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Question 1 of 10
1. Question
Which of the following statements is true regarding Individual?
Correct
Individual
An individual is a singular person that invests for him- or herself. An individual is usually a natural person and not a corporation. Individuals are typically referred to as small investors or as retail investors. The reference to retail investing refers to the fact that they are not large, institutional investors. Often, individual investors are unable to access certain types of investments that may have large minimum buy-ins. The sophistication of each individual varies from person to person depending upon life experience, but the level of sophistication is usually significantly less than that of institutional investors.Incorrect
Individual
An individual is a singular person that invests for him- or herself. An individual is usually a natural person and not a corporation. Individuals are typically referred to as small investors or as retail investors. The reference to retail investing refers to the fact that they are not large, institutional investors. Often, individual investors are unable to access certain types of investments that may have large minimum buy-ins. The sophistication of each individual varies from person to person depending upon life experience, but the level of sophistication is usually significantly less than that of institutional investors. -
Question 2 of 10
2. Question
Which of the following statements is true regarding sole proprietorship?
Correct
Sole proprietorship
Sole proprietorships are business structures that investors may use to their advantage concerning simplicity for purposes of taxation. A business that is formed by the owner and not structured as a limited liability corporation, but a sole proprietorship, may report its income and losses on the individual owner’s income tax returns. This may lead to some tax advantages, such as reduced reportable income for the individual, but it also makes the owner (sole proprietor) liable for all of the businesses debts. In this case, a failed venture on the part of the investor would not limit the investor’s loss to the investment in the venture but gives creditors access to the client’s personal assets as well.Incorrect
Sole proprietorship
Sole proprietorships are business structures that investors may use to their advantage concerning simplicity for purposes of taxation. A business that is formed by the owner and not structured as a limited liability corporation, but a sole proprietorship, may report its income and losses on the individual owner’s income tax returns. This may lead to some tax advantages, such as reduced reportable income for the individual, but it also makes the owner (sole proprietor) liable for all of the businesses debts. In this case, a failed venture on the part of the investor would not limit the investor’s loss to the investment in the venture but gives creditors access to the client’s personal assets as well. -
Question 3 of 10
3. Question
Which of the following statements is false regarding trusts and estates?
Correct
Trusts and estates
Trusts and are estates are means by which investors protect their money from several different factors. Estates are the property left behind by a deceased person. If the deceased did not leave explicit instructions concerning their wishes for the disposition of their assets, a probate court will be required to assign those assets’ disposition. This often leads to nonpositive results for the decedent’s assets and the heirs to whom the decedent wished their assets be passed. Trusts are legal arrangements by which investors may protect their assets. They are vetted as legal and valid before the decedent’s death to avoid probate court and the unnecessary loss of assets. Trust documents assign a trustee to carry out the deceased’s wishes in accordance with the trust documents and make the passing of wealth and assets an easier transition.Incorrect
Trusts and estates
Trusts and are estates are means by which investors protect their money from several different factors. Estates are the property left behind by a deceased person. If the deceased did not leave explicit instructions concerning their wishes for the disposition of their assets, a probate court will be required to assign those assets’ disposition. This often leads to nonpositive results for the decedent’s assets and the heirs to whom the decedent wished their assets be passed. Trusts are legal arrangements by which investors may protect their assets. They are vetted as legal and valid before the decedent’s death to avoid probate court and the unnecessary loss of assets. Trust documents assign a trustee to carry out the deceased’s wishes in accordance with the trust documents and make the passing of wealth and assets an easier transition. -
Question 4 of 10
4. Question
Which of the following statements is true regarding foundations and charities as possible investment clients?
