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. Describe a cautious investor personality type.
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
Using HIFO accounting - an investor assumes the lot with the highest tax basis was sold to either maximize the loss for harvesting or minimize the taxable gain
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
1) specific risk (unsystematic risk) 2) market risk (systematic risk) 3) residual risk (counterparty risk and regulatory risk)

2. template for return objective
To earn a total ______-tax __________ return of ______% covering: -expense 1 -expense 2 -expense n
The client's psychological profile
1) revocable trust = the settlor can rescind the trust and resume ownership of the assets 2) irrevocable trust = the settlor relinquishes ownership and control 3) fixed trust = pattern of distributions to the beneficiaris is predetermined by the sett
Client is a foundign family member - the firm still bears the family name - the shares were acquired by a loved one

3. What are the psychological issues of low basis stock held by an executive?
1) specific risk (unsystematic risk) 2) market risk (systematic risk) 3) residual risk (counterparty risk and regulatory risk)
Self confident - Gather information from a wide variety of sources to make their own decisions - Willing to take risk
- 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
Demand for life insurance decreases

4. What should an investor use in mean-variance optimization
Objectives = required return; risk tolerance - Constraints = time horizon - tax concerns; liquidity needs - legal/regulatory; unique circumstances
Should use accrual-equivalent returns and after-tax 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
- 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

5. What are the disadvantages of an outright sale of low basis stock?
Can be implemented quickly - can facilitate low cost borrowing (to monetize) - borrowing costs may be tax-deductible
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
Sources of wealth - measure of wealth - stage of life
Triggers tax on unrealized capital gains - requires liquidity - shares must be publicly traded or have low restrictions on sale

6. What is the reinvestment caveat when considering tax loss harvesting?
- if you sell a security to harvest its loss and then reinvest the proceeds in a very similar security - the selling price fo the old security becomes the tax basis for the new security - in that case - the loss harvest only delays the payment of t
More subjective than situational profiling -helps to understand how an investor perceives risk and return. -Bridges the differences between traditional finance and behavioral finance -Methodical - cautious - individualist - spontaneous
The government shares in both gains and losses
- tax drag% > tax rate - as investment horizon increases - tax drag $ and tax drage % increase - as investment return increases - tax drag $ and tax drag % increase

7. What are the advantages of hedging for low basis stock?
Excess capital
Demand for life insurance decreases
Can be implemented quickly - can facilitate low cost borrowing (to monetize) - borrowing costs may be tax-deductible
Fixed income streat set at inception - usually no inflation adjustment - so real value falls over time - usually illiquid (can't withdraw funds) - lock in at the prevailing rate - which might be historically low

8. What are the disadvantages of completion portfolios for low basis stock?
Simple and quick - removes all residual risk - allows reinvestment of proceeds to achieve desired diversification
The more equity-like - the less the demand for life insurance
1. foundation 2. accumulation 3. maintenance 4. distribution
Must have a very large portfolio or be willing to borrow - may take a long time to diversifiy completely

9. What is another name for a variable prepaid forward and What is its main purpose?
INTEREST = heavy interest tax; light capital gain tax DVIDIDEND = heavy capital gain tax; light capital gain tax CAPITAL GAIN = heavy capital gain tax
Can be used for clarification if questions areise about specific invesetment decisions - should outline a process for dispute resolution
Aka - unbalanced collar - forward sale of shares with an agreed delivery date in exchange for cash today
Can be used for clarification if questions areise about specific invesetment decisions - should outline a process for dispute resolution

10. What are the different types of trusts?
Income rising - assets growing - long time horizon - above-avg. ability to take risk
1) revocable trust = the settlor can rescind the trust and resume ownership of the assets 2) irrevocable trust = the settlor relinquishes ownership and control 3) fixed trust = pattern of distributions to the beneficiaris is predetermined by the sett
1) outright sale 2) exhcange funds (public or priate) 3) completion portfolios 4) hedging
Joint ownership with rights of survivorship - living trusts - retirement plans - life insurance - other means that transfer assets without the need for a will

