NASAA Series 66 Uniform Combined State Law Examination flashcards

A portfolio management strategy that involves setting long-term target asset allocation percentages based on the client's risk tolerance and investment objectives, and periodically rebalancing to maintain those targets.

• Long-term focus, typically 5+ years.
• Assumes market efficiency and does not attempt to time the market.
• Rebalancing is done to restore the original asset mix and risk profile.

Memory trick: Strategic sets the course, tactical adjusts the sails, dynamic dances with the whales.

The most stringent version of the Efficient Market Hypothesis, asserting that security prices fully reflect all public and private (insider) information, making it impossible to consistently achieve abnormal returns.

• Implies that even insider information cannot lead to sustained excess profits.
• Suggests that active management is futile for outperforming the market.
• Often considered an ideal theoretical benchmark, not fully observed in reality.

Memory trick: Weak: price history is known; Semi-Strong: public news is sown; Strong: all secrets are shown.

Bonds issued by highly rated corporations or governments, characterized by lower default risk and generally lower yields compared to speculative-grade bonds.

• Credit ratings typically BBB- (S&P/Fitch) or Baa3 (Moody's) or higher.
• Lower default risk, higher credit quality.
• Suitable for conservative investors seeking capital preservation and income.
• Examples: U.S. Treasuries, highly rated corporate bonds, municipal bonds.

Memory trick: For safety and income, investment grade is the way, avoiding the junk that might make you pay.

A fee charged by the insurance company in a variable annuity contract to cover the costs of mortality risk (annuitants living longer than expected) and expense risk (actual expenses exceeding projections).

• Compensates the insurer for guaranteed payouts and administrative costs.
• Typically expressed as a percentage of the contract's net asset value.
• One of several fees associated with variable annuities.

Memory trick: M&E is the Money for Mortality and Expenses.

A debt instrument that guarantees the return of a certain percentage of principal at maturity while offering exposure to the upside potential of an underlying asset or index, typically with a cap.

• Guarantees principal return at maturity.
• Offers participation in underlying asset performance.
• Upside participation is usually capped.
• Often issued by banks.

Memory trick: Protect your 'P'rincipal, 'P'articipate in gains, but remember the 'P'eak.

Real Estate Limited Partnerships (RELPs) generate passive income and losses, primarily from depreciation, which are subject to Passive Activity Loss (PAL) rules and can generally only offset other passive income.

• Depreciation is a major source of non-cash losses in RELPs.
• Passive losses can offset passive income from other sources.
• Cannot typically offset active income unless specific IRS criteria are met.

Memory trick: Depreciation is the gift, passive loss is the lift, but only for passive income's sift.

A type of investment company that issues a fixed number of shares that trade on a stock exchange. Its market price is determined by supply and demand, often trading at a premium or discount to its net asset value (NAV).

• Professionally managed and diversified.
• Trades like a stock on an exchange throughout the day.
• Fixed number of shares (no continuous creation/redemption).
• Market price can deviate significantly from NAV.

Memory trick: Closed-end, a fixed share count, trades like a stock, its price will bounce.

A measure of a bond's price sensitivity to changes in interest rates. Higher duration means greater price volatility for a given change in interest rates.

• Expressed in years.
• Longer duration = greater interest rate risk.
• Shorter duration = less interest rate risk.
• Used to manage interest rate risk in fixed-income portfolios.

Memory trick: Rising rates: Shorten duration, avoid bond price frustration!

The tax treatment of income distributions from Real Estate Investment Trusts, which typically differ from qualified corporate dividends.

• Generally taxed as ordinary income.
• May qualify for a Section 199A (QBI) deduction, reducing taxable income.
• Not typically considered qualified dividends, so not subject to preferential capital gains rates.
• Some distributions may be classified as return of capital.

Memory trick: REITs are Real Estate Income, but Regular Income Tax.

U.S. Treasury bonds indexed to inflation to protect investors from a decrease in purchasing power. The principal value adjusts with the Consumer Price Index (CPI).

• Principal adjusts with CPI.
• Interest payments are on the adjusted principal.
• Issued by the U.S. Treasury.
• Effective inflation hedge.

Memory trick: To beat inflation, TIPS are your best creation.

The process of adjusting a portfolio's asset allocation back to its original or target weights after market movements have caused it to drift.

• Maintains desired risk level.
• Typically done periodically (e.g., annually) or when drift exceeds a threshold.
• Involves selling overweight assets and buying underweight assets.

Memory trick: Rebalance your portfolio, steady your ship.

Prioritizing a higher proportion of growth-oriented assets (like equities) in a portfolio to maximize long-term capital appreciation, typically for investors with long time horizons and higher risk tolerance.

