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Question 1 of 10
1. Question
Which of the following statements is true regarding time horizon?
I. The time horizon is the length of time investors’ investments need to last, that is, until their eventual death
II. While most investors prefer to consider their death, it is not important for the advisor to consider the client’s expected lifespan to ensure that all investments are suitable for the client
III. An investor with a long time horizon will be able to withstand short- term market volatility without much impact on the long-term goals
IV. Investors who are currently taking income from their investments will need stable and secure investments that preserve their capitalCorrect
Time horizon
The time horizon is the length of time investors’ investments need to last, that is, until their eventual death. While most investors prefer not to consider their death, it is important for the advisor to consider the client’s expected lifespan to ensure that all investments are suitable for the client. An investor with a long time horizon will be able to withstand short- term market volatility without much impact on the long-term goals, while investors who are currently taking income from their investments will need stable and secure investments that preserve their capital, as they are currently relying on them for income.Incorrect
Time horizon
The time horizon is the length of time investors’ investments need to last, that is, until their eventual death. While most investors prefer not to consider their death, it is important for the advisor to consider the client’s expected lifespan to ensure that all investments are suitable for the client. An investor with a long time horizon will be able to withstand short- term market volatility without much impact on the long-term goals, while investors who are currently taking income from their investments will need stable and secure investments that preserve their capital, as they are currently relying on them for income. -
Question 2 of 10
2. Question
Which of the following statements is true regarding the client’s financial status?
I. The financial status of a client is a holistic look at the client’s current financial condition
II. Items to consider when determining a client’s financial status should include the client’s current expenditures, debt obligations, tax situation, etc
III. The family balance sheet is different from a corporate balance sheet
IV. It should clearly show all of the family’s assets and liabilities, but eschew income and amounts paid as expensesCorrect
The client’s financial status
The financial status of a client is a holistic look at the client’s current financial condition. Items to be considering when determining a client’s financial status should include the client’s current expenditures, debt obligations, tax situation, all sources of income, and family balance sheet. The family balance sheet is similar to a corporate balance sheet. It should clearly show all of the family’s assets and liabilities, but eschew income and amounts paid as expenses.Incorrect
The client’s financial status
The financial status of a client is a holistic look at the client’s current financial condition. Items to be considering when determining a client’s financial status should include the client’s current expenditures, debt obligations, tax situation, all sources of income, and family balance sheet. The family balance sheet is similar to a corporate balance sheet. It should clearly show all of the family’s assets and liabilities, but eschew income and amounts paid as expenses. -
Question 3 of 10
3. Question
Which of the following statements is true regarding understanding the clients’ tax situation?
I. Understanding clients’ tax situation is critical to providing proper advice regarding their current situation
II. It dictates some goods should be set aside during the year regarding taxable events such as dividends and capital gains received from investments
III. It will also help the advisor recommend the most suitable investments to shelter income from taxation
IV. Understanding the client’s tax situation won’t help the advisor choose the appropriate account types to take full advantage of current tax laws as wellCorrect
Understanding the clients’ tax situation
Understanding clients’ tax situation is critical to providing proper advice regarding their current situation. It dictates how much money should be set aside during the year regarding taxable events such as dividends and capital gains received from investments. It will also help the advisor recommend the most suitable investments to shelter income from taxation. Understanding the client’s tax situation will help the advisor choose the appropriate account types to take full advantage of current tax laws as well. In addition to helping the client obtain the lowest tax bill possible, the advisor is also well positioned to help the client ensure that he or she paying the appropriate amount to prevent incurring a large tax bill and penalties throughout the year.Incorrect
Understanding the clients’ tax situation
Understanding clients’ tax situation is critical to providing proper advice regarding their current situation. It dictates how much money should be set aside during the year regarding taxable events such as dividends and capital gains received from investments. It will also help the advisor recommend the most suitable investments to shelter income from taxation. Understanding the client’s tax situation will help the advisor choose the appropriate account types to take full advantage of current tax laws as well. In addition to helping the client obtain the lowest tax bill possible, the advisor is also well positioned to help the client ensure that he or she paying the appropriate amount to prevent incurring a large tax bill and penalties throughout the year. -
Question 4 of 10
4. Question
Which of the following statements is true regarding nonfinancial considerations?
