PSC-TDA Flashcards
1
Q
How does purchasing insurance help smooth consumption?
A
A contingent claim provides a payout to preserve lifetime wealth when an unexpected loss occurs.
2
Q
Which one of the following is a good benchmark to estimate the expected rate of return of a safe asset?
A
The yields on TIPS
3
Q
Financial theory usually assumes people are _______________ and expect a reward for taking risk.
A
Risk averse
4
Q
Is volatile compensation important to consider as part of investment planning?
A
Yes, volatility in income constitutes a risk in investment planning.
5
Q
The two factors associated with higher-than-expected future stock performance are
A
low volatility and less trading frequency.
6
Q
Which approach would a pension plan use if it is interested in eliminating the interest rate risk associated with its investment portfolio?
A
Immunization
7
Q
Investment A has a return of 6 percent and a standard deviation of 10 percent. The risk-free rate is 3 percent. The Sharpe Ratio for Investment A is ___________.
A
The Sharpe Ratio is .06 – .03, divided by the standard deviation of 0.10. The final calculation is 0.03/0.10 = 0.3.
8
Q
The event study is an example of a research technique used to test whether
A
Markets respond quickly to new information.
9
Q
By law, the primary goals of monetary and fiscal policy are
A
Full employment and price stability.
10
Q
In an efficient market, the investment portfolio that provides the highest expected Sharpe Ratio is
A
The market portfolio.
11
Q
After the price of her company’s stock falls, a CEO attributes the drop to a decline in the overall stock market. If the CEO is correct that the stock price is strongly related to changes in the market, she is implying that
A
The R-squared of the stock with respect to the market is high.
12
Q
As an asset class, the performance of human capital is most similar to that of a
A
Bond.
13
Q
If an investor’s nominal return is 5 percent and the inflation rate is 2 percent, the investor’s real rate of return is
A
The correct calculation is ((1+.05)/(1+.02))–1 = 0.0294, or 2.94 percent.
14
Q
Client A has $700,000 saved in a traditional IRA and $300,000 in a Roth IRA. Client B has $500,000 saved in a traditional IRA and $500,000 in a Roth IRA. Which retiree can meet a higher spending goal with their current savings assuming they own the same investments?
A
Since Client B has the same retirement savings balance as Client A but has a larger share of that balance in Roth savings, Client B will be able to spend more after-tax dollars in retirement.
15
Q
Each of the following municipal bonds provides a yield of 3.5 percent for 10 years. Which will have the highest price?
A
A New York general obligation bond
16
Q
The sale of a life insurance policy in a life settlement
A
Could provide the advantage of some of the gain on the policy being taxed at long-term capital gains rates.
17
Q
An investment advisor increases the duration of a bond portfolio. One implication of this decision is that
A
The bond portfolio will be more sensitive to changes in interest rates.
18
Q
During periods of rapidly rising interest rates, such as the early 1960s to the mid-1980s, which of the following has historically experienced the worst performance?
A
Long-term bond funds
19
Q
Which of the following defines the term “mortality credits”?
A
The risk pooling aspect of an income annuity in which those who live long have part of their income subsidized by those who died earlier
20
Q
Which of the following items related to real estate can serve as a leading economic indicator?
A
Commercial vacancy rates
21
Q
The selection of a benchmark index should be based on the index being
A
As similar as possible to the portfolio being evaluated.
22
Q
A trend analysis can best be used to
A
Calculate growth in revenue over time.
23
Q
An appropriate characterization of business tax treatment would be
A
Corporations are taxed on corporate income, and shareholders are taxed on dividends received.
24
Q
A wealth management client is considering a charitable donation. She wishes to retain some cash flow after making the contribution of property. The client is reluctant to deal with significant fees or complexities. An appropriate charitable donation for this client would be a
A
Charitable gift annuity.
25
Rick is very wealthy but lives a low-profile life. He gives generously but always anonymously. He has highly appreciated publicly traded stock. He wants to establish a giving tradition that goes on for generations. Which fact as stated above would lead you to rule out a private foundation for Rick?
He wants to be private about his giving.
26
A wealth management professional can assist in the implementation and administration of a private foundation by
Assisting the trustee in forming an investment policy statement for the investment of the private foundation’s assets.
27
An appropriate first step to providing a client with a beneficiary designation audit is to
Perform a fact finding to identify the client’s assets and how they are currently transferred.
28
A typical revocable living trust
Is required to tax the grantor on income earned by the trust even if distributions are made to third-party beneficiaries.
29
Which one of the following statements correctly describes marginal utility?
The satisfaction received from an additional unit of consumption
30
What pooling technique can reduce the risk of dying early in the life cycle and not meeting a bequest goal?
Life insurance
31
News of an unexpected inheritance will most likely result in which of the following?
An increase in permanent income and a reduction in the savings needed before retirement
32
A typical utility curve is
Concave based on a decreasing marginal utility of consumption.
33
Which of the following is a market risk to the value of human capital?
Working in an occupation whose profits are closely tied to interest rates
34
The primary purpose of a contingent claim is to
Protect total wealth against a random loss.
35
A year of tuition costs $10,000 today. We save $10,000 today to fund tuition in 5 years. After 5 years, our investment has grown to $15,000. A year of tuition now costs $17,000.
The tuition investment has experienced a negative real return.
36
When a client has less flexibility to adjust spending, the client’s portfolio should be
Less in risky assets and more in safe assets
37
An investor’s preference for certainty implies that
The investor needs a reward for taking risk.
