Midterm Questions
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MID TERM QUESTION
1-Based on the following stocks in Kim's portfolio, what is her portfolio's beta coefficient?
1500 shares of Condor stock at $14 a share. The beta is 0.7.
2500 shares of Golden Hawk stock at $23 a share. The beta is 1.4.
2000 shares of Warrior stock at $28 a share. The beta is 1.5.
Answer- Portfolio Beta = (0.1567 * 0.7) + (0.4281 * 1.4) + (0.4152 * 1.5)
Portfolio Beta ≈ 0.10969 + 0.59934 + 0.6228 ≈ 1.33183 So, Kim's portfolio has
a beta coefficient of approximately 1.3318
2-Henry Hill's Advisor calculates his portfolio has a beta coefficient of 1.25. The market
achieved a return of 11.3% versus a risk-free rate of 4.2%. What is the expected rate of
return using the security market line formula?- 13.08%
.
3- Angela's key estate goal is to leave the family cottage to her son to enjoy with his
children, but she is worried about the taxes that will need to be paid. What should she
do? - Put whole life insurance in place to pay the taxes when needed
4- The theory that states that a stock price reflects all available information and that it
reflects its true value is known as which of the following? - efficient market hypothesis
5- Which of the following is most correct when discussing alphas and betas?
Beta is a
measure of portfolio volatility (risk) compared to the market as a whole and
alpha represents value added by the find manager.
6- Systematic ('market') risk is one of the two components of the CAPM and is impacted
by sources such as cyclical fluctuations and interest rate fluctuations. - True
7- Which of the following is a way to indirectly invest in real estate: a real estate
investment trust
8- Which of the following applies to an open mortgage? does not have a restriction on
repayment of principal
9-Dwight is about to start a $600,000 mortgage with a 5.5 rate and 25-year amortization.
The monthly payment is $3,684. He wants to know what his accelerated weekly payment
would be and how many years (expressed as a decimal is OK) his amortization period
would be reduced. (set calculator to end...press "2nd" "BGN then '2nd' 'SET' to toggle
between beginning and end of year payments)- The accelerated weekly payment
would be $850, and his new amortization would be 23.76 years, so he would
save 1.24 years.
10- Anjali has $250,000 in money market funds to use as a down-payment on a home in
4 years and expects a 3.0% rate of return on GICs. During this investment period she
plans to take out $2,000 at the beginning of each year for her son’s annual soccer club
fee. How much will she have when she needs her down-payment? (set calculator to
'beginning...press '2nd' 'BGN' then '2nd' 'SET' to toggle between beginning and end of
year payments) - $272,759.
11- Arvind was reviewing his personal documents folder and realized he didn't name a
beneficiary when he put his life insurance in place 3 years ago. What would happen if
Arvind died? the estate becomes the revokable beneficiary.
12- The right to exercise a power of sale arises: -
after default on payment by the
mortgagor
13- Jim bought a whole life policy 15 years ago and has paid $44,000 in premiums,
received $4,000 dividends and the NCPI is $12,000. What, if any, is the taxable policy
gain if CSV is $33,000? -
$5,000 taxable income
14- Expected morbidity costs
are a key factor in how an insurance company
determines the premiums for a life insurance contract. - False
15
- Anjali owns
a permanent life insurance policy with a $150,000 CSV and a $500,000
death benefit. Her parents and two children are named equal revocable beneficiaries.
Even though she is being sued, her creditors cannot access this life insurance policy
asset. - True
16- A 'three-party'
life insurance contract is when the life insured and policy owner are
different people. - True
17- Which Principle of the Code of Ethics for CFP, requires Financial Planners to stay
current in their understanding of tax changes impacting financial planning
- Competence
18- A statement of net worth includes which of the following:
liabilities include the
two monthly car payments that were not paid
19- Which of the following is NOT an effective savings strategy? save any remaining
cash flow each month in a high interest savings account
20- After analysis you determined your client is a balanced investor with strategic asset
allocation of 50% equity and 50% fixed income. They inherited $100,000 and want to
start using it to invest in their newborn son's college education. Which of the following
would you suggest? - 50,000 will be gradually moved into a RESP to take
advantage of tax sheltering of growth and government grants. The other
$50,000 will be moved into an in-trust-for (ITF) account. The RESP and ITF
accounts will each have 50% equities and 50% fixed income.
21- A segregated fund shares many similarities with a mutual fund except it has certain
guarantees at death and maturity: The investor pays for these guarantees through a
higher management fee. True
22- With group benefits, the employee's beneficiary would receive any death benefit tax
free, but any disability benefit would be fully taxable if the employer pays the premiums
on both. False
23- Generally, cash values in a permanent life insurance policy will be subject to taxation
whether it is part of the death benefit when the life insured dies or upon the surrender
(cashing in) of the policy by the individual while they are still alive.