• Higher equity exposure (e.g., 70-100%).
• Lower fixed income/cash exposure.
• Suitable for young investors or those with long-term goals.
• Higher potential for volatility and short-term losses.

Memory trick: To grow your wealth, make stocks your quest, a high equity blend, puts you to the test.

The risk inherent to the entire market or market segment, affecting all assets to varying degrees. It is non-diversifiable, meaning it cannot be eliminated through diversification within a single market.

• Affects all investments.
• Caused by macroeconomic factors (e.g., interest rates, inflation, recessions).
• Cannot be eliminated through diversification within a single asset class or market.
• Can be reduced by diversifying across different asset classes and global markets.

Memory trick: Diversify globally, spread your risk broadly!

An investment strategy focused on minimizing the risk of losing principal, typically prioritizing safety and liquidity over high returns.

• Suitable for investors with low risk tolerance or short time horizons.
• Emphasizes low-volatility assets like cash, money market funds, and short-term debt.
• Income generation is secondary to protecting the original investment.

Memory trick: Capital preservation means keeping your Cash Protected, not chasing risky Growth.

An investment strategy focused on maximizing capital appreciation over the long term, typically involving a higher allocation to equities.

• Suitable for investors with long time horizons.
• Requires a higher risk tolerance.
• Emphasizes assets with higher growth potential, like stocks.

Memory trick: Growth means Go for stocks, Safety means Stay with bonds.

In a limited partnership, the individual or entity responsible for managing the business and bearing unlimited personal liability for its debts.

• Actively involved in day-to-day operations and management decisions.
• Assumes full personal liability for partnership obligations.
• Typically compensated through management fees and a share of profits.

Memory trick: General Partner: Gets General Control and General Liability.

The risk that an investment cannot be converted into cash quickly without a significant loss in value, often due to a lack of buyers in the market.

• Difficulty selling an asset quickly.
• May result in a lower selling price.
• Common in private investments (e.g., real estate, private equity).
• Opposite of marketability.

Memory trick: Remember 'L'iquidity means 'L'iquid cash, can you get it out fast?

An active portfolio management strategy that involves making short-term adjustments to the strategic asset allocation based on market forecasts or perceived opportunities/risks.

• Attempts to 'time the market' to some extent.
• Deviates from long-term target allocations temporarily.
• Requires market analysis and judgment.

Memory trick: Strategic is the map, tactical is the weather; dynamic is the chase.

A comprehensive measure of an investment's performance, including all income (dividends, interest) and capital appreciation (realized and unrealized gains/losses).

• Calculated as (Ending Value - Beginning Value + Income) / Beginning Value.
• Reflects the overall change in value of an investment over a period.
• Is a key metric for evaluating portfolio performance.

Memory trick: Total Return: End Value minus Start Value, all divided by Start Value.

A hypothesis stating that all publicly available information (past prices, financial statements, news) is already fully reflected in a security's price, making it impossible to consistently earn abnormal returns using fundamental analysis.

• Public information is immediately priced in.
• Neither technical nor fundamental analysis can consistently beat the market.
• Insider information *could* potentially lead to abnormal returns.
• Many active managers operate under the assumption that they can exploit subtle inefficiencies within this form.

Memory trick: EMH forms: Weak, Semi-Strong, Strong – know where you belong!

The process of evaluating the investment returns of a portfolio or asset manager against predetermined benchmarks over a specific period.

• Compares portfolio returns to relevant market indices or custom benchmarks.
• Helps assess the effectiveness of an investment strategy.
• Should consider risk-adjusted returns, not just absolute returns.

Memory trick: Compare the portfolio's climb to the market's and custom's stride.

A mutual fund that automatically adjusts its asset allocation over time, becoming more conservative as the 'target date' (typically retirement) approaches. It provides a diversified, professionally managed portfolio.

• Asset allocation adjusts automatically (glide path).
• Named for a specific retirement year (e.g., 2050 Fund).
• Offers diversification and professional management.
• Suitable for hands-off investors.

Memory trick: Target-date fund: Set it and forget it, for your retirement you won't regret it!

The expense ratio is the annual percentage of fund assets paid for operating expenses. A 12b-1 fee is an annual marketing or distribution fee charged as a percentage of fund assets.

• Both are ongoing annual costs to investors.
• Expense ratio covers management fees, administrative costs, etc.
• 12b-1 fees are for marketing, distribution, and sometimes compensating brokers.
• Total annual operating cost = Expense Ratio + 12b-1 Fee.

Memory trick: Expense ratio plus 12b-1, sum them up, your annual cost is done.

