Test your basic knowledge |

Private Wealth Management

Subjects : personal-finance, business-skills

Instructions:

Answer 50 questions in 15 minutes.
If you are not ready to take this test, you can study here.
Match each statement with the correct term.
Don't refresh. All questions and answers are randomly picked and ordered every time you load a test.

This is a study tool. The 3 wrong answers for each question are randomly chosen from answers to other questions. So, you might find at times the answers obvious, but you will see it re-enforces your understanding as you take the test each time.

1. characteristics of foundation stage
HC = PV of future labor income
Simple and quick - removes all residual risk - allows reinvestment of proceeds to achieve desired diversification
Young -Building a foundation for future wealth -above avg risk tolerance
The more equity-like - the less the demand for life insurance

2. What are the general legal and regulatory considerations for individuals?
Tax rate lower today = use tax-exempt - tax rate lower in future = use tax deferred - not expected to change = use either
1) Entrepreneur - large position in 1 private stock 2) Executive - large position in 1 public stock 3) Investor - large positions in 1 successful public stock
If board of director member = inside - prudent investor rules usually applies - recommend legal counsel for setting up personal trust or family foundation - if a trust - balance the needs of income beneficiaries and remainderment
Most risk tolerant - fear that failing to respond to changing market conditions will negatively impact their portfolio - constantly adjust their portfolios in response to changing market conditions - tend to doubt investment advice. - high turnover a

3. Human capital is sometimes referred to as what?
Achieves diversification slowly over time - capital gains taxes avoided to extent of matching gains and harvesting losses
Wealth transfer stage - focus on tax min. with trusts and foundations
Implied assets
Entrepreneurial activity (likely to have highly concentrated portfolio) -inheritance - one-time windfalls (may be more willing to diversify) -built up over long periods of safe employment (e.g. middle mgr - easier to divest than huge entrepreneurial

4. What is the general relationship between tax drag% and tax rate with accrual taxes; and as investment horizon increases and return increases?
Simple and quick - removes all residual risk - allows reinvestment of proceeds to achieve desired diversification
Risk tolerance = as risk tolerance increases - demand for life insurance decreases
Implied liabilities
- tax drag% > tax rate - as investment horizon increases - tax drag $ and tax drage % increase - as investment return increases - tax drag $ and tax drag % increase

5. Describe a spontaneous investor personality type.
High need for financial security - High need to avoid losses - Don't like to make own investment decisions - Don't trust others to make investment decisions - either - Tend to select least volatile assets - Low asset turnover - Frequently miss invest
Achieves diversification slowly over time - capital gains taxes avoided to extent of matching gains and harvesting losses
Most risk tolerant - fear that failing to respond to changing market conditions will negatively impact their portfolio - constantly adjust their portfolios in response to changing market conditions - tend to doubt investment advice. - high turnover a
1) Financial market risk (reduced with efficient diversification) 2) Longevity risk (hedged w/ annuities) 3) Savings risk (hedged by employing a savings program and consuming less)

6. characteristics of individualist investor
Diligently gather the best possible investment info - tend to be conservative and - since they base decision on facts - they rarely form emotional attachments to investments - continually seek better info to confirm past investment decisions
- tax drag% > tax rate - as investment horizon increases - tax drag $ and tax drage % increase - as investment return increases - tax drag $ and tax drag % increase
Self confident - Gather information from a wide variety of sources to make their own decisions - Willing to take risk
High need for financial security - High need to avoid losses - Don't like to make own investment decisions - Don't trust others to make investment decisions - either - Tend to select least volatile assets - Low asset turnover - Frequently miss invest

