Exam 2 407

1. Tara, age 32, has adjusted gross income of $100,000 and unreimbursed medical expenses of $8,000. How much of the medical expense will be deductible? A. $0 B. $500 C. $7,500 D. $8,000

A. $0

For a gain to be afforded preferential treatment, the asset must be 1. a capital asset 2. sold or exchanged 3. held for at least 6 months A. 1 and 2 B. 1 and 3 C. 2 and 3 D. 1, 2 and 3

A. 1 and 2

A taxpayer may incur an AMT liability if he has which of the following items of deduction or income? 1. State and local income taxes 2. Straight-line depreciation 3. Exercise of incentive stock options A. 1 and 3 B. 2 only C. 2 and 3 D. 1, 2 and 3

A. 1 and 3

Which of the following is included in gross income? A. Alimony received B. Interest received from municipal bonds C. Life insurance death benefits received D. Child support payments received

A. Alimony received

7. When must an insurable interest exist for a property insurance policy? A. Both at the time of loss and at the inception of the policy B. At the time the loss settlement process takes place C. At the inception of the policy D. At the time of loss

A. Both at the time of loss and at the inception of the policy

1. In 2016, Ellen and Paul are married and had the following deductions: $6,000 mortgage interest, $2,000 real estate taxes, $2,000 state income tax, and medical expenses of $2,000. Assuming Ellen and Paul file a joint return, had an adjusted gross income of $50,000 and are both age 35, which of the following is CORRECT? A. Ellen and Paul should take a standard deduction of $12,600. B. Ellen and Paul should take a standard deduction of $9,300. C. Ellen and Paul should take an itemized deduction of $12,000. D. Ellen and Paul should take an itemized deduction of $10,000.

A. Ellen and Paul should take a standard deduction of $12,600.

1. Which of the following statements regarding futures contracts is(are) correct? I. A futures contract is an agreement that provides for the future exchange of a particular asset or commodity between a buyer and a seller. II. Most participants in futures are either hedgers or speculators—hedgers seek to profit from the uncertainty of the future; speculators seek to reduce price uncertainty over some future period. A. I only B. II only C. Both I and II D. Neither I nor II

A. I only

1. Which of the following statements regarding market efficiency is(are) correct? I. The efficient market hypothesis (EMH) is the proposition that securities markets are efficient and that the prices of securities reflect their current economic value. II. Investors who believe the EMH usually adopt an active investment strategy. A. I only B. II only C. Both I and II D. Neither I nor II

A. I only

1. Which of the following statements regarding the use of a passive investment strategy in common stock valuation is(are) correct? I. If the securities market is totally efficient, no active investment strategy should be able to beat the market on a risk-adjusted basis; therefore, a passive investment strategy may be superior. II. Passive investment strategies include stock selection, sector rotation, and market timing. A. I only B. II only C. Both I and II D. Neither I nor II

A. I only

1. Which of the following statements regarding the use of an active investment strategy in common stock valuation is(are) correct? I. Pursuit of an active investment strategy assumes that investors possess some advantage relative to other market participants, such as superior analytical skills. II. Active investment strategies include buy-and-hold and using index funds. A. I only B. II only C. Both I and II D. Neither I nor II

A. I only

25. Which of the following statements regarding capital market theory is(are) CORRECT? I. The capital market line (CML) is the graphical depiction of the capital asset pricing model (CAPM). II. The capital market line (CML) depicts the trade-off between risk and expected return for all assets, especially individual securities. A. I only B. II only C. Both I and II D. Neither I nor II

A. I only

7. The tendency of persons expecting to need dental work to seek dental insurance is an example of A. adverse selection B. morale hazard C. fundamental risk D. moral hazard

A. adverse selection

7. All of the following are steps in the risk management process EXCEPT A. implementing a risk management plan based on unexposed risk B. periodically evaluating and reviewing the risk management program C. evaluating the identified risks as to the probability of outcome and potential loss D. identifying the risks to which the company is exposed

A. implementing a risk management plan based on unexposed risk

6. A flood is an example of a A. peril B. risk C. moral hazard D. physical hazard

A. peril

7. Rainy conditions, which increase the chances of an automobile accident, are an example of a A. physical hazard B. peril C. risk D. morale hazard

A. physical hazard

7. The use of higher deductibles by the insured in insurance contracts is one example of A. risk retention B. risk avoidance C. risk reduction D. risk transfer

