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32 Cards in this Set

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What are the 6 parameters for determining asset allocation?
1. Risk Tolerance
2. Time Horizon
3. Liquidity
4. Marketability - How quickly can you convert that portion of the portfolio into cash.
5. Tax Consequences
6. Diversification
What are the 7 budget steps?
Pre-step: Gather resources.
1. Establish reasonable goals + objectives
2. Analyze current conditions
3. Select appropriate budget forms
4. Client Forecasts
5. Set up monthly budget
6. Prepare a 12 month forecast
7. Compare and Contrast
-actual to forecast
5 Important Areas of Financial Statement Analysis -
1. Short-term liquidity.
2. Cash Flow Statement - Income Side
3. Capital and Long Term Solvency
4. Asset Development
5. Short term performance
Insurance - 6 things we are doing/ looking for:
1. Monitor
2. Gaps
3. Duplication

4. Policy limits
5. Dependent Coverage
6. Cost - What are they paying, who are they paying it to.
6 Major Types of Insurance:
1. Life Insurance
- Term
- Whole Life / Cash Value

2. Health Insurance

3. Disability Insurance

4. Homeowner's Insurance

5. Auto Insurance

6. Professional Liability
Why is a GO bond superior to a bond tied to a general revenue project?
The GO stands for General Obligation, as the city/municipality has to pay for it out of general funds.

If it is tied to a revenue project, then the revenue project must be completed and generate income in order for you to receive any of your interest income.
How can you reduce insurance costs?

Note: I would know 3 or 4...there are too many for
him to ask to know all of them.
1. Raise the deductible
2. Earn discounts
3. Compare offers.
4. Reduce life insurance coverage later in life.
5. Avoid credit life insurance
6. Extend disability waiting period.
7. Self-Insurance
8. Dread-disease riders
9. Pay premium on an annual,
rather on quarterly or monthly
2 purposes of Life Insurance:
1. Protection.
2. building block for investments.
What amount of insurance is recommended?
Simple Calculation:

1. 5X Salary
2. Others say 1M minimum.

Consider other factors, this is just baseline, rule of thumb stuff.
6 Insurance Needs Analysis Factors:
1. Non-Working Spouse
2. Investments
3. Ages of Children

4. Dual earners
5. Dependent parents
6. Special needs situations
5 Insurance Ratings Companies:
1. A.M. Best - underwriting, expense control
2. S+P - claims paying solvency
3. Fitch - corporate debt, RE, asset backed financing, claims paying
4. Moody's -
5. the Street - ability to meet commitments
Term Insurance - Features
1. Pure Protection - nothing but insurance
2. No cash value
3. Least expensive
4. For a specified # of years
5. Renewable - can automatically renew
6. Insurability
Permanent / Whole Life - Benefits Features
1. Protection
2. Investment element
3. Cash Value
4. Investment vehicle
5. Borrow against it (you can)
6. Minimum earnings rate
Why for tax purposes do you not want to hold incidents of ownership?
If you die holding incidents of ownership, then the insurance policy can be roped in with the estate for taxable purposes.
What do incidents of ownership include?
- Power to change beneficiaries
- Any modifications
5 Settlement options for Life Insurance -
1. Lump- Sum Payment
2. Interest option - proceeds remain with insurer - protects principal
3. Fixed amount - A certain amount of $ for a certain amount of years.
4. Fixed period - all proceeds of policy will be paid out over a # of years
5. Income for life
7 Planning Issues:
Note - Probably low priority, or general knowledge question for the test.
1. Current Market Trends
2. Manage Expectations of a client
3. Clients will continue to grow their portfolios
4. Inheritances - 17T wealth transfer
5. Retirement plan issues
-Special Dividend Tax
-Gov't control over retirement
6. Automatic Investment Vehicles - Lifestyle funds - etc
7. Increased Demand for Professional Advice
Modern Portfolio Theory:
For every risk level, there is a perfect frontier ---

Essentially, for every level of risk, there is a perfect equilibrium of profit and risk.
2 General Types of Risk:
Systematic: portfolio variability, portion related to markets

Unsystematic: variability not related to to markets, but to individual investments.
Factors in Evaluating Systematic Risk:
1. Market Capitalization - Market value of outstanding shares
2. Interest Rate Risk - Mainly affects bond markets
3. Price Level Risk - purchasing power
4. Social Regulatory Risk - government intervention etc.
Unsystematic Risks:
1. Functional or Business Risk -deals with individual investments
-competition, product demand, resources available, not connected to broader issues

2. Financial Risk - debt, management, individual securities.
4 Traditional Asset Classes:
1. Cash
2. Stock
3. Bonds
4. RE
6 New School Asset Classes:
1. Cash
2. Stocks
3. Bonds
4. Real Estate
5. Commodities
6. Alternative Investments
What is formula for determining the effective rate of return (Tax equivalent yield) on a tax-free bond?
Interest rate of TF bond / 1 - Tax Bracket rate.


4% GO Bond, 35% tax bracket:

.04 /(1-.35) = .04/.65 = 6.15% Adjusted
4 Main Types of Portfolio -
Investment Objectives/Strategies:
1. Safety of Principal
2.Income Stability - Long term, greater than 5 years
3.Protection of Purchasing Power - Inflation protected assets
4.After-Tax Returns
Planner's Role: 4 Steps:
1.Define Client Investment Experience + Objective
2. Project Investment Requirements
3.Evaluate Current Holdings
4.Determine appropriate asset allocation
5. (My added step) Monitor and adjust
How often is NAV valued and priced in Mutual Funds?
Once per day, generally at close of business.
What is the formula for calculating Net Asset Value?
Total Value of Holdings / Shares
How are ETF's valued?
They fluctuate, just like the stock market. Constantly revalued while the market is open.

They can be purchased at a premium or discount, just like stock.

Used to increase risk, or diversify assets.
What are the 3 factors that are important to good returns?

Which one is the most important?
1.Market timing - allocation of assets based on market conditions - risky

2. Security Selection - AAPL over HP, or Exxon over BP

3.Asset allocation - 98% of returns are based on asset allocation
Explain Modern Portfolio Theory:
For every level of return, there is one portfolio that offers the lowest level of risk. There is also one investment that offers a high level of return.

By buying both, or diversifying, you are attempting to mitigate risk, and increase returns...which gives you the midpoint, or perfect blend for both assets.

Add a low or no risk investment, and you can add an extremely risky investment on the high end.
Ways to buy foreign stock:
1.) Mutual Fund

2.) ADR's

-American Depository Receipt