38
How much would a client pay for a risky investment with a 50 percent probability of it being worth $3,000 and 50 percent probability of it being worth $8,000 in one year assuming a natural log utility function?
This means the value of the risky investment is based on its expected utility, not its expected value. [0.5 x (3,000)] + [0.5 x (8,000)] ≈ 8.4967822. Then calculate 8.4967822, which gives you $4,898.9
39
A risk-tolerant investor
Is willing to consider a more uncertain investment payout, all other things being equal.
40
The three elements of a financial goal are
Goal amount, time horizon, and goal flexibility.
41
Life-cycle planning is best described as providing
A model to smooth spending over time by addressing spending and income risks.
42
An investor hopes to reach a specific goal of $200,000 by saving $2,000 per month. How does investment risk affect this goal?
The amount of risk taken could either shorten or lengthen the time needed to meet this goal.
43
How does purchasing insurance help smooth consumption?
A contingent claim provides a payout to preserve lifetime wealth when an unexpected loss occurs.
44
An investor purchases an asset for $100. If the investor sells the asset for $200 and also receives a $2 dividend prior to the sale, the holding period return for this asset is
(sale price – purchase price + dividend)/(purchase price). 102 Percent
45
Assets A and B have a covariance of 2 percent. The standard deviation of Asset A is 15 percent, and the standard deviation of Asset B is 20 percent. What is the correlation coefficient of A and B?
.2*.15 = .03. 0.02/0.03 = 0.667.
46
An investor holds two assets, Asset X and Asset Y. In most years, when the return on Asset X is below its mean return, the return on Asset Y is also below its mean return. It is likely that assets X and Y have a
If Asset X and Asset Y both tend to have a return above or below (as in this case) their mean returns during the same year, they have a positive covariance.
47
Expected return is best described as
The average, or central tendency, return.
48
A stock researcher can predict an increase in the price of a stock by obtaining a nonpublic earnings report, but not by obtaining publicly available information. The researcher is taking advantage of a market that is only
Semi-strong form efficient.
49
Risk-free Asset A has a payout of $105 in one year. Asset B has an expected stochastic payout in one year of $105. The price of Asset B will be
Since the return on Asset B is stochastic, or uncertain, the price an investor is willing to pay is lower than the price of a risk-free asset whose payout is the same as the expected payout of the risky asset. "Lower than Asset A"
50
Two assets have a correlation coefficient of zero. The expected rate of return of Asset A is 9 percent, and the expected rate of return of Asset B is 5 percent. The standard deviation of Asset A is 20 percent, and the standard deviation of Asset B is 8 percent. The investor holds half of his or her portfolio in Asset A and half in Asset B. Which one of the following is true?
A portfolio’s efficiency is always improved by combining financial assets that are not perfectly correlated. The return on the portfolio of two assets is equal to the weight of each asset, in this case 50 percent, multiplied by the return. 0.5*9 percent + 0.5*5 percent = 7 percent.
51
The "Markowitz bullet," or efficient frontier, illustrates which of the following?
The combinations of assets that provide the highest return for each level of risk
52
Bill has invested 25 percent of his portfolio in his employer's stock. This subjects Bill to a significant amount of what type of risk?
Idiosyncratic risk
53
The market return is 8.2 percent, and the risk-free rate is 3.5 percent. An asset with a beta of 1.2 achieves a return of 9.7 percent. What part of the return is alpha?
The expected return according to CAPM was 3.5 percent + 1.2*(8.2 percent – 3.5 percent) = 9.14 percent. The alpha is the difference between the asset return of 9.7 percent – 9.14 percent = 0.56 percent.
54
What is the appropriate relationship between Social Security benefits and a person’s overall portfolio?
A financial planner should include the estimated present value of Social Security benefits as part of a client’s overall portfolio.
55
The Fama-French 3-factor model includes which of the following investment factors?
Size, value, and beta
56
The broadest measure of inflation is the
Consumer Price Index for All Urban Consumers, or CPI-U
57
Liability-driven investing (LDI) differs from other forms of investment management because it incorporates strategies that
Account for future payouts in determining portfolio allocation.
58
Re balancing is a technique primarily concerned with
Risk management.
59
The risk associated with the unexpected loss of human capital is
Mortality risk
60
The clients who receive the largest benefit from tax sheltering are
Investors with a higher marginal tax rate receive larger benefits from tax sheltering.
61
Asset location can best be described as
Positioning assets among accounts in order to maximize net return
62
The U.S. stock and bond markets currently make up approximately what percentage of their respective total global market capitalizations?
40 percent
63
Historical returns for cash, bonds, and stocks indicate that
Returns are consistent with modern portfolio theory.
64
An investment advisor tells a client to be patient after the value of her stocks has fallen in the middle of a recession because the market will eventually recover. The advisor is likely basing this recommendation on the phenomenon of
Equity mean reversion.
65
If the index of leading indicators is rising, the index of coincident indicators is flat, and the index of lagging indicators is falling, then the business cycle is most likely in which phase?
Trough
66
You are asked to consider lending to a company that is willing to pay 10 percent on new loans. In doing due diligence, you ask why the company instead did not seek capital from a financial institution that specializes in obtaining financing for companies. This type of lender is known as a(n)
An investment bank specializes in helping companies find private lenders and is likely more skilled than individual investors at evaluating a firm’s ability to repay the investment.
67
If interest rates rise after a bond is issued at par, the bond will most likely
Sell at a discount.
