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S66 deck > Risks and Recommendations > Flashcards

Risks and Recommendations Flashcards

1
Q

Municipal bond interest is exempt from __________ tax

A

federal tax

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2
Q

Describe inflation or purchasing power risk.

A

The risk that today’s investment will not be worth as much when the money is received in the future

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3
Q

True or False: Investors sell covered options in order to generate income.

A

True. By selling the option, the seller is immediately credited with the premium

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4
Q

True or False: A low beta security would be expected to rise more than a high beta security in a bull market.

A

False. An asset with a low beta would be less volatile and would, therefore, be expected rise less in a rising market.

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5
Q

Which asset class is most susceptible to interest-rate risk?

A

Debt (i.e., bonds)

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6
Q

A stock with a positive alpha is generally considered a _______ opportunity by an analyst.

A

buying

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7
Q

True or False: Under the UPIA, an adviser should never recommend speculative investments to conservative investors.

A

False. Risk should be managed, not avoided. Speculative investments (e.g., options and commodities) may reduce overall risk

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8
Q

Why is a client’s profession relevant when determining suitability?

A

It may indicate the client’s level of sophistication and the potential need for liquidity

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9
Q

Retirement goals, future college tuition, and remaining mortgage payments are examples of _______ needs.

A

capital needs

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10
Q

What is the risk that investors may be unable to dispose of a securities position quickly and at a fair price?

A

Liquidity risk

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11
Q

True or False: When managing assets in a trust, the trustee should consider the grantor’s tax status.

A

False. Generally, the trustee should act in the best interests of the beneficiary, not the grantor.

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12
Q

For a person with a diversified portfolio of large-cap stocks, what type of risk may be reduced by using index options?

A

Systematic risk

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13
Q

Money-market securities have a maturity of __________________.

A

one year or less

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14
Q

___________________ is the balancing of investment classes according to an investor’s investment objectives.

A

Asset allocation

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15
Q

What is the risk that Congress may enact tax law changes that negatively impact the value of an investment?

A

Legislative risk

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16
Q

An __________ policy is a type of life insurance that pays face value at the end of a period.

A

endowment policy

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17
Q

What is the risk that certain circumstances or factors may have a negative impact on the profitability of a company?

A

Business risk

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18
Q

The principal value of TIPS may be adjusted based on changes to the __________________________.

A

Consumer Price Index (CPI)

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19
Q

What is another name for non-diversifiable risk?

A

Systematic risk

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20
Q

Is market risk considered a form of diversifiable or non-diversifiable risk?

A

Non-diversifiable risk

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21
Q

What is the Sharpe Ratio used to determine?

A

The Sharpe Ratio is used to determine if returns are from wise investments or the result of excess risk.

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22
Q

Define currency risk.

A

The risk that foreign investments will be worth less in the future due to changes in exchange rates.

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23
Q

True or False: Investors may buy options in an effort to hedge stock positions.

A

True

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24
Q

What is the risk of foreign investors losing money due to changes with a country’s government or regulatory environment?