11. Calculating the required return component is driven by what 2 elements?
Should use accrual-equivalent returns and after-tax risk
1) growing the portfolio (capital gains) 2) liquidity needs - total return approach
Single publicly traded mature company stock or vested options - greater appetite for specific risk due to higher degree of control - less residual risk - b/c the firm is more mature - less liquidity risk - but may have restrictions - desires tax effi
Both increase with longer holding periods and higher returns

12. As age increases..
Methodical - cautious - individualist - spontaneous
1) growing the portfolio (capital gains) 2) liquidity needs - total return approach
Taxes paid on the gain (long or short position) when an asset is sold or purchased
Demand for insurance decreases; less human capital to replace

13. What are the two sources of wealth?
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
1) active 2) passive
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)
Objectives = required return; risk tolerance - Constraints = time horizon - tax concerns; liquidity needs - legal/regulatory; unique circumstances

14. situational profiling

15. Living expenses in retirment can be referred to as what?
Both increase with longer holding periods and higher returns
1) outright sale 2) exhcange funds (public or priate) 3) completion portfolios 4) hedging
Implied liabilities
To earn a total ______-tax __________ return of ______% covering: -expense 1 -expense 2 -expense n

16. If human capital is equity-like/fixed-income like - how should you generally allocate financial assets?
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
Using HIFO accounting - an investor assumes the lot with the highest tax basis was sold to either maximize the loss for harvesting or minimize the taxable gain
When a decedent leaves no will or if the will is deemed invalid
Total wealth = financial assets + human capital

17. When should you use a tax-exempt versus a tax-deferred account?
Total wealth = financial assets + human capital
Objectives = required return; risk tolerance - Constraints = time horizon - tax concerns; liquidity needs - legal/regulatory; unique circumstances
Tax rate lower today = use tax-exempt - tax rate lower in future = use tax deferred - not expected to change = use either
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

18. Describe a spontaneous investor personality type.
Retired - focus on lifestyle maintenance and security - preservation of wealth - shortening time horizon and declining risk tolerance
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
INTEREST = heavy interest tax; light capital gain tax DVIDIDEND = heavy capital gain tax; light capital gain tax CAPITAL GAIN = heavy capital gain tax
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

19. What are the different stages of life?
- if you sell a security to harvest its loss and then reinvest the proceeds in a very similar security - the selling price fo the old security becomes the tax basis for the new security - in that case - the loss harvest only delays the payment of t
The risk of a premature death with accompanying loss of future human capital
1) foundation phase 2) accumulation phase 3) maintenance phase 4) distribution phase
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

20. What is measure of wealth?
- a subjective assessment of financial well-being based on perceived wealth
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
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
Implied liabilities

21. What is the person called that transfers assets through a will?
Demand for insurance decreases; less human capital to replace
1) foundation phase 2) accumulation phase 3) maintenance phase 4) distribution phase
The testator
Upside potential of hedged position limited - regulatory risk (avoid constructive sale - some risk exposure required)

22. Define capital gains taxes.
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
Taxes paid on the gain (long or short position) when an asset is sold or purchased
Client is a foundign family member - the firm still bears the family name - the shares were acquired by a loved one
1) active 2) passive

23. What are the disadvantages of private exchange funds for low basis stock?
Must partner with an outside - unrelated investor - lock up period - taxesdeferred but not avoided - potential regulatory (IRS) risk
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
Investors have too much confidence in their ability to forecast - they tend to discount or even ignore info that does not support their choices - they interpret info based on their current frame of mind and the medium through which it is received
- cautious - methodical - individualistic - spontaneous

24. Equation for total wealth.
Provides clarification in the event of questions regarding suitability -process for resolution of disputes with client -helps identify issues to be resolved to avoid problems
The demand for life insurance increases - regardless of age
Total wealth = financial assets + human capital
Triggers tax on unrealized capital gains - requires liquidity - shares must be publicly traded or have low restrictions on sale