Correct
Foundations and charities as possible investment clients
Even though foundations and charities, as well as other nonprofit organizations, are not seeking to maximize profit as a central organizational aim, they may yet utilize investments for the sake of their funding and growth. Foundations and charities, to the extent that they do not rely on donors, may even depend upon investment returns as crucial to their ongoing activity. This is especially true for foundations. Alternatively, foundations and charities may wish to supplement significant donations with investment returns anyway. In any case, the role of investments to foundations and charities requires an investment adviser to consider how his services could provide value to such nonprofit organizations.Incorrect
Foundations and charities as possible investment clients
Even though foundations and charities, as well as other nonprofit organizations, are not seeking to maximize profit as a central organizational aim, they may yet utilize investments for the sake of their funding and growth. Foundations and charities, to the extent that they do not rely on donors, may even depend upon investment returns as crucial to their ongoing activity. This is especially true for foundations. Alternatively, foundations and charities may wish to supplement significant donations with investment returns anyway. In any case, the role of investments to foundations and charities requires an investment adviser to consider how his services could provide value to such nonprofit organizations. -
Question 5 of 10
5. Question
Which of the following statements is true regarding client’s time horizon?
Correct
Client’s time horizon
Each client is considered to have a time horizon, or period of time in which their assets are to be invested. Advisors should always know a client’s time horizon as it is critical to help the client make the most informed and suitable decisions and investments regarding their funds. Time horizons may contain significant events such as college attendance for the investors’ children, the marriage of an investor’s child, retirement, and eventually the death of the client. Understanding when the investor expects to experience these significant events is necessary to provide suitable investment advice.Incorrect
Client’s time horizon
Each client is considered to have a time horizon, or period of time in which their assets are to be invested. Advisors should always know a client’s time horizon as it is critical to help the client make the most informed and suitable decisions and investments regarding their funds. Time horizons may contain significant events such as college attendance for the investors’ children, the marriage of an investor’s child, retirement, and eventually the death of the client. Understanding when the investor expects to experience these significant events is necessary to provide suitable investment advice. -
Question 6 of 10
6. Question
Which of the following statements is false regarding client’s risk tolerance?
Correct
Client’s risk tolerance
Many factors are to be considered when defining a client’s risk tolerance. Time horizon is a very important factor. If an investor is unsure of their need for risk, their time horizon may be a very helpful and informative metric. For clients with a long horizon, more aggressive and risky investments may be the solution to the need of capital appreciation. For clients with shorter time horizons, safer and less-volatile investments may be more in line with their risk tolerance. Time horizon, however, should not be the only factor of risk tolerance considered. Investor personality is also a large factor when determining risk tolerance. An investor with a long time horizon may have no stomach for volatility and loss and may therefore be better suited to less-aggressive and safer investments.Incorrect
Client’s risk tolerance
Many factors are to be considered when defining a client’s risk tolerance. Time horizon is a very important factor. If an investor is unsure of their need for risk, their time horizon may be a very helpful and informative metric. For clients with a long horizon, more aggressive and risky investments may be the solution to the need of capital appreciation. For clients with shorter time horizons, safer and less-volatile investments may be more in line with their risk tolerance. Time horizon, however, should not be the only factor of risk tolerance considered. Investor personality is also a large factor when determining risk tolerance. An investor with a long time horizon may have no stomach for volatility and loss and may therefore be better suited to less-aggressive and safer investments. -
Question 7 of 10
7. Question
Which of the following statements is true regarding client’s investment profile?
Correct
Client’s investment profile
A client’s investment profile is a multifaceted look at the client’s current situation and goals. It consists of many factors to be considered. The advisor must be aware of the client’s current income, their goals regarding retirement, their plans regarding their eventual death and possible disability, and their time horizon and risk tolerance. It is also important to consider their current financial status including their cash flows, their balance sheet of assets, any existing investments, and their tax situation. Lastly, and just as important, are the nonfinancial investment considerations including their values, attitude, experience and level of sophistication, and their demographics. Each of the preceding factors plays an important part in determining the client’s investment profile.Incorrect
Client’s investment profile
A client’s investment profile is a multifaceted look at the client’s current situation and goals. It consists of many factors to be considered. The advisor must be aware of the client’s current income, their goals regarding retirement, their plans regarding their eventual death and possible disability, and their time horizon and risk tolerance. It is also important to consider their current financial status including their cash flows, their balance sheet of assets, any existing investments, and their tax situation. Lastly, and just as important, are the nonfinancial investment considerations including their values, attitude, experience and level of sophistication, and their demographics. Each of the preceding factors plays an important part in determining the client’s investment profile. -
Question 8 of 10
8. Question
Which of the following statements is true regarding modern portfolio theory?
