CFS 3

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Ratnok
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CFS 3
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2012-02-21 16:28:39
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CFS 3 exam
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  1. If both spouses are 65, what are the chances one will reach age 95?
    28%
  2. What is a basis for rebalancing a portfolio?
    regression to the mean
  3. Provide another name for average return.
    arithmetic mean
  4. French and Fama, two well-known authors and long-time members of the academic community, favor what investment approach (or category)?
    value stocks
  5. With a pass-through MBS, what will cause a reduction in the face amount (not market value) invested in the MBS?
    a mortgage refinanced
  6. What makes the Mount Lucas Management Index (MLMI) different than its GSCI and DJ-UBS counterparts?
    MLMI is based on a specific trading strategy
  7. Your clients can choose from a handful of educational accounts to help out their children.

    On a cumulative basis, which one of these accounts offers the highest contribution?
    529 Plan
  8. Describe the volatility difference between a portfolio of global small cap stocks vs. a portfolio of large cap U.S. and large cap foreign stocks.
    global small cap stock portfolio is only marginally more volatile
  9. Your client has been reading about the different ways cost basis can be determined for shares of a mutual fund.

    When talking about the average cost-single category method, what words come to mind?
    fairly simple
  10. Describe a Regulation D security.
    can only be bought and sold to sophisticated investors
  11. When are the benefits of portfolio optimization most likely to be lost?
    During a severe market downturn.
  12. For the individual investor (with a 50/50 portfolio mix), what is the biggest advantage of using a 3x mutual fund [changing the mix to (17 x 3)/83]--particularly if there are huge swings in the stock market?
    loss in equities is limited to 100% of what the individual invested
  13. Do most buyout funds use debt financing?

    What asset does a buyout fund use to collateralize debt?
    yes / assets of the target company
  14. What phrase or word best describes the correlation coefficient between two asset categories?
    not static
  15. What is the serial correlation of the S&P 500?

    What is the serial correlation of the U.S. 10-Year Treasury?
    0.2 (S&P) / -0.2 (T-bond)
  16. Describe the typical convertible security.
    Rated below investment grade.
  17. Charles bought $3,000 worth of a highly-leveraged equity fund on February 15th. Less than a month later, Charles died when the equity fund was worth $4,200. Betsy, a good friend of Charles, immediately inherited the equity fund and sold all shares for $4,300 on September 3rd the same year.

    What are the tax consequences to Betsy?
    long-term capital gain of $100
  18. An objective for most mutual funds is to increase the amount of money under management.

    If you were to pick one fund category wherein asset growth is sometimes (or often) considered not to be positive for shareholders, what would be the category?
    small cap stocks
  19. When did the first hedge fund begin and how many hedge funds are there today?
    1949 / > 11,000
  20. You have just come across a very strange investment. This investment returns exactly 30% each year or loses exactly 10% each year and either return is equally likely.

    After a 10-year period, what would you expect this investment's annualized return to be?
    8.17%
  21. From the 1950s through 2000-2009, on a decade-by-decade basis, what has been the biggest spread for the S&P 500’s standard deviation?
    <5%
  22. When is an investment’s annualized return the same as its mean return?
    when returns for each period (year) are identical
  23. What is easier to breach, particularly on a quarter-by-quarter basis: a covenant-lite loan provision or a maintenance covenant loan provision?
    maintenance covenant (e.g., reduction in cash flow below 4-5 times EBITDA)
  24. Give an example of a random correlation coefficient.
    0
  25. What instrument is considered to be the most basic form of eliminating credit risk?(hint: the size of the marketplace is unknown, but estimated to be in the tens of trillions of dollars)
    Credit default swaps.
  26. Ted and Tina have been neighbors for over a decade. They have a JTWROS; account that began with a $30,000 investment in a stock fund (that was never added to) now worth $130,000.

    If Tina were to die tomorrow, what would then be Ted's cost basis?
    $80,000
  27. What are the two greatest disadvantages of a commodity-linked note?

    I. investor must rely on underlying credit quality of the issuer
    II. gains are taxed as ordinary income
    III. investor is responsible for rolling over contracts from month to month IV. these types of notes never contain a stated rate of interest to be paid to the investor (unlike a managed accounts approach)
    I and II only
  28. There are annualized returns and there are average returns.