An individual or entity that meets specific income or net worth requirements, allowing them to invest in certain securities offerings not registered with the SEC (e.g., private placements).

• Individual: Net worth > $1 million (excluding primary residence) OR income > $200k ($300k for couples) for two most recent years.
• Allows participation in private placements and hedge funds.
• Assumed to have sufficient financial sophistication to understand risks.

Memory trick: Accredited: Access to private deals if you're Rich or a Regular High Earner.

A transaction under Section 1031 of the U.S. Internal Revenue Code that allows an investor to defer paying capital gains taxes on the sale of an investment property if they reinvest the proceeds into a 'like-kind' property.

• Applies only to investment or business properties, not primary residences.
• Requires reinvestment in 'like-kind' property.
• Strict timelines for identifying and closing on the replacement property.
• Defers, but does not eliminate, capital gains taxes.

Memory trick: 1031 Exchange: Sell one property, buy another, taxes wait for a later brother!

An investment strategy focused on identifying and purchasing securities that are trading for less than their intrinsic or book value, often characterized by strong fundamentals, low P/E ratios, and consistent dividends.

• Seeks undervalued companies with solid financial health.
• Often associated with a long-term investment horizon.
• Popularized by Benjamin Graham and Warren Buffett.

Memory trick: Growth shoots high; Value digs deep; Momentum rides waves; Income keeps it cheap.

An Exchange-Traded Fund (ETF) designed to mimic the performance of a specific market index, offering diversification, low costs, and tradability.

• Passively managed, aiming to match index returns rather than outperform.
• Typically has lower expense ratios than actively managed mutual funds.
• Trades on exchanges throughout the day like stocks.

Memory trick: Mutual funds are baskets; ETFs are stocks; hedge funds are exclusive; annuities are contracts.

An irrevocable trust specifically created to own a life insurance policy, designed to remove the policy proceeds from the grantor's taxable estate and provide liquidity for estate settlement or direct distribution to beneficiaries.

• Removes life insurance proceeds from grantor's taxable estate.
• Grantor gives up ownership and control of the policy.
• Beneficiaries receive proceeds tax-free upon grantor's death.
• Requires careful planning and administration.

Memory trick: To dodge the 'Death Tax', an ILIT for life insurance is a 'Sure Bet'.

A type of trust where the trustee has the discretion to distribute or accumulate income, make principal distributions, and potentially make charitable contributions. It does not have to distribute all income annually.

• Trustee has discretion over income and principal distributions.
• Can accumulate income.
• Can make charitable contributions.
• Often used for beneficiaries who are minors or need protected assets.

Memory trick: Complex discretionary: The trustee's choice, the children's voice (later).

An investment strategy where an investor divides their fixed-income portfolio into several bonds with staggered maturity dates, aiming to reduce reinvestment risk and interest rate risk while providing regular income.

• Bonds mature at regular intervals.
• Reduces reinvestment risk.
• Mitigates interest rate risk.
• Provides predictable cash flow.

Memory trick: A 'Ladder' helps you step up and down interest rates without falling into risk.

An investment fund that holds a portfolio of assets and trades like a common stock on a stock exchange.

• Offers diversification and professional management.
• Trades throughout the day on exchanges.
• Typically has lower expense ratios than actively managed mutual funds.

Memory trick: ETFs are Easy To Find for flexible trading.

Strategies and financial products designed to ensure an individual does not outlive their retirement savings, providing income for their entire lifespan.

• Primary concern for retirees as life expectancies increase.
• Often addressed with annuities, especially those with lifetime income riders.
• Can also be managed through conservative spending and diversified portfolios.

Memory trick: Longevity's a long road; inflation's a thief; healthcare's a bill; market's a thrill.

An investment strategy where an investor buys bonds with staggered maturity dates over a period of time.

• Helps mitigate interest rate risk by diversifying maturities.
• Provides regular cash flow as bonds mature.
• Allows reinvestment at prevailing rates, benefiting from rising rates.

Memory trick: A bond ladder lets you climb over interest rate worries.

A legal arrangement where assets are transferred to a trust and the terms cannot be changed or canceled by the grantor once established, offering strong asset protection and estate planning benefits.

• Assets are removed from the grantor's taxable estate.
• Provides protection from creditors and lawsuits.
• Terms are generally unchangeable, requiring careful planning.

Memory trick: Revocable can change; irrevocable is set; testamentary is after death; Totten is just a bank bet.

Debt obligations issued by state and local governments, where the interest income is often exempt from federal, state, and local income taxes.

• Interest is federally tax-exempt.
• Interest may be state and local tax-exempt if issued in the investor's state of residence.
• Attractive for investors in higher tax brackets.