68
A 10-year maturity, $1,000 par value bond is issued in the primary market at the par of $1,000. The bond has a 3 percent coupon paid semiannually. How much will the price change if interest rates immediately rise to 6 percent?
The coupon payment is paid twice a year, so there are 20 payments of $15 each. Since the bondholder receives two $15 coupons per year (0.03*1,000)/2, the payment is $15. There are 20 periods; the new interest rate is 6 percent/2, or 3 percent, per period; and the future value remains $1,000. The present value is $776.84, making the difference –$223.16.
69
A corporation has its credit rating changed from B to Ba. What impact will this change likely have on the current yield of the bond?
The current yield is the annual bond coupon payment, which does not change, divided by the price of the bond. Since a move from B to Ba suggests that the likelihood of default has decreased, the price of the bond will increase and the current yield will fall
70
A ranking of Treasury securities in order of initial maturity from shortest to longest would be
Bills, bonds, notes
71
An advantage of owning individual bonds rather than bond funds is the
Control over the timing of coupon payments
72
Cash is most useful for which type of financial goal?
Short term and inflexible
73
A corporation issues a $1 dividend, has 20 million shares outstanding, and a stock price of $25 per share. The company earned $100 million in profits. The dividend payout ratio is
The dividend payout ratio is the percentage of profits distributed to investors as dividends. The company paid $1 * 20 million in dividends, or $20 million. It earned $100 million in profits. The dividend payout ratio is $20 million/$100 million, or 0.20.
74
An investor holding a large position in an emerging market stock finds that it will be difficult to sell this position at the current price because there are not enough buyers to absorb the large number of shares. This is an example of _______ risk.
Liquidity risk
75
One of the most common reasons for a firm going public is
A common reason for going public is so the founder can trade equity for cash that can be invested in a more diversified portfolio.
76
Most individual investors purchase financial securities through the
Secondary market
77
An investor who is a member of a dividend clientele is most likely applying which one of the following behavioral phenomena to the concept of income from stocks?
Framing
78
For which of the following stocks is it most appropriate to use a dividend discount model to assess a fair price today?
A company with stable earnings and a sticky dividend, but modest prospects for growth
79
The super sector that tends to have the lowest beta is
Defensive stocks tend not to drop as much in value during a recession, resulting in a lower beta.
80
Which of the following is a characteristic of a real estate investment trust?
At least 75 percent of income must come from rents, interest from mortgages, or other real estate investments.
81
An investor sells 1,000 shares of a mutual fund at 10 a.m. on Tuesday. Her proceeds from the sale are calculated based on the net asset value of the 1,000 shares at the
Close of the market on Tuesday.
82
Socially responsible funds might be considered for a portfolio because they provide
A warm-glow effect.
83
The primary difference between indices that are value weighted and those that are equal weighted is
The market portfolio is, in theory, a value-weighted portfolio. Value weighting gives greater exposure to large cap securities, and equal weighting gives greater exposure to small cap securities.
84
Which of the following types of investments may be more appropriate when held within a unit investment trust (UIT) rather than a mutual fund?
Illiquid investments
85
A measure that suggests there are many investors who believe that a stock is overpriced is
The short sale interest.
86
A wealthy client couple is considering the purchase of a real estate investment using 5% of their portfolio. The investment property will be overseen by a management company. Which of the following risks related to investment real estate is most important to consider for this client?
While investment property represents an idiosyncratic risk to a portfolio, for wealthy clients with adequate liquidity who are investing only 5% of their portfolio in an investment property, the primary risk is the liability risk associated with a potential lawsuit.
87
Owning property that represents a significant percentage of a client’s wealth is an example of a(n) _______ risk exposure.
Idiosyncratic risk
88
The credited interest rate on a fixed indexed annuity is determined based on the change in a stock index
Without the impact of dividends and with a floor of 0 percent
89
Permanent life insurance has a larger premium than term life insurance because
Permanent life insurance builds up funds to help offset the cost of insurance in the later years of the policy.
90
Which of the following statements concerning the use of the cash surrender value of a life insurance contract is correct?
Policy loans from cash value can generally be taken without federal income tax consequences.
91
A benefit of purchasing an annuity compared with putting money into a retirement plan like a 401(k) or 403(b) is that
There are no limits to deposits into an annuity but there are deposit limits in the other plans.
92
Client A is completing medical school and is self-employed as a medical technician making $80,000 per year. Client B is an older doctor with an income well above the taxable wage base. How much higher are Client A’s marginal self-employment contributions for each dollar of earned income than Client B’s?
Since Client A is self-employed, he pays 15.3 percent of his income as a Social Security contribution.
93
Sarah claimed her Social Security benefits in 2017 at age 62, when the earnings test limit was $16,920. She was entitled to receive $1,000 a month. However, Sarah was still working and had earnings of $22,920 in 2017. Due to the earnings test, her benefits will be reduced by
Because she claimed benefits while still working and before her full retirement age, Sarah is subject to the earnings test. For each $2 she earns over the threshold, she is subject to a $1 reduction in her Social Security benefits. The earnings test threshold for 2017 was $16,920. Since she is $6,000 over the threshold, she is subject to a $3,000 reduction in benefits.
94
The alternative minimum tax (AMT) is best described as
A separate tax system parallel to the regular income tax system.
95
An important distinction between the federal gift tax and federal estate tax is
Tuition payments made directly to an educational institution on behalf of another individual are not subject to gift tax but are subject to estate tax.
