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Inv. Objectives & Suitable Inv. > Funds, Characteristics, Suitability > Flashcards

Funds, Characteristics, Suitability Flashcards

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1
Q

What is the primary function of a Direct Participation Program (DPP) Limited Partnership?

A

Distributes passive income and passive losses to its partners

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2
Q

What potential financial benefits can a DPP Limited Partnership provide?

A

May provide tax deductions and tax credits

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3
Q

What type of liability does a DPP Limited Partnership offer to its limited partners?

A

Limited liability

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4
Q

What is a key characteristic of the liquidity of DPP Limited Partnerships?

A

Illiquid and subject to the adverse effects of tax law changes

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5
Q

What risk is associated with the tax benefits of a DPP Limited Partnership?

A

Risk of IRS recapturing tax benefits

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6
Q

Who is a DPP Limited Partnership suitable for?

A

Investors who are able to afford significant risks and commit capital for the long term

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7
Q

Fill in the blank: A Direct Participation Program (DPP) Limited Partnership offers _______ to limited partners.

A

[limited liability]

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8
Q

True or False: A DPP Limited Partnership is a liquid investment.

A

False

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9
Q

What should investors consider regarding the risks of a DPP Limited Partnership?

A

Significant risks and long-term capital commitment

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10
Q

What is a Mutual Fund?

A

Offers shares of a portfolio that’s diversified based on the type of fund

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11
Q

What is a key advantage of investing in a Mutual Fund?

A

Less risky and easier than buying individual securities

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12
Q

When is a Mutual Fund priced?

A

Priced once per day (forward pricing)

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13
Q

How does a Mutual Fund redeem shares?

A

Fund will redeem shares at NAV; there’s no secondary market

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14
Q

What factors determine the suitability of a Mutual Fund?

A

Varies based on objectives and share class

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15
Q

Who is a Mutual Fund suitable for?

A

Investors seeking to invest in a diversified portfolio of securities rather than creating their own

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16
Q

What is a Growth Fund?

A

A managed portfolio consisting of common stocks which have strong upside potential

Growth funds typically focus on capital appreciation rather than income generation.

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17
Q

What type of dividends may a Growth Fund pay?

A

May pay little or no dividends

Growth funds prioritize reinvesting earnings for growth over paying dividends.

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18
Q

What determines the risk of a Growth Fund?

A

Risk is determined by types of companies included (large-, mid-, small-cap)

Different cap sizes can lead to varying levels of volatility and risk.

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19
Q

Who is a Growth Fund suitable for?

A

Suitable for investors willing to accept the risk associated with long-term growth

These investors typically seek capital appreciation and are prepared for market fluctuations.

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20
Q

What is an Income Fund?

A

A managed portfolio that primarily consists of bonds, preferred stocks, and possibly high dividend paying common stocks

Income Funds are designed to provide current income to investors.

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21
Q

How does the price volatility of an Income Fund compare to growth funds?

A

The price is less volatile than growth funds

This characteristic makes Income Funds potentially less risky for investors.

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22
Q

What type of yield do Income Funds typically offer?

A

A high dividend yield

This makes them attractive to investors looking for income.

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23
Q

Who are Income Funds suitable for?

A

Investors seeking current income

These funds are particularly appealing to those who prioritize income over capital growth.

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24
Q

What is a Specialized/Sector Fund?