7. What are the disadvantages of completion portfolios for low basis stock?
Typically very loyal to the firm - views the concentrated position as a positive - does not desire diversification - b/c feels in control of the future - as entrepreneurs delegate more and more control to others - they strive for more and more divers
Must have a very large portfolio or be willing to borrow - may take a long time to diversifiy completely
Entrepreneurial activity (likely to have highly concentrated portfolio) -inheritance - one-time windfalls (may be more willing to diversify) -built up over long periods of safe employment (e.g. middle mgr - easier to divest than huge entrepreneurial
- tax drag% > tax rate - as investment horizon increases - tax drag $ and tax drage % increase - as investment return increases - tax drag $ and tax drag % increase

8. An investor's ability to take risk depends on what?

Warning: Invalid argument supplied for foreach() in /var/www/html/basicversity.com/show_quiz.php on line 183

9. Why would an individual try to use generation skipping in estate planning?
Transferring assets directly to a third generation avoids possible double taxation
Both increase with longer holding periods and higher returns
Implied assets
Depends on the investor's goals and time horizon and the volatility the portfolio can bear b/f those goals are jeopardized

10. What is core capital?
1) growing the portfolio (capital gains) 2) liquidity needs - total return approach
The amount of assets (i.e.present value) necessary to meet all future liabilities
If human capital is equity-like - allocate financial assets more to fixed income - if the human capital is fixed-income like - allocate financial assets more to equities
Transferring assets directly to a third generation avoids possible double taxation

11. What are the advantages of an outright sale of low basis stock?
The demand for life insurance increases - regardless of age
Simple and quick - removes all residual risk - allows reinvestment of proceeds to achieve desired diversification
Required = critical financial objectives (e.g. living expenses - kids' college expenses) Desired = objectives the client would like to meet (e.g. - large bequests to family or charity - early retirement)
1. foundation 2. accumulation 3. maintenance 4. distribution

12. When dealing with low basis stock - emotional issues can arise from what?
- does not ordinarily exhibit the same attachments to the firm as an entrepreneur or top executive - does not have any degree of control either
- extrepreneurs - for example - are usually familiar with taking business risk - they are willing to take risk b/c they feel they control their business and personal circumstances
Joint ownership with rights of survivorship - living trusts - retirement plans - life insurance - other means that transfer assets without the need for a will
Client is a foundign family member - the firm still bears the family name - the shares were acquired by a loved one

13. Define tax drag.
- a subjective assessment of financial well-being based on perceived wealth
The reduction in return caused by the payment of taxes
1) Traders (all gains short term) 2) Active investors (less churn - some gains taxed at reduced rates) 3) Passive investor (buy and hold - most gains are deferred) 4) Exempt investors (no investment taxes)
Active wealth creators typically have an above-avg. willingness to take risk - passive recipients of wealth typically have an average or below-average willingness to take risk

14. What is the most common estate planning tool?
Long stock position + long put + short call - long put protects downside (like purchasing insurance) - short call generates income to at least partially offset the cost of the put
Wealth transfer stage - focus on tax min. with trusts and foundations
1) Residence-residence = 2 individuals claim residence for the same individual 2) Source-Source = 2 countries claim authority over the same income (i.e. multinational company) 3) Residence-Source = individual is subject to residence jurisdiction and
A will (also known as a testament)

15. What happens to both tax drag $ and tax drag % with holding period changes and return changes?
The risk of a premature death with accompanying loss of future human capital
1) Residence-residence = 2 individuals claim residence for the same individual 2) Source-Source = 2 countries claim authority over the same income (i.e. multinational company) 3) Residence-Source = individual is subject to residence jurisdiction and
Quick to make decisions in the heat of moment (don't want to miss opportunities) - High PTO - Focus on return w/out considering risk - Don't consider themselves experts - Don't trust professionals
Both increase with longer holding periods and higher returns

16. characteristics of spontaneous investor

Warning: Invalid argument supplied for foreach() in /var/www/html/basicversity.com/show_quiz.php on line 183