A

Political risk

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25
List some of the common financial goals
Income, growth, preservation of capital, liquidity, tax relief, and speculation
26
Regarding clients, list some of the non-financial considerations an IAR must consider?
Age, occupation, time horizon, investment experience, and social values
27
What is the risk that changes in tax law could impact securities prices?
Legislative risk
28
List some important considerations when determining the suitability of recommendations made to customers.
Investment objectives, financial situation, risk tolerance, tax status
29
How is interest on municipal bonds treated for tax purposes?
Federally tax-exempt, but may be subject to state and local tax
30
An investor wants to invest in bonds so she can buy a car in two years. What is an appropriate recommendation?
Buying bonds with less than two years to maturity would be best. Money-market securities would also be suitable.
31
A 20-year U.S. Treasury zero-coupon bond is most susceptible to _________ risk.
inflation risk
32
What risk is based on the possibility that new regulations may have a negative impact on an investment’s value?
Regulatory risk
33
What would an IAR consider when performing a capital needs assessment for a client?
The client's future earnings potential, expenses, and life expectancy, but also inflation expectations
34
True or False: When conducting a client's financial analysis, liquid investments would be considered long-term assets.
False. Liquid investments would be considered current assets.
35
__________ is a form of life insurance that may be suitable for people with a fixed time horizon.
Term life
36
Do long-term bonds have higher or lower interest-rate risk?
Higher
37
True or False: When formulating a financial plan, it is always important to consider the client's liquidity needs.
True
38
What type of risk does beta measure?
Non-diversifiable
39
What is the risk that environmental regulations could impact the prices of securities?
Regulatory risk
40
Define negative financial leverage
It is when the return achieved is less than the cost of borrowing.
41
What is the risk of having an excessive portion of a portfolio invested in one particular security or asset class?
Concentration risk
42
Is a person who invests in a variable annuity more susceptible to legislative risk or investment risk?
Investment risk, since the separate account of a variable annuity fluctuates with the overall performance of the market
43
Identify the risk: Investors miss out on receiving a better return by placing their funds elsewhere.
Opportunity risk
44
Gold coins, gold certificates, or gold futures may be purchased in an effort to avoid what type of risk?
Inflation risk
45
In a rising market, is a low beta security expected to outperform or underperform the market as a whole?
Underperform
46
True or False: When the market suffers a large, general decline, most stocks are affected.
True. Stocks are subject to the risks of the market as a whole.
47
True or False: The longer a bond's duration, the less sensitive the bond's price is to changes in interest rates
False. The longer the duration, the greater a bond's price sensitivity to changes in interest rates.
48
List the risks associated with investing in 30-year U.S. Treasury bonds.
Inflation risk and interest-rate risk
49
What are TIPS?
Treasury Inflation-Protected Securities
50
True or False: A buy-and-hold strategy is considered an active/tactical investment strategy.
False. A buy-and-hold strategy is considered a passive/strategic investment strategy
51
____________ stock is resistant to recession.
Defensive stock is resistant to recession (utility companies).
52
True or False: Systematic risk may be avoided through diversification.
False. Systematic (non-diversifiable) risk may not be avoided through diversification.
53
_________ stock pays higher than average dividends.
Income stock pays higher than average dividends (e.g., stocks of utility companies).
54
What type of risk is liquidity risk?
It is non-systematic risk, since liquidity risk may be diversified against by buying actively traded assets.
55
Identify the risk: A particular enterprise may not perform well due to poor management or increased competition.
Business risk
56
If a security's beta is more than 1, is it considered more or less volatile than the market as a whole?
The higher the beta, the greater the volatility.
57
Define reinvestment risk.
The risk that an investor will not be able to reinvest her principal at the same interest rate.
58
Which would have the least risk—large-, mid-, or small-cap companies?
Large cap stocks have the least risk.
59
When investing for an estate, the most suitable investments are normally _______-term.
short-term
60
Define positive financial leverage.
It is when the return achieved is greater than the cost of borrowing.
61
What is another name for diversifiable risk?
Non-systematic risk
62
If a client's goal is preservation of principal, what fund would be most appropriate?
Money-market fund
63
A client notices that a thinly traded stock has had few daily trades effected. To what risk is it most susceptible?
Liquidity risk
64
True or False: Alpha represents an investment's actual return in excess of its expected return.
True
65
If a client is reluctant to disclose information, what must an IAR do?
Use the information given and create a plan based on that information. An IAR may not make assumptions.
66
A capital needs analysis is done to determine a client's _________ needs in order to fund future financial goals.
insurance needs
67
What types of securities tend to have a low beta?
Defensive stocks
68
Business, regulatory, political, and liquidity risk are all types of ____________ risk.
unsystematic risk
69
True or False: Under the Uniform Prudent Investor Act (UPIA), an IA's main objective should be risk avoidance.
False. The UPIA indicates that advisers are responsible for managing risk, not avoiding risk.
70
Which would have the most risk—large-, mid-, or small-cap companies?
Small cap stocks would have the most risk.
71
In a declining market, is a high beta security expected to outperform or underperform the market as a whole?
Underperform
72
True or False: A bottom up approach to investing uses the economy as a main factor in determining which stocks to buy.
False. Bottom up investing uses company specific items (e.g., earnings and dividend payments) to pick stocks.
73
Which is a better hedge against inflation, investing in stocks or bonds?
Historically, stocks have outperformed inflation. Since bonds are fixed income instruments, they are hurt by inflation.
74
Market, interest rate, and inflation risk are all types of ___________ risk.
systematic risk
75
Another name for a security's risk-adjusted return is its ________.
alpha
76
Identify the risk of existing bond prices declining while interest rates are rising.
Interest rate risk
77
What type of risk is avoided through indexing?
Business risk, since indexing involves purchasing stocks of many companies
78
Is a hedge fund investment considered liquid?
No
79
Name some of the different types of money-market instruments.
T-Bills, Bankers' Acceptances (BAs), Commercial Paper, Negotiable CDs
80
Buying gold or gold futures may protect an investor against _________ risk
inflation
81
True or False: Diversification is one method by which an investor may avoid non-systematic risk
True
82
True or False: The longer an investor's time horizon, the more concerned he is with market fluctuations.
False. The longer the time horizon, the less concerned he is with market fluctuations.
83
True or False: Investors who are planning to hold bonds until maturity have no risk.
False. Opportunity risk (the risk of missing out on a superior investment) is a risk these types of investors face.
84
Which interest rates are generally more volatile?
Short-term rates
85
Highly regulated companies, such as utilities, are subject to __________ risk.
regulatory risk
86
What types of securities tend to have a high beta?
Growth stocks
87
In calculating an IA's net worth, what assets are NOT included?
Homes, home furnishings, automoblies, goodwill, and pre-paid expenses are not included.
88
Define capital risk
The risk that an investor may lose a part or her entire investment (principal). Capital risk is a form of diversifiable risk
89
Which type of risk is non-diversifiable?
Market risk
90
True or False: When interest rates go up, bonds prices go up, and when interest rates go down, bond prices go down.
False. There is an inverse relationship between interest rates and prices.
91
What risk is based on the possibility that new laws may have a negative impact on an investment’s value?
Legislative risk
92
List some forms of business risk that apply when investing in individual equity securities.
Poor management, obsolete products, changing market conditions
93
If a client eliminates unsystematic or diversifiable risk in his portfolio, he is willing to accept ______ risk.
market risk
94
True or False: The interest rate on TIPS is fixed, but the principal may be adjusted.
True
95
Who typically buys hedge funds?
Accredited (sophisticated) investors through Regulation D offerings
96
___________ stock fluctuates with the business cycle
Cyclical
97
Given a yield change, ____________ bonds move more in price
long-term bonds
98
Describe positive financial leveraging
Paying less interest than earnings received (e.g., client pays 4% on a margin loan, but earns 10% on stock gains)
99
If a client gives little information when opening an account, what securities may an agent recommend to the client?
Only securities that are suitable based on the information the client did provide
100
____________ risk is the inability to sell an investment easily
Liquidity risk

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