A

A managed portfolio that invests in one specific industry or geographic area

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25
What is the diversification level of a Specialized/Sector Fund?
The least diversified type of fund
26
What kind of risk is associated with Specialized/Sector Funds?
Higher risk with higher potential returns
27
Who is a Specialized/Sector Fund suitable for?
Aggressive investors who are seeking a higher return
28
What is a Balanced Fund?
A diversified and managed portfolio that consists of both stocks and bonds
29
What are the two primary benefits of a Balanced Fund?
Growth and current income
30
Who is a Balanced Fund suitable for?
Conservative investors seeking both long-term growth and current income
31
What is an International Stock Fund?
A managed portfolio that consists of stocks of foreign corporations.
32
In what currency are shares of an International Stock Fund priced?
U.S. dollars.
33
In what currency are dividends paid for an International Stock Fund?
U.S. dollars.
34
Who is an International Stock Fund suitable for?
Investors seeking to diversify into foreign stocks.
35
What is an Index Fund?
A passively managed fund that buys and holds securities that mirror a specific index (e.g., the S&P 500) ## Footnote Index funds aim to replicate the performance of a specific market index.
36
What is a key characteristic of Index Funds?
Low expense ratio ## Footnote This makes them a cost-effective investment option.
37
Who are Index Funds suitable for?
Investors seeking a low-cost alternative to more actively managed funds with similar objectives ## Footnote They are ideal for those looking for a simple and effective investment strategy.
38
What is an Exchange Traded Fund (ETF)?
Offers shares that track an index and trade in the secondary market like common stock
39
How do ETFs differ from mutual funds?
Shares are priced and traded in real-time on an exchange
40
Can ETFs be sold short?
Yes, ETFs may be sold short and purchased on margin
41
What are the variations of ETFs?
High risk leveraged and inverse ETFs
42
What type of investment are traditional ETFs suitable for?
Low cost and long-term investment (like mutual funds)
43
What type of trading are non-traditional ETFs suitable for?
Short-term trading and speculation
44
Fill in the blank: ETFs may be sold short and purchased on _______.
margin
45
True or False: Shares of ETFs are not traded in real-time.
False
46
What is a key characteristic of traditional ETFs?
They are suitable as a low cost and long-term investment
47
What are leveraged and inverse ETFs considered?
Non-traditional ETFs
48
What does ETN stand for?
Exchange Traded Note
49
How is an ETN similar to an ETF?
Both are traded on exchanges and can provide exposure to various assets.
50
What type of debt is an ETN considered?
Unsecured debt
51
What risk is associated with ETNs?
Default risk
52
What types of assets do ETNs often track?
Exotic mix of assets such as foreign stocks and illiquid markets
53
Can ETNs be sold short?
Yes
54
Can ETNs be purchased on margin?
Yes
55
Who might find ETNs suitable?
Investors seeking diversification and those looking for speculative investments
56
Fill in the blank: An ETN is considered _______.
unsecured debt
57
True or False: ETNs have no associated default risk.
False
58
What is a Closed End Fund?
Issues a limited number of shares which are priced and traded in real-time
59
Are shares of a Closed End Fund redeemable?
No, shares are not redeemable
60
How is the share price of a Closed End Fund determined?
Set in market by supply and demand, not based on NAV
61
What type of investors is a Closed End Fund suitable for?
Investors seeking to invest in a diversified portfolio with short-term trading capabilities
62
What is a similarity between Closed End Funds and ETFs?
Both allow for short-term trading capabilities
63
Fill in the blank: A Closed End Fund's share price is influenced by _______.
supply and demand
64
What is a Business Development Company (BDC)?
A registered closed-end investment company that invests in developing companies.
65
What types of companies do BDCs typically invest in?
Often private companies and startups that are not available to the average investor.
66
How does the volatility of BDCs compare to mutual funds?
More volatile than most mutual funds.
67
What is the potential reward of investing in BDCs?
High potential reward.
68
Who is the ideal investor for BDCs?
Aggressive investors who can withstand short-term volatility.
69
Fill in the blank: BDCs are suitable for those seeking an investment that is often only available to large _______ funds.
private equity
70
What type of returns are investors seeking from BDCs?
High dividends.
71
What is a Real Estate Investment Trust (REIT)?
A portfolio consisting of income producing properties and/or mortgages
72
What percentage of net income does a REIT distribute to investors?
90%
73
Does a REIT distribute losses to investors?
No
74
How are dividends from a REIT taxed?
As ordinary income (non-qualified)
75
Is a REIT considered an investment company?
No
76
Who is a REIT suitable for?
Investors seeking high dividend yield and willing to accept price volatility
77
Fill in the blank: A REIT distributes _______ of its net income to investors.
90%
78
True or False: A REIT is required to distribute losses to its investors.
False
79
What type of income do REIT dividends represent for tax purposes?
Ordinary income (non-qualified)
80
What is a key characteristic of the properties held by a REIT?
They must be income producing
81
What is a Hedge Fund?
A private investment fund that’s not subject to the Investment Company Act of 1940.
82
What types of strategies may Hedge Funds use?
Exotic strategies that involve short selling, leverage, and derivatives.
83
Do Hedge Funds publish their daily NAV?
No, they do not publish their daily NAV.
84
What is a key characteristic of Hedge Funds regarding liquidity?
They are illiquid.
85
Who are Hedge Funds suitable for?
Sophisticated investors who can afford the increased risk and potential loss of capital.
86
What must investors be able to do when investing in Hedge Funds?
Tie up funds for the long-term.
87
What is a Variable Annuity?
An investment contract with an insurance company
88
Who assumes the risk in a Variable Annuity?
The annuitant
89
What can a Variable Annuity be set up to provide?
Periodic payments for life
90
What is the tax treatment of income in a Variable Annuity?
Income grows tax-deferred until paid out
91
What factors determine the risk and return in a Variable Annuity?
The investments chosen in the separate account
92
What may be adjusted in a Variable Annuity to suit the investor?
Investments may be adjusted to suit the investor’s age and risk profile
93
Who is a Variable Annuity suitable for?
Investors seeking tax-deferred retirement savings or the potential for lifetime payments
94
Fill in the blank: A Variable Annuity is an investment contract with an _______.
insurance company
95
True or False: The income from a Variable Annuity is taxed immediately.
False
96
What type of payments can a Variable Annuity provide?
Periodic payments for life
97
What is a Fixed Annuity?
An investment contract with an insurance company
98
Who assumes the risk in a Fixed Annuity?
The insurance company
99
What type of payments may a Fixed Annuity provide?
Fixed payments for life
100
How does income from a Fixed Annuity grow?
Tax-deferred until paid out
101
What is the nature of the investment return in a Fixed Annuity?
At a fixed rate
102
Who is a Fixed Annuity suitable for?
Investors seeking lifetime income payments after retirement
103
What is an important consideration regarding the fixed rate of return in a Fixed Annuity?
It may not keep up with inflation
104
Fill in the blank: A Fixed Annuity provides income that grows _______ until paid out.
tax-deferred
105
True or False: A Fixed Annuity guarantees a variable rate of return.
False
106
What is one potential downside of a Fixed Annuity for investors?
The fixed rate of return may not keep up with inflation
107
What is an Individual Retirement Account (IRA)?
A tax deferred investment account
108
Who can fund an IRA?
Persons with earned income
109
How are withdrawals from an IRA taxed?
As ordinary income
110
What penalty is assessed for early withdrawal from an IRA?
A penalty is assessed
111
What does RMD stand for in relation to an IRA?
Required Minimum Distribution
112
Who is the IRA suitable for?
Persons with earned income who are saving for retirement
113
What is a Roth IRA?
A tax-free investment account available to persons with earned income.
114
Who is eligible to contribute to a Roth IRA?
Persons with earned income below certain income limits.
115
What happens to qualified withdrawals from a Roth IRA?
They are tax-free.
116
Is there a penalty for early withdrawal from a Roth IRA?
Yes, a penalty is assessed for early withdrawal.
117
Does the required minimum distribution (RMD) apply to Roth IRAs?
No, RMD doesn’t apply.
118
Who is a Roth IRA suitable for?
Persons with earned income below the limit who are saving for retirement and want future tax-free withdrawals.
119
Fill in the blank: A Roth IRA is a _______ investment account.
tax-free
120
True or False: High-income persons can contribute to a Roth IRA.
False
121
What does CESA stand for?
Coverdell Education Saving Account
122
What is the primary purpose of a CESA?
To help pay a child’s education expenses
123
Are contributions to a CESA subject to income limits?
Yes
124
What type of withdrawals are tax-free from a CESA?
Withdrawals used for qualified education expenses
125
At what levels of education can CESA funds be used?
At any level of education
126
What happens if CESA funds are not used for education?
Penalties and taxes are assessed
127
Is a change of beneficiary allowed in a CESA?
Yes
128
What is a 529 College Savings Plan?
A tax-free investment account established to help pay higher education expenses and private school tuition.
129
What are the tax benefits of a 529 College Savings Plan?
Withdrawals are tax-free if used for qualified education expenses.
130
Are there any income limits for contributors to a 529 College Savings Plan?
No income limits are imposed on contributors.
131
What happens if funds from a 529 College Savings Plan are not used for education?
Penalties and taxes are assessed.
132
Can the beneficiary of a 529 College Savings Plan be changed?
Yes, a change of beneficiary is allowed.
133
Who is a 529 College Savings Plan suitable for?
Investors saving for a child’s education expenses, including elementary, secondary, or higher education.
134
What is the maximum amount that can be used from a 529 College Savings Plan for private school tuition per year?
$10,000 per year.
135
Fill in the blank: A 529 College Savings Plan is suitable for investors saving for a child’s _______ expenses.
[education]
136
True or False: Withdrawals from a 529 College Savings Plan are tax-free for any purpose.
False

Inv. Objectives & Suitable Inv. (6 decks)

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