17. typical IPS elements
Quick to make decisions in the heat of moment (don't want to miss opportunities) - High PTO - Focus on return w/out considering risk - Don't consider themselves experts - Don't trust professionals
Acts as an operational guideline that represents the long-term - best interests of the investor - the process is dynamic and can incorporate changed circumstances (review at least annually) - the IPS allows continuity over time and portability to new
- a subjective assessment of financial well-being based on perceived wealth
Client description -purpose of IPS -identification of duties - responsibilities -formal statement of objectives and constraints -calendar schedule for portfolio performance and IPS review -performance measures and benchmarks -considerations for devel

18. Why would an individual try to use generation skipping in estate planning?
Transferring assets directly to a third generation avoids possible double taxation
Client is a foundign family member - the firm still bears the family name - the shares were acquired by a loved one
Lock up period (7-10 yrs) - must hold >20% illiquid assets - lack of control (no changes - manager determines asset mix) - original cost basis
1) Source jurisdiction = country levies taxes on all income generated within its borders - whether by citizens or foreigners 2) Residence jurisdiction = a country taxes income of its residents whether generated inside or outside the country (most pre

19. Why would someone want to use a valuation discount?
Taxes paid on the gain (long or short position) when an asset is sold or purchased
Retirement -Wealth has been accumulated -Liabilities paid off -Investor looking to live off of portfolio and/or considering distributions to others -need + ability to bear risk really starts to decline
- the higher in the ranks - the more the executive acts like an entrepreneur - the more control = the more attached the executie is to the firm
Valuation discounts can reduce the value of wealth transfers - so high net worth indiiduals utilize them whenever possible to minimize transfer taxes

20. What are the different stages of life?
1) foundation phase 2) accumulation phase 3) maintenance phase 4) distribution phase
Determine: the client's contraints - as well as risk/return objectives - the best strategy - given capital market expectations for achieving the client's objectives - the appropriate strategic (long term) asset allocation which meets those goals
Wealth transfer stage - focus on tax min. with trusts and foundations
1) Source jurisdiction = country levies taxes on all income generated within its borders - whether by citizens or foreigners 2) Residence jurisdiction = a country taxes income of its residents whether generated inside or outside the country (most pre

21. What are the disadvantages of private exchange funds for low basis stock?
Upside potential of hedged position limited - regulatory risk (avoid constructive sale - some risk exposure required)
Active wealth creators typically have an above-avg. willingness to take risk - passive recipients of wealth typically have an average or below-average willingness to take risk
Extra investment value created by effective tax management
Must partner with an outside - unrelated investor - lock up period - taxesdeferred but not avoided - potential regulatory (IRS) risk

22. Investor questionnaires help to determine what?
1) Taxes - outright sale produces large capital gains taxes 2) Psychological factors - client might have emotional attachment or not care about diversification
Early career 8accumulating education - developing skills - above-average ability to take risk
Risk tolerance and decision-making style
Total wealth = financial assets + human capital

23. Calculating the required return component is driven by what 2 elements?
Anticipate individual investors' concerns and risk tolerance by specifying the investor's source of wealth - measure or adequacy of wealth in relation to needs - and stage of life -observables - reasonably objective
1. foundation 2. accumulation 3. maintenance 4. distribution
1) growing the portfolio (capital gains) 2) liquidity needs - total return approach
The decedent's estate

24. four types of investors
Deterministic = use point estimates to generate a forecasted value such as an expected return or terminal value Monte Carlo = use probability distributions of inputs to generate expected returns with accompanying probability distributions
1) specific risk (unsystematic risk) 2) market risk (systematic risk) 3) residual risk (counterparty risk and regulatory risk)
Anticipate individual investors' concerns and risk tolerance by specifying the investor's source of wealth - measure or adequacy of wealth in relation to needs - and stage of life -observables - reasonably objective
Methodical - cautious - individualist - spontaneous

