8.11 Protecting Your Investments

Lawrence is a retiree. In addition to Social Security benefits, he has a small pension plan from a former employer. Lawrence is looking for an investment that will generate income during his retirement. He does not need government insurance for his investment, but he does not want to take on too much risk. Which of the following investments will best meet his need?

• I savings bonds

• real estate

• stocks

• bonds

Which of the following investment has the lowest risks and lowest returns?

• real estate

• exchange-traded funds

• EE savings bonds

• money market savings accounts

Larry recently opened a brokerage account with a small firm located in Colorado. He opened the account with $45,000, which was held in a cash account at the firm. Earlier this year, he purchased $5,000 in stock. The price has fallen and the stock is now worth $1,000. Early today, Larry learned that the brokerage firm went out of business. Larry is panicked. Help Larry understand what will happen by choosing the correct statement from those listed.

• Larry need not worry because his entire $45,000 loss is covered by FDIC

• Larry will lose 100% of everything held in the brokerage account

• Larry will get back $40,000 in cash, $1,000 in stock, and $4,000 in stock losses from SIPC

• Larry will get back $40,000 in cash and $1,000 in stock from SIPC

Alberto is just beginning his career in the financial service industry. He has been studying the markets for a number of years and has figured out a way to generate consistently high returns for his clients while taking low risk. His approach involves using money from new investors to pay interest to clients who have been invested for a longer period of time. Alberto's investment approach is called a:

• diversification tactic

• hedge fund

• ponzi scheme

• fiduciary allocation

Which of the following is an indication that a financial advisor may be engaged in a financial fraud?

• the advisor tells you that she has earned approximately 10% per year over the last 15 years without a losing year

• the advisor claims that he can use stock options to hedge potential losses in a portfolio as a way to reduce investment risk

• the advisor recommends that you invest no more than 10% of your portfolio in hard assets, with the remainder allocated among stocks and bonds

• consistent earnings without losing over long time periods, using stock options to hedge risk, and recommendations to limit allocations to hard assets are all signs of financial fraud

Emily is working with a commissioned-based financial planner. The financial planner is recommending that Emily purchase shares in a mutual fund that charges 5% commission. If Emily invests $10,000, how much will the advisor be paid?

• $50

• $450

• $500

• $5,000

Emily is working with a commissioned-based financial planner. The financial planner is recommending that Emily purchase shares in a mutual fund that charges 5% commission. If Emily invests $10,000, and after Emily's financial planner has been paid, how much will be invested in the mutual fund?

• $9,500

• $9,550

• $9,950

• $10,000

Answer explanation

After commission, Emily will have 95% of her contribution left to be invested in the mutual fund

Lindsey works as a comprehensive financial planner. When working with clients, she looks at someone's entire financial situation and makes recommendations across several financial areas. She is also CFP. As such, Lindsey:

I. cannot charge a fee for her investment advice

II. must act as a fiduciary

III. specializes in investment management rather than general financial planning

• II only

• I and II only

• II and III only

• I, II, and III

Which of the following statements regarding a certified financial planner (CFP) professional is FALSE?

• a CFP professional only works with accredited investors

• a CFP professional may charge a commission for services or products

• a CFP professional must put the interest of his or her clients first

• a CFP professional may charge a fee for her or his services

As you set out on your financial journey, it is best to choose a financial advisor that:

I. works with clients who have more income and wealth than you do

II. understands your financial goals

III. discloses all conflict of interest

• III only

• I and II only

• II and III only

• I, II, and III