Instructions:

• Answer 50 questions in 15 minutes.
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• 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. What happens to both tax drag $ and tax drag % with holding period changes and return changes?
Objectives = required return; risk tolerance - Constraints = time horizon - tax concerns; liquidity needs - legal/regulatory; unique circumstances
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
Transferring assets directly to a third generation avoids possible double taxation
Both increase with longer holding periods and higher returns


2. Human capital is sometimes referred to as what?
Self confident - Gather information from a wide variety of sources to make their own decisions - Willing to take risk
Risk tolerance = as risk tolerance increases - demand for life insurance decreases
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


3. What are the different types of trusts?
Single privately-held stock - high degree of control - immature firm - very high unsystematic risk - face significant residual risk - limited or restricted liquidity - zero cost basis in the original investment - desires tax efficient transfer to hei
- cautious - methodical - individualistic - spontaneous
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
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


4. Any amount above core capital is considered what?
Excess capital
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
The decedent's estate


5. Describe an individualistic investor personality type.
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
1) active 2) passive
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
The demand for life insurance increases - regardless of age


6. Describe a spontaneous investor personality type.
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
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
Valuation discounts can reduce the value of wealth transfers - so high net worth indiiduals utilize them whenever possible to minimize transfer taxes
Risk tolerance = as risk tolerance increases - demand for life insurance decreases


7. What is another name for a variable prepaid forward and What is its main purpose?
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
Aka - unbalanced collar - forward sale of shares with an agreed delivery date in exchange for cash today
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
The amount of assets (i.e.present value) necessary to meet all future liabilities


8. What are the different stages of life?
1) foundation phase 2) accumulation phase 3) maintenance phase 4) distribution phase
Joint ownership with rights of survivorship - living trusts - retirement plans - life insurance - other means that transfer assets without the need for a will
Wealth transfer stage - focus on tax min. with trusts and foundations
Demand for life insurance increases


9. Human capital is sometimes referred to as what?
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
Sources of wealth - measure of wealth - stage of life
- 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
Implied assets


10. What are the main characteristics of the maintenance phase of life?
Retired - focus on lifestyle maintenance and security - preservation of wealth - shortening time horizon and declining risk tolerance
The amount of assets (i.e.present value) necessary to meet all future liabilities
1) growing the portfolio (capital gains) 2) liquidity needs - total return approach
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


11. As desire to leave an estate increases...
Objectives = required return; risk tolerance - Constraints = time horizon - tax concerns; liquidity needs - legal/regulatory; unique circumstances
Demand for life insurance increases
Income rising - assets growing - long time horizon - above-avg. ability to take risk
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


12. What are the different global tax regimes and their respective ordinary income tax structure?
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
1) growing the portfolio (capital gains) 2) liquidity needs - total return approach
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)
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


13. All costs associated with probate are born by whom?

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14. What is tax alpha?
Depends on the investor's goals and time horizon and the volatility the portfolio can bear b/f those goals are jeopardized
Implied liabilities
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
Extra investment value created by effective tax management


15. characteristics of methodical investor
Number of years to retirement/death - investable assets - annual liquidity requirement - specific amount (if any) needed at a future date
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) active 2) passive
Relies on hard facts -decisions tend to be conservative in nature -more risk averse -thinking/analysis


16. What are the disadvantages of completion portfolios for low basis stock?
Must have a very large portfolio or be willing to borrow - may take a long time to diversifiy completely
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)
Sources of wealth - measure of wealth - stage of life
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)


17. Who is responsible for gains/losses in a taxable (accrual taxation) account?
Joint ownership with rights of survivorship - living trusts - retirement plans - life insurance - other means that transfer assets without the need for a will
Demand for life insurance decreases
The government shares in both gains and losses
- a subjective assessment of financial well-being based on perceived wealth