A. risk retention

Tax credits reduce A. tax liability B. adjusted gross income C. tax withholding D. taxable income

A. tax liability

5. A peril is A. the cause of a loss B. the probability that a loss will occur C. a condition that creates or increases the chance of a loss D. a moral hazard

A. the cause of a loss

Margie, a single taxpayer, owned and used her home as a principal residence for 18 months. She then sold her home because of a new job in another city, realizing a gain on the sale of $300,000. What would Margie's reportable gain be? A. $0 B. $112,500 C. $187,500 D. $300,000

B. $112,500

Rustin is a married taxpayer who files jointly with his spouse and has a short-term capital loss of $300 and a long-term capital loss of $3,800 in the current year. What deduction will Rustin be able to take from ordinary income in the current year? A. $1,500 B. $3,000 C. $3,800 D. $4,100

B. $3,000

During the current year, Kate received salary of $50,000, dividends of $3,000, tax-exempt interest of $1,000, and a gift of $20,000 from her parents. What amount will Kate report as gross income on her tax return? A. $50,000 B. $53,000 C. $54,000 D. $74,000

B. $53,000

1. Hadley has a 33% marginal income tax rate, and she would like to invest in State of Texas bonds. If similar taxable investments yield 10%, what must Hadley earn on the state bonds to make the investment worthwhile? A. 5% B. 6.7% C. 10% D. 15.6%

B. 6.7%

7. Which of the following statements describes adverse selection? A. Insurers refuse applications from applicants with bad credit histories. B. People most likely to suffer losses are most likely to seek insurance. C. Insureds change agents when service is bad. D. Insurers charge higher premiums to insureds who are higher risks.

B. People most likely to suffer losses are most likely to seek insurance.

Which of the following would be considered a capital asset? A. Copyrights or creative works held by the creator B. Securities held for investment C. Accounts or notes receivable arising in the ordinary course of a trade or business D. Inventory or property held for sale to customers in the ordinary course of a trade or business

B. Securities held for investment

1. All of the following are investments available through direct investing EXCEPT A. savings deposits, certificates of deposit, and U.S. savings bonds B. money market and hybrid mutual funds C. Treasury bills, commercial paper, and eurodollars D. option and futures contracts

B. money market and hybrid mutual funds

7. Falsely claiming a theft in order to collect insurance proceeds is an example of a A. morale hazard B. moral hazard C. risk D. physical hazard

B. moral hazard

7. Failure to lock the house because of the existence of insurance is an example of a A. moral hazard B. morale hazard C. speculative hazard D. physical hazard

B. morale hazard

7. The risk of premature death is an example of a A. physical hazard B. pure risk C. speculative risk D. fundamental risk

B. pure risk

1. An individual's personal assessment of the chance of loss is an example of A. a prior probability B. subjective probability C. objective risk D. objective probability

B. subjective probability

7. Loss severity is A. the probability that a liability judgment may exceed the individual's net worth B. the probable size or damage of the losses that may occur C. the probable number of losses that may occur during a period D. the probability that any particular property may be totally lost or destroyed

B. the probable size or damage of the losses that may occur

Which of the following is(are) considered ordinary income? 1. Salaries 2. Qualified dividends from a stock 3. Rent income to a partnership A. 1 only B. 1 and 3 C. 1, 2 and 3 D. None

C. 1, 2 and 3

7. When must an insurable interest exist for a life insurance policy? A. Both at the time of death and at the inception of the policy B. At the time the beneficiary is paid C. At the inception of the policy D. At the time of death

C. At the inception of the policy

1. Which of the following statements concerning the insurance term indemnity is correct? I. Subrogation is the right, upon paying the insured the amount of a loss, to try to collect from a responsible third party. II. A contract of indemnity entitles the insured to payment only to the extent of financial loss or legal liability. A. I only B. II only C. Both I and II D. Neither I nor II

C. Both I and II

1. Which of the following statements concerning the legal requirements of insurance as a contract is(are) correct? I. The agreement by which insurance is effected is a contract in which the insurer, in consideration of the payment of a specified sum by the policyowner, agrees to make good on the losses suffered through the occurrence of a designated unfavorable contingency. II. To be valid and enforceable, insurance contracts must meet 4 general legal requirements: an offer by one party and an acceptance by another party; a legal purpose or objective; legal competence of both parties; and a consideration exchanged by both parties to the agreement. A. I only B. II only C. Both I and II D. Neither I nor II