False
24- A capital needs analysis is performed to estimate the amount of life insurance
required based on the immediate cash needs of surviving dependents such as funeral
costs and paying off a mortgage as well as the ongoing income needs of survivors- True
25- Which of the following lists the correct order of steps in the financial planning
process? establishing the client/advisor relationship, conducting a periodic
review. analyzing data & information, implementing the recommendations
collecting data & information, analyzing data & information, conducting a
26- An advisor with qualifications who does more than simply take 'orders' has a certain
duty of care. The advisor would owe a greater duty of care to which of the following? a
retired client with little investment experience and only $100,000 of
investments. 27- Which of the following is NOT true regarding the financial planning process? the
process will identify past performance of investments in order to identify
suitable future investments
28- Dwight is 35 and has inherited $50,000. He wants to know how much his money will
grow if he retires at age 65. Guidelines suggest his portfolio will have a 5% rate of return.
(setting on calculator to "beginning or end” won't matter because there are no
payments) $216,097.
29- Pam and Angela own a business together and they are worried about what might
happen to the ownership structure if one of them died. To help ensure the surviving
partner can take full ownership of the business you advise them to have a buy-sell
agreement drafted and purchase life insurance to fund it when required.
30- Shortening the term of a loan will reduce the total interest charges and the client's
cash flow will benefit because the monthly payment will also be lowered. False
31- Anu wants to have ready access to cash. He does not want to have to sign
documents every time he wants cash. He does not want to repay any loans he has taken
according to any particular schedule. What would be the best type of credit for Anu to
arrange? A personal line of credit
32- Hadi earns $130.000 per year as an optometrist and his marginal tax rate is 44% and
his average tax rate is 27%. He has a GIC earning 5%. What is the after-tax rate of return
on his GIC investment? 2.80%
33- Which of the following is NOT an advantage of consumer credit? low interest rates
on credit card balances
34- Leveraging or borrowing funds to purchase non-registered securities is an investment
strategy. It is only beneficial if: the after-tax return on the investment is greater
than the after-tax cost of the investment loan.
35- Tori wants to lower her disability insurance policy premiums. Which one of the
following would have the most impact?
Increase the waiting period.
36- Key person disability protection is a business application that provides a benefit in
the event of disability to help the key person and their family. False
37- A client suffered a total loss of hearing and began receiving his disability benefit
because of this common disability policy provision: Presumptive disability benefit
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38- Dwight received a $50,000 benefit after 30 days when he survived a heart attack.
This type of benefit is provided by: Critical illness insurance (CI)
39- Many Canadians don't realize that the Canada Pension offers disability protection,
and this protection provides the coverage most will need regarding this type of protection
True
40- Which one of the following is true regarding taxation in Canada? -
The principal
residence exemption allows a tax exemption from capital gains for the
residence you reside in for the majority of time during each year. 41- Which of the following statement best describes the tax consequences of charitable
gifting? The maximum charitable deduction each year is 75% of income but in
the year of death it can be 100%
42- Reducing taxes should not be the only objective because such a strategy could have
non-tax implications that work against a client’s goals False
43- Raj has been farming for the past 5 years but has decided to sell his property for
$3,000,000 to a neighbor. Raj originally paid $1,000,000 for the farm. What is Raj's
approximate taxable capital gain? Assume he still has his $1,000,000 LCGE. $1,000,000
44- Raymond has 18 months left on his 500,000 mortgage and is considering switching
early to get a better rate. If his current mortgage rate is 5% and the new rates are 4.5%
what would his penalty estimate be?
$3.750
45- Jerry just received his annual bonus. He received $20,000 and was wondering if he
should pay down his mortgage debt or if he should invest the money. His mortgage rate
is 4.20%, his average tax rate is 30% and his marginal tax rate is 45%. What is the
minimum amount of non-registered GIC return Jerry would have to earn on an investment
to make it a better option than simply paying down his mortgage?
6.00%
46-Masud has a permanent life insurance policy that has significant cash values, He
cannot make his annual premium payment this year and the insurance company paid
this premium. This non-forfeiture option is known as:
Automatic premium loan. 47- And wants to lease a car that costs $45,000. Taxes are 13% and he has $5.000
(plus$650 for the tax) for a down-payment. The lease rate is 7% for 48 months and the
residual is $20.000. Calculate Anil's monthly cost including tax, fret calculator binging
press 2nd BGN them 2 "SET to toggle between beginning and if year payments if mode
your
result
will
be
off
by
53)
$517
48- Your clients were told they could "blend and extend" their existing mortgage with a
new 5-year mortgage rate of 4.15%. What would their new rate be? The current rate is
5%
with
1.5
years
remaining
in
the
5-year
term.
