NASAA Series 65, Uniform Investment Adviser Law Examination flashcards

A retirement savings plan where contributions are made with after-tax dollars, and qualified withdrawals in retirement are tax-free.

• Tax-free withdrawals in retirement are the major benefit.
• Contributions are not tax-deductible.
• Suitable for those who expect to be in a higher tax bracket in retirement.

Memory trick: Roth is about 'FUTURE' tax savings: Free withdrawals, Understanding tax brackets, Retirement planning, Ultimate growth.

Real Estate Investment Trusts (REITs) avoid corporate income tax if they distribute at least 90% of their taxable income to shareholders annually, with these distributions typically taxed as ordinary income to investors.

• Must distribute >= 90% of taxable income to shareholders.
• Avoids double taxation at the corporate level.
• Dividends generally taxed as ordinary income to investors.

Memory trick: REITs give 90 to get zero corporate tax.

A method of evaluating a security by attempting to measure its intrinsic value by examining related economic, financial, and other qualitative and quantitative factors.

• Focuses on a company's financial health, management, and industry outlook.
• Aims to identify undervalued or overvalued securities.
• Contrasts with technical analysis, which focuses on price patterns.

Memory trick: Analysis methods 'SEE' value: Study, Examine, Evaluate.

A risk-adjusted performance measure that calculates the excess return per unit of systematic risk (beta) in a portfolio.

• Formula: (Portfolio Return - Risk-Free Rate) / Beta.
• Higher ratio indicates better risk-adjusted performance.
• Focuses only on systematic risk.

Memory trick: Treynor: Excess return over beta.

A strategy designed to reduce unsystematic risk by investing in a variety of assets with different risk-return characteristics and low correlations.

• Reduces portfolio risk.
• Combines different asset classes or securities.
• Aims to smooth out returns.

Memory trick: Don't put all your eggs in one basket.

A measure of risk-adjusted return, indicating the amount of excess return (or risk premium) per unit of total risk (standard deviation) in an investment.

• Formula: (Portfolio Return - Risk-Free Rate) / Standard Deviation.
• Higher Sharpe Ratio indicates better risk-adjusted performance.
• Used to compare the performance of different investment portfolios.

Memory trick: Risk-adjusted is about 'BALANCE': Better Alpha, Lower Beta, Adjusted for volatility, Net gain.

A statistical measure that indicates the degree to which two assets move in relation to each other. Low or negative correlation helps reduce overall portfolio risk.

• Ranges from -1 (perfect negative) to +1 (perfect positive).
• Lower correlation enhances diversification.
• Assets with low correlation tend to move independently.
• Goal is to combine assets that don't all move in the same direction.

Memory trick: Don't put all your eggs in one basket; spread them for safety.

A model that calculates the expected rate of return for an investment, given its risk-free rate, beta, and expected market return.

• Formula: E(Ri) = Rf + Beta * (E(Rm) - Rf).
• Beta measures systematic risk.
• Used to determine if an asset is undervalued or overvalued.

Memory trick: Risk-free plus beta times market minus risk-free.

The yield that a taxable bond must offer to provide the same after-tax return as a tax-exempt municipal bond.

• Formula: Tax-Exempt Yield / (1 - Marginal Tax Rate).
• Used to compare municipal bonds with corporate bonds.
• Considers both federal and state income tax rates.

Memory trick: Tax-exempt yield divided by one minus your total tax rate.

A risk-adjusted performance measure that calculates the excess return of an investment over the return predicted by the Capital Asset Pricing Model (CAPM).

• Alpha = Actual Return - CAPM Expected Return.
• CAPM Expected Return = Risk-Free Rate + Beta * (Market Return - Risk-Free Rate).
• A positive alpha indicates outperformance relative to its risk, a negative alpha indicates underperformance.

Memory trick: Alpha: Actual minus CAPM's expected.

Investments that are not traditional assets like stocks, bonds, or cash. They typically include hedge funds, private equity, real estate, commodities, and derivatives.

• Often less liquid than traditional investments.
• Can offer diversification benefits due to low correlation with traditional assets.
• Typically involve higher fees and risks.
• Often restricted to accredited or institutional investors.

Memory trick: Think beyond the basic 'stocks and bonds' box for 'alternative' options.

A mutual fund that invests in a mix of equities (stocks) and fixed-income securities (bonds) to provide both growth potential and income, often with a moderate risk profile.

• Diversifies across asset classes.
• Aims for growth and income.
• Suitable for moderate risk tolerance.

Memory trick: Balance your portfolio for steady growth and income.

The process of transferring funds from a traditional IRA (or other tax-deferred retirement account) to a Roth IRA, resulting in a taxable event in the year of conversion but tax-free qualified withdrawals in retirement.

• Taxable event in the year of conversion.
• Qualified Roth distributions are tax-free.
• No RMDs for the original owner of a Roth IRA.
• Beneficial if future tax rates are expected to be higher.

Memory trick: Tax Smart Retirement: Plan conversions, avoid RMD surprises.

An asset allocation strategy, often used in target-date funds, where the portfolio's asset mix automatically becomes more conservative as the investor approaches a specific target date, such as retirement.

• Systematically reduces risk over time.
• Shifts from higher equity exposure to higher fixed income exposure.
• Aims to protect accumulated capital as the target date nears.

Memory trick: Glide path: Smooth descent to retirement.

