Brainscape's Knowledge GenomeTM

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


See full index

CFA > Reading 19 > Flashcards

Reading 19 Flashcards

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

Human Capital

A

PV of expected future labor income

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

Economic net worth

A

Extends individual’s assets to include human capital while liabilities are extended to include consumption and bequest goals

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

Tax Avoidance

A

not illegal tax evasion. minimizing taxes by utilizing investment accounts that are legally exempt from taxes on income and capital gains

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

Tax Reduction

A

investing in tax free securities or those that are more tax efficient

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

Tax Deferral

A

deferring recognition of taxes in the future - focus on long term capital gains and low turnover. eg retirement accounts - tax free contributions and earnings accumulation but require taxes to be paid on withdrawals

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

Planned Goals

A

reasonably estimated within a specified time horizon

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
6
Q

unexpected financial expenditure

A

uncertainty associated with amount of expenditure and/or timing

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
7
Q

Risk Tolerance of pvt client

A

willingness and ability to take risks

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

risk capacity

A

ability to take risks. more objective than risk tolerance which is more of an attitude towards risk

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

Capital sufficiency (Capital needs)

A

determined using: deterministic forecasting and monte carlo simulation

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

Deterministic forecasting

A

liner return analysis that assumes that a pvt client’s portfolio will achieve a single compound annual growth rate across the client’s investment horizon. downside: use of a single return assumption is not representative of actual market volatility

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

Monte Carlo Simulation

A

allows input variables to give a probability distribution to allow for real world uncertainty. WM can then aggregate all the outcomes to determine the probability tat a client will achieve a financial goal over the investment horizon. WM use a 75% - 90% probability of success as a rule of thumb when advising pvt clients.

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

Peak accumulation stage of pvt client

A

financial capital accumulation is typically greatest int he decade before retirement as human capital is converted into financial capital. earnings and need to accumulate funds for retirement is high. pvt client also reduces liabilities such as mortgage debt.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
13
Q

Mortality Table

A

shows life expectancy for an individual at different ages and enables a pvt wealth manager to determine the probability that a client will survive to a given age

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
14
Q

Longevity risk

A

risk of outliving one’s financial resources

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

Annuity

A

buyer of annuity makes an upfront payment in exchange for receiving a series of specified payments over time

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

Immediate Annuity

A

guarantees specified monthly payments for PREDETERMINED PERIOD, with payments due immediately

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

Deferred Annuity

A

monthly payments begin at a specified time in the future

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
18
Q

Life Annuity

A

Makes monthly payments for as long as the annuity holder is alive

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
19
Q

Annuity puzzle

A

individuals tend to avoid annuities to meet their spending needs in retirement. possible reasons include:
1. clinging on to the hope of funding a better retirement lifestyle
2. desire to keep control of assets
3. high cost of annuities

20
Q

Lack of Self-Control for Retirees

A

retirees prefer to meet their spending needs from investment income rather than by liquidating securities. this preference for investment income over capital appreciation can be attributed to lack of self-control when it comes to spending.

21
Q

PWM discretionary authority

A

specifies ability of the private wealth manager to take investment actions without first seeking the client’s approval

22
Q

PWN non-discretionary service

A

can make investment recommendations but is unable to act on the recommendation without client approval

23
Q

Modeled portfolio performance

A

range of possible portfolio outcomes over different investment horizons as well as distribution of returns at specific percentiles

24
Q

capital market expectations

A

different return, risk and correlations of the asset classes that the PWM can include in the client’s portfolio

25
Q

Goals based investing

A

follows same steps as traditional approach, but instead of constructing a single portfolio, the private WM creates separate portfolios for each of the client’s goals. MVO is carried out for a given level of risk or to meet a specified probability of success for each goal portfolio rather than for the entire portfolio

26
Q

Portfolio review areas

A
  1. appropriateness of clients existing goals and investment parameters and if any changes are required
  2. rebalancing of portfolio asset allocation to target allocation or ranges
  3. any changes to the wealth manager’s ongoing management of the portfolio (eg degree of discretionary authority)
  4. any changes or updates in the wealth manager’s duties and responsibilities
  5. any changes to IPS and portfolio review frequency
27
Q

Goal Achievement

A

an investment program is considered a success if it fulfills a clients goals within the specified risk parameter. is the portfolio still likely to meet the client’s longer term goals without a significant change in the original strategy?

28
Q

an investment process is successful if it achieves which 3 parameters?