25. What are the advantages of completion portfolios for low basis stock?
Demand for life insurance increases
Risk tolerance and decision-making style
Achieves diversification slowly over time - capital gains taxes avoided to extent of matching gains and harvesting losses
Lock up period (7-10 yrs) - must hold >20% illiquid assets - lack of control (no changes - manager determines asset mix) - original cost basis

26. What are the equity holding life risk attributes for an investor?
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
Upside potential of hedged position limited - regulatory risk (avoid constructive sale - some risk exposure required)
Portfolio size incr. = ability up - Liquidity needs up = ability down - Time horizon up = ability up - Spending importance down = ability up
Multiple-security holding with one superstar - the result is a concentrated equity position - high specific risk - diversifies from concentrated - active and core concentrations into passive index positions

27. What are the main characteristics of chritable gifts?
1) revocable trust = the settlor can rescind the trust and resume ownership of the assets 2) irrevocable trust = the settlor relinquishes ownership and control 3) fixed trust = pattern of distributions to the beneficiaris is predetermined by the sett
- gifts to charitable organizations are not taxed - donor is allowed to take a tax deduction in the amount of the gift
Risk tolerance = as risk tolerance increases - demand for life insurance decreases
Aka - unbalanced collar - forward sale of shares with an agreed delivery date in exchange for cash today

28. What are the main characteristics of the maintenance phase of life?
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
1) active 2) passive
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
Retired - focus on lifestyle maintenance and security - preservation of wealth - shortening time horizon and declining risk tolerance

29. Describe biased expectations in a behavioral finance context.
Wealth transfer stage - focus on tax min. with trusts and foundations
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
Total wealth = financial assets + human capital
Investors have too much confidence in their ability to forecast - they tend to discount or even ignore info that does not support their choices - they interpret info based on their current frame of mind and the medium through which it is received

30. What are the different global tax regimes and their respective ordinary income tax structure?
1) common progressive (progressive) 2) heavy dividend tax (progressive) 3) heavy capital gain tax (progressive) 4) heavy interest tax (progressive) 5) light capital gain tax (progressive) 6) flat and light (flat) 7) flat and heavy (flat)
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
Taxes paid on the gain (long or short position) when an asset is sold or purchased
Demand for life insurance increases

31. What is the eifference in willingness to take risk between active and passive wealth creators?
Income rising - assets growing - long time horizon - above-avg. ability to take risk
Extra investment value created by effective tax management
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
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

32. What is typically considered when imposing an exit tax?
- 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
- 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
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
Transferring assets directly to a third generation avoids possible double taxation

33. What are the advantages of the monte carlo approach to portfolio construction?
Implied assets
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
- cautious - methodical - individualistic - spontaneous
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

34. What are the psychological issues of low basis stock held by an entrepreneur?
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
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
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
Lock up period (7-10 yrs) - must hold >20% illiquid assets - lack of control (no changes - manager determines asset mix) - original cost basis

35. Describe a methodical investor personality type.
1) revocable trust = the settlor can rescind the trust and resume ownership of the assets 2) irrevocable trust = the settlor relinquishes ownership and control 3) fixed trust = pattern of distributions to the beneficiaris is predetermined by the sett
1) specific risk (unsystematic risk) 2) market risk (systematic risk) 3) residual risk (counterparty risk and regulatory risk)
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
- a subjective assessment of financial well-being based on perceived wealth

36. characteristics of cautious investor

37. What are the psychological issues of low basis stock held by an investor?
- does not ordinarily exhibit the same attachments to the firm as an entrepreneur or top executive - does not have any degree of control either
INTEREST = heavy interest tax; light capital gain tax DVIDIDEND = heavy capital gain tax; light capital gain tax CAPITAL GAIN = heavy capital gain tax
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
The risk of a premature death with accompanying loss of future human capital