    Assuming these two returns are never exactly the same for any given year, when will the ABC's Equity Fund's average returns be higher than its annualized returns?
    Always
  29. Your client’s sole goal is to minimize risk.

    What should be the portfolio's stock/bond mix?
    Jul-93
  30. According to a study by Chen and Ibbotson, how much does backfill (instant history) add or subtract from a hedge fund database?
    adds 500 basis points a year
  31. Mr. Jones bought 50 shares of ABC Growth and Income Fund for $9 each in 2004. He purchased another 100 shares for $10 a share a year later and 50 more shares for $11 each in late 2006 (a total of three different purchase dates). It is now early 2010 and Mr. Jones wants to sell 60 shares at the current NAV price of $12 each. All of the 200 shares have been owned for over a year. The total sale proceeds are $720.

    Under average cost—single category, what would be the taxable gain?
    $120
  32. Mr. Jones bought 50 shares of ABC Growth and Income Fund for $9 each in 2004. He purchased another 100 shares for $10 a share a year later and 50 more shares for $11 each in late 2006 (a total of three different purchase dates). It is now early 2010 and Mr. Jones wants to sell 60 shares at the current NAV price of $12 each. The total sale proceeds are $720.

    Under specific share identification, what would be the taxable gain?
    $70
  33. Mr. Jones bought 50 shares of ABC Growth and Income Fund for $9 each in 2004. He purchased another 100 shares for $10 a share a year later and 50 more shares for $11 each in late 2006 (a total of three different purchase dates). It is now early 2010 and Mr. Jones wants to sell 60 shares at the current NAV price of $12 each. All of the 200 shares have been owned for over a year. The total sale proceeds are $720.

    Under average cost—double category, what would be the taxable gain?
    no such method or this method cannot be used with this fact pattern
  34. Describe distressed debt.
    any liability trading for less than half its face value
  35. What is the basis of Monte Carlo simulation?
    Random behavior
  36. Marne is looking at several investments that have more and more volatility.

    As volatility increases, the gap between what returns is going to get greater and greater?
    Average and annualized returns.
  37. When was the last time the S&P 500 experienced three consecutive negative years?
    2000, 2001, 2002
  38. According to Dalbar, what is the gap between bond fund returns and what investors in bond funds actually experience?
    600 basis points per year
  39. Describe the Merrill Lynch Factor Model--Exchange Series.
    benchmark designed to have the same risk and return characteristics of hedge funds
  40. How many years can losses from securities sales be carried forward by individual taxpayers?
    Until they are used up or on the death of the tax payer.
  41. Assume the following about a margin account with an initial cash deposit of $10,000 (now leveraged to $20,000):

    (a) $20,000 of quality stocks have just been bought
    (b) the stocks bought dropped $2,500 in value by the end of the year
    (c) the interest rate charged for the margin account works out to 6%

    What percentage loss has this investor experienced for the first year?
    31%
  42. Your friend is going to invest in commodities and is thinking about using a managed account.

    What should your friend know about such a managed account?
    minimum initial investment is typically $10-$20 million
  43. Which method of determining cost basis of mutual fund shares is the best way to reduce, or at least control, taxes?
    specific identification
  44. Over the past 55-60 years, how frequently have T-bill annual returns been negative (after adjusting for inflation and assuming a 25% tax bracket)?
    50% of the time
  45. What does CaR refer to?
    total loss incurred by an investor if each futures position in a fund hits its stop loss price
  46. According to the Financial Planning Association, what is the average long-term annualized gain for a 60/40 portfolio mix?
    8%
  47. Which investment experiences the most amount of interest rate risk?
    zero-coupon government bonds maturing in nine years
  48. Over each of the past six decades (1950s, 1960s, etc.), describe the characteristics of a 50/50 (stock/bond) portfolio from decade to decade.
    similar risk levels but very different annualized returns
  49. Describe the idea behind portfolio rebalancing.
    Regression to the mean
  50. Usually, how long will it take before a portfolio's return projections match the portfolio's risk?
    Roughly 30 years
  51. Looking at the exit strategy for LBOs, how often is the final disposition based on a sale to a strategic partner and/or a financial sale?