I. Nonfinancial considerations are those concerns that shape an investor’s profile but do not pertain directly to financial considerations
II. They are often considered more important than many financial considerations
III. The importance of clients’ demographics can often supersede their financial condition
IV. The age of a client with a high amount of money to invest won’t determine an unsuitable investment for the client, not the amount they have to investCorrect
Nonfinancial considerations
Nonfinancial considerations are those concerns that shape an investor’s profile but do not pertain directly to financial considerations. They are often considered more important than many financial considerations. The importance of clients’ demographics can often supersede their financial condition. The age of a client with a small amount of money to invest will determine the most suitable investment for the client, not the amount they have to invest.Incorrect
Nonfinancial considerations
Nonfinancial considerations are those concerns that shape an investor’s profile but do not pertain directly to financial considerations. They are often considered more important than many financial considerations. The importance of clients’ demographics can often supersede their financial condition. The age of a client with a small amount of money to invest will determine the most suitable investment for the client, not the amount they have to invest. -
Question 5 of 10
5. Question
Which of the following statements is true regarding the capital asset pricing model (CAPM)?
I. According to the capital asset pricing model, stocks are priced based on two types of risk, systematic and unsystematic
II. Given this assumption, the investor should be able to demand higher return for great risk taken, and expect less return for less risk taken
III. Modern portfolio theory is based on this principal and places emphasis on using CAPM to calculate and control risks and rewards
IV. Portfolio diversification ignoring the capital asset pricing model theory should theoretically allow the investor to increase risk while increasing returnsCorrect
CAPM
According to the capital asset pricing model, stocks are priced based on two types of risk, systematic and unsystematic. Given this assumption, the investor should be able to demand higher return for great risk taken, and expect less return for less risk taken. Modern portfolio theory is based on this principal and places emphasis on using CAPM to calculate and control risks and rewards. Portfolio diversification based on the capital asset pricing model theory should theoretically allow the investor to reduce risk while increasing returns. This theory is proven relevant regarding bonds and stocks due to the nature of the relative safety of bonds compared to stocks, and the difference in the potential returns realized.Incorrect
CAPM
According to the capital asset pricing model, stocks are priced based on two types of risk, systematic and unsystematic. Given this assumption, the investor should be able to demand higher return for great risk taken, and expect less return for less risk taken. Modern portfolio theory is based on this principal and places emphasis on using CAPM to calculate and control risks and rewards. Portfolio diversification based on the capital asset pricing model theory should theoretically allow the investor to reduce risk while increasing returns. This theory is proven relevant regarding bonds and stocks due to the nature of the relative safety of bonds compared to stocks, and the difference in the potential returns realized. -
Question 6 of 10
6. Question
Which of the following statements is true regarding Modern portfolio theory (MPT)?
Correct
MPT
Modern portfolio theory states that it is possible to control the risk and return of investment portfolios. According to modern portfolio theory, it is possible to identify the relationship of risk and reward in the portfolio as a whole instead of analyzing individual investments. This is done with the assistance of CAPM, which suggests that securities that have higher risks come with greater rewards, and investments with less risk result in lower rewards. This allows the investor to increase returns while reducing risk. This feat is accomplished by investing in securities that are inversely correlated, such as stocks and bonds. As the price of stocks rise, investors stop demanding the comparative safety of bonds to capitalize on the increase in the equity markets. During times of uncertainty, many investors seek the safety of bonds, leading to an increase in the price of bonds. This demonstrated negative correlation is exemplary of the strategy of modern portfolio theory.Incorrect
MPT
Modern portfolio theory states that it is possible to control the risk and return of investment portfolios. According to modern portfolio theory, it is possible to identify the relationship of risk and reward in the portfolio as a whole instead of analyzing individual investments. This is done with the assistance of CAPM, which suggests that securities that have higher risks come with greater rewards, and investments with less risk result in lower rewards. This allows the investor to increase returns while reducing risk. This feat is accomplished by investing in securities that are inversely correlated, such as stocks and bonds. As the price of stocks rise, investors stop demanding the comparative safety of bonds to capitalize on the increase in the equity markets. During times of uncertainty, many investors seek the safety of bonds, leading to an increase in the price of bonds. This demonstrated negative correlation is exemplary of the strategy of modern portfolio theory. -
Question 7 of 10
7. Question
Which of the following statements is true regarding efficient market hypothesis?