25. What are the main characteristics of the distribution phase of life?
Payments are based on the performance of a mixed-asset class portfolio selected by the investor (client) - investor receives a fixed number of 'units' each period - value of each unit increases (decreases) during periods of rising (falling) market re
Lock up period (7-10 yrs) - must hold >20% illiquid assets - lack of control (no changes - manager determines asset mix) - original cost basis
Wealth transfer stage - focus on tax min. with trusts and foundations
Must partner with an outside - unrelated investor - lock up period - taxesdeferred but not avoided - potential regulatory (IRS) risk

26. Why would someone want to use a valuation discount?
A positive relationship
Valuation discounts can reduce the value of wealth transfers - so high net worth indiiduals utilize them whenever possible to minimize transfer taxes
Typically very loyal to the firm - views the concentrated position as a positive - does not desire diversification - b/c feels in control of the future - as entrepreneurs delegate more and more control to others - they strive for more and more divers
Must partner with an outside - unrelated investor - lock up period - taxesdeferred but not avoided - potential regulatory (IRS) risk

27. Generally - how does portfolio size - liquidity - time horizon - and/or importance of spending affect ability to tolerate risk?
Immediate diersification - ability to borrow (monetize) - at end of partnership receive proportional share of pool
Client description -purpose of IPS -identification of duties - responsibilities -formal statement of objectives and constraints -calendar schedule for portfolio performance and IPS review -performance measures and benchmarks -considerations for devel
1) exhibit loss aversion rather than risk aversion 2) exhibit biased expectations rather than rational expectations 3) tend to segregate investments rather than considering them in a portfolio perspective
Portfolio size incr. = ability up - Liquidity needs up = ability down - Time horizon up = ability up - Spending importance down = ability up

28. What are the diffferent types of tax jurisdictions?
The more equity-like - the less the demand for life insurance
Portfolio size incr. = ability up - Liquidity needs up = ability down - Time horizon up = ability up - Spending importance down = ability up
1) credit method 2) exemption method 3) deduction method
1) Source jurisdiction = country levies taxes on all income generated within its borders - whether by citizens or foreigners 2) Residence jurisdiction = a country taxes income of its residents whether generated inside or outside the country (most pre

29. What are the main characteristics of the maintenance phase of life?
Determine: the client's contraints - as well as risk/return objectives - the best strategy - given capital market expectations for achieving the client's objectives - the appropriate strategic (long term) asset allocation which meets those goals
1) Residence-residence = 2 individuals claim residence for the same individual 2) Source-Source = 2 countries claim authority over the same income (i.e. multinational company) 3) Residence-Source = individual is subject to residence jurisdiction and
Retired - focus on lifestyle maintenance and security - preservation of wealth - shortening time horizon and declining risk tolerance
Risk tolerance and decision-making style

30. Describe the equity holding life three stages from the perspective of the stock.
Starts as a private stock held by an entrepreneur - Sold publicly in IPO (now held by exec - still major part of wealth - less specific risk b/c more mature) - Contributes less and less specific risk as other securities are added to portfolio - ends
Active wealth creators typically have an above-avg. willingness to take risk - passive recipients of wealth typically have an average or below-average willingness to take risk
Self confident - Gather information from a wide variety of sources to make their own decisions - Willing to take risk
The risk of a premature death with accompanying loss of future human capital

31. As wealth increases...
Wealth transfer stage - focus on tax min. with trusts and foundations
Demand for life insurance decreases
1. foundation 2. accumulation 3. maintenance 4. distribution
Income rising - assets growing - long time horizon - above-avg. ability to take risk

32. characteristics of accumulation phase
Active wealth creators typically have an above-avg. willingness to take risk - passive recipients of wealth typically have an average or below-average willingness to take risk
1) Taxes - outright sale produces large capital gains taxes 2) Psychological factors - client might have emotional attachment or not care about diversification
Earnings start to accelerate -Expenses increase - but so do savings -Long time horizon over which to recover from short-term losses -above-average risk tolerance
Excess capital

