Brainscape's Knowledge GenomeTM

Browse over 1 million classes created by top students, professors, publishers, and experts.


See full index

CFA Level III > R11 > Flashcards

R11 Flashcards

You may prefer our related Brainscape-certified flashcards:
CFA flashcards
1
Q

Investment objectives

A

Reduce risk
Liquidity
Tax efficiency

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
2
Q

Investment objective obstacles

A

Insider trading laws
Company restrictions
Wants to retain control
Asset has other uses

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
3
Q

Considerations affecting all concentrated positions

A

Sale triggers tax bills
Asset illiquid
Transaction costs
Alternatives like hedging or borrowing

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
4
Q

Constraints on dealing with concentration: Institutional and Capital market constraints

A

Margin lending rules
Regulations
Employer restrictions
Market limitations: needs liquidity, ability to borrow shares, brokers want observable trading history, instruments must exist

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
5
Q

Psychological considerations: Emotional biases

A
  • Overconfidence/familiarity
  • Status quo
  • Naïve extrapolation of past results
  • Endowment effect
  • Loyalty effects
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
6
Q

Psychological considerations: Cognitive biases

A
  • Conservatism
  • Confirmation
  • Illusion of control
  • Anchoring and adjustment
  • Availability heuristic
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
7
Q

Goal-based planning: Personal risk bucket - goal and types of investments?

A

Goal: prevent big declines
Types: safe haven investments like home, money market, treasury bills

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
8
Q

Goal-based planning: Market risk bucket - goal and types of investments?

A

Goal: Maintain current standard of living
Types: normal stocks/bonds

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
9
Q

Goal-based planning: Aspirational risk bucket - goal and types of investments?

A

Goal: Grow wealth strongly
Types: high risk investments, concentrated positions

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
10
Q

Primary capital: Definition + Source buckets

A

Def: provides lifetime spending needs
Buckets: Market/personal risk buckets

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
11
Q

Surplus Capital: Definition + Source buckets

A

Def: excess capital above primary
Buckets: aspirational bucket

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
12
Q

Monetize concentrated position: 5 questions that need to be answered

A
  1. Lifetime spending needs/desires after sale
  2. Primary/surplus capital requirements?
  3. Current value of concentrated position?
  4. Value of assets other than concentrated positions?
  5. Is value of concentrated position sufficient to meet primary/surplus capital need?
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
13
Q

Wealth Transfer Strategies: 3 strategies

A
  • Gift to charity
  • Estate tax freeze
  • Combine limited partnership, gifting, valuation discount
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
14
Q

Wealth Transfer Strategies: Gift to charity

A

-tax deduction for full value

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
15
Q

Wealth Transfer Strategies: Estate tax freeze definition + example

A

Def: transfer future appreciation that does not get taxed
Ex: transfer junior equity to kids. current market value taxed, but not future appreciation.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
16
Q

Family Limited Partnership: Why does using this to transfer assets reduce taxes?

A

Value of limited partnership is less than sum of assets. Discount applied because of LP non-controlling stake and lack of marketability due to difficulty of selling

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
17
Q

Equity monetization:

What are 4 basic types?

A
  1. Short sale against the box
  2. Total return equity swap
  3. Forward conversion with options
  4. Forward sale or single stock futures
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
18
Q

Equity monetization:

explain a “short sale against the box”

A

short a security you already hold

19
Q

Equity monetization:

explain a “forward sale”

A

sell for delayed delivery

20
Q

Equity monetization:

explain a “forward conversion with options”

A

synthetic short forward position. Buy put, sell call at same strike. Riskless.

21
Q

Equity monetization:

explain a “Total return equity swap”

A

contract to pay return of stock (capital gains and dividends) in exchange for return on index, LIBOR, or other

22
Q

Two major hedging approaches

A
  1. Purchase a put

2. Cashless (zero premium) collar

23
Q

Cashless (zero-premium) collar

A

Buy a put slightly below market price, sell a call above market price to finance put premium

24
Q

Prepaid Variable Forward

A

Combines economics of a collar and a borrowing against underlying stock into a single instrument.

Get paid upfront and deliver shares (or cash) in the future based on terms of underlying collar.

25
Q

Choosing best hedging strategy: main considerations

A
  • minimal initial cost
  • max upside potential
  • max downside protection
  • minimum tax
  • other
26
Q

Tax Issue: mismatch in character

A

instrument hedged and tool used to do the hedge produce income and loss of different character.

E.g.: Stock options gains are “ordinary income”; hedging produces losses taxed at capital gains rate, but not deductible against ordinary income

27
Q

Tax optimization equity strategies: Index tracking with active tax management

A

make portfolio that tracks the market closely, not perfectly, and use opportunistic tax loss harvesting and other strategies to outperform on an after-tax basis

28
Q

Tax optimization equity strategies: completeness portfolio

A

Invest funds other than the concentrated stock position such that the combined portfolio is as diversified as possible. Whittle down concentrated piece over time.

29
Q

Tax considerations: what is a perfect hedge?

A

perfect hedge (hedge item and vehicle perfectly correlated; no systematic/non-systematic risk), if too perfect, could be equivalent to a sale, triggering tax due immediately

30
Q

Tax considerations: what is a cross hedge and what is a downside of using it?

A

If instruments to hedge asset directly do not exist, hedge a substitute asset with high correlation with primary asset.

Downside: don’t eliminate company-specific (non-systematic) risk

31
Q

Tax considerations: what is an exchange fund? How long must partner remain in fund?

A

An investment fund where partners each contribute their concentrated positions and gain pro-rata share of total fund.

How long: must remain in fund 7 years

32
Q

Managing risk of privately held business: what are three considerations?

A
  • owner psychologically attached
  • Owner has financial reasons to maintain control
  • Complexity in determining exit strategy and value
33
Q

Business monetization: Strategic buyer

A

Pay more than financial buyers, because long term view.

Usually very active.

34
Q

Business monetization: Financial buyer

A

typically invest in mature/stable businesses.

Don’t pay as much as strategic buyer

35
Q

Business monetization: Recapitalization

A

Company issues debt to finance purchase of owner’s shares

36
Q

Business monetization: Management Buy Out

A

group of employees buy the business.

Most of the time owners acts as creditor for small cash component and large promissory note, because employees cannot raise enough cash.

37
Q

Business monetization: Divestiture

A

sell some assets

38
Q

Business monetization: Sale or gift to family member

A

self explanatory

39
Q

Business monetization: Line of credit secured by company shares

A

personal loan secured by shares.

40
Q

Business monetization: Employee stock ownership plan

A

An ESOP. Tax advantaged for Subchapter C companies.

41
Q

Real-estate monetization: Mortgage financing

A

Get a mortgage where payments equal to rent (if income generating property)

Non-recourse loan means could only go after property in case of default

42
Q

Real-estate monetization: Sale-leaseback

A

sell property for cash and lease back to retain use

43
Q

Real-estate monetization: Donor-advised fund or charitable trust

A

give asset to charity or fund set up for charitable gift. Full tax deduction on gift.

CFA Level III (17 decks)

Brainscape helps you reach your goals faster, through stronger study habits.
© 2024 Bold Learning Solutions. Terms and Conditions