Correct
Efficient market hypothesis
The efficient market hypothesis states that all securities pricing reflects all pertinent information available on the security, and that there is no way to predict a rise in the price of a security. Some in the industry call this the “random walk theory,” and suggest that printing a list of securities and throwing darts at the list would be as effective a method as any to select securities in an efficient market. According to this theory, in an efficient market, the price of a security will always reflect its intrinsic value, because all information about the security is known by the general investing public. There are three types of efficient markets: the weak form efficient market, the semi-strong form efficient market, and the strong form efficient market.Incorrect
Efficient market hypothesis
The efficient market hypothesis states that all securities pricing reflects all pertinent information available on the security, and that there is no way to predict a rise in the price of a security. Some in the industry call this the “random walk theory,” and suggest that printing a list of securities and throwing darts at the list would be as effective a method as any to select securities in an efficient market. According to this theory, in an efficient market, the price of a security will always reflect its intrinsic value, because all information about the security is known by the general investing public. There are three types of efficient markets: the weak form efficient market, the semi-strong form efficient market, and the strong form efficient market. -
Question 8 of 10
8. Question
Which of the following statements is true regarding portfolio management styles and strategies?
Correct
Portfolio management styles and strategies
Those individuals responsible for managing the assets and investments of others have widely varying styles. No individual style is suited to every investor, even though the overarching goal of all managers is to outperform their benchmark or the markets in general. Investors have access to many money managers, ranging from mutual funds and managed accounts for the common investor, to hedge funds for the high-net-worth individual or sophisticated investor. Usually, it is the investment advisor’s duty to be sure that clients choose the most suitable option for their needs based on their attitude toward risk, financial goals, and time horizon. Proper execution of this job function is critical to the advisor maintaining fiduciary responsibility.Incorrect
Portfolio management styles and strategies
Those individuals responsible for managing the assets and investments of others have widely varying styles. No individual style is suited to every investor, even though the overarching goal of all managers is to outperform their benchmark or the markets in general. Investors have access to many money managers, ranging from mutual funds and managed accounts for the common investor, to hedge funds for the high-net-worth individual or sophisticated investor. Usually, it is the investment advisor’s duty to be sure that clients choose the most suitable option for their needs based on their attitude toward risk, financial goals, and time horizon. Proper execution of this job function is critical to the advisor maintaining fiduciary responsibility. -
Question 9 of 10
9. Question
Which of the following statements is false regarding strategic asset allocation?
Correct
Strategic asset allocation
Strategic asset allocation describes a long-term style of portfolio management (as opposed to short-term tactical asset allocation) in which the assets are unequally proportioned based on long-term goals, needs, and time horizon. These goals determine the allocation of assets between equity securities and debt/cash securities. The more aggressive the goals of the investor, the higher allocation of the account value would be assigned to equity securities, and vice versa concerning more conservative goals and debt/cash securities. Strategic asset allocation attempts to capitalize on modern portfolio theory by holding inversely correlated assets to reduce risk and increase returns.Incorrect
Strategic asset allocation
Strategic asset allocation describes a long-term style of portfolio management (as opposed to short-term tactical asset allocation) in which the assets are unequally proportioned based on long-term goals, needs, and time horizon. These goals determine the allocation of assets between equity securities and debt/cash securities. The more aggressive the goals of the investor, the higher allocation of the account value would be assigned to equity securities, and vice versa concerning more conservative goals and debt/cash securities. Strategic asset allocation attempts to capitalize on modern portfolio theory by holding inversely correlated assets to reduce risk and increase returns. -
Question 10 of 10
10. Question
Which of the following statements is true regarding tactical asset allocation?
Correct
Tactical asset allocation
Tactical asset allocation describes a short-term style of portfolio management (as opposed to long-term strategic asset allocation) in which the manager takes a hands-on, active approach to managing the account. The goal of tactical asset allocation is to obtain returns by quickly changing the asset allocation in reaction to changes in market conditions. The asset moves aren’t necessarily always reactions, but may be the result of the managers’ overall sense of the market and analysis of market timing. This is most obviously demonstrated in the timing of market cycles. Since market cycles are highly predictable, they are easily timed for maximum benefit.Incorrect
Tactical asset allocation
Tactical asset allocation describes a short-term style of portfolio management (as opposed to long-term strategic asset allocation) in which the manager takes a hands-on, active approach to managing the account. The goal of tactical asset allocation is to obtain returns by quickly changing the asset allocation in reaction to changes in market conditions. The asset moves aren’t necessarily always reactions, but may be the result of the managers’ overall sense of the market and analysis of market timing. This is most obviously demonstrated in the timing of market cycles. Since market cycles are highly predictable, they are easily timed for maximum benefit.