96
An advisor is transitioning a $1 million taxable account with a $750,000 cost basis to a new target asset allocation. The client is single and 60 years old. She has adjusted gross income (AGI) of $250,000. Which of the following tax thresholds would be the most likely to apply to her situation?
The estimated taxable gain is $250,000. Along with the projected $250,000 in AGI, the client’s personal exemption could be fully phased out at some point.
97
A traditional IRA contribution is most appropriate for
The traditional IRA contribution is most appropriate for the 68-year-old investor who meets the age requirement (younger than 70 ½), the taxable compensation requirement, and the modest income eligibility requirements, which are designed to limit IRAs for middle-income investors.
98
A reason for an investor to contribute to a Roth IRA over a traditional IRA is if
If a client doesn’t have any Roth balances, a Roth IRA contribution would make sense because it would give the investor tax diversification
99
An investor is considering a Roth conversion and paying the taxes from a taxable account. Her combined marginal tax rate is 30 percent. She projects out that in 10 years she will likely pay the same tax rate on distribution that she would on the conversion. Which of the following actions should she take?
She should do the conversion; the Roth will outperform
100
529 college savings plans are ideal for education funding because
Monies contributed to the account grow tax free and are distributed tax free as long as the funds are used for qualified educational purposes.
101
Which of the following statements accurately describes the difference between qualified and nonqualified deferred compensation plans?
An unlimited amount of compensation may be deferred under a nonqualified deferred compensation plan.
102
A heuristic is
A simple rule or shortcut that allows for quick decision making.
103
A goal-based planning process emphasizes spending goals. For the wealthiest clients, it is important to consider a different goal of
Planning for abundance
104
A question that normally opens a conversation of purpose “above the line” is,
“If you keep on doing what you are currently doing until death, will you feel that your life is complete?”
105
In addition to evaluating and confirming numerical information in the client discovery process, an advisor should determine a client’s
Motivators
106
Which of the following is an advantage of creating an investment policy statement (IPS)?
It helps to manage emotional response to risk
107
Jack is a WMCP™ whose practice is 100 percent devoted to recommending investments or portfolios of investments. He operates on a fee-only basis within an investment advisory firm. What is his seat at the planning table?
He is an expert providing a professional service drawing on his specialized expertise
108
An important characteristic of a profession as defined by Solomon Huebner is that
According to Huebner, professionals are engaged in a vocation that is useful to society insofar as it promotes a social good.
109
A wealth manager has the responsibility to
Protect clients from harm
110
Which of the following best describes a registered representative of a broker-dealer?
Registered representatives are subject to licensing and the rules set by FINRA
111
Alice is single and retired. She receives $12,000 of Social Security retirement benefits each year, and this year will receive $15,000 of fully taxable IRA withdrawals. If this is all of Alice’s income for the year, the percentage of her Social Security benefits that will be subject to federal income taxation is
0 percent.
112
The client who is most likely paying the alternative minimum tax (AMT)
Has income over $200,000 and paid significant state and local tax payments
113
A pickup or credit estate tax is
No longer a state estate tax because the federal credit was removed.
114
Which of the following best describes the technique(s) a client uses in investing the after-tax proceeds of a bonus into a publicly traded security?
Conversion and deferral
115
The dominant reason for making a nondeductible IRA contribution is
To implement the so-called backdoor Roth strategy.
116
A favorable provision offered by federal student loans compared with private loans is
Subsidized federal loans offer a deferral of principal and interest payments while the student is enrolled in school at least half time.
117
Which of the following statements best describes securing a benefit from a nonqualified deferred compensation plan?
Informal funding is secured through the use of business or corporate-owned life insurance or a rabbi trust.
118
The endowment effect refers to a tendency for people to
Value an item more highly once they own it.
119
Understanding the client’s needs and showing a commitment to making recommendations that fulfill these needs is associated with developing
Trust
120
The stage of the discovery process in which the advisor gathers more detailed information about financial issues that are most important to a client is known a
Laddering
121
A goal-based investment policy statement (IPS) most likely contains
Multiple asset allocations to support multiple goals and time horizons.
122
In which of these situations is a trusted advisor (as team leader) needed?
Melba owns a closely held business and is planning to exit in a year. She has a net worth of $12 million, the bulk of which is in her business. She married a man whose daughter is autistic. Melba also has three children from a prior marriage.
123
The best definition of the principle of competence is that competent professionals
Strive to maintain an expert level of knowledge and act only within their areas of expertise.
124
Gerry recently completed a master’s degree in economics from a well-regarded university. Upon joining a local firm, he immediately began advertising himself as a “comprehensive financial planner.” While he understood that he did not have any experience or specific training in the financial services industry, he relied on the trick he learned when he was a graduate teaching assistant: “As long as you are one day ahead of your students, you’re good. After all, they don’t know what you don’t know.”
According to the material presented, Gerry lacks the professional virtue of
Humility
125
Which of the following are required for a transaction to be suitable to a client?
Meets the client's risk profile
126
A wealth management professional can provide the greatest value to a client who is developing an estate plan by
Organizing and prioritizing the client’s goals.
127
Taking steps to plan an efficient transfer of wealth
Will be hampered by unprepared beneficiaries or unnecessary expenses or taxes.
128
Which of the following correctly describes the tax treatment for an intentionally defective trust?
The grantor is required to pay the income tax on the trust earnings because the trust is not a separate taxpayer.
129
Life insurance proceeds may be subject to
Estate tax if the proceeds are received by or used for the benefit of the insured’s estate.