Memory trick: Muni bonds are a Municipal shield against taxes.

An investment strategy designed to generate regular cash flow for the investor, often prioritizing stability and capital preservation over aggressive growth.

• Suitable for retirees or those needing consistent income.
• Typically allocates heavily to bonds, preferred stocks, and dividend-paying equities.
• Focuses on lower volatility and predictable returns.

Memory trick: Income needs a steady stream, safety is the dream.

An investment portfolio that combines different asset classes, typically equities and fixed income, to achieve a balance between risk and return.

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

Memory trick: Balance your portfolio, balance your future.

A portfolio management approach focused on generating regular income through investments such as bonds, preferred stocks, and high-dividend common stocks, often prioritizing capital preservation.

• Primary goal: regular income.
• Secondary goal: capital preservation.
• Suitable for conservative investors or those needing cash flow.
• Invests in fixed-income, preferred stocks, dividend stocks.

Memory trick: Income strategy: steady cash flow, watch your portfolio glow!

An action by a company that increases the number of its outstanding shares by dividing each share into multiple shares. The price per share is proportionally reduced, but the total market value of an investor's holdings remains unchanged.

• Common splits are 2-for-1, 3-for-1, or 3-for-2.
• Increases liquidity and makes shares more attractive to small investors.
• A reverse stock split reduces the number of shares and increases price per share.

Memory trick: Splits are like cutting a pie: more slices, smaller size, same pie.

A retirement plan for self-employed individuals or small business owners that allows for significant tax-deductible contributions and tax-deferred growth.

• For self-employed or small businesses
• Tax-deductible contributions
• Tax-deferred growth
• Higher contribution limits than Traditional/Roth IRAs

Memory trick: Self-employed can 'SEP'arate for big tax deductions.

An annuity payout option that provides income payments for the lives of two or more individuals, continuing until the last annuitant dies.

• Covers two or more lives
• Payments continue as long as one annuitant is alive
• Often used by married couples
• Typically offers lower periodic payments than a single-life annuity

Memory trick: Annuity payments last like a 'life' sentence, or as a 'joint' venture.

A type of exchange-traded product that tracks the price of a single commodity or a basket of commodities, allowing investors to gain exposure without direct ownership.

• Tracks commodity price (single or basket)
• Trades on exchanges like stocks
• No physical ownership or storage
• Can be structured as debt instruments or grantor trusts

Memory trick: Commodities are raw, but 'ETCs' make them easy to trade.

The inverse relationship between bond prices and market interest rates: when interest rates rise, bond prices fall, and vice versa.

• Inverse relationship
• Existing bonds' coupon rates are fixed
• Market price adjusts to align yield with prevailing rates
• Longer maturity bonds are more sensitive to rate changes

Memory trick: Interest rates and bond prices are like a 'seesaw'.

A Simplified Employee Pension (SEP) IRA is a retirement plan designed for self-employed individuals and small business owners, allowing for large, tax-deductible contributions.

• Contribution limits are much higher than Traditional or Roth IRAs.
• Contributions are made by the employer (even if self-employed) and are tax-deductible.
• Easy to set up and administer.
• Ideal for individuals with fluctuating income who want to maximize savings.

Memory trick: SEP: Self-Employed's Big Contribution Plan.

A type of structured product that guarantees the return of the investor's principal at maturity while providing potential returns linked to the performance of an underlying asset.

• Debt instrument (senior unsecured debt)
• Principal guarantee at maturity
• Upside participation linked to an underlying asset
• Issuer credit risk applies

Memory trick: Structured products are like custom financial 'LEGOs'.

Measures of the return an investor receives from a bond, including coupon rate, current yield, yield to maturity (YTM), and yield to call (YTC).

• Coupon Rate: Stated annual interest rate as a percentage of par value.
• Current Yield: Annual interest / Current market price.
• YTM: Total return if held to maturity, considering interest, capital gains/losses.

Memory trick: Price and Yield are always opposing forces, like a seesaw.

A type of mutual fund with a portfolio constructed to match or track the components of a market index, such as the S&P 500. It is passively managed, aiming to replicate index performance rather than outperform it.

• Lower expense ratios than actively managed funds.
• Lower portfolio turnover, leading to fewer capital gains distributions.
• Offers broad market exposure and diversification.

Memory trick: Mutual funds: baskets of investments, managed differently.

The purchase of a put option, granting the buyer the right, but not the obligation, to sell the underlying asset at a specified strike price before or on the expiration date.

• Profits from a decline in the underlying asset's price.
• Maximum loss is the premium paid.
• Offers significant leverage.
• Subject to time decay (wasting asset).