4.34%
49- If there is an error made during the application process regarding the age of the life
insured the insurance company would:
If the insured is still alive and older than
stated in the contract the insurance company can collect the difference of
premium or adjust the death benefit to a lower amount and if the insured is
deceased the insurance company will adjust the death benefit lower
50- Which statement is most accurate regarding asset allocation and the advisor's impact
on portfolio returns? - over the long term, strategic asset allocation can account
for
the
majority
of
the
return
in
the
portfolio
51- A portfolio consists of the following:
Security A; 1,000 shares, has a beta of 0.82 and a market price of $40/share.
Security B; 3,500 shares, has a beta of 1.3 and a market price of $25/share.
Security C; 2,000 shares, has a beta of 1.1 and a market price of $12/share.
Security D; 1000 shares, has a beta of 0.75 and a market price of $15/share.
What is the beta coefficient of this portfolio? // how to calculate beta coefficient, explain
with answer to the question – 1.06
52- Non-forfeiture options regarding a permanent life insurance contract include: CSV,
reduced paid-up insurance, automatic premium loan, extended term insurance
53- A RESP tax considerations are best described as:
A RESP does not allow a tax
deduction for the parent but does provide tax deferred growth and
government matching contributions. When money is withdrawn it is taxed in
the child’s hands.
54- Which disability policy would likely be best for an average client in their mid-twenties
with a family?
70% income replacement with a 90-day elimination period, age 65
benefit
period
and
a
regular
occupation
definition
55- Stacey, a lawyer, earns a very high income and owns a home with a $250,000
mortgage at 5%. She has $45,000 in RRSP contribution room. Her marginal tax rate is
50%. She asks you how she can make the best use of her $20,000 bonus from work.
Which of the following options are you most likely to recommend? Contribute $20,000
to her RRSP.
56- Calculate Net Worth based on the following: Jim paid $425,000 for his home 5 years
ago and now his mortgage is $250,000. He has 4.000 owing on his credit card and he
contributes $6,000 per year to his RRSP. His investments are worth $75,000 and he
bought a new car 3 years ago for $50,000. His house is now worth $950,000 but his car is
only $35,000. His Roger’s bill is quite high at $500/month, and he forgot to pay the last
month. He also has $5,000 in his bank account and his bank just approved his application
for a line of credit with a 25,000 limit.
$810,500
57- A crucial component of the financial planning process which is key to all other parts
is: ensure the client's current situation is accurately shown in net worth and
58- Disability insurance protection is often overlooked by people because the financial
impact of a permanent disability is much less than death and the risk of a disability is
also less.
False
59- Dwight's portfolio has a beta coefficient of 1.3. The market achieved a return of
11.3% with a risk-free rate of 4.2% Dwight's portfolio return this past year was 13.7%.
What is the Jensen index? Jensen Index (Alpha) = Portfolio Return - [Risk-Free
Rate + Portfolio Beta * (Market Return - Risk-Free Rate)] - Jensen Index (Alpha)
=
13.7%
-
[4.2%
+
1.3
*
(11.3%
-
4.2%)]
=
0.27%
60- Like an RRSP a TFSA allows a tax deduction for contributions and tax deferred
growth. It differs because upon withdrawal an RRSP produces taxable income while a
TFSA provides tax free income.
False
61- Parents can claim a childcare expense based on certain limits for children at different
ages. The parent with the highest marginal tax rate can claim these expenses to create
the
maximum
tax
return.
False
62- Andrew is a lawyer but has suffered an illness that prevents him from performing his
essential duties. He has been collecting full disability benefits for the past 2 years even
though he has been working in a retail store for the past 6 months. What type of
disability definition protection does he have in place? Own occupation
63- Which of the following statements best describes the tax consequences of charitable
gifting? The government encourages charitable donations by allowing a dollar-
for-dollar reduction to a person's taxable income in the year the donation is
made up to a 75% maximum.
64- For emigrants leaving Canada to settle in another country, which of the following is
NOT an example of severing residential ties? spending the winter in a vacation
condominium residence in Florida
65- Your client agrees with you that the goal of increasing his/her net worth this year is a
primary goal. Which of the following strategies is the most effective to help improve this
situation? restructure debt to minimize high interest debt?
66- Which of the following would be the best choice for a source of emergency funds?
Government treasury bills
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