    How often is the "final disposition" a bankruptcy?
    ~ 70% of the time / ~ 1% of the time (bankruptcy)
  52. Frank is thinking about investing in a VC fund.

    How long should Frank plan on owning this investment?
    10-12 years
  53. What would you estimate the serial correlation of equity REITs to be?
    0.1
  54. Is there any benefit to Larry if he owns shares of the GHI Foreign Fund and the fund has just paid foreign taxes on its gains?
    he is not helped or hurt (Larry gets a credit or deduction)
  55. When are you likely to see a cramdown?
    Banckruptcy
  56. With regard to illiquid stocks and bonds, are there any guidelines the SEC wants mutual funds to follow?
    yes (and the limit is 15% or less)
  57. An emerging markets security is exposed to what kind of risk?
    liquidity
  58. How many main tranches does almost every CDO contain?

    Which of these tranches is considered to have the greatest risk of total loss to the investor?
    three / the equity tranche
  59. What return figure is used to compute standard deviation?
    The mean return.
  60. Describe the serial correlation of large cap domestic stocks.

    Describe the serial correlation for equity REITs.
    very low / very low
  61. What is the IRR based on?
    a discount rate that results in all net cash flows having a PV of zero
  62. Bobbi's parents set up a UTMA account for Bobbie (age 12).

    Each year, how much income can be earned in this account before it is subject to mom and dad's tax bracket?
    about $1,900
  63. What is the likely long-term result of a high “tracking error” portfolio?
    different behavior
  64. On a decade-by-decade basis, what was the annualized range of returns for the S&P 500 from 1950-1959 through 2000-2009 (6 decades)?
    -1% in the 2000s and 19% in the 1950s
  65. Jason just sold some shares of a mutual fund.

    If no election is made, the IRS assumes a specific method of determining cost basis is being used.

    What is this assumed method?
    FIFO
  66. When is a side pocket used?

    Are side pockets good for the hedge fund's investors?
    positions difficult to value by a hedge fund manager / bad for investors
  67. What is a disadvantage of mean variance optimization (MVO)?
    It does not take rebalancing into account
  68. Describe the correlation coefficient between the vast majority of asset categories.
    random or positive
  69. What is the risk horizon of the typical individual investor, based on a study conducted during the 1990s published in the Quarterly Journal of Economics? (hint: the answer is still probably valid today)
    One year
  70. With what asset category are you likely to see arithmetic mean returns most similar to annualized returns?
    short-term bond funds
  71. Compare the historical returns of managed futures accounts with those from a passive futures index.
    benefits are about the same with either investment approach
  72. There are three sources that make up the returns for a commodity futures contract.

    What is the income return component based on?
    return on cash used for collateral for futures contracts
  73. A venture capital fund includes a clawback covenant.

    When is this type of covenant likely to kick in, if ever?
    at the end of the VC fund's life
  74. What asset category is subject to the most amount of reinvestment risk?
    High yield long-term bonds
  75. Mr. Jones bought 50 shares of ABC Growth and Income Fund for $9 each in 2004. He purchased another 100 shares for $10 a share a year later and 50 more shares for $11 each in late 2006 (a total of three different purchase dates).

    It is now early 2010 and Mr. Jones wants to sell 60 shares at the current NAV price of $12 each.

    The total sale proceeds are $720.

    Under specific share identification, what would be the taxable gain?
    $70
  76. Over the past several decades, what has been the average P/B ratio of the S&'P 500?
    ~2
  77. Reinvestment risk should be a major concern of an investor in what investment?
    high-yield corporate bonds
  78. Mr. Jones bought 50 shares of ABC Growth and Income Fund for $9 each in 2004. He purchased another 100 shares for $10 a share a year later and 50 more shares for $11 each in late 2006 (a total of three different purchase dates). It is now early 2010 and Mr. Jones wants to sell 60 shares at the current NAV price of $12 each. The total sale proceeds are $720. Under FIFO, what would be the taxable gain?
    $170
  79. What time frame does the wash sale rule cover?
    similar sales 30 days before or after purchase

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