Memory trick: Puts for downward moves, short sells for big falls.

The financial outcome for an investor who buys a put option, calculated by comparing the option's intrinsic value at expiration to the premium paid.

• Right to sell stock at strike price
• Profitable if market price < strike price
• Max loss = premium paid (if market price >= strike price)
• Break-even = Strike Price - Premium

Memory trick: Long put: 'P' for 'Protection' if price 'Plummets'.

An investment company that continuously offers new shares and redeems existing shares at the current net asset value (NAV).

• Shares are bought and sold directly from the fund company.
• NAV is calculated daily based on the value of the underlying assets.
• Professional management and diversification are key benefits.

Memory trick: Open funds open doors to daily NAV.

A company that owns, operates, or finances income-producing real estate. REITs trade on major exchanges and typically pay out at least 90% of their taxable income to shareholders as dividends.

• Offers diversification and liquidity in real estate.
• Taxed as corporations if they don't meet distribution requirements.
• Can be equity, mortgage, or hybrid REITs.

Memory trick: Real estate: many paths, choose your adventure.

A debt security that is backed by a pool of mortgage loans, allowing investors to receive payments derived from the principal and interest paid by homeowners.

• Backed by a pool of mortgage loans
• Pays monthly principal and interest
• Subject to prepayment risk (mortgage refinancing)
• Issued by government agencies (e.g., Ginnie Mae) or private entities

Memory trick: Securitized debt bundles loans; MBS is 'Mortgage-Backed' special.

A complex debt security that pools together mortgage-backed securities and separates them into different classes (tranches) with varying maturities, payment priorities, and interest rate sensitivities.

• Creates different tranches to redistribute prepayment risk.
• Each tranche has a distinct payment stream and risk profile.
• Can be highly sensitive to interest rate changes and prepayment speeds.
• Primarily used by institutional investors due to complexity.

Memory trick: CMOs slice mortgages into tranches, each with a different flavor of risk.

A class of ownership in a corporation that has a higher claim on assets and earnings than common stock, but typically does not carry voting rights.

• Fixed dividend payments
• No voting rights (generally)
• Senior to common stock in liquidation
• Junior to bonds in liquidation

Memory trick: Equity is ownership, but 'preferred' gets paid first.

A type of Collateralized Mortgage Obligation (CMO) tranche designed to have a more predictable cash flow and average life over a range of prepayment speeds, due to the presence of companion (support) tranches.

• Offers protection against both extension and contraction risk.
• Lower yield than companion tranches due to lower risk.
• Suitable for investors seeking stable cash flows.

Memory trick: CMO tranches are like a river with different currents; some are calm, some are wild.

A contract with an insurance company designed to provide income during retirement. It offers investment options (subaccounts), tax-deferred growth, a death benefit, and the ability to annuitize for guaranteed income.

• Investment performance varies based on subaccount choices.
• Subject to market risk, unlike fixed annuities.
• Often includes riders for enhanced benefits like guaranteed minimum withdrawal benefits (GMWB).

Memory trick: Annuities are a secure way to nurture your nest egg.

A municipal bond whose debt service (interest and principal payments) is payable solely from the revenues generated by the specific project or facility it finances.

• Backed by user fees, tolls, or other operational revenues.
• Not backed by the full faith and credit (taxing power) of the municipality.
• Often used to finance public utilities, airports, hospitals.
• Generally carry higher risk than GO bonds due to reliance on project success.

Memory trick: Revenue bonds rely on project earnings, GO bonds on taxes.

A debt instrument issued by a corporation to raise capital, typically offering a fixed interest payment and a promise to return the principal at maturity.

• Issued by corporations
• Fixed interest payments (coupon)
• Return of principal at maturity
• Subject to credit risk of the issuer

Memory trick: Debt securities are promises to pay, from 'T'reasuries to 'C'orporations.

A corporate action where a company reduces the number of its outstanding shares, thereby increasing the market price per share.

• Total market value of the investment remains unchanged.
• Often done to increase share price to meet exchange listing requirements.
• Expressed as '1-for-X' where X is the number of old shares for each new share.

Memory trick: Reverse split: shares shrink, price swells, value stays.

For a call option buyer, profit occurs when the underlying asset's price at expiration is above the strike price plus the premium paid. Loss is limited to the premium paid if the option expires out-of-the-money.

• Breakeven point = Strike Price + Premium.
• Intrinsic value = Market Price - Strike Price (if positive).
• Profit = (Intrinsic Value - Premium) * Shares per contract.

Memory trick: Call options: if the price 'calls' higher, you profit, after paying the 'price'.