130
A benefit that a private foundation has over a donor advised fund (DAF) is
Permanence
131
What is an important deductibility attribute of a gift to a charitable organization?
A gift of cash to a charitable organization allows the donor to take the largest permissible deduction.
132
A wealth management client would be most likely to create a charitable trust if the client
Wants to retain the ability to defer the selection of a charity for future distributions.
133
Your client today gives charitable contributions in small amounts when asked. She has expressed an interest in giving more and being more strategic. What line of questioning below would work best in locating a point of philanthropic passion?
When you consider what is happening in the world, what do you want to change or support?
134
Among the various types of private foundations that can be created, a (an)
Operating foundation may receive funds from many individuals and directly operates the charitable function.
135
Small-business ownership affects an investor’s portfolio by
Increasing illiquidity and concentration risk because the business can’t be easily converted into liquid funds.
136
In a taxable sale of a business interest at retirement, the seller-owner may incur
Capital gains tax and possibly income tax.
137
The primary factor to consider when putting together a succession plan for a small-business owner includes
Whether the owner needs continuing income from the business to support her through retirement
138
A business entity that involves owners with unlimited liability is
A general partnership
139
Which of the following statements best describes the difference(s) between incentive stock options (ISOs) and nonstatutory stock options (NSOs)?
Qualifying for long-term capital gains treatment from the sale of stock acquired through the exercise of an ISO takes longer than the requirement imposed for stock acquired through an NSO.
140
A ratio analysis of the financial statements of a client’s small business can best be used to provide information about
The company’s operations and performance over time and in comparison with similar businesses.
141
Unmarried partners are not able to
Rely on intestacy laws to ensure the surviving partner is provided for when the other partner dies
142
An appropriate method to fund the care for a special needs relative while ensuring the relative is eligible for Medicaid would be to
Establish and fund a custodial account, such as a UGMA or UTMA account, in the relative's name if the relative is a minor.
143
The sponsor of a defined contribution (DC) plan is
The employer.
144
An advisor motivates a client to establish a college savings fund by asking him to imagine his newly graduated child entering the workforce with or without the burden of debt. This is an example of which of the following techniques used to motivate clients?
Vision
145
Which of the following is a reason to hold a lower percentage of assets in cash?
High illiquidity premium
146
Which two of the following variable annuity guaranteed living benefit riders provide a lifetime income benefit?
GMWB and GMIB riders
147
A single premium deferred annuity is commonly sold with a market value adjustment that increases when
Interest rates increase.
148
An investor is considering using either a coupon bond or a zero-coupon bond to fund a large mortgage payment that is due in 10 years.The investor wants to make sure the bond pays the exact amount needed to make the payment.You recommend a zero-coupon bond because
It has no reinvestment risk.
149
If a bond with a $1,000 par value is issued with a $20 coupon paid semi-annually, the current yield on the bond if the price today is $800 is
Divide by the current price (40/800) to get the current yield of 5%.
150
When there is a partial surrender of a universal life policy, the policy holder would benefit from a reduction in the face amount because this reduction
Lowers the chance the policy will lapse without value by keeping the net amount at risk the same.
151
An educational savings fund that is subject to adjusted gross income (AGI) restrictions is
Coverdell Education Savings Account.
152
The best definition of the shadow account in a universal life insurance policy with a secondary guarantee is
If the shadow account is more than the account value, that difference can be withdrawn as cash.
153
The best description for how an annual point-to-point method credited interest rate is determined in a fixed indexed annuity is
The ending index is divided by the index value at the beginning of the year minus one.
154
The type of stock that tend to have high Tobin's Q ratios are
Value Stocks
155
If the index of leading indicators is flat, the index of coincident indicators is falling, and the index of lagging indicators is also flat, then the business cycle is most likely in which phase?
Recession
156
The methodology for computing the DJIA is described as
Price weighted.
157
After controlling for other factors and the expense ratios, which of the following mutual fund characteristics is a statistically significant predictor of performance?
Fund Size
158
Among the Fama-French factors, the one that has historically been associated with higher than expected returns is
beta, size, and value.
159
When the alphas of mutual funds are estimated using historical fund return data, which of the following is true?
Low alpha funds tend to continue to perform worse in the future.
160
The methodology for computing the DJIA is described as
Price weighted
161
When a distribution has a strong positive skew, which will be higher: the median or the mean?
The mean
162
A high-earning worker who has no pension in retirement and little current retirement savings would likely earn the highest net return in which type of account?
Tax Exempt
163
A client holds an equal allocation of stocks and bonds in a taxable, tax-exempt, and tax-deferred account. Which of the following is the best suggestion for improving the tax efficiency of the portfolio while maintaining the same overall asset allocation?
Increase stock allocation within the taxable account.
164
A client has clearly not saved enough for retirement and is worried that he will not have enough base income to pay for living expenses in retirement. The best of the following suggestions is to continue working and
An option for those who have not saved enough to maintain their lifestyle in retirement is to avoid claiming Social Security until the maximum age of 70. Claiming later than 70 will not increase the monthly income benefit, and will in fact result in losing out on any benefits deferred after turning 70.
165
A ratio that could indicate how capable a business will be in generating cash to pay its debts within the next 12 months is the
Current Ratio
166
The transaction that would provide the most tax-efficient method for receiving funds from a life insurance contract is a
A viatical settlement by a terminally ill policy owner would be income tax free, just like the death benefit, as long as there is compliance with the appropriate rules.