C. Both I and II

1. Which of the following statements regarding building an efficient portfolio is(are) correct? I. An efficient portfolio is one with the highest level of expected return for a given level of risk or one with the lowest risk for a given level of expected return. II. The efficient frontier is the set of efficient portfolios generated by the Markowitz portfolio model. A. I only B. II only C. Both I and II D. Neither I nor II

C. Both I and II

1. Which of the following statements regarding derivatives is(are) correct? I. Derivatives are securities that derive their value in whole or in part by having a claim on certain underlying securities. II. Gains or losses on the sale of derivatives will depend on the difference between the purchase price and the sales price. A. I only B. II only C. Both I and II D. Neither I nor II

C. Both I and II

1. Which of the following statements regarding market efficiency is(are) correct? I. An efficient market is one in which security prices quickly and fully reflect all available information. II. The efficient market hypothesis states that securities markets are efficient and security prices reflect their true economic value. A. I only B. II only C. Both I and II D. Neither I nor II

C. Both I and II

1. Which of the following statements regarding market efficiency is(are) correct? I. To assess market efficiency, three cumulative forms of efficiency are discussed: the weak form, the semistrong form, and the strong form. II. The weak form of market efficiency involves market data, whereas the semistrong and strong forms involve the assimilation of all public and private information, respectively. A. I only B. II only C. Both I and II D. Neither I nor II

C. Both I and II

1. Which of the following statements regarding options is(are) correct? I. Buyers of calls are betting that the price of the underlying common stock will rise, making the call option more valuable. II. Put buyers are betting that the price of the underlying common stock will decline, making the put option more valuable. A. I only B. II only C. Both I and II D. Neither I nor II

C. Both I and II

1. Which of the following statements regarding options is(are) correct? I. The call option buyer expects the price of the stock to move up and relatively soon. II. The put option buyer expects the price of the stock to move down and relatively soon. A. I only B. II only C. Both I and II D. Neither I nor II

C. Both I and II

1. Which of the following statements regarding portfolio management (is)are correct? I. Portfolio management consists of building a portfolio, revising the portfolio on a regular basis, and measuring the portfolio's performance. II. If an investor pursues an active investment strategy, the issue of market efficiency must be considered when revising a portfolio. A. I only B. II only C. Both I and II D. Neither nor II

C. Both I and II

1. Which of the following statements regarding risk is(are) correct? I. Interest rate risk is the variability of a security's returns resulting from changes in interest rates. II. Inflation risk, or purchasing power risk, is the variability of security returns caused by the decline in the purchasing power of invested dollars. A. I only B. II only C. Both I and II D. Neither I nor II

C. Both I and II

1. Which of the following statements regarding systematic and unsystematic risk (is)are correct? I. Systematic risk represents the portion in the variability of a stock's total return that is directly associated with overall movements in the general economy or stock market. II. Unsystematic risk represents the portion in the variability of a stock's total return that is not related to the variability in general economic activity. A. I only B. II only C. Both I and II D. Neither I nor II

C. Both I and II

1. Which of the following statements regarding the correlation coefficient as a measure of the relative movements between security returns is(are) correct? I. The correlation coefficient is a relative measure of association that is bounded by +1.0 and −1.0. II. A correlation coefficient of +1.0 denotes perfect positive correlation; −1.0 denotes a perfect negative (inverse) correlation; 0.0 denotes zero correlation or no relationship. A. I only B. II only C. Both I and II D. Neither I nor II

C. Both I and II

1. Which of the following statements regarding the measuring of rate of return on investment is(are) correct? I. Arithmetic mean is a better measure of average (typical) performance over single periods. II. Geometric mean is a better measure of the change in wealth over time (multiple periods). A. I only B. II only C. Both I and II D. Neither I nor II

C. Both I and II

1. Which of the following statements regarding the mechanics of futures trading is(are) correct? I. Short position is an agreement to sell an asset at a specified future date at a specified price. II. Long position is an agreement to purchase an asset at a specified future date at a specified price. A. I only B. II only C. Both I and II D. Neither I nor II

C. Both I and II

1. Which of the following statements regarding the total risk of an asset is(are) correct? I. Systematic risk is the risk attributable to broad macroeconomic factors affecting all securities, such as interest rate risk, market risk, and inflation risk. II. Unsystematic risk is the risk attributable to factors unique to an individual security, such as business risk, financial risk, and liquidity risk. A. I only B. II only C. Both I and II D. Neither I nor II