Correct
Modern portfolio theory
Modern portfolio theory attempts to provide a method by which investors may maximize their return and minimize their risk through the use of descriptive statistics as applied to the risk and return of multiple securities. These securities are based on the investor’s risk appetite. The theory states that a portfolio may be constructed that maximizes returns while minimizing risk. It also reinforces the investor’s awareness that an acceptance of additional risk will result in higher returns as stated in the Capital Asset Pricing Model. This is achieved through accurate security valuation, asset allocation according to risk appetite (more risk acceptance means more aggressive allocations), portfolio optimization, and the regular measurement of the performance of the portfolio.Incorrect
Modern portfolio theory
Modern portfolio theory attempts to provide a method by which investors may maximize their return and minimize their risk through the use of descriptive statistics as applied to the risk and return of multiple securities. These securities are based on the investor’s risk appetite. The theory states that a portfolio may be constructed that maximizes returns while minimizing risk. It also reinforces the investor’s awareness that an acceptance of additional risk will result in higher returns as stated in the Capital Asset Pricing Model. This is achieved through accurate security valuation, asset allocation according to risk appetite (more risk acceptance means more aggressive allocations), portfolio optimization, and the regular measurement of the performance of the portfolio. -
Question 9 of 10
9. Question
Which of the following statements is true regarding strategic asset allocation?
Correct
Strategic asset allocation
Strategic asset allocation describes a long-term investing strategy. When risk tolerance and investment goals are determined and suited to the proper portfolio, these securities are held until they are deemed to be no longer suitable or toxic. An allocation of the assets is determined based on the investor’s goal, and to maintain that allocation, the investor will sell the gains in the highly performing securities and buy more of the underperforming securities to maintain the allocation. This process is called rebalancing, so called because is maintains the balance of the allocation. The four parts that make up strategic asset allocation are style, asset class, rebalancing, and buy/hold.Incorrect
Strategic asset allocation
Strategic asset allocation describes a long-term investing strategy. When risk tolerance and investment goals are determined and suited to the proper portfolio, these securities are held until they are deemed to be no longer suitable or toxic. An allocation of the assets is determined based on the investor’s goal, and to maintain that allocation, the investor will sell the gains in the highly performing securities and buy more of the underperforming securities to maintain the allocation. This process is called rebalancing, so called because is maintains the balance of the allocation. The four parts that make up strategic asset allocation are style, asset class, rebalancing, and buy/hold. -
Question 10 of 10
10. Question
Which of the following statements is true regarding income-producing securities vs. capital appreciation?
Correct
Income-producing securities vs. capital appreciation
Income-producing securities are usually characterized by low-risk, stable securities that produce some amount of income. Securities that fall into this category include but are not limited to bonds, preferred stocks, real estate investment trusts (REITs), and dividend- paying common stock. Usually, the investor who is most interested in income-producing securities is the retired investor seeking current income and capital preservation. The investor’s income need is met by the interest or dividends paid on the securities, and the desire for capital preservation is met because of the stability of the security. Investors seeking capital appreciation look to higher-risk and more volatile securities, such as common stock of companies that are of small-market capitalization. These investors are usually younger investors with long time horizons, which allow them to absorb losses and benefit from long-term gains.Incorrect
Income-producing securities vs. capital appreciation
Income-producing securities are usually characterized by low-risk, stable securities that produce some amount of income. Securities that fall into this category include but are not limited to bonds, preferred stocks, real estate investment trusts (REITs), and dividend- paying common stock. Usually, the investor who is most interested in income-producing securities is the retired investor seeking current income and capital preservation. The investor’s income need is met by the interest or dividends paid on the securities, and the desire for capital preservation is met because of the stability of the security. Investors seeking capital appreciation look to higher-risk and more volatile securities, such as common stock of companies that are of small-market capitalization. These investors are usually younger investors with long time horizons, which allow them to absorb losses and benefit from long-term gains.