33. What are the psychological issues of low basis stock held by an investor?
- the higher in the ranks - the more the executive acts like an entrepreneur - the more control = the more attached the executie is to the firm
- does not ordinarily exhibit the same attachments to the firm as an entrepreneur or top executive - does not have any degree of control either
A will (also known as a testament)
Achieves diversification slowly over time - capital gains taxes avoided to extent of matching gains and harvesting losses

34. stages of life
Deterministic = use point estimates to generate a forecasted value such as an expected return or terminal value Monte Carlo = use probability distributions of inputs to generate expected returns with accompanying probability distributions
Tax drag % = tax rate - as the investment horizon increases - tax drag is unchanged - as the investment return increases - tax drag is unchanged - as the investment horizon increases - value of the tax deferral increases - as the inestment return inc
Wealth transfer stage - focus on tax min. with trusts and foundations
1. foundation 2. accumulation 3. maintenance 4. distribution

35. sources of wealth
- extrepreneurs - for example - are usually familiar with taking business risk - they are willing to take risk b/c they feel they control their business and personal circumstances
Can be implemented quickly - can facilitate low cost borrowing (to monetize) - borrowing costs may be tax-deductible
Decisions should be optimal -process is dynamic - thus factors in changing circumstances -focus on long-term objectives -new investment advisors should be able to use the IPS
Entrepreneurial activity (likely to have highly concentrated portfolio) -inheritance - one-time windfalls (may be more willing to diversify) -built up over long periods of safe employment (e.g. middle mgr - easier to divest than huge entrepreneurial

36. Equation for total wealth.
High need for financial security - High need to avoid losses - Don't like to make own investment decisions - Don't trust others to make investment decisions - either - Tend to select least volatile assets - Low asset turnover - Frequently miss invest
Anticipate individual investors' concerns and risk tolerance by specifying the investor's source of wealth - measure or adequacy of wealth in relation to needs - and stage of life -observables - reasonably objective
Total wealth = financial assets + human capital
Active wealth creators typically have an above-avg. willingness to take risk - passive recipients of wealth typically have an average or below-average willingness to take risk

37. Describe a cautious investor personality type.
Methodical - cautious - individualist - spontaneous
Most risk averse/least risk tolerant - primary focus is financial security: preservation of wealth - hard to advise - can over-analyze - slow in making decisions and then changing investments - low portfolio turnover/volatility
Must have a very large portfolio or be willing to borrow - may take a long time to diversifiy completely
If board of director member = inside - prudent investor rules usually applies - recommend legal counsel for setting up personal trust or family foundation - if a trust - balance the needs of income beneficiaries and remainderment

38. What are the diffferent types of estate ownership rights?

Warning: Invalid argument supplied for foreach() in /var/www/html/basicversity.com/show_quiz.php on line 183

39. What are the advantages of an outright sale of low basis stock?
Sources of wealth - measure of wealth - stage of life
Simple and quick - removes all residual risk - allows reinvestment of proceeds to achieve desired diversification
Tax on the entire value of assets held - principal + earnings - not just earnings - has the same effect as an accrual tax - only taxes are paid at a (usually) reduced rate
Both increase with longer holding periods and higher returns

40. Describe an individualistic investor personality type.
1) specific risk (unsystematic risk) 2) market risk (systematic risk) 3) residual risk (counterparty risk and regulatory risk)
The amount of assets (i.e.present value) necessary to meet all future liabilities
More risk toelrant than than methodical investors - do their own research; very confident in their ability to make investment decisions - confidence in their ability to achieve their long-term investment objectives - unlike methodical investors - th
Active wealth creators typically have an above-avg. willingness to take risk - passive recipients of wealth typically have an average or below-average willingness to take risk

41. Define capital gains taxes.
Tax rate lower today = use tax-exempt - tax rate lower in future = use tax deferred - not expected to change = use either
- extrepreneurs - for example - are usually familiar with taking business risk - they are willing to take risk b/c they feel they control their business and personal circumstances
Taxes paid on the gain (long or short position) when an asset is sold or purchased
The amount of assets (i.e.present value) necessary to meet all future liabilities

