AWMA Practice Exam II

Question #9 of 80 Question ID: 1334316 Assume you have the following portfolio: StockWeightBetaBCD40%1.15EFG25%.90HIJ35%1.05 What is the overall weighted beta for this portfolio? A)1.053 B)1.105 C)1.127 D)1.011

A (.4 × 1.15) + (.25 × .90) + (.35 × 1.05) = 1.053. Be sure to keep your calculator at four decimal places for this course.

Using the capital asset pricing model, what is the expected return for a stock where its beta is 1.20, the risk-free rate is 4%, and the market rate of return is 10%? (Set calculator for four decimal places to reduce rounding error.) A)11.2% B)8.8% C)10.1% D)16.0%

A .04 + 1.2 (.10 − .04) = .04 + .072 = .112 or 11.2%

Flynn would like to eventually pass on a portion of his wealth to his children while living, but would like to retain control and use of his property for the next 10 years. He would also like to minimize the amount of the gift tax owed on this transfer, since he has already fully utilized his gift tax exclusion amount. Flynn would also like the possibility of excluding the asset from his gross estate. Additionally, he would like to receive a fixed percentage from the assets that is valued annually to ensure he has sufficient funds to use for his annual vacations for the next 10 years. Which of the following gifting techniques should Flynn utilize? A)10-year grantor retained unitrust (GRUT) B)10-year grantor retained income trust (GRIT) C)10-year grantor retained annuity trust (GRAT) D)Irrevocable trust with Crummey powers

A A GRUT will pay Flynn an income stream of a fixed value, valued annually, and will minimize the gift tax owed since this trust is qualified under the Chapter 14 rules. A GRIT is not qualified under the Chapter 14 rules. That means a GRIT would result in more gift tax than a GRAT or GRUT because the retained life estate for a GRIT is defined by law as having no value for gift tax purposes. Thus, 100% of the initial transfer to a GRIT is subject to gift taxes. On the other hand, a GRAT or a GRUT values the retained life estate as its actual present value. Thus, with a GRAT or a GRUT some of the transfer to the trust is not gift taxed. An additional aspect of GRITs, GRATs, and GRUTs is that no future interest gift will ever be eligible for the annual gift tax exclusion. A GRAT will not achieve his objective of receiving a fixed percentage of the actual trust amount each year. A GRAT would pay an income stream of a fixed value of the initial FMV. If Flynn retains a beneficial interest in an irrevocable trust, the assets will continue to be included in his gross estate. However, if he outlives the 10-year term of the GRIT, GRAT, or GRUT, the trust assets will be removed from his gross estate because the trust will have already distributed them to his children prior to his death.

Which of these is correct with respect to net unrealized appreciation (NUA) treatment from a distribution of employer securities? A)The distribution must be a lump-sum distribution from the plan. B)The NUA is treated as a long-term capital gain if the stock is sold more than one year after the distribution of the stock. C)The NUA treatment is available for stock that has been rolled over to an IRA. D)The basis of the stock is treated as capital gain at the time of distribution.

A In order to qualify for NUA treatment, the distribution must be a lump-sum distribution taken in-kind. The stock must not have been rolled over to an IRA. The basis of the stock is treated as ordinary income in the year of distribution, and the NUA is treated as long-term capital gain, regardless of the holding period.

Which statement correctly describes when a bypass trust should be used by a grantor? A)When the grantor wants to include persons other than their spouse as income beneficiaries B)When the grantor wants to give their spouse a general power of appointment over trust assets C)When a grantor wants to use the marital deduction for the value of all assets placed in trust D)When the grantor wants to be able to make an election to receive a marital deduction for trust assets

A All trusts that qualify for the marital deduction must name the grantor's spouse as the sole income beneficiary. Because the grantor of a bypass trust wants to control who will receive the trust assets at the spouse's death, the spouse should not be given a general power of appointment. A bypass trust cannot qualify for the marital deduction automatically or by election.

What behavioral finance bias explains the tendency of individuals to attach more value to an asset they own rather than one that they may be interested in purchasing? A)Endowment B)Rationalization C)Framing D)Illusion of control

A The endowment bias is when individuals value an owned asset more than those that are not owned. One result is the tendency to demand a higher price when selling an asset, and requiring a lower price to purchase an asset.