An investment strategy characterized by frequent buying and selling of securities in an attempt to profit from short-term price fluctuations and perceived market inefficiencies.

• Involves high transaction costs due to frequent trading.
• Often results in frequent taxable events (short-term capital gains).
• Relies on predicting market direction or individual security movements.

Memory trick: Active trading: Constantly moving, costs soaring.

A dividend discount model that calculates the intrinsic value of a stock based on a series of future dividends that are expected to grow at a constant rate indefinitely.

• Formula: P0 = D1 / (r - g).
• D1 = Expected dividend next year.
• r = Required rate of return; g = Constant dividend growth rate.

Memory trick: Gordon: Dividend next year divided by (rate minus growth).

An investment objective focused on maximizing portfolio growth over the long term, typically involving high-risk assets like equities.

• Suitable for investors with a long time horizon and high-risk tolerance.
• Prioritizes growth over income or capital preservation.
• Often involves a high allocation to growth stocks, small-cap stocks, or emerging markets.

Memory trick: Allocation is about 'FIT': Financial goals, Investor profile, Time horizon.

An active investment strategy that involves predicting future market price movements and making investment decisions (buying or selling) in an attempt to capitalize on these predictions.

• Often involves frequent trading.
• Difficult to execute successfully consistently.
• Contrasts with 'buy and hold' strategies.
• Can incur higher transaction costs.

Memory trick: Styles: Set course (passive), adjust sails (active), or predict the weather (timing).

A type of limited partnership that invests in real estate, allowing limited partners to contribute capital and receive tax benefits and returns, while general partners manage the property.

• Offers potential for income, appreciation, and tax benefits.
• Illiquid investment.
• Limited partners have limited liability.
• Passive losses from depreciation are a common tax benefit.

Memory trick: RELP: Real Estate Losses help your Passive income.

An investment strategy that allocates capital to different asset classes such that each asset class contributes equally to the overall portfolio risk.

• Aims to achieve a more balanced risk profile across the portfolio.
• Often involves leveraging lower-volatility assets to achieve target risk contributions.
• Can lead to better risk-adjusted returns and reduced downside volatility.

Memory trick: Risk parity: every asset pulls its risk weight.

A sustained increase in the general price level of goods and services in an economy over a period of time, resulting in a reduction in purchasing power.

• Reduces purchasing power of money.
• Measured by indices like CPI and PPI.
• Can be caused by demand-pull or cost-push factors.

Memory trick: In-flation means prices are 'in'creasing.

An economic indicator that changes after the economy has already begun to follow a particular pattern or trend, confirming previous economic activity.

• Confirms economic trends previously observed.
• Examples: unemployment rate, corporate profits, average duration of unemployment.
• Useful for confirming the end of a recession or start of a recovery.

Memory trick: Lagging indicators 'lag' behind, confirming what just happened.

An insurance product that provides guaranteed income payments for a predetermined number of years, offering predictability and safety.

• Guaranteed income for a specific period
• Suitable for risk-averse investors
• Does not guarantee income for life, only the specified period

Memory trick: Fixed-Period provides guaranteed income for a set Time, like a predictable income Timer.

A type of permanent life insurance that provides a guaranteed death benefit for the insured's entire life and a cash value component that grows at a guaranteed rate.

• Guaranteed death benefit for life
• Guaranteed cash value growth rate
• Level premiums for the entire policy duration

Memory trick: Whole Life: Whole lot of guarantees for your Whole life.

An economic variable that tends to change before the overall economy changes, signaling future economic activity.

• Helps predict future economic trends (e.g., recessions, expansions).
• Examples include stock market returns, building permits, and manufacturing new orders.
• Not always accurate, but provides early signals.

Memory trick: Lead, Coincide, Lag: Predict, Confirm, Reflect the economic path.

A type of municipal bond backed by the full faith and credit and taxing power of the issuing municipality, with income typically exempt from federal (and sometimes state/local) taxes.

• Backed by the full faith and credit/taxing power of the issuer
• Interest income is federally tax-exempt
• Often triple-tax exempt for residents of the issuing state/municipality

Memory trick: GO Bonds: Government Obligation, Great for Tax-Off Income.

A security that represents ownership in a corporation, giving the holder a claim on a portion of the company's assets and earnings, and typically voting rights.

• Represents ownership in a company
• Provides voting rights
• Potential for capital appreciation and dividends (not guaranteed)

Memory trick: Common Stock gives you Common control and Common gains.

A type of private equity fund that invests in early-stage, high-potential, and high-risk startup companies in exchange for an equity stake.

• Invests in early-stage, high-growth companies
• High risk, high reward potential
• Illiquid investment with a long-term horizon

Memory trick: Venture Capital: Very Creative, Very Challenging, Very Profitable.

A debt instrument with a variable interest rate that is tied to a benchmark rate (e.g., LIBOR, Prime Rate) and is reset periodically.

• Interest rate adjusts periodically
• Provides protection against rising interest rates
• Offers a variable income stream

Memory trick: FRN: Floating Rate, Risk Neutralizer.

A short-term debt obligation issued by the U.S. Treasury with a maturity of one year or less, sold at a discount from face value.

• Maturity of one year or less
• Issued at a discount, matures at face value
• Backed by the full faith and credit of the U.S. government

Memory trick: T-Bills are the shortest BIlls from the Treasury.