42. What is the general relationship b/t a client's perception of wealth and risk willingness?
Portfolio size incr. = ability up - Liquidity needs up = ability down - Time horizon up = ability up - Spending importance down = ability up
1) active 2) passive
Wealth transfer stage - focus on tax min. with trusts and foundations
A positive relationship

43. An investor's ability to take risk depends on what?

Warning: Invalid argument supplied for foreach() in /var/www/html/basicversity.com/show_quiz.php on line 183

44. What risks must be considered when discussing each concentrated investor category?
Depends on the investor's goals and time horizon and the volatility the portfolio can bear b/f those goals are jeopardized
1) specific risk (unsystematic risk) 2) market risk (systematic risk) 3) residual risk (counterparty risk and regulatory risk)
The reduction in return caused by the payment of taxes
- the higher in the ranks - the more the executive acts like an entrepreneur - the more control = the more attached the executie is to the firm

45. How is mortality risk typically hedged?
Demand for life insurance increases
Simple and quick - removes all residual risk - allows reinvestment of proceeds to achieve desired diversification
Hedged with life insurance - think of the life insurance as a replacement for lost human capital
Wealth transfer stage - focus on tax min. with trusts and foundations

46. As age increases..
- Deemed disposition = amount is usually based on the gains on assets leaving - as if the individuals sold the assets and realized the gains - Shadow period = could include a tax on income earned for a period after leaving
- gifts to charitable organizations are not taxed - donor is allowed to take a tax deduction in the amount of the gift
Triggers tax on unrealized capital gains - requires liquidity - shares must be publicly traded or have low restrictions on sale
Demand for insurance decreases; less human capital to replace

47. What are the advantages of public exchange funds for low basis stock?
Most risk tolerant - fear that failing to respond to changing market conditions will negatively impact their portfolio - constantly adjust their portfolios in response to changing market conditions - tend to doubt investment advice. - high turnover a
Tax drag % = tax rate - as the investment horizon increases - tax drag is unchanged - as the investment return increases - tax drag is unchanged - as the investment horizon increases - value of the tax deferral increases - as the inestment return inc
Objectives = required return; risk tolerance - Constraints = time horizon - tax concerns; liquidity needs - legal/regulatory; unique circumstances
Immediate diersification - ability to borrow (monetize) - at end of partnership receive proportional share of pool

48. characteristics of methodical investor
Wealth transfer stage - focus on tax min. with trusts and foundations
Must partner with an outside - unrelated investor - lock up period - taxesdeferred but not avoided - potential regulatory (IRS) risk
The reduction in return caused by the payment of taxes
Relies on hard facts -decisions tend to be conservative in nature -more risk averse -thinking/analysis

49. What are the main characteristics of chritable gifts?
Most risk tolerant - fear that failing to respond to changing market conditions will negatively impact their portfolio - constantly adjust their portfolios in response to changing market conditions - tend to doubt investment advice. - high turnover a
If human capital is equity-like - allocate financial assets more to fixed income - if the human capital is fixed-income like - allocate financial assets more to equities
Demand for insurance decreases; less human capital to replace
- gifts to charitable organizations are not taxed - donor is allowed to take a tax deduction in the amount of the gift

50. What are the disadvantages of hedging for low basis stock?
1) Source jurisdiction = country levies taxes on all income generated within its borders - whether by citizens or foreigners 2) Residence jurisdiction = a country taxes income of its residents whether generated inside or outside the country (most pre
Distribution of outcomes provides a better indication of the risk/return tradeoff - show the tradeoff b/t short-term risk and ability meet long-term goals - incorporates the impact of taxes and the compounding effect of reinvestment - can build in f
Wealth attained through inheritance - windfalls - long steady employment - etc. - might have less experience and less understanding of risk/return - might require investment education
Upside potential of hedged position limited - regulatory risk (avoid constructive sale - some risk exposure required)