Your client, John, is 72 years old. He has started taking required minimum distributions from his 401(k), which has grown to over $3 million. He currently has no IRA account. His RMDs are mostly an annoyance, as he does not need the funds to cover his living expenses, and he does not want to leave too much of an inheritance to his children. What planning option might you discuss with John? A)John could roll over a portion of the funds from his 401(k) to an IRA, and then execute a qualified charitable distribution from his IRA to his alma mater, the University of Notre Dame. B)John could utilize a qualified charitable distribution from his 401(k) to his favorite veteran's group. C)John could utilize a qualified charitable distribution from his 401(k) to his alma mater, the University of Notre Dame. D)None of these.

A Because John is over age 70½, he may utilize a qualified charitable distribution; however, the distribution must be made to a 50% organization—churches, schools, Red Cross,

Which trust will NOT entitle the grantor to take an annual exclusion upon funding the trust? A)Bypass trust in which income is paid at the discretion of the trustee B)Section 2503(c) minor's trust C)Section 2503(b) mandatory income trust D)Crummey trust

A For gifts to a trust to be entitled to the annual exclusion, income must be payable on a mandatory basis (Section 2503(b)), the beneficiaries must be given a general power of appointment (such as a Crummey power) over the trust assets, or the trust must conform to the requirements of Section 2503(c). A bypass trust that gives the trustee discretion over income is not entitled to the annual exclusion.

Which two acts have been cited by many to have contributed to the market meltdown and financial crisis in 2008? A)Gramm-Leach-Bliley Act of 1999 and Commodity Futures Modernization Act of 2000 B)Securities Acts Amendments of 1975 and USA Patriot Act of 2001 C)Commodity Futures Modernization Act of 2000 and Sarbanes Oxley Act of 2002 D)Gramm-Leach-Bliley Act of 1999 and Sarbanes Oxley Act of 2002

A Gramm-Leach-Bliley repealed part of the Glass-Stegall Act of 1933, and this allowed financial institutions to consolidate and offer banking services along with investments and insurance. This led to banks taking on more risk and complexity than they had in the past. The Commodity Futures Modernization Act had an impact on the financial crisis for what it didn't do, namely exempting derivatives such as credit default swaps (which played a major role in the 2008 meltdown) from regulation.

Which of these statements are correct concerning incentive stock options and nonqualified stock options? I.Incentive stock options are not taxed at the time of the grant. II.Nonqualified stock options are taxable at the time of the grant if their value is ascertainable. III.IRC Section 409A does not apply to incentive stock option plans. IV.As a general rule, nonqualified stock options are freely transferable and may be sold to a third party. A)I, II, and III B)I, III, and IV C)III only D)I only

A Incentive stock options (ISOs) are not taxed until the time of sale, and then at capital gains rates if the holding period requirement is met at least two years from the grant date and at least one year from the date of exercise. Nonqualified stock options may be taxed at grant if the value is ascertainable or at exercise if it is not. As a general rule, nonqualified stock options are nontransferable.

As a planner, you have grown increasingly concerned about the impact of the alternative minimum tax. Which one of these clients is least likely to have exposure to the alternative minimum tax? A)The client who itemizes deductions. B)The client who is heavily invested in private-activity municipal bonds. C)The client who is invested in oil and gas activities. D)The client who has exercised incentive stock options during the tax year.

A Investment in oil and gas activities often causes AMT exposure due to the intangible drilling costs and percentage depletion. The bargain element on the exercise of an ISO and the interest from private-activity municipal bonds are preference items for AMT purposes. The client least likely, in this case, to have an AMT exposure is the one who itemizes deductions. After the Tax Cuts and Jobs Act, the only itemized deductions disallowed for AMT purposes are the state and local income taxes. Because state and local income taxes are capped at a $10,000 deduction, this is the maximum itemized deduction amount that may be disallowed for AMT purposes. A client who does not itemize deductions will face a disallowance of the entire standard deduction amount. Note that interest on private-activity municipal bonds issued in 2009 and 2010 is not a preference item for the AMT.