38. What is the person called that transfers assets through a will?
The testator
Sources of wealth - measure of wealth - stage of life
1) growing the portfolio (capital gains) 2) liquidity needs - total return approach
Can borrow and/or use derivatives to diversify - ability to borrow (monetize) increased - owners retain upside potential of the original investment - not required to hodl illiquid assets - partners can change fund composition

39. How does the nature of human capital affect the demand for life insurance?
The more equity-like - the less the demand for life insurance
- does not ordinarily exhibit the same attachments to the firm as an entrepreneur or top executive - does not have any degree of control either
The amount of assets (i.e.present value) necessary to meet all future liabilities
Achieves diversification slowly over time - capital gains taxes avoided to extent of matching gains and harvesting losses

40. What are the problems that financial advisers can face with low basis stock?
1) Taxes - outright sale produces large capital gains taxes 2) Psychological factors - client might have emotional attachment or not care about diversification
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
Number of years to retirement/death - investable assets - annual liquidity requirement - specific amount (if any) needed at a future date
Upside potential of hedged position limited - regulatory risk (avoid constructive sale - some risk exposure required)

41. What are the equity holding life risk attributes for an executive?
1) growing the portfolio (capital gains) 2) liquidity needs - total return approach
1) active 2) passive
Achieves diversification slowly over time - capital gains taxes avoided to extent of matching gains and harvesting losses
Single publicly traded mature company stock or vested options - greater appetite for specific risk due to higher degree of control - less residual risk - b/c the firm is more mature - less liquidity risk - but may have restrictions - desires tax effi

42. Describe the different types of double taxation conflicts.
Forced heirship rules (children have the right to parents' estate) - community property rights (each spouse has right to 1/2 the estate) - separate property rights (each spouse's estate considered separately)
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
A positive relationship
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

43. characteristics of foundation stage
1) foundation phase 2) accumulation phase 3) maintenance phase 4) distribution phase
Young -Building a foundation for future wealth -above avg risk tolerance
1) source of wealth 2) measure of wealth 3) stage of life
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

44. What is loss aversion?
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
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)
Relies on hard facts -decisions tend to be conservative in nature -more risk averse -thinking/analysis
An investor focuses on gains and losses - prefer certain (riskless) gains and uncertain losses - are willing to face incerased risk to avoid losses - causes investors to exhibit risk-seeking behavior

45. As age increases..
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
Valuation discounts can reduce the value of wealth transfers - so high net worth indiiduals utilize them whenever possible to minimize transfer taxes
Demand for insurance decreases; less human capital to replace
Depends on the investor's goals and time horizon and the volatility the portfolio can bear b/f those goals are jeopardized

46. Why would someone want to use a valuation discount?
Valuation discounts can reduce the value of wealth transfers - so high net worth indiiduals utilize them whenever possible to minimize transfer taxes
Relies on hard facts -decisions tend to be conservative in nature -more risk averse -thinking/analysis
1) growing the portfolio (capital gains) 2) liquidity needs - total return approach
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

47. How does the nature of human capital affect the demand for life insurance?
The more equity-like - the less the demand for life insurance
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
A will (also known as a testament)
- 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

48. Why would an individual try to use generation skipping in estate planning?
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
Achieves diversification slowly over time - capital gains taxes avoided to extent of matching gains and harvesting losses
Transferring assets directly to a third generation avoids possible double taxation
Wealth attained through inheritance - windfalls - long steady employment - etc. - might have less experience and less understanding of risk/return - might require investment education

49. What are the equity holding life risk attributes for an investor?
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
Fixed income streat set at inception - usually no inflation adjustment - so real value falls over time - usually illiquid (can't withdraw funds) - lock in at the prevailing rate - which might be historically low
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
Multiple-security holding with one superstar - the result is a concentrated equity position - high specific risk - diversifies from concentrated - active and core concentrations into passive index positions

50. Why would someone want to use a valuation discount?
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
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
Total wealth = financial assets + human capital
Valuation discounts can reduce the value of wealth transfers - so high net worth indiiduals utilize them whenever possible to minimize transfer taxes