C. Both I and II

1. Which of the following statements regarding the use of passive investment strategies as a way to select and manage common stocks is(are) correct? I. Passive investment strategies emphasize minimizing transaction costs and time spent in managing the stock portfolio because expected benefits from active trading or analysis are likely to be less than the costs. II. Passive investors act as if the market is efficient and accept the consensus estimates of return and risk, regarding current market price as the best estimate of a security's value. A. I only B. II only C. Both I and II D. Neither I nor II

C. Both I and II

7. Which of the following is(are) fundamental purposes of the principle of indemnity? I. Reduce moral hazard. II. Prevent the insured from profiting from insurance. A. I only B. II only C. Both I and II Neither I nor II

C. Both I and II

7. All of the following insurance rating agencies evaluate the financial condition of insurers EXCEPT A. Moody's Investors Service B. AM Best, Inc. C. National Association of Insurance Commissioners (NAIC) D. Standard & Poor's

C. National Association of Insurance Commissioners (NAIC)

1. In determining adjusted gross income, the taxpayer may reduce gross income by which of the following? A. 100% of self-employment tax paid B. Alimony received from an ex-spouse C. Qualifying moving expenses D. Medical expenses

C. Qualifying moving expenses

1. All of the following statements regarding the mechanics of futures trading are correct EXCEPT A. Because a futures contract is a commitment to buy or sell a specific commodity at a specified future settlement date, no money is exchanged at the time the contract is negotiated. B. In futures trading, the seller and the buyer are agreeing to make and take delivery, respectively, at some future time for a price agreed upon today. C. Similar to an options contract, a futures contract involves the right to make or take delivery. D. When buyers sell their positions and sellers buy their positions sometime before delivery, an offsetting transaction has occurred and holders have liquidated their positions.

C. Similar to an options contract, a futures contract involves the right to make or take delivery.

1. Which of the following definitions best describes risk? A. The return expected by investors over some future holding period B. Actual return on an investment for a previous period C. The chance that the actual return on an investment will be different from the expected return D. The return on a riskless asset, often proxied by the rate of return on U.S. Treasury securities

C. The chance that the actual return on an investment will be different from the expected return

1. All of the following statements regarding risk and return on investments are correct EXCEPT A. market risk includes a wide range of factors originating outside of securities, including recessions, wars, structural changes in the economy, and changes in consumer preferences B. exchange rate risk is the variability in returns on securities caused by currency fluctuations C. a Treasury bill may have substantial liquidity risk, whereas a small over-the-counter (OTC) stock has little or no liquidity risk D. inflation risk, or purchasing power risk, is the variability in security returns caused by the changes in the purchasing power of invested dollars

C. a Treasury bill may have substantial liquidity risk, whereas a small over-the-counter (OTC) stock has little or no liquidity risk

1. All of the following statements regarding the use of the correlation coefficient in reducing portfolio risk are correct EXCEPT A. combining securities that have perfect positive correlation with each other provides no portfolio risk reduction B. combining two securities that have zero correlation with each other reduces portfolio risk C. combining two securities that have perfect negative correlation provides no portfolio risk reduction D. investors should seek out securities with the least correlation possible to reduce portfolio risk

C. combining two securities that have perfect negative correlation provides no portfolio risk reduction

1. All of the following statements regarding the legal characteristics of insurance contracts are correct EXCEPT A. insurance contracts are conditional in nature; that is, the insurer is required to compensate the insured only if certain conditions are met B. an insurance contract is a contract of adhesion, meaning that the insurer prepares all contract details and the policyowner must accept the policy as written C. if a court finds that the terms of a policy are ambiguous, the construction most favorable to the insurer will prevail D. insurance contracts are considered contracts of indemnity

C. if a court finds that the terms of a policy are ambiguous, the construction most favorable to the insurer will prevail

7. False statements made by an applicant for insurance are generally considered to be A. breaches of warranty B. lack of offer and acceptance C. misrepresentations D. concealments

C. misrepresentations

The federal personal income tax rate is A. integrative B. regressive C. progressive D. flat

C. progressive

7. All of the following are ways in which individuals or businesses may respond to pure risk exposures EXCEPT A. risk transfer B. risk reduction C. risk withdrawal D. risk retention

C. risk withdrawal

7. Loss frequency is A. the probability that a liability judgment may exceed the individual's net worth B. the probability that any particular property may be totally lost or destroyed C. the probable number of losses that may occur during a period D. the probable size of the losses that may occur