Which of these is NOT a general rule pertaining to investing in small firms? A)Look for low volatility stocks B)Diversify among 20 to 30 different issues C)Have a long-term time horizon D)Avoid turnover of more than 30% annually

A Investors in small firms need to expect volatility and have a long-term time horizon. Gerald Perritt recommends investing in between 20 and 30 different issues, and turnover should be limited to no more than 30% annually in order to control transaction costs.

The gross income multiplier (GIM) that can be used to value real estate is closest to which financial ratio? A)Price-to-sales B)Price-to-earnings C)Price-to-book D)Free cash flow

A The gross income multiplier approach is similar to the price-to-sales ratio because it involves coming up with a multiplier based on either gross rental receipts, the potential gross income (which would include any other income in addition to rent), or the effective gross income (potential gross income after deducting for vacancy and collection losses).

Which of the following statements is correct regarding the "solely incidental" exemption guidance provided by the SEC in Release IA-5259 provided in July 2019? A)Neither the amount (quantum) nor the importance of investment advice necessarily determines whether the advice is solely incidental or not. B)If the advice is of significant importance to the client because of its potential impact on the client's well-being, it cannot be solely incidental. C)If there is a significant amount (quantum) of advice or financial planning services, it cannot be solely incidental. D)If the advice is in the best interest of the client, it cannot be solely incidental.

A Neither the amount nor the importance of investment advice will necessarily prevent a broker-dealer from meeting the solely incidental exemption according to recent SEC guidance. However, certain services may cause a broker-dealer to be deemed as being in the investment advisory business, such as exercising investment discretion over a client's accounts.

The Uniform Prudent Investor Act identified five fundamental changes in the former criteria for prudent investing. Which of the following statements incorrectly states one of these changes? A)The standard of prudence is applied to each investment individually. B)Prudent investing requires that fiduciaries diversify their investments. C)The trade-off between risk and return in all investing is the fiduciary's central consideration. D)Delegation of trust investment and management functions is permitted, subject to safeguards.

A Prior to the Uniform Prudent Investor Act, the focus was on individual investment choices, which made it very difficult to focus on the risk and return of the entire portfolio. The benefits of diversification have now been firmly established, and the standard of prudence is now applied to any investment as part of the total portfolio rather than to that investment individually.

Which of these describe a hedge fund using a relative value arbitrage strategy? A)A fund that compares one security to another and strives to profit on changes in the differential between the two B)A fund that takes a top-down "big picture" macroeconomic approach to investing C)A fund that invests in distressed securities that are trading below their intrinsic value D)A fund that purchases Regulation D securities that are priced lower than similar public securities

A Relative value arbitrage is not betting on the direction of the market, but rather comparing one security and seeing how cheap or expensive it is compared to another security. Hedge funds can also invest in distressed securities that are trading below their intrinsic value, or in Regulation D securities, which are often priced lower than similar publicly traded securities. A hedge fund that takes a "big picture" approach to investing is called a global macro fund.

Which statement is NOT true regarding a preferred stock recapitalization? A)To freeze the value of their interest in the corporation for estate tax purposes, the original owner must maintain an interest that will pay them either an annuity or unitrust amount. B)The original owner will retain a qualified interest for IRC Chapter 14 purposes if he or she maintains the right to income that is fixed in time and amount. C)To maintain control of the corporation, the original owner must maintain a majority of the shares with voting rights. D)The original owner can maintain a preference in the payment of income and maintain a qualified payment right for IRC Chapter 14 purposes.

A Shareholders with a majority of the shares with voting rights can elect directors, who appoint officers, who run the day-to-day affairs of the corporation. Under IRC Chapter 14, a qualified right in a corporation is one that entitles the shareholder to a fixed amount of income (that cannot be reduced) on a cumulative basis. As long as these requirements are met, the shares can be preferred in the payment of income. To freeze the value of a business interest, the shares must have a fixed liquidation value (rather than an annuity or unitrust amount).

Which of these would a contrarian investor interpret as a bullish indicator? A)Bullish specialist sentiment B)Low put-call ratio C)Small cash positions in mutual funds D)Decreased short selling

A Specialists are considered "smart money" and, therefore, if they are bullish a contrarian investor would follow their sentiment. If the specialist's total short sales are 65% or more that is a bearish sign, and if they are 40% or less it is a bullish sign.

