Unit 19 (6)

Question 1

John and Jane doe have a net worth of 20,000 and total assets of 150k. If their revolving credit and unpaid bills total 8k, how much are their total liabilities?

Answer 1

Just assets minus liabilities. Ignore the credit and unpaid bills.
150k - liabilities = 20k net worth
Liabilities = 130k

Question 2

Among investors objectives is preservation of capital. Which of the following would be most appropriate for inclusion in the portfolio?

1. Blue chip stocks
2. Money market fund
3. International funds
4. US treasury bonds

Answer 2

Money market fund. Preservation of capital means no fluctuations. Money market funds are the logical choice here. Treasury bonds do not have default risk, but because they can have maturities as long as 30 years, they are subject to interest rate risk.

Question 3

Study of why people often make decisions using rules of thumb rather than rational analyses

Answer 3

Behavioral finance

Question 4

What is the key document that defines an investors risk and return objectives and any constraints for their investment

Answer 4

Investment policy statement

Question 5

One of the portions of the Patriot Act that affects opening of an account for a new customer is

Answer 5

Customer identification program

Question 6

Client is risk averse and retiring in 16yrs. Which of the following would you recommend?

1. Gov bond fund
2. 50% SNP index, 50% high quality bonds
3. High yield bond fund
4. Diversified mutual fund of small caps

Answer 6

2. 50% SNP 50% high quality bonds. With a 16 year retirement goal, some inflation protection is necessary. The index fund carries some market risk, but does offer purchasing power protection.

Question 7

When you see inflation protection, what will the answer be?

Answer 7

Common stock (unless TIPS is given as an answer choice)

Question 8

Whenever you see “low tax bracket” the answer cannot be what

Answer 8

Muni bonds. Those are only for high tax brackets

Question 9

Which of the following is generally not appropriate for retirement planning?

1. Life insurance
2. Bonds
3. Commodities
4. Mutual funds

Answer 9

The answer is commodities. Don’t get this confused with a question about IRAs where insurance would not be acceptable in an IRA

Question 10

Investment constraints

Answer 10

Limitations on the ability to make use of particular investments. They can be:
Liquidity
Time horizon
Tax concerns
Legal and regulatory factors
Ethical objectives or social considerations

Question 11

Investment constraints

Answer 11

Liquidity
Time horizon
Tax concerns 
Legal and regulatory factors 
Ethical objectives or social considerations

Question 12

What is the easiest way to differentiate between an investment constraint and a capital need?

Answer 12

If it mentions a dollar amount it’s a capital need

Question 13

Which of the following should be considered by an IA in determining whether a specific security is suitable for a specific investor?

1. Past performance of the investment
2. Investors anticipated time horizon
3. Amount of remuneration to the BD and the agent
4. The investors risk appetite

Answer 13

2 and 4 the investors anticipated time horizon and risk appetite. Past performance, while important to know, cannot be used to indicate future returns.

Question 14

Your client has a child entering college in 5 years. Is this a capital need or investment constraint?

Answer 14

Investment constraint. Time constraints of liquidity and time horizon.

Question 15

Investment constraints

Answer 15

Time horizon
Liquidity
Taxes
Laws and regulations
Unique circumstances/preferences

Question 16

Investment objectives

Answer 16

Return requirements

Risk tolerance