Product Benefits/Risks & Comparisons

Question 1

DPP benefits

Answer 1

• investment is managed by others
• flow through of income and certain expenses
• limited liability

Question 2

DPP risks

Answer 2

• liquidity risk
• legislative risk
• risk of audit
• depreciation recapture

Question 3

Commodities benefits

Answer 3

• potential hedge against inflation
• diversification (not typically correlated with stock market returns)
• potential returns (subject to supply and demand on a global basis)

Question 4

Commodities risks

Answer 4

• principal risk (prices can be extremely volatile)
• foreign market risks
• high leverage (bad in a down market)
• lack of income

Question 5

Structured Products Risks

Answer 5

• illiquid
• returns not fully realized until maturity
• credit risk
• lack of efficient pricing (market price does not necessarily reflect real value)

Question 6

ISO vs NSO

Question 7

4 Conditions of S Corp (to stay in business)

Answer 7

• no more than 100 stockholders
• each stockholder must be a citizen or resident of the US
• only one class of stock
• no more than 25% of income can come from passive activities

Question 8

Dividends

Answer 8

Quarterly - Equity (Common and preferred stock)
Semiannually - Debt (Bond)

Question 9

ETF benefits

Answer 9

• ability to buy on margin
• intraday pricing for active traders
• greater tax efficiency
• dividends can be paid monthly or even weekly

Question 10

Simple Trusts vs. Complex Trusts

Answer 10

Simple trust - All income earned on assets must be distributed to benes during the year received
Complex trust - Permitted deductions for distributions of net income or principal. Grantor is taxed

Question 11

Living Trust vs. Testamentary Trust

Answer 11

Living Trust - established during the Maker’s lifetime. AKA inter vivos trust
Testamentary Trust - established by Will

Question 12

TOD designation

Answer 12

Transfer on Death
Pro: used to avoid probate
Con: cannot be used to avoid estate tax

Question 13

TBE - Tenants in the entirety

Answer 13

Only account registration that requires the consent of both parties for any activity to take place in the account

Question 14

Growth Funds vs Income Funds

Answer 14

Growth Funds: reinvest most profits towards R&D, focused on generating capital
Income Funds: dividend payment focused (utilities, large cap, preferred)

Question 15

Small Cap vs. Big Cap

Answer 15

Small Cap: $300 million to $2 billion
Big Cap: over $10 billion

The larger the market cap, the more conservative

Question 16

Specialized (Sector) Funds

Answer 16

• Specializing in particular economic sectors, industries or geographic areas
• 25% - 100% invested
• more likely to stick to a relatively fixed allocation and low diversification among industries or geographically
• i.e. Gold funds, insurance funds, tech funds, utility funds

Question 17

Special Situation Funds

Answer 17

Buys securities of companies that may benefit from a large change.
i.e. Takeover candidates and turn around situations.
Leans on the speculative side

Question 18

Index Funds

Answer 18

No turnover, low management cost, passive style of portfolio management
Goal is to mirror index. Some do not do well

Question 19

International Funds vs Global Funds

Answer 19

International Funds - entire portfolio invested outside of the US.
Global Funds - portfolio is both in and out of the US
Think travels!!

Question 20

Combination Funds vs Balanced Funds

Answer 20

Combination Funds - combines growth and current income goals by diversifying portfolio among companies showing long term growth potential and those paying high dividends
Balanced Funds - stocks for appreciation, bonds for income. Most conservative of stock funds

Question 21

Asset allocation funds

Answer 21

Stocks for growth, bonds for income, money market instruments/cash for stability

Question 22

Target date funds

Answer 22

aka lifecycle fund.
Offered by nearly 90% of employer-sponsored defined contribution plans

Question 23

Money Market Funds

Answer 23

• No load, open end investment companies (mutual funds) that acts as a temp holding account for investor’s money. Money market securities
• NAV generally fixed at $1, but not guaranteed
• Interest is distributed as dividends (computed daily and credited to customer accounts monthly)
• Great if an investor requires liquidity above all other goals, due to check writing privileges

Question 24

Money Market Fund Restrictions

Answer 24

• Investments are limited to Securities with remaining maturities of 397 days or less
• Average portfolio maturity not exceeding 60 days
• Investments are limited to Securities that I’ve received a rating from a recognized rating agency in 1 of the 2 highest short-term rating categories

Question 25

Investor Objective: Preservation Of Capital; Safety

Answer 25

Insured Bank CDs Money market securities Money market funds T bills

Question 26

Investor Objective: Growth - Balanced/moderate growth - Aggressive growth

Answer 26

Suitable recommendation: common stock or common stock mutual funds - large cap stocks, defensive stocks - technology stocks, sector funds, or cyclical stocks - DPPs and REITs

Question 27

Investor Objective: Income - greatest safety - tax-free income - high-yield income - from a stock portfolio

Answer 27

Suitable Recommendation: Bonds (but not zero coupons) - US government bonds - municipal bonds or municipal Bond funds - corporate bonds or corporate Bond funds Corporate bonds or corporate Bond funds - preferred stock, utility stocks

Question 28

Investor Objective: Liquidity

Answer 28

Suitable Recommendation: Money Market Securities Money Market Funds Cash and demand deposits Treasury Bills (DPPs, real estate, and annuities are not considered liquid)

Question 29

Investor Objective: Speculation

Answer 29

Suitable Recommendation: Volatile stocks High-yield bonds Stock/index options Leveraged and inverse ETFs Commodities Options Precious metals Sector Funds DPPs

Question 30

Investment Objective: Tax Advantage

Answer 30

Muni bonds Muni Bond funds Tax-advantaged DPPs

Question 31

GICs

Answer 31

Guaranteed Investment Contracts - Issued by insurance companies for 401(k) and 403(b) plans - Offer guaranteed return of principal at a certain date in the future - Not federally insured - Higher fixed return than bank CDs. - More investment risk than CDs

Question 32

401k plan loans

Answer 32

IRS maxes out loans at the lesser of: 50% vested interest or 50k. Must be payed out within 5 years/60 months

Question 33

529 plan

Answer 33

Muni fund security MRSB rules require the delivery of an official statement/offering circular No income limits on donors making contributions No age restriction Typically has experienced investment management companies managing

Question 34

STRIPS

Answer 34

Bonds sold at a discount to their face value

Question 35

CML vs SML

Answer 35

Capital Market Line - standard deviation and total risk vs Security Market Line - beta and systematic risk only

Question 36

EMH

Answer 36

Efficient Market Hypothesis Weak Form Market Efficiency - technical analysis is pointless - fundamental analysis and insider info is useful Semi-Strong Form Market Efficiency - technical and fundamental analysis is pointless - Insider information is useful Strong form-market Efficiency - Random walk and throwing darts theory

Question 37

Covered Calls vs Protective Puts (Portfolio insurance) vs Short selling protection

Answer 37

Covered Calls - long stock, short call, premium received, generates income Protective Puts - long stock, long put, premium paid, loss minimized Short selling protection - short stock, long call, premium paid