C. the probable number of losses that may occur during a period

A. Robin's stereo was stolen. The stereo cost $3,000 when purchased. A similar new stereo now costs $2,400. Assuming the stereo was 50% depreciated, what is the actual cash value of Robin's loss? B. $400 C. $800 D. $1,200 E. $1,500

D. $1,200

Which of the following is(are) an objective of the federal income tax law? 1. Revenue raising 2. Economic growth 3. Social policy A. 1 only B. 1 and 2 C. 1 and 3 D. 1, 2 and 3

D. 1, 2 and 3

The 2016 FICA employee withholding rate is A. 6.75% B. 7.25% C. 7.5% D. 7.65%

D. 7.65%

Which of the following is included in taxable income? A. An inheritance B. A gift received C. Child support payments received D. Alimony received

D. Alimony received

7. The basic functions of a risk manager include I. identifying potential losses II. selecting the appropriate risk management techniques III. implementing a risk management plan A. I only B. II only C. III only D. All of the above

D. All of the above

1. Which of the following is allowed a standard deduction? A. A married person filing a separate return, if his spouse itemizes deductions B. A nonresident alien C. An individual filing a tax return for a period of less than 12 months D. Children under age 18

D. Children under age 18

1. Which of the following statements regarding derivative securities is(are) correct? I. A call option is an option to sell a specified number of shares of stock at a stated price within a specified period. II. A put option is an option to buy a specified number of shares of stock at a stated price within a specified period. A. I only B. II only C. Both I and II D. Neither I nor II

D. Neither I nor II

1. Which of the following regarding IRS guidance is correct? A. A Letter Ruling is a written statement issued by an IRS district director that applies the principles and precedents announced by the National Office to a given set of facts. B. A Determination Letter is a statement issued for a fee at a taxpayer's request that describes how the IRS will treat a proposed transaction for tax purposes. C. A Private Letter Ruling is a written statement issued by the National Office of the IRS that gives guidance on the way the IRS will treat a prospective or contemplated transaction for tax purposes. D. Revenue Rulings are official pronouncements of the National Office of the IRS.

D. Revenue Rulings are official pronouncements of the National Office of the IRS.

7. What is the effect of an insurance policy being adhesive? A. The insurer can refuse to pay claims unless the insured has complied with all policy provisions. B. The insured cannot assign the policy without the insurer's consent. C. The insurer can require the insured to pay any premiums. D. The insured gets the benefit of the doubt if a policy contains any ambiguities or uncertainties.

D. The insured gets the benefit of the doubt if a policy contains any ambiguities or uncertainties.

7. A contract in which the values exchanged may not be equal is a(n) A. contract of adhesion B. conditional contract C. unilateral contract D. aleatory contract

D. aleatory contract

7. Insurance rating agencies, such as AM Best Co., evaluate an insurance company's A. underwriting practices B. employment policies C. policyowners D. financial condition

D. financial condition

7. A pure risk occurs where there is A. a possibility of either profit or loss B. a possibility of neither profit nor loss C. only the possibility of profit D. only the possibility of loss or no loss

D. only the possibility of loss or no loss

7. Risk management is concerned with A. pure and speculative risks B. pure risks that are uninsurable C. pure risks that are insurable D. pure risks that are insurable or uninsurable

D. pure risks that are insurable or uninsurable

7. The sharing of risk across two or more insurance providers is known as A. secondary insurance B. pooled insurance C. comprehensive risk exposure D. reinsurance

D. reinsurance

A capital gain results from A. selling an asset for less than the purchase price B. holding an asset that has appreciated C. selling an asset at the same price as the purchase price D. selling an asset for more than the purchase price

D. selling an asset for more than the purchase price

25. All of the following statements regarding capital market theory are correct EXCEPT A. the capital asset pricing model (CAPM) allows an analyst to measure the relevant risk of an individual security as well as to assess the relationship between the risk and returns expected from investing B. the capital asset pricing model (CAPM) relates the required rate of return for any security to the risk for that security as measured by beta C. the market portfolio is the portfolio of all risky assets, with each asset weighted by the ratio of its market value to the market value of all risky assets D. the capital market line (CML), also known as the security market line, is the trade-off between expected return and risk only for efficient portfolios

D. the capital market line (CML), also known as the security market line, is the trade-off between expected return and risk only for efficient portfolios