A
  1. goal achievement
  2. process consistency
  3. portfolio performance
29
Q

categories of private clients

A
  1. mass affluent
  2. high net worth
  3. ultra-high net worth
30
Q

mass affluent segment

A

wide range of WM services, large number of clients per wealth manager and greater use of technology in delivering services

31
Q

HNW segment

A

tailored investment solutions
tax planning
estate planning
sophisticated strategies and alternative investments
longer investment horizons, greater risk capacity

32
Q

VHNW

A

5m to 15m USD
higher AI - high min buy ins, reduced liquidity, long time horizons, required capital contributions and higher expected risk adjusted returns
accounts managed on discretionary fee only basis

33
Q

UHNW

A

multi generational investment horizons, complete tax and estate planning and more comprehensive range of service requirements including ancillary services like travel planning, advice on luxury investments. they have relatively low client to manager ratio because of the need for highly customized service to clients.

34
Q

Investment Parameter Criteria

A

Risk Tolerance
Investment Horizon
Asset Class Preference
Other Investment Preference
Liquidity Preference
Constraints

35
Q

Drawbacks of goal based investing

A

1may not be mean-variance efficient because the overall allocation of the entire portfolio will depend on the aggregated asset class allocations of the goal portfolios and is unlikely to be as ell diversified as the optimal portfolio obtained using the traditional approach

36
Q

Annuity Puzzle

A

A phenomenon that retirees tend to avoid annuity investments, which may be appropriate to best help them reach their financial goals. An annuity provides a series of fixed payments, either for life or for a specified period, in exchange for a lump sum. People who refuse to buy annuity might minimize the chance of a substantial improvement in her lifestyle

37
Q

What are the soft skills of PWM?

A
  • interpersonal relationships
  • communication skills
  • social skills
  • education and coaching skills
  • business development skills
  • sales skills

DOES NOT INCLUDE SPEAKING TO CUSTOMER IN THE SAME LANGUAGE

38
Q

Tax Free Earnings and withdrawal are an example of tax:
- deferral
- reduction
- avoidance?

A

Avoidance since it eliminates the taxes you’d have to pay on investment income and gains in the account

39
Q

How do you test for risk aversion?

A

See how the individual behaves when faced with negative outcomes

eg if you lose your job, will you still go on vacation?

40
Q

When you hear the word “risk”, what do you think? Opportunity/ avoid it/ etc.

This is an example of a question to test?

A

Risk perception

41
Q

Is probability of success a feature of goal-based investing?

A

no - it is a feature of monte carlo simulation

42
Q

As a starting point, what information should you know about your wealth management client?

A

family situation, identification, additional career information, investment background and more details on financial goals and risk tolerance

43
Q

What are the different client segment/ advisor types?

A
  1. Robo Adviser
  2. Mass Affluent ($250-1m)
  3. HNW ($1-10m)
  4. UHNW (Over $50m)
44
Q

Determine the approach:

Sili determines that he can specify his level of annual spending during retirement and that he can model that spending as a series of fixed payments. He calculates the present value of that series of payments as of the day of his retirement, resulting in the amount of money that he will need to fund his retirement goals.

A

Annuity Method

The calculated price of an annuity equals the present value of a series of future fixed outflows during retirement.
A relatively simple way for Sili to calculate the present value of his desired retirement spending is by pricing an annuity. Annuities provide a series of fixed payments, either for life or for a specified period, in exchange for a lump sum payment.

45
Q

Determine the method:

Sili considers the probability that he will live to a certain age and then predicts his inflation-adjusted retirement spending according to the probability that he will still be living in a given year. This approach allows him to estimate the present value of his retirement spending needs by assigning associated probabilities to annual expected cash outflows.

A

Mortality Tables

46
Q

Determine the method:

Sili models the uncertainty of each key variable individually by assigning each one its own probability distribution and then generates a large number of random outcomes for each variable. He aggregates the outcomes to determine an overall probability of reaching his objectives. Sili sees this as a flexible approach that allows him to explore various scenarios, including unforeseen expenses.

A

Monte Carlo Simulation

47
Q

What all should be included in the portfolio report?

A
  • Performance summary for the current period
  • market commentary for the current period to provide context for the portfolio performance
  • portfolio asset allocation at the end of the current period, including strategic asset allocation weights or tactical asset class target ranges
  • detailed performance of asset classes and individual securities
  • benchmark report comparing asset class and overall portfolio performance to appropriate benchmarks
  • historical performance of client’s investment portfolio since inception
  • transaction details for the current period
  • purchase and sale report for the current period
  • impact of currency exposure and exchange-rate fluctuations
  • progress toward meeting goal portfolios when using a goals-based investing approach

CFA (21 decks)

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