167
Special needs trusts can be set up in various ways. An acceptable way to establish a special needs trust would be to
Fund the trust with assets owned by the disabled individual, or with assets from other individuals.
168
A married client dies without a will. Her property will
Intestacy laws dictate the property distribution, not a probate judge. Pass to her surviving spouse, children, and other family.
169
A 45-year-old investor is thinking about opening an IRA and contributing $5,000 per year. A good reason to forgo contributing to a Roth IRA would be if the investor could need
She could need the money in 5 years for a business venture.
170
An appropriate approach to estate planning for your clients would be to discuss legacy goals
With all of your clients periodically.
171
Which of the following bond structures best describes a lifetime income annuity?
A coupon bond that does not provide a face value at maturity but provides coupon payments for as long as the annuitant lives.
172
A client would like to increase the protection against additional risk exposures without increasing the total risk transfer expense. An appropriate solution would be to
Increase deductibles.
173
If you are willing to pay higher asset-based fees (12b-1 fees) over the course of a few years to avoid a load charge, the class of share you would prefer would be Class
C
174
Industries such as energy and communication, which are modestly affected by business cycles, fall within the super sector category known as
Sensitive
175
Mr. Smith creates a revocable living trust and transfers all his probate assets into the trust. Mr. Smith is the current trustee. The most likely objective for Mr. Smith in creating this vehicle is to
Reduce the costs of probating his estate.
176
Price stability means
Low rates of inflation.
177
One of the most common ways of measuring a company's profitability is to
Divide income by book value.
178
A hedge fund manager is rewarded when the performance of the fund is much higher than the market, but is not punished when the performance of the hedge fund is lower than the market. What portfolio strategy should the hedge fund manager adopt?
A portfolio with a low R-squared with respect to the market
179
According to the mutual fund theorem, an investor's portfolio should consist of
Only a risk-free asset and the market portfolio.
180
The primary advantage of investing in high-yield bond funds is
Higher expected returns than other types of bond funds.
181
An advantage of an LLC over an S corp is
The identity of LLC members is not subject to heavy legal restrictions.
182
A unique risk of mortgage bonds issued by government-sponsored entities that does not exist in other federal bonds is
Prepayment risk
183
An investor would like to receive the highest yield possible on a municipal bond investment while avoiding idiosyncratic risk. The most appropriate recommendation would be
A private activity bond mutual fund.
184
An important force that puts pressure on a firm's management to maintain better corporate governance is
Mergers and acquisitions.
185
Which of the following is a correct statement about emerging market stocks?
Emerging market funds have recently had higher correlations with international equities than with U.S. equities.
186
Stock A increases its dividend from $0.50 to $0.75 per quarter. Stock B also has a $0.50 dividend but repurchases shares rather than increase dividends. Which one of the following would be most consistent with this difference in payout choice?
Stock A has more stable profits than Stock B.
187
A liquid alternative investment may be best described as
An actively-managed mutual fund that employs hedge fund strategies.
188
To minimize the impact of taxes when rebalancing a portfolio, a wealth manager should
Sell appreciated assets within tax-sheltered accounts.
189
Liability relative optimization differs from cash flow matching primarily because it considers
The benefit of using risky assets to fund the inflation-adjusted cost of a spending goal.
190
According to modern portfolio theory, which set of financial assets will provide the highest expected return for a given level of historical standard deviation?
A complex combination of investments that includes multiple asset classes.
191
Steps a financial planner might recommend to offset high income volatility would include:
Selecting lower-risk investments to be part of a well-balanced portfolio.
192
Historically, the correlation between equity REITs and traditional equities has been approximately
70%
193
Jennifer has been a financial advisor for several years. She has been cultivating affluent prospects to grow her practice. Robin Matthews is her first large case. The plan Jennifer created suggested that Robin purchase a large life insurance policy for both protection and investment purposes. The sale of this policy will generate a large commission for Jennifer. Robin, who is sophisticated about financial matters, is aware of the size of the commission and is pushing Jennifer to give her a ‘kick-back' when she receives the payment. Jennifer understands that this would be a violation of rebating laws in her state, but agrees since she is eager to maintain the relationship. According to the text, Jennifer lacks the professional virtue of
Courage
194
The step of the client discovery process in which a wealth manager gathers additional information and evaluates the accuracy of the information used to develop planning recommendations is known as
Checking
195
A business owner client is developing a plan to sell his business to his key employee. A strategy that could be relevant to his plan is
Pegging the estate tax value.
196
A wealthy business owner wants to sell his business to a grandchild who has worked for the business for several years. The business owner is 89 years old and has a net worth of $23 million. The business has not appreciated significantly to date, but due to regulatory changes, he believes the business will appreciate significantly in the next 2 years. He is not concerned with getting significant income from the sale. The best transfer strategy would be
An immediate sale of the business funded with a private annuity.
197
When calculating the Social Security benefits for a married couple, a key feature to note is that
If two spouses worked, the smaller benefit will expire when the first spouse dies.
198
The expected return of a financial investment is determined by the risk aversion of the
The marginal investor, which includes institutional investors and wealthy investors, will influence the price of financial assets.
199
Which of the following statements is correct?
Higher-income Americans have longer life expectancies than lower income Americans.
200
Higher real rates of return result in all of the following EXCEPT
Improved lifestyle for a borrower.
201
Contingent claims trade a small loss in expected wealth for expected
Gains in utility.
202
Which financial product does not protect against a loss of human capital?
