[h] HS300 – Module 5
[q] Investment Assets to Gross Pay Ratio
[a] A ratio that helps determine if a client is on track for successful retirement. The benchmark is based on the client’s age.
[q] Investment Assets to Gross Pay Ratio Formula
[a] Ratio = (Investment Assets + Cash and Cash Equivalents) / Gross Pay
[q] Investment Asset Exclusions
[a] Assets that are excluded from the definition of investment assets include a personal residence and collectibles.
[q] Performance Ratios
[a] Ratios that measure investment performance.
[q] Return on Investments (ROI)
[a] A type of performance ratio that calculates the rate of return in invested assets.
[q] Return on Investments (ROI) Formula
[a] Ratio = [Ending Balance – (Beginning Balance + Savings)] / Beginning Balance
[q] Return on Assets (ROA)
[a] A type of performance ratio that calculates the rate of return of total assets.
[q] Return on Assets (ROA) Formula
[a] Ratio = [Ending Assets – (Beginning Assets + Savings)] / Beginning Assets
[q] Vertical Analysis
[a] A type of ratio analysis that highlights relationships among items on financial statements via a percentage.
[q] Comparative Financial Statements
[a] Financial statements used in vertical analysis. Lines up the current year and previous year’s financial statements.
[q] Horizontal Analysis
[a] A type of ratio analysis that studies period-to-period changes of individual items. Also known as trend analysis.
[q] Balance Sheet Limitations
[a] Balance Sheet doesn’t explain:
Why an asset increased in value.
How an asset or liability was acquired.
Reason for a change in net worth.
[q] Ratio Analysis Limitations
[a] Limitations include:
Statements cannot predict the future.
Difficult to compare financial statements from one period to the next.
Net worth calculation includes personal use assets.
Very few benchmarks have been established for personal financial ratios.
[q] Sensitivity Analysis
[a] A type of analysis that determines how different values of an independent variable affect a particular dependent variable under a given set of assumptions. Also referred to as a what-if or simulation analysis.
[q] Monte Carlo Analysis
[a] A simulation that is used to determine the probability of an outcome. The simulation helps to explain the impact of risk and uncertainty in prediction and forecasting models.
[q] Monte Carlo Analysis Limitations
The analysis is extremely vulnerable to incorrect assumptions (garbage in, garbage out).
There is no ability to model rare but consequential events (Black Swans).