One provision of the Sarbanes-Oxley Act of 2002 requires A)the CEO and CFO of a public company to certify the financial information in the annual report. B)the SEC to develop a national securities market. C)investment advisers to register with the SEC. D)measures to combat money laundering.

A The Sarbanes-Oxley Act of 2002 was enacted to strengthen the accounting standards for public corporations. One part of that was to require the CEO and CFO of a public company to certify the financial information in the annual report. The act has also precipitated the employment of chief compliance officers (CCOs) at many firms. The CCO usually reports directly to the board of directors.

Assume the following correlations between long-term government bonds and the following asset classes: Small stocks: .17 Foreign stocks: .21 Treasury bills: −.12 Gold: −.25 Which asset class will provide the most diversification with long-term government bonds? A)Gold B)Small stocks C)Treasury bills D)Foreign stocks

A The asset with the correlation farthest from +1.0 will provide the most diversification. In this case, it would be gold with its −.25 (correlations range from +1.0 to −1.0).

Victoria has told you, her wealth management adviser, that she is interested in selling her successful local chain of 10 bakeries, of which she is the sole owner. One of Victoria's two adult children works in the business and has expressed interest in running the chain when Victoria retires. The other adult child has pursued a career in public service. Victoria asks you what obstacles might exist for such an exit route. You tell her all of the following are disadvantages to a transfer to children, except A)transfers to children always have significant gift tax implications. B)transfers to children take longer than some other exit routes. C)the non-business-active child may feel that the business active child is being given preferential treatment. D)Victoria will receive relatively little in the way of upfront money.

A The non-business-active child may indeed harbor feelings of being left out, but this is a situation that can be resolved through Victoria allocating other wealth to the non-business-active child and fully communicating the overall estate plan to the two children. Transfers to children do result in delayed income streams to the seller. Transfers to children are generally a multiyear process that do take longer than third-party and ESOP sales. Transfers to children do not necessarily have significant gift tax implications. Annual exclusions are available and the applicable credit amount can shelter up to $11.58 million in taxable gifts in 2020. The gift tax implications can also be mitigated through various techniques, such as minority discounts and a grantor retained annuity structure.

Which of these choices is NOT a fiduciary duty explicitly required under the CFP Board Practice Standards? A)Duty to delegate B)Duty to follow client instructions C)Duty of care D)Duty of loyalty

A The three fiduciary duties explicitly stated in the CFP Board Practice Standards are the duty of loyalty, duty of care, and duty to follow client instructions. There is a fiduciary duty to consult with others as needed, and CFP professionals as fiduciaries should do this as needed. There is no fiduciary duty to delegate.

Which statement regarding nontraded and private REITs is correct? A)Private REITs invest in core, value added, and opportunistic properties. B)Nontraded REITs have tax advantages for investors that are not available for publicly traded REITs. C)Private REITs, although not publicly traded, are generally very liquid. D)Neither nontraded nor private REITs are registered with the SEC.

A The three main types of private real estate funds are core, value-added, and opportunistic. The typical time horizon for core investments is 8 to 12 years, for value-added investments 4 to 8 years, and for opportunistic investments 3 to 5 years. Nontraded REITs are registered and regulated by the SEC. The tax treatment of nontraded REITs is similar to that of publicly traded REITs. Private REITs are hard to value and trade, and should generally be purchased as longer-term investments.

Special arrangements need to be made concerning the residence and contents of the high net worth individual's primary residence for which situation? A)When the owner is planning to live overseas for a year B)When the owner is taking a month to travel through Europe C)When the owner is on vacation for a week D)When the owner is at their vacation home for two weeks

A When the primary residence will be vacant for a short time, homeowners policies will continue to provide coverage. However, when the owner will be out of the country for a year, the property may be considered vacant and coverage may not apply. Specialty insurance carriers who commonly deal with situations such as clients who live internationally for periods of time can reduce the likelihood that a significant risk is overlooked. These companies often provide risk managers who can properly advise clients concerning their choices.

Three years ago, Kerri received a gift of 1,000 shares of Mica Inc. common stock from her parents. The fair market value of the stock on the date of the gift was $20,000. Kerri's parents purchased the stock several years earlier for $40,000. She sold this stock for $31,000 last week. What is the amount of gain or loss, if any, from Kerri's stock sale? A)$0 B)$40,000 gain C)$9,000 loss D)$11,000 gain

A Where the fair market value on the date of gift is less than the donor's adjusted basis, and the asset is sold at a price between the fair market value on the date of gift and the donor's adjusted basis, there is no gain or loss recognized on the sale. A loss can only be claimed if sold below the FMV on the date of gift ($20,000), and a gain would only apply to any gain above the original basis ($40,000).

