AAMS Module Quizzes (1-10)

What are the major steps in the asset management process - answer-1. Gather data 2. Establish goals 3. Analyze information 4. Make and implement recommendations 5. Monitor Stefan's business plan includes the following goal: "I will contact 50 prospective clients and document this activity in the CRM for tracking purposes." Which primary element of a good goal is missing? - answer-This goal is not time-framed. The acronym to remember for goal setting is SMART, which stands for Specific, Measurable, Achievable, Relevant, and Time-Framed. The primary flaw in this goal is that it is not time-framed. Because it is not time-framed, it is difficult to tell if this is achievable, but it is certainly measurable and very likely relevant. Which one of the following is not an invested asset? - answer-180-day certificate of deposit A certificate of deposit is a cash equivalent and therefore should be listed under Cash and Cash Equivalents. Victoria Gregory's financial situation is as follows: Cash/cash equivalentsl $15,000 Short Term debts: $23,000 Ltds: $140,000 Taxes: $8000 Invested Assets: $45,000 Use Assets: $192,000 What is her net worth? - answer-$89,000 Assets = Cash/cash equivalents + Invested assets + Use assets ($15,000 + $45,000 + $192,000 = $252,000). Liabilities = Short-term debts + Long-term debts ($23,000 + $140,000 = $163,000). Assets - Liabilities = Net Worth, so $252,000 - $163,000 = $89,000. Which one of the following statements best describes the income statement and its major components? - answer-The income statement indicates, for a certain period of time, an individual's cash inflows and outflows. Its components include gross income, expenses, and surplus or deficit. The income statement describes cash flow for a period of time and contains the components of gross income, from which expenses are subtracted to determine the surplus or deficit. All of the following provide a clearer picture of the client's needs - answer-1. Anticipated retirement lifestyle 2. Bad experiences w/ particular investments 3. Succession planning in place, if any, for a client involved in ownership of small business Which one of the following is considered a "foundation" goal? - answer-emergency fund An emergency fund is a "foundation" goal because it is an essential goal for survival in the event of a dramatic life event. Which one of the following is the better written financial goal? - answer-to accumulate $15,000 for a boat purchase in two years This goal is well written because it contains a specific dollar amount and a specific time frame. When analyzing information gathered from a client, which of the following are important factors to look for? - answer-1. Mismatches between the current investment position or resources and stated goals. This is an important factor in the analysis step. Any mismatches between the client's goals and the investment vehicles used to attain those goals should be highlighted. 2. The validity of the client's stated goals. This is an important factor in the analysis step. If the client's goals are unrealistic, this problem needs to be addressed immediately. 3. Tax problems that might be ameliorated through investment planning. This is an important factor in the analysis step. Potential tax problems should be addressed as part of the investment strategy. Marcia Simpson has analyzed her client's situation and has concluded that her client will come short of attaining the amount of capital he would like to have by the time he plans to retire. The client is a low risk taker and will have limited funds for future periodic investments. Before making a recommendation, Marcia should do which one of the following? - answer-Discuss the problem and ask the client to clarify how he wishes to adjust his accumulation goal, risk level, or periodic investments. After being informed of the various constraints, implications of their decisions, and other options they have, the client can choose to make adjustments with which he is comfortable. Which of the following is a matter that needs to be clarified before making investment recommendations? - answer-1. Client's goals 2. Risk parameters of the client 3. Time horizons of the goals Four main attributes of a good business plan - answer-1. Written and shared with someone who has an interest in your success 2. Include realistic action steps and personal goals 3. Professional development goals Which of the following is the more important factor in establishing trust with a client? - answer-demonstrating professionalism and honesty Demonstrating professionalism and honesty is the most important factor in establishing trust with a client. What are the three characteristics of a well-defined goal? - answer-1. Purpose 2. Specific dollar amount 3. Defined time frame Which one of the following is a mismatch between a client's time horizon and stated goal? - answer-A 55-year-old client with no current retirement savings says that saving for retirement is her top priority; she plans to retire at age 62. Seven years is not enough time for this client to amass the principal needed to support a retirement period of 15 to 20 years (or longer). Managing client expectations is best achieved through which of the following? - answer-educate the client Educating your clients is the best way to help set and manage their expectations. Who ultimately makes the investment decision in the asset management process? - answer-the client Which one of the following is not