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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 are the four broad categories of investor personality types (BB&K)?
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
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
- cautious - methodical - individualistic - spontaneous


2. Describe a cautious investor personality type.
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
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
Upside potential of hedged position limited - regulatory risk (avoid constructive sale - some risk exposure required)
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


3. typical IPS elements
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
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) growing the portfolio (capital gains) 2) liquidity needs - total return approach
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


4. What are the disadvantages of hedging for low basis stock?
1) growing the portfolio (capital gains) 2) liquidity needs - total return approach
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
Upside potential of hedged position limited - regulatory risk (avoid constructive sale - some risk exposure required)
- 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 equity holding life risk attributes for an executive?
- 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
Joint ownership with rights of survivorship - living trusts - retirement plans - life insurance - other means that transfer assets without the need for a will
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
To earn a total ______-tax __________ return of ______% covering: -expense 1 -expense 2 -expense n


6. What are the different global tax regimes and their respective ordinary income tax structure?
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 client's psychological profile
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)
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


7. As wealth increases...
Number of years to retirement/death - investable assets - annual liquidity requirement - specific amount (if any) needed at a future date
1) credit method 2) exemption method 3) deduction method
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)
Demand for life insurance decreases


8. template for return objective
The amount of assets (i.e.present value) necessary to meet all future liabilities
To earn a total ______-tax __________ return of ______% covering: -expense 1 -expense 2 -expense n
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
The decedent's estate


9. What are the main characteristics of variable annuities?

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10. characteristics of foundation stage
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
Young -Building a foundation for future wealth -above avg risk tolerance
Aka - unbalanced collar - forward sale of shares with an agreed delivery date in exchange for cash today
1) Taxes - outright sale produces large capital gains taxes 2) Psychological factors - client might have emotional attachment or not care about diversification


11. How is demand for insurance affected by risk tolerance - financial wealth - probability of death - age - and bequest desire?
A will (also known as a testament)
Risk tolerance = as risk tolerance increases - demand for life insurance decreases
Relies on hard facts -decisions tend to be conservative in nature -more risk averse -thinking/analysis
Risk tolerance and decision-making style


12. Generally - how does portfolio size - liquidity - time horizon - and/or importance of spending affect ability to tolerate risk?
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
Portfolio size incr. = ability up - Liquidity needs up = ability down - Time horizon up = ability up - Spending importance down = ability up
Demand for life insurance decreases
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


13. What happens to both tax drag $ and tax drag % with holding period changes and return changes?
Both increase with longer holding periods and higher returns
Tax rate lower today = use tax-exempt - tax rate lower in future = use tax deferred - not expected to change = use either
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
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


14. Describe a methodical investor personality type.
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
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
1) specific risk (unsystematic risk) 2) market risk (systematic risk) 3) residual risk (counterparty risk and regulatory risk)
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


15. What are the steps involved in creating an IPS?

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16. In contrast to standard finance (MPT) - behavioral finance assumes individuals do what?
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
To earn a total ______-tax __________ return of ______% covering: -expense 1 -expense 2 -expense n
Lock up period (7-10 yrs) - must hold >20% illiquid assets - lack of control (no changes - manager determines asset mix) - original cost basis
Immediate diersification - ability to borrow (monetize) - at end of partnership receive proportional share of pool


17. When dealing with low basis stock - emotional issues can arise from what?
Demand for life insurance decreases
Client is a foundign family member - the firm still bears the family name - the shares were acquired by a loved one
Number of years to retirement/death - investable assets - annual liquidity requirement - specific amount (if any) needed at a future date
Simple and quick - removes all residual risk - allows reinvestment of proceeds to achieve desired diversification


18. What are the main characteristics of the foundation phase of life?
Income rising - assets growing - long time horizon - above-avg. ability to take risk
To earn a total ______-tax __________ return of ______% covering: -expense 1 -expense 2 -expense n
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
Early career 8accumulating education - developing skills - above-average ability to take risk


19. What is the reinvestment caveat when considering tax loss harvesting?
Risk tolerance and decision-making style
Can be implemented quickly - can facilitate low cost borrowing (to monetize) - borrowing costs may be tax-deductible
To earn a total ______-tax __________ return of ______% covering: -expense 1 -expense 2 -expense n
- 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


20. How does the nature of human capital affect the demand for life insurance?
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
Taxes paid on the gain (long or short position) when an asset is sold or purchased
The more equity-like - the less the demand for life insurance
Relies on hard facts -decisions tend to be conservative in nature -more risk averse -thinking/analysis


21. characteristics of methodical investor
Relies on hard facts -decisions tend to be conservative in nature -more risk averse -thinking/analysis
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
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
Hedged with life insurance - think of the life insurance as a replacement for lost human capital


22. sources of wealth
Joint ownership with rights of survivorship - living trusts - retirement plans - life insurance - other means that transfer assets without the need for a will
When a decedent leaves no will or if the will is deemed invalid
The testator
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


23. What are the two sources of wealth?
Early career 8accumulating education - developing skills - above-average ability to take risk
Demand for insurance decreases; less human capital to replace
- 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
1) active 2) passive


24. characteristics of accumulation phase
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
Demand for life insurance increases
1) specific risk (unsystematic risk) 2) market risk (systematic risk) 3) residual risk (counterparty risk and regulatory risk)
- 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


25. Why do individuals often take steps to avoid probate?
It is expenseive - time consuming - public
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
1) growing the portfolio (capital gains) 2) liquidity needs - total return approach
Transferring assets directly to a third generation avoids possible double taxation