When faced with a client with a behavioral bias, an adviser should consider which course of action? A)Coach the client on good financial steps and refer the client to a therapist if any money biases persist after coaching. B)Listen well to the client's concerns and coach the client on good financial steps; doing this means a therapist will not be needed. C)Listen well to the client's concerns and refer the client to a therapist if there is any money bias present. D)Coach the client on good financial steps and refer the client to a therapist if the client becomes emotional.

A. If a wealth planner encounters a self-destructive financial tendency in a wealthy client, coaching about the money behavior should first be attempted. If a planner cannot persuade a client to work in their own best interest, a therapist or life coach may be needed to dispel destructive money scripts that the client has retained. This is a delicate process, and should only come after listening and developing trust with a wealthy client.

You are evaluating the absolute performance of the Shining Star mutual fund. The return of the fund for the past year was 13%, its beta is 1.10, and standard deviation is 23. The market risk premium is currently 5%, and the risk-free rate is 4.5%. Which of these statements is true? A)The fund's alpha cannot be determined; however, 13% is a very good relative return. B)The fund's alpha is +3, meaning that the fund manager achieved a higher return than required for the amount of risk taken. C)The fund's Treynor ratio is 7.73, meaning the fund manager achieved a 7.73% higher return than required for the amount of risk taken. D)The fund's Sharpe ratio is .37, meaning this fund should be chosen when compared with another fund with a Sharpe ratio of .48.

B Alpha is an absolute measure that is simply the difference between the return of the portfolio and the required return (CAPM). The formula is Rp − [Rf + (Rm − Rf)β. The difference between the return of the market and the risk-free rate (Rm − Rf) is the market risk premium, so 13 − [4.5 + (5)1.1] = 3. Treynor and Sharpe are comparative or relative measures, and you would choose the investment with the highest number (more return per unit of risk). Alpha is an absolute measure, giving you the actual return above the required return.

Brant is a participant in his company's stock bonus plan that was established many years ago when the company contributed 1,000 shares of its stock to Brant's plan account. At the time, these shares were each valued at $15. During the current year, Brant took a lump-sum distribution from the plan and sold his shares for $25 each. Brant elects to use NUA treatment. Brant will have to report ordinary income for the current year equal to which amount? A)$20,000 B)$15,000 C)$5,000 D)$10,000

B Brant is immediately taxed on the cost, or basis, of the securities received, and at ordinary income rates. Hence, he would have to include $15,000 (1,000 shares × $15 cost basis) as ordinary income for the current year. Brant's net unrealized appreciation (NUA) in the distribution is taxed during the current year. His NUA equals $10 per share ($25 per share less $15 per share), so he also will have to report a long-term capital gain of $10,000 ($10 NUA per share × 1,000 shares).

Which statement correctly explains a characteristic of freezing the value of assets? A)Freezing the value of the assets disallows additional valuation discounts. B)All future appreciation of the asset will be assessed to the new owner. C)Transfer taxes are always assessed on the value of the property on the date of death. D)This goal may be obtained only if the owner retains control of the asset.

B Freezing the value of an asset in your estate removes any future appreciation by transferring that asset to a third party. Transfer taxes are assessed on the date of transfer (whether during life or at death). The owner must give up sufficient control of the property to remove it from the estate. Valuation discounts may be used in conjunction with the freezing technique.

Stock C has a mean return of 8% with a standard deviation of 13%. Assuming a normal distribution of returns, what is the probability that Stock C's return will be greater than −5%? A)34% B)84% C)68% D)16%

B Graphing out the answer can be helpful. Determine the range of the 1, 2, and 3 standard deviations. For 1 standard deviation take the mean return of 8% and add the standard deviation of 13% (21%), then subtract the standard deviation of 13% (−5%). This means that the range for 1 SD falls between −5% and +21%. You know that 50% of area will be to the right of the mean of 8% and 34% of 1 SD will be to the left of the mean (and 34% to the right for a total of 68% of the returns). Add the 50% (to the right of the mean return) and 34% (of 1 SD that is lower than the mean return) to get the answer, 84%.

