it better

A

Add sector limits or minimums, relaitve minimums etc.

72
Q

Resampled MVO - what is it and what are the advantages

A

It is using regular MVO, but then incorporating the average of multiple periods of monte carlo simulation and averaging out the asset allocaition to create a portfolio

This takes future into consideration, like rebalancing and withdrawrals. and also creating a portfolio more diverse than a regular MVO

73
Q

Monte Caro simulation in asset allocation advantages

A

Incorporates reblaancing and withdrarwals in future periods and taxes.

Good for future periods

74
Q

What are the 3 types of liability driven approaches to asset allocation

A

Surplus
Hedged portfolio
ALM

75
Q

What is the surplus approach to Asset liability management in asset allocation

A

Surplus is jsut managing the SURPLUS of assets over your future liabilities and managing the risk of that surplus. Risk stats are used on the asset and the liabikity

76
Q

What is the hedged/2asset approach to Asset liability management in asset allocation

A

Is it creating 2 portfolios, one to hedge the liability (WHICH CAN NEVER BE DONE PERFECTLY) and another for growth

77
Q

Breifly explain process of goals based asset allocation

A

Pretty much determineing a set of goals for an individual, then assigning probabilities of success to each of those goals in x years - this will dictate how much money you initially have to put in.

Then the money is put to work in a variety of subportfolios.

78
Q

What are some heuristic approaches (rule of thumb) to asset allocation

A

120 minus age = allocation to equitiyies
60-40
Yale/endowment

79
Q

High correlation = what to corridors of rebalancing

A

Wide corridor

80
Q

High vol means low corridor for rebalancing

A

Yep

CFA iii (11 decks)

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