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Question 1 of 10
1. Question
Which of the following statements is false regarding marital status, and dependents?
Correct
Whether an investor is married and has dependents also plays a critical role in determining a suitable investment recommendation as a single investor is able to take greater risks and will typically have more disposable income, or ability to take risks. A married investor with five children, however, will have more of his income committed to providing for his family and will likely have several near-term life events to save for including higher education and marriages.
Incorrect
Whether an investor is married and has dependents also plays a critical role in determining a suitable investment recommendation as a single investor is able to take greater risks and will typically have more disposable income, or ability to take risks. A married investor with five children, however, will have more of his income committed to providing for his family and will likely have several near-term life events to save for including higher education and marriages.
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Question 2 of 10
2. Question
Which of the following statements is true regarding income?
Correct
Income is important in determining a suitable investment recommendation because investors with greater income typically have a greater ability to take risk, all else being equal, than investors with less income. However, investors with greater income may be able to meet their investment and income objectives with a lower return and less risk than investors with less income who may need to achieve a higher rate of return on a smaller base of investment principal.
Incorrect
Income is important in determining a suitable investment recommendation because investors with greater income typically have a greater ability to take risk, all else being equal, than investors with less income. However, investors with greater income may be able to meet their investment and income objectives with a lower return and less risk than investors with less income who may need to achieve a higher rate of return on a smaller base of investment principal.
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Question 3 of 10
3. Question
Which of the following statements is true regarding expenses and disposable income?
Correct
Income is just one side of the equation when making a suitable investment recommendation, as a good adviser must also consider that investor’s expenses. Two investors with the same income may have significantly different amounts of disposable income, defined as after-tax income less expenses. Thus, the amount of income, expenses, and taxes all play into the amount of discretionary income an investor has to choose how much from which to invest.
Incorrect
Income is just one side of the equation when making a suitable investment recommendation, as a good adviser must also consider that investor’s expenses. Two investors with the same income may have significantly different amounts of disposable income, defined as after-tax income less expenses. Thus, the amount of income, expenses, and taxes all play into the amount of discretionary income an investor has to choose how much from which to invest.
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Question 4 of 10
4. Question
Which of the following statements is true regarding Assets and liabilities?
Correct
An investor’s personal balance sheet, or his assets and liabilities at any given point in time, is critically important in helping an adviser determine a suitable investment recommendation. An investor’s other assets may include real estate, bank accounts, other brokerage accounts, and retirement plans, while common personal liabilities include mortgages, auto loans, and credit cards.
Incorrect
An investor’s personal balance sheet, or his assets and liabilities at any given point in time, is critically important in helping an adviser determine a suitable investment recommendation. An investor’s other assets may include real estate, bank accounts, other brokerage accounts, and retirement plans, while common personal liabilities include mortgages, auto loans, and credit cards.
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Question 5 of 10
5. Question
Which of the following statements is true regarding investor’s active participation?
Correct
An investor’s active participation in retirement programs will increase his ability to take risk with his remaining investment portfolio because his ability to fund his retirement lifestyle will not be as severely impacted by gains or losses in his personal portfolio as an investor with a lower level of participation in a retirement program. The safety net of the retirement plan participation will allow the investor to take additional risks in his personal portfolio.
Incorrect
An investor’s active participation in retirement programs will increase his ability to take risk with his remaining investment portfolio because his ability to fund his retirement lifestyle will not be as severely impacted by gains or losses in his personal portfolio as an investor with a lower level of participation in a retirement program. The safety net of the retirement plan participation will allow the investor to take additional risks in his personal portfolio.
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Question 6 of 10
6. Question
Which of the following statements is true regarding benefit plans?
Correct
An investor with stronger benefit plans will not have as many out-of-pocket expenses to be concerned with as an investor with a weaker benefit plan offering. Thus, the former can choose to redirect a greater portion of his income to his personal investment portfolio instead of his other obligations. Finally, an investor’s tax status will help an adviser determine both the appropriate amount and type of investments to recommend. All else being equal, an investor in a lower tax rate can earn a higher after-tax rate of return than an investor in a higher tax rate.
Incorrect
An investor with stronger benefit plans will not have as many out-of-pocket expenses to be concerned with as an investor with a weaker benefit plan offering. Thus, the former can choose to redirect a greater portion of his income to his personal investment portfolio instead of his other obligations. Finally, an investor’s tax status will help an adviser determine both the appropriate amount and type of investments to recommend. All else being equal, an investor in a lower tax rate can earn a higher after-tax rate of return than an investor in a higher tax rate.
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Question 7 of 10
7. Question
Which of the following statements is false regarding Preservation of capital?
Correct
Preservation of capital
Aptly named, the goal of a preservation of capital investment objective is to preserve the initial capital investment (i.e., minimize the risk of an investment loss). To achieve this objective, an investor must be willing to sacrifice much of the upside potential of investment return in order to minimize the risk of a negative return. This trade-off fits within the concept of the risk/return framework, as the investor must give up higher return potential in favor or reduced volatility.Incorrect
Preservation of capital
Aptly named, the goal of a preservation of capital investment objective is to preserve the initial capital investment (i.e., minimize the risk of an investment loss). To achieve this objective, an investor must be willing to sacrifice much of the upside potential of investment return in order to minimize the risk of a negative return. This trade-off fits within the concept of the risk/return framework, as the investor must give up higher return potential in favor or reduced volatility. -
Question 8 of 10
8. Question
Which of the following statements is true regarding Current income?
Correct
Current income
The goal of a current income investment objective is to provide a source of current income. The current income investment objective is typically utilized by investors who have a shorter time horizon or who may be looking to their investment portfolio to supplement their current income.Incorrect
Current income
The goal of a current income investment objective is to provide a source of current income. The current income investment objective is typically utilized by investors who have a shorter time horizon or who may be looking to their investment portfolio to supplement their current income. -
Question 9 of 10
9. Question
Which of the following statements is true regarding Capital appreciation?
Correct
Capital appreciation
Contrary to a current income investment objective, a capital appreciation investment objective seeks to achieve a high level of return through growth in the price of the security. As a result, investors with this objective would prefer that funds be reinvested into the high growth company instead of being paid out in the form of dividends. Investors pursuing this investment objective typically have longer time horizons as capital appreciation is considered to be a much riskier source of return than current income or capital preservation.Incorrect
Capital appreciation
Contrary to a current income investment objective, a capital appreciation investment objective seeks to achieve a high level of return through growth in the price of the security. As a result, investors with this objective would prefer that funds be reinvested into the high growth company instead of being paid out in the form of dividends. Investors pursuing this investment objective typically have longer time horizons as capital appreciation is considered to be a much riskier source of return than current income or capital preservation. -
Question 10 of 10
10. Question
Which of the following statements is true regarding Growth and income?
Correct
Growth and income
The goal of a growth and income investment objective is to achieve investment returns through a combination of both current income and capital appreciation. This investment objective lies on the spectrum between the options of achieving returns through current income only (corporate bonds) and by capital appreciation only (small-cap equity securities). Additionally, this growth and income investment objective is a moderate risk objective as the current income portion of the portfolio mitigates some of the risk that results from the capital appreciation portion of the investment portfolio.Incorrect
Growth and income
The goal of a growth and income investment objective is to achieve investment returns through a combination of both current income and capital appreciation. This investment objective lies on the spectrum between the options of achieving returns through current income only (corporate bonds) and by capital appreciation only (small-cap equity securities). Additionally, this growth and income investment objective is a moderate risk objective as the current income portion of the portfolio mitigates some of the risk that results from the capital appreciation portion of the investment portfolio.