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

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19. What are typical characteristics of passive recipients of wealth?
The risk of a premature death with accompanying loss of future human capital
Early career 8accumulating education - developing skills - above-average ability to take risk
Wealth attained through inheritance - windfalls - long steady employment - etc. - might have less experience and less understanding of risk/return - might require investment education
Retired - focus on lifestyle maintenance and security - preservation of wealth - shortening time horizon and declining risk tolerance


20. How is mortality risk typically hedged?
Portfolio size incr. = ability up - Liquidity needs up = ability down - Time horizon up = ability up - Spending importance down = ability up
The reduction in return caused by the payment of taxes
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
Hedged with life insurance - think of the life insurance as a replacement for lost human capital


21. Describe biased expectations in a behavioral finance context.
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
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
Depends on the investor's goals and time horizon and the volatility the portfolio can bear b/f those goals are jeopardized
1) foundation phase 2) accumulation phase 3) maintenance phase 4) distribution phase


22. 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
Retired - focus on lifestyle maintenance and security - preservation of wealth - shortening time horizon and declining risk tolerance
Self confident - Gather information from a wide variety of sources to make their own decisions - Willing to take risk
Extra investment value created by effective tax management


23. Define tax drag.
The reduction in return caused by the payment of taxes
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
Should use accrual-equivalent returns and after-tax risk
Implied assets


24. What risks must be considered when discussing each concentrated investor category?
Wealth transfer stage - focus on tax min. with trusts and foundations
Depends on the investor's goals and time horizon and the volatility the portfolio can bear b/f those goals are jeopardized
Single privately-held stock - high degree of control - immature firm - very high unsystematic risk - face significant residual risk - limited or restricted liquidity - zero cost basis in the original investment - desires tax efficient transfer to hei
1) specific risk (unsystematic risk) 2) market risk (systematic risk) 3) residual risk (counterparty risk and regulatory risk)


25. What are the main characteristics of variable annuities?

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26. Describe a spontaneous investor personality type.
Extra investment value created by effective tax management
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
- 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
Excess capital


27. 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
Lock up period (7-10 yrs) - must hold >20% illiquid assets - lack of control (no changes - manager determines asset mix) - original cost basis
The government shares in both gains and losses
The more equity-like - the less the demand for life insurance


28. characteristics of cautious investor

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29. What are the general legal and regulatory considerations for individuals?
1) Taxes - outright sale produces large capital gains taxes 2) Psychological factors - client might have emotional attachment or not care about diversification
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
The government shares in both gains and losses
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)


30. Who is responsible for gains/losses in a taxable (accrual taxation) account?
1) credit method 2) exemption method 3) deduction method
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
HC = PV of future labor income
The government shares in both gains and losses


31. Living expenses in retirment can be referred to as what?
The client's psychological profile
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
A will (also known as a testament)
Implied liabilities


32. An investor's willingness to take risk is determined by what?

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33. What are the main characteristics of variable annuities?

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34. characteristics of maintenance phase
Demand for insurance decreases; less human capital to replace
Investors begin to shift portfolios into less volatile assets -Reduced focus on accumulating additional wealth and more focus on preserving current wealth -Reduced ability to recover from market downturns -diminishing risk tolerance
Early career 8accumulating education - developing skills - above-average ability to take risk
Taxes paid on the gain (long or short position) when an asset is sold or purchased


35. characteristics of distribution phase
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
Joint ownership with rights of survivorship - living trusts - retirement plans - life insurance - other means that transfer assets without the need for a will
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
The risk of a premature death with accompanying loss of future human capital


36. benefits of IPS to manager
Should use accrual-equivalent returns and after-tax risk
Depends on the investor's goals and time horizon and the volatility the portfolio can bear b/f those goals are jeopardized
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
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


37. Investor questionnaires help to determine what?
Taxes paid on the gain (long or short position) when an asset is sold or purchased
1) Taxes - outright sale produces large capital gains taxes 2) Psychological factors - client might have emotional attachment or not care about diversification
Risk tolerance and decision-making style
Tax rate lower today = use tax-exempt - tax rate lower in future = use tax deferred - not expected to change = use either