26. Define capital gains taxes.
Excess capital
- a subjective assessment of financial well-being based on perceived wealth
Young -Building a foundation for future wealth -above avg risk tolerance
Taxes paid on the gain (long or short position) when an asset is sold or purchased


27. What are the main characteristics of the maintenance phase of life?
Extra investment value created by effective tax management
Depends on the investor's goals and time horizon and the volatility the portfolio can bear b/f those goals are jeopardized
- does not ordinarily exhibit the same attachments to the firm as an entrepreneur or top executive - does not have any degree of control either
Retired - focus on lifestyle maintenance and security - preservation of wealth - shortening time horizon and declining risk tolerance


28. What are the benefits of an IPS to the adviser?
1) foundation phase 2) accumulation phase 3) maintenance phase 4) distribution phase
HC = PV of future labor income
Can be used for clarification if questions areise about specific invesetment decisions - should outline a process for dispute resolution
- cautious - methodical - individualistic - spontaneous


29. What are the main characteristics of the distribution phase of life?
To earn a total ______-tax __________ return of ______% covering: -expense 1 -expense 2 -expense n
Extra investment value created by effective tax management
Wealth transfer stage - focus on tax min. with trusts and foundations
The more equity-like - the less the demand for life insurance


30. When should you use a tax-exempt versus a tax-deferred account?
The more equity-like - the less the demand for life insurance
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
Tax rate lower today = use tax-exempt - tax rate lower in future = use tax deferred - not expected to change = use either
To earn a total ______-tax __________ return of ______% covering: -expense 1 -expense 2 -expense n


31. What are the main characteristics of the accumulation phase of life?
1) source of wealth 2) measure of wealth 3) stage of life
Income rising - assets growing - long time horizon - above-avg. ability to take risk
Must have a very large portfolio or be willing to borrow - may take a long time to diversifiy completely
- 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


32. What are the steps involved in creating an IPS?

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33. What are the main characteristics of chritable gifts?
Triggers tax on unrealized capital gains - requires liquidity - shares must be publicly traded or have low restrictions on sale
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
Taxes paid on the gain (long or short position) when an asset is sold or purchased
- gifts to charitable organizations are not taxed - donor is allowed to take a tax deduction in the amount of the gift


34. situational profiling

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35. What are the main characteristics of the foundation phase of life?
The more equity-like - the less the demand for life insurance
When a decedent leaves no will or if the will is deemed invalid
Early career 8accumulating education - developing skills - above-average ability to take risk
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


36. characteristics of methodical investor
Relies on hard facts -decisions tend to be conservative in nature -more risk averse -thinking/analysis
Client is a foundign family member - the firm still bears the family name - the shares were acquired by a loved one
To earn a total ______-tax __________ return of ______% covering: -expense 1 -expense 2 -expense n
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


37. The client's risk tolerance (mostly willingness) is affected by what personal characteristics?
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
1) source of wealth 2) measure of wealth 3) stage of life
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


38. What are the advantages of completion portfolios for low basis stock?
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
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
Achieves diversification slowly over time - capital gains taxes avoided to extent of matching gains and harvesting losses
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


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

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40. What are the psychological issues of low basis stock held by an entrepreneur?
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
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
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
Retired - focus on lifestyle maintenance and security - preservation of wealth - shortening time horizon and declining risk tolerance


41. What are the problems that financial advisers can face with low basis stock?
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
INTEREST = heavy interest tax; light capital gain tax DVIDIDEND = heavy capital gain tax; light capital gain tax CAPITAL GAIN = heavy capital gain tax
Methodical - cautious - individualist - spontaneous
1) Taxes - outright sale produces large capital gains taxes 2) Psychological factors - client might have emotional attachment or not care about diversification


42. Describe an individualistic investor personality type.
Transferring assets directly to a third generation avoids possible double taxation
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
Sources of wealth - measure of wealth - stage of life


43. What are investment objectives and constraints?
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
The client's psychological profile
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
Objectives = required return; risk tolerance - Constraints = time horizon - tax concerns; liquidity needs - legal/regulatory; unique circumstances


44. What are the psychological issues of low basis stock held by an investor?
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) source of wealth 2) measure of wealth 3) stage of life
- does not ordinarily exhibit the same attachments to the firm as an entrepreneur or top executive - does not have any degree of control either
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


45. 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
- 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
- a subjective assessment of financial well-being based on perceived wealth
1) active 2) passive


46. What are the advantages of an outright sale of low basis stock?
Simple and quick - removes all residual risk - allows reinvestment of proceeds to achieve desired diversification
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
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
Can be implemented quickly - can facilitate low cost borrowing (to monetize) - borrowing costs may be tax-deductible


47. characteristics of maintenance phase
Risk tolerance = as risk tolerance increases - demand for life insurance decreases
Sources of wealth - measure of wealth - stage of life
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
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


48. What are the diversification techniques for low basis stock?
The amount of assets (i.e.present value) necessary to meet all future liabilities
1) outright sale 2) exhcange funds (public or priate) 3) completion portfolios 4) hedging
Retired - focus on lifestyle maintenance and security - preservation of wealth - shortening time horizon and declining risk tolerance
A positive relationship


49. What are wealth taxes.
Achieves diversification slowly over time - capital gains taxes avoided to extent of matching gains and harvesting losses
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
Implied assets
The more equity-like - the less the demand for life insurance


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

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