Human capital can be considered an asset in which way? A)Human capital, considered as a part of the main portfolio, is the employees of a high net worth client who can be accessed when needed. B)Human capital, considered as a part of liquid assets, is the education, skills, talents, and/or connections a high net worth client possesses that can be accessed when needed. C)Human capital, considered as a part of the main portfolio, is the education, skills, talents, and/or connections a high net worth client possesses that can be accessed when needed. D)Human capital, considered as a part of liquid assets, is the employees of a high net worth client who can be accessed when needed.

B Human capital, which is a part of the liquid assets category, is especially apropos for high net worth clients, as their education or other skills, talents, and/or connections provide a safety net for assets (likelihood of continuing income and/or other funds).

An adviser remains professional while a client is acting agitated during a meeting, and is actually able to calm the client's emotions and have a successful meeting. Which level of emotional intelligence is the highest level that adviser has reached? A)Emotional facilitation B)Emotional regulation C)Emotional perception D)Emotional understanding

B In practicing emotional regulation, the highest form of emotional intelligence, the openness and understanding of feelings permits the individual (adviser in this case) to learn to control their feelings and dictate expression when appropriate, in addition to being able to guide another to emotional understanding. Emotional management allows people to "put on their happy face" even if they feel less than happy; in financial planning this leads to empathizing with and being able to coach a client.

Your client is currently subject to the Medicare contribution tax. Which method may help reduce the impact of the Medicare contribution tax? A)Receiving passive business income B)Receiving municipal bond interest C)Capturing capital gain income D)Maximizing the use of charitable contribution deductions.

B Municipal bond interest is not subject to the Medicare contribution tax, nor does it increase the AGI. Charitable contributions increase itemized deductions, thereby reducing taxable income. However, the threshold for the Medicare contribution tax is based on AGI, not taxable income. Passive business income is specifically subject to the Medicare contribution tax, as is capital gain income.

Which of these are forms of systematic risk? I.Purchasing power risk II.Exchange rate risk III.Default risk IV.Market risk

B Recall the P.R.I.M.E. acronym for systematic (or nondiversifiable) risk: Purchasing power, Reinvestment, Interest rate, Market, and Exchange rate risks. Options I, II, and IV are elements of the P.R.I.M.E. acronym, while III (default) is a form of unsystematic (or diversifiable) risk.

Which of these statements are characteristics of SERPs (Unfunded) and excess benefit plans (funded)? I. Benefits are usually paid out of the employer's general assets. II. Both plans are used to supplement benefits provided by the employer's qualified plan. III. They are subject to the same ERISA requirements. V. The plan's benefit formula may provide for defined contributions or a defined benefit. A)II and III B)I, II, and IV C)II only D)III only

B Statements I, II, and IV are correct. Unfunded excess benefit plans are exempt from the requirements of ERISA. In contrast, funded excess benefit plans are subject to the fiduciary, written plan requirements; reporting and disclosure requirements; and the enforcement and claims provisions of ERISA. However, funded excess benefit plans are exempt from other ERISA requirements. SERPs are subject to brief reporting and disclosure requirements and the enforcement and claims provisions of ERISA. However, top hat plans and unfunded SERPs are exempt from other ERISA requirements.

An important difference with baby boomers, versus the earlier greatest and silent generations is that A)as a group, baby boomers have fewer funds to pass to the next generation. B)baby boomers are working later into life. C)the greatest and silent generations care more about supporting a present lifestyle. D)the greatest and silent generations saved more toward retirement.

B Statistics from PEW Research show that baby boomers are staying in the workforce later than the silent and greatest generations did.

Custom Plywood is a closely held corporation. Frank Roberts is Custom Plywood's sales director. During the last five years that Frank has been in this position, Custom Plywood has experienced tremendous growth in earnings and sales. Custom Plywood would like to provide Frank with the opportunity to share in the future growth of the company, while not diluting the ownership interests of the present shareholders. What is the most appropriate form of compensation plan that Custom Plywood could offer to Frank? A)Incentive stock option B)Stock appreciation rights C)Nonqualified stock option D)