Income annuities
203
An investor loses 15% in her portfolio during the prior month. According to prospect theory, what would she be more inclined to do?
Prospect theory suggests that when investors experience a loss, they will seek greater risk in order to return to a positive return from a reference point.
204
A 57-year-old client opens a Roth IRA and contributes $12,000 over the course of the next few years, at which time the total value in the Roth is $20,000. If the client withdraws the entire value on his 60th birthday, the tax consequences would be
Taxable income of $8,000 since the 5-year rule had not been met.
205
An estate planning advantage for married spouses compared to unmarried partners includes the fact that
A surviving spouse may utilize the unused federal exemption amount remaining from the deceased spouse.
206
Which one of the following is a reason to defer claiming Social Security until age 70?
A client wishes to maximize the retirement benefit to a surviving spouse.
207
A client has clearly not saved enough for retirement and is worried that he will not have enough base income to pay for living expenses in retirement. The best of the following suggestions is to continue working and
Avoid claiming Social Security until age 70 in order to maximize his Social Security retirement benefits.
208
Juan has made significant money in Silicon Valley. He has a spreadsheet documenting all his giving: where, how much, to what charity, in what issue area, and an estimate of results (low, medium, or high). He sees giving as a puzzle to be solved, so that it is most effective and efficient. Where is Juan on the philanthropic learning curve?
At the middle of the curve.
209
An investor has $300,000 in an IRA, which he expects to grow at a 7% rate of return until 30 years from now when he must take his first RMD. He is currently in a 35% tax bracket. For retirement, he projects it will take an additional $75,000 of income in today's dollars (factoring in deductions, exemptions and Social Security) before he would move up into the 35% tax bracket. Inflation is expected to increase the cost of goods by 2.5 times over the next 30 years and the RMD divisor is 25.6. Assume he plans to work until he has to begin taking RMDs. He has $5,000 he can contribute this year. Which of the following best summarizes the investor's situation, assuming a Roth IRA is not an option?
The IRA is projected to have a value low enough at retirement that it is tax efficient to make the $5,000 contribution.
210
A general rule of thumb for selecting the most appropriate property to gift is:
Property that has significantly appreciated should be distributed through an estate, rather than gifted.
211
Asset A has a beta of 0.8. Asset B has a beta of 1.4. If the risk-free rate is 2% and the risk premium is 5%, how much higher is the expected return of Asset B?
Asset A has an expected return of 2%+0.8*5%=6%. Asset B has an expected return of 2%+1.4*5%=9%.
The difference between the two is 9%-6%=3%.
212
According to the mutual fund theorem, an investor's portfolio should consist of
Only a risk-free asset and the market portfolio.
213
A charitable lead trust could be a useful planning tool if
A high net worth individual would like to make a substantial bequest to reduce her estate for the purposes of the federal estate tax liability.
214
An advantage of an LLC over an S corp is
The identity of LLC members is not subject to heavy legal restrictions.
215
A corporation has 1 million shares of common stock outstanding and a market capitalization of $100 million. It earns $5 million in annual profit and pays $1 million of the profit back to shareholders in the form of an annual dividend. What is the dividend yield of this stock?
The dividend yield is the annual dividend per share divided by the price of each share. Since the firm has a market capitalization of $100 million and 1 million shares outstanding, each share has a price of $100. If they pay $1 million in dividends on 1 million shares, they will pay $1 in dividends per share. The $1 dividend divided by the $100 share price equals 1%.
216
For which one of the following investor goals is an investment in corporate bonds most appropriate?
Investing within a tax-sheltered account
217
Asset A has a beta of 0.8. Asset B has a beta of 1.4. The risk-free rate is 2% and the market risk premium is 3.5%. The expected payout on both A and B is $1,000 in one year. What is the difference in price between Asset A and Asset B?
The estimated price of Asset A is the risk-free rate plus beta multiplied by the risk premium, or 2% + 0.8*3.5% = 4.8%. The price is equal to the $1,000/1.048=$954.20. Asset B is 2% + 1.4*3.5% = 6.9%. The price is equal to $1,000/1.069=$935.45. The difference is $18.75.
218
Over the last 25 years, the annual inflation rate has been approximately ____% with a ____% standard deviation.
The correct answer is 2.25%/1%. This is lower than the long-term average since 1926 of 3.25% and a standard deviation of 4.90%.
219
An asset has an expected return of 6% with a standard deviation of 10%. Assuming a normal distribution of returns, approximately 68% of the time the return will fall between
Assuming a normal distribution of returns, 68% of the time the return will fall within one standard deviation. Thus 6% - 10% = -4%, and 6% + 10% = 16%.
220
According to modern portfolio theory, which set of financial assets will provide the highest expected return for a given level of historical standard deviation?
A complex combination of investments that includes multiple asset classes.
221
An event study finds that prices fall in the days before a particular type of negative information becomes publicly available. This suggests the market lacks
Semi-strong form efficiency.
222
A deduction under the regular income tax rules that is also not included in the AMTI calculation is (are)
A charitable contribution.
223
Mr. and Mrs. Jones are retired and receiving Social Security retirement benefits. The couple receives $28,000 a year in Social Security benefits and takes $80,000 a year out of their fully taxable IRA. If this is all of the Jones' income for the year, the percentage of their Social Security benefits that will be subject to federal income taxation is
Eighty-five percent of benefits would be subject to taxation
224
Which of the following is a consequence of a client's unrealistically optimistic expectation of future investment returns?
Not understanding the goal tradeoffs when developing priorities.
225
What is the real net return on an investment that provides an annual return of 4.4%, from which a 1% asset management fee is subtracted, if inflation during the year is 2.4%?
You must first subtract the asset fee from the 4.4% in order to calculate the net, real return of (1.034/1.024) - 1 = 0.98%
226
A bond has a coupon rate of 4.2% paid semi-annually, a par value of $1,000, and maturity date of 4 years. If the current price is $1,046, what is the yield to maturity?
To estimate the yield to maturity, the present value is the price (-$1,046), the future value is $1,000, there are 8 periods (4 years * 2 periods/year), and the coupon payments are $21 (0.042*$1,000)/2. The interest rate per semi-annual period is 1.486%. Double this to get the annual yield to maturity of 2.97%.
227
Which financial product does not protect against a loss of human capital?
Income annuities
228
A technique that uses the concept of prospect theory to motivate a client is
Attaching a specific goal, such as a child's college education, to a monthly savings amount, so that a client feels a loss when failing to meet a monthly savings goal.
229
The primary purpose of a financial intermediary is to
Identify lenders to provide capital and evaluate the credit quality of borrowers.
230
An individual wishes to create a charitable vehicle to engage members of his family in making donations over a long time frame to charities selected by the entity's advisory board. An appropriate charitable vehicle to accomplish these goals is
A normal private foundation.
231
An important distinction between the federal gift tax and federal estate tax is:
A charitable gift made during life allows the donor to take an income tax deduction, while a charitable transfer from an estate does not.
232
Which of the following characteristics should reduce the optimal amount of property risk transfer?
Higher insurance load
233
An advantage of owning a bond mutual fund rather than individual bonds is
The ability to maintain a consistent duration in the bond portfolio.
234
An investor is considering a municipal bond with a 3.4% yield. She is in the 33% federal tax bracket and lives in a state with no income tax. Her tax-equivalent yield on this municipal bond would be
The tax-equivalent yield is equal to 3.4%/(1-0.33) = 5.07%.
235
What is the real rate of return of a $1,000 investment that has a nominal return of 6% if the inflation rate of 3%?
1.06, divide 1.03 = 1.029, and then 1 = 2.9%
236
Adjustments to Social Security benefits are tied to the
Consumer Price Index for Urban Wage Earners and Clerical Workers, or CPI-W.
237
An asset with a very strong negative covariance with another assets is
A hedge
238
The most diversified type of REIT investment is usually a
A real estate fund.
239
A study finds that mutual funds that spend significantly more on fundamental research outperform mutual funds that spend little on such research. This is evidence that markets are most likely
Weak form efficient.
240
A planning strategy to avoid or minimize the AMT liability in an AMT tax year would be to
Defer income from an investment in a private activity bond to a later, non AMT tax year.
241
The best formula for determining the total value of Social Security payments to be received is
Average life expectancy times average monthly benefit times 12 based on earnings.
242
Which of the following is correct regarding contingent claims?
A contingent claim has a negative expected return.
243
An investment that has a positively skewed distribution
Will have a higher percentage of extreme positive returns than a normal distribution.
244
ABC, Inc. transfers 1,000 of its shares with a market value of $30/share to Ernestine Executive subject to the condition that she must triple sales in the next 4 years. If she does not, she must return the stock to the company. Ernestine decides not to make the Sec.83(b) election. If sales tripled in 4 years and the market price rose to $55, which of the following statements is correct?
Ernestine has income equal to the value of the stock at the time she meets the performance criterion of tripling sales within the 4-year time frame. ABC, Inc. has a compensation expense deduction of the identical amount at that time.
245
When the risk-free rate falls and the market risk premium stays the same, the expected return on a risky investment
Will Decrease
246
Portfolio A has a Sharpe Ratio of 0.4. Portfolio B has a Sharpe Ratio of 0.35. Which of the following is correct?
Portfolio A provides a higher return for a given level of risk.
247
A charitable lead trust could be a useful planning tool if
A high net worth individual would like to make a substantial bequest to reduce her estate for the purposes of the federal estate tax liability.
248
An important advantage of including international securities in a portfolio is that
International equities can improve the Sharpe Ratio of a portfolio.
249
When developing a client's estate plan, a tax minimization strategy should be formulated
After assessing the client's pattern of asset distribution.
250
An advantage of owning a bond mutual fund rather than individual bonds is
The ability to maintain a consistent duration in the bond portfolio.
251
An investor is considering a municipal bond with a 3.4% yield. She is in the 33% federal tax bracket and lives in a state with no income tax. Her tax-equivalent yield on this municipal bond would be
The tax-equivalent yield is equal to 3.4%/(1-0.33) = 5.07%.
252
The primary difference between a closed-end investment company (closed-end fund) and an open-end investment company (mutual fund) is that
Shares of a mutual fund can be redeemed at net asset value.
253
The best argument for making commodities a part of a portfolio is that
Commodity prices have low correlations with the prices of stocks and bonds.
254
The first priority when working with a client to develop an estate plan is to
Evaluate the adequacy of the client's future income.
255
If an investor earns 6% in year one, -5% in year two and 10% in year three, the arithmetic mean return is
6%-5%+10%=11% Then divide by 3 = 3.67%
256
Risks to an investor's portfolio arising from small business ownership include the risk that the
Business's fair market value will be difficult to determine accurately.
257
An investment that has a positively skewed distribution
Will have a higher percentage of extreme positive returns than a normal distribution.