38. Calculating the required return component is driven by what 2 elements?
INTEREST = heavy interest tax; light capital gain tax DVIDIDEND = heavy capital gain tax; light capital gain tax CAPITAL GAIN = heavy capital gain tax
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
1) growing the portfolio (capital gains) 2) liquidity needs - total return approach
Extra investment value created by effective tax management


39. What progressive tax regimes do not have favorable treatment for interest income/dividend income/capital gains?
Transferring assets directly to a third generation avoids possible double taxation
INTEREST = heavy interest tax; light capital gain tax DVIDIDEND = heavy capital gain tax; light capital gain tax CAPITAL GAIN = heavy capital gain tax
Early career 8accumulating education - developing skills - above-average ability to take risk
HC = PV of future labor income


40. What are typical characteristics of passive recipients of wealth?
Young -Building a foundation for future wealth -above avg risk tolerance
Wealth attained through inheritance - windfalls - long steady employment - etc. - might have less experience and less understanding of risk/return - might require investment education
Total wealth = financial assets + human capital
Risk tolerance = as risk tolerance increases - demand for life insurance decreases


41. four types of investors
Methodical - cautious - individualist - spontaneous
1) source of wealth 2) measure of wealth 3) stage 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
Excess capital


42. Why would someone want to use a valuation discount?
Depends on the investor's goals and time horizon and the volatility the portfolio can bear b/f those goals are jeopardized
Immediate diersification - ability to borrow (monetize) - at end of partnership receive proportional share of pool
Valuation discounts can reduce the value of wealth transfers - so high net worth indiiduals utilize them whenever possible to minimize transfer taxes
The reduction in return caused by the payment of taxes


43. typical IPS elements
Risk tolerance and decision-making style
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
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
The decedent's estate


44. What are the different methods of relief from double taxation?
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
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
Sources of wealth - measure of wealth - stage of life
1) credit method 2) exemption method 3) deduction method


45. What are the disadvantages of public exchange funds for low basis stock?
Upside potential of hedged position limited - regulatory risk (avoid constructive sale - some risk exposure required)
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
Lock up period (7-10 yrs) - must hold >20% illiquid assets - lack of control (no changes - manager determines asset mix) - original cost basis


46. What are the four broad categories of investor personality types (BB&K)?
- cautious - methodical - individualistic - spontaneous
Simple and quick - removes all residual risk - allows reinvestment of proceeds to achieve desired diversification
1) credit method 2) exemption method 3) deduction method
Wealth transfer stage - focus on tax min. with trusts and foundations


47. When should you use a tax-exempt versus a tax-deferred account?
Iinvestors analyze ind. investments on a stand-alone basis - do not consider how the asset will affect portfolio risk and return - manifests itself as mental accounting/pyramiding - lack of diversification
Tax rate lower today = use tax-exempt - tax rate lower in future = use tax deferred - not expected to change = use either
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
- a subjective assessment of financial well-being based on perceived wealth


48. What are ways that individuals can avoid probate?
Joint ownership with rights of survivorship - living trusts - retirement plans - life insurance - other means that transfer assets without the need for a will
Can be used for clarification if questions areise about specific invesetment decisions - should outline a process for dispute resolution
Income rising - assets growing - long time horizon - above-avg. ability to take risk
When a decedent leaves no will or if the will is deemed invalid


49. What should an investor use in mean-variance optimization
- does not ordinarily exhibit the same attachments to the firm as an entrepreneur or top executive - does not have any degree of control either
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
Should use accrual-equivalent returns and after-tax risk
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


50. What are the equity holding life risk attributes for an entrepreneur?
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
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)
Single privately-held stock - high degree of control - immature firm - very high unsystematic risk - face significant residual risk - limited or restricted liquidity - zero cost basis in the original investment - desires tax efficient transfer to hei
Demand for life insurance increases