Unit 20+

Question 1

Asset classes

Answer 1

Stocks with sub (market cap, value vs. growth, and international)
Bonds with subs (intermediate vs long terms, and issuer US vs non US
Cash: Standard risk free investment 91 (13 weeks) T bills but also other short term mm

Question 2

Port diversification

Answer 2

1. Reduces unsystematic risk & enhances return
   2.

Question 3

2 methods of diversification

Answer 3

Tactical and Strategic
Tactical (Active)
Short-term adjustments to mix given current market conditions and investor sentiment
Active management: Timing and Stock picking abilities

Strategic (passive): Usually a portf. mirroring an index.

Question 4

Growth style Vs. value

Answer 4

-Port focus on growth style include companies whose earnings are growing faster than most other stocks. Looking for earnings momentum.
-Value stocks: buying undervalued or out-of-favor securities
Value managers expect low P/E ratio or low price-to-book ratio

Question 5

Monte Carlo Simulations:

Answer 5

attempts to forecast how investment returns on different asset classes differ over time.

Question 6

What is barbell bond strategy?

Answer 6

Buyin bonds maturing in 1 to 2 years and an equal amount maturing in 10 years with no bonds in between. Long term giv eu long term high interest rate and short term, u can sell to buy better rate. This is active investment

Question 7

What is bullet bond strategy?

Answer 7

Buying bonds at different times but with same maturities. Enables to capture current interest rate and they change rather than having an entire port. locked into one rate.

Question 8

What is a ladder bond strategy?

Answer 8

Purchased at the same time, but mature at different times. shorter maturities reinvested and become long term ones.

Question 9

CAPM

Answer 9

determine risk adjusted return based on how much risk an investor needs to stomach.
Based in systematic risk - non diversifiable

Question 10

Modern Port. Theory:

Answer 10

-Attempts to quantify and control portfolio risk. Risk and reward based on the total of the portfolio rather than specific securities. Instead of risk reward, modern portfolio theory focused on the relationships among all the investments in a portfolio. Diversify by holdings with uncorrelated returns. All else equal, the portfolio with least volatility will do better than one with most volatility.

Question 11

CLM

Answer 11

Using std, it measure the return of the port based on the level of risk.

Question 12

Portfolio Frontier

Answer 12

Any portf. that lies on the curve is considered an efficient portfolio.

Question 13

Security Market Line (SML)

Answer 13

Expected return given the extra rate in addition to the RF rate. To calculate, Expected market return -risk free return =result. Result *beta of company +risk free rate

Question 14

Efficient market theory

Answer 14

All info into prices
Weak; only fundamental info can help predict return no technical value
semi strong, no value in fundamental or technical info; only insider info
strong-form: fully incorporates all types of information.

Question 15

There two tax functions:

Answer 15

1. Regressive (sales, excise, payroll, property, and gas) charges at the same rate. Poor spend a lot of their income so this will affect them the most.
2. Progressive (estate , income, gift) increase the tax rate as income increases. Costly for people with high income.

Marginal tax rate: highest rate an ind, pays on income

Question 16

There two tax functions:

Answer 16

1. Regressive (sales, excise, payroll, property, and gas) charges at the same rate. Poor spend a lot of their income so this will affect them the most.
2. Progressive (estate , income, gift) increase the tax rate as income increases. Costly for people with high income.

Marginal tax rate: highest rate an ind, pays on income.

Question 17

5 ways to file taxes:

Answer 17

1. Single
2. Married filing jointly
3. Married filing separately
4. Head of household
5. Qualifying widow (er) with dependent child

*single parent with dependent children, best to use head of household.
*married filling jointly is the most advantageous for married couples
*Age 65 or blind/disabled get an additional 1300 or 1650 deduction
*state tax up to a limit could be used as deduction on federal tax
*resident alien or non-resident alien have different tax treatments

Question 18

What is Alimony?

Answer 18

Payment made under a divorce court order to an ex-souse. Generally deductible to the spouse making the pmt and includable in income for tax purposes by the spouse receiving them.
but it has changed; now no reporting needed no deducting allowed for either couples for divorces after dec 31 2018.

Question 19

Child support

Answer 19

Child support to parent who lives with child. Not deductible by payer nor included in income.

Question 20

Passive income & losses

Answer 20

Rental, limited partnerships, and enterprises. General partners income is as income, limited is passive. Passive income is netted against passive losses then taxes as ordinary income. Passive losses only offsets passive income.

Question 21

Any qualified dividend taxes

Answer 21

Generally around 15% sometimes 20.
Interest except municipal issues (municiple capital gains are taxable) are always taxes at ordinary income
Interest on US T securities is exempt from state taxes but not federal. Bond funds income also as regular income.

Question 22

Reinvestment of dividends (taxed at the year received) is also taxable.

Answer 22

Stocks and bonds dividends and interest (taxable in year received)

Question 23

Dividend reinvestment plan (DRIPS)?

Answer 23

Companies allowing shareholders to buy using dividends usually at a discount. the div is taxed but also the investor’s cost basis will increase as well.

Question 24

Margin Expenses

Answer 24

Margin interest is tax deductible. Exception is interest expense in purchase of municipal securities as federally tax exempt.

Question 25

Any qualified dividend taxes

Answer 25

Generally around 15% sometimes 20.
Interest except municipal issues (municipal capital gains are taxable) are always taxes at ordinary income
Interest on US T securities is exempt from state taxes but not federal. Bond funds income also as regular income.

Question 26

Determine which sales to share:

Answer 26

1. Fist in, first out (FIFO)
2. Share identification (investor keeps track of the cost of each share purchased and uses this info to liquidate the shares that would provide the lowest capital gain.
3. Average cost basis (when redeeming mutual fund shares but not stocks. Total cost by total no of shares.
   FIFO shares sold, cost of the shares held the longest is used to calculate the gain or loss.

Question 27

Primary residence taxation

Answer 27

As long as lived there for at least two of the past five years, then good tax treatment. So, the first $500k in profit is excluded from capital gain for a couple. Single, first $250k.

Question 28

AMT

Answer 28

Items added back to regular taxes.

Question 29

Life insurance taxes

Answer 29

-Premiums for individually purchased LI are generally nondeductible
-Proceeds from LI policies are exempt from federal income tax
-Life insurance death benefits go to estate of that person.
-Policy surrender (any gains in cash value will be taxed as ordinary income
-

Question 30

SSN taxation

Answer 30

-50% of ssn is taxable if income is more than $32k for couple and single $25k. 85% taxable if $34k and $44 k respectively for married and single.

Question 31

Gift security

Answer 31

-Carry over basis: gift a stock, the receiver cost basis will be the donor’s cost basis.
-If donated to charity (Nprofit) then deduction is based on the fair market value on the date of the gift. So, it is best to donate appreciated stock.
-Inherited stocks: cost basis is the fair value on the date of the person
-Each ind. in a married couple has a lifetime estate tax exclusion of $11.4 mil.
-Generation - skipping trust:

Question 32

Trust tax rates:

Answer 32

Distributable Net Income: any income in excess of reinvestment and expenses. If not distributed, taxes are very high.
-Bypass trust; use to enable surviving spouse to take advantage of the unused lifetime exclusion of the first to die and add it to their exclusion.
-Portability of unused estate tax:
basically replacing bypass to enable the spouse to take the unused portion of the first deceased spouse’s fedral exemption and aggregate it with the surviving spouse’s unused portion.

Question 33

Distributable net income DNI

Answer 33

Determines the amount of income that may be taxable to beneficiaries whereas the balance may be taxed to the trust. IF trust revocable, then all income distributed or not is taxed to the grantor.

Question 34

GST (Generation skipping trust)

Answer 34

-Certain expense are deducted from the gross estate to arrive the adjusted gross; funeral expenses, charitable, contributions, and debts of decedent.
-After this, the unlimited marital and charitable deductions are subtracted to arrive at the taxable estate.
11400000 can be transferred to spouse for tax exemption.

Question 35

Form 706 is used to compute estate taxes and form 1041

Answer 35

is used to calculate estate income tax

Question 36

Gift tax obligation

Answer 36

$11.4 million in lifetime gifts may be without incurring gift tax. $can give up to $15000 per year to any number of individuals without generating the federal gift tax. Married 30k. Giftin to spouse who is US citizen is unlimited.

Question 37

Taxation of Business

Answer 37

Sole Proprietorship: Part of the personal tax return using form 1040.
Partnership: General partnerships no liability protection. Limited partnership offers some protection. LP loss is what has already been invested plus any funds committed.
LLC:
Corporations; C&S
C corporation pays taxes. rate does not exceed 21%.
Sole and single member LLC file on schedule C.
S corporations receive a schedule K1 and C corp report on 1120 form.

Question 38

Margin accounts:

Answer 38

-required documents; complete promptly after the initial trade
-Risk disclosure document; at the time of opening the account.
Can buy securities but can not buy options.

Question 39

Margin accounts:

Answer 39

Can borrow up to 50% against the security in the account
-If the stock go down by a lot, a margin maintenance will be called. generally, when the security value is 25% of the account value
-House maintenance: ind. firms may require other values like 35% for maintenance level.
Margin call: by fed reserve showing how much can be borrowed 50%
Min. maintentance 25% or 30% below which call is made.

Question 40

Mixed margin accounts

Answer 40

-when the account contains both short sales and long positions. In long account; you own your value of security minus the debt balance. In case of short, it is the same. you owe the cost to buy back the stock you’ve borrowed. Credit balance minus short.
-Margin interest is tax deductible expense.