included in an investment policy statement? - answer-which securities to include in the portfolio While an investment policy statement determines which types of securities may be included in a portfolio, it does NOT make recommendations as to specific securities to purchase. Which one of the following types of investors is concerned with losing what he or she has accumulated in the past? - answer-a risk-averse investor A risk-averse investor is concerned with losing what he or she has accumulated in the past. Which one of the following best describes the purpose of an investment policy statement (IPS)? - answer-to provide a foundation on which the client's portfolio is constructed, and to provide a basis for review and adaptation to changing conditions An investment policy statement's primary purpose is to provide broad guidelines with which to establish a foundation for portfolio construction, and to provide a basis for periodic review. Of the following, which one describes a key attribute of an investment policy statement? - answer-long-term perspective—to take advantage of the positive bias in the markets A key attribute of an investment policy statement is that it should be created with a long-term perspective to use the positive bias in the markets that occurs with the passage of time. Time is of critical importance in an investment policy statement because - answer-it determines the feasibility of the investment professional making recommendations that meet the client's goals. The amount of time available for a financial goal determines if the investment professional can make recommendations that will achieve that goal. Which of the following is a key element that all investment policy statements should contain? - answer-An investment policy statement should include statements regarding acceptable investment vehicles, the portfolio's asset allocation, and the client's risk tolerance level. The asset management process can be used to adjust to changes in a client's financial situation by - answer-helping the client to ignore market "noise." The asset management process is designed to help the client ignore market noise and respond only to significant events (major changes in personal situations and discontinuous changes in the markets). Sara White bought a stock that has subsequently dropped 50%. She plans to hold on to the stock in the hopes of getting back to even. What investor mistake is Sara most likely making? - answer-loss aversion Loss aversion is the reluctance to take losses and is associated with a "get-even-itis" mentality. The investment policy statement would most likely need to be changed if which of the following occurred? - answer-The investment policy statement would most likely need to be changed if a client experienced a major event in his or her life. Examples of such changes would include inheriting a large amount of money, divorcing a spouse, and taking an early retirement from his or her company. Who bears the main responsibility for decision making in an investment policy statement? - answer-the client Which behavioral mistake is defined as a misunderstanding that an investor has in relating nominal rates of return to real (inflation-adjusted) rates of return? - answer-money illusion Money illusion is a misunderstanding that an investor has in relating nominal rates of return to real (inflation-adjusted) rates of return. Which of the following is not an example of a discontinuous change? - answer-receiving a 10% raise at work Discontinuous changes represent a significant departure from a trend or pattern. Bonds fell in price on news of higher interest rates. To which one of the following risks are the bonds most likely to be subject? - answer-interest rate risk Interest rate risk centers on the inverse relationship of interest rate changes and bond prices, so, in this situation, if interest rates go up, the price of George's bonds go down. If international stocks were added to a portfolio of U.S. stocks, which one of the following risks would specifically be added to the portfolio? - answer-exchange rate risk International stocks specifically add exchange rate risk to a portfolio since their value is affected by changes in the values of foreign currencies relative to that of the U.S. dollar. Which of the following are characteristics of the Sharpe ratio? - answer-It adjusts the return for variability by using standard deviation as the measure of risk Jensen's Alpha - answer-1. It assumes that the portfolio being evaluated is well diversified 2. Both alpha and beta appear in the formula for the ratio 3. It indicates by how much the realized return differs from the return required by the capital asset pricing model (CAPM) Treynor Ratio - answer-it assumes that the portfolio being evaluated is well diversified A measure of a security's systematic risk is - answer-beta. Beta measures the degree to which a security moves with the market or systematic risk. Measurement of total risk - answer-standard deviation Assume a growth stock mutual fund has a beta of 1.3. If the stock market increases by 9%, you would expect this mutual fund to - answer-increase by 11.7%. You would expect any fund with a beta of 1.3 to increase by 11.7% (1.3 × 9%). The risk-free rate is 1.25%, the market rate of return is 8%, the standard deviation of XYZ stock is 20, and the beta of XYZ stock is 1.10. Using the capital asset pricing model in conjunction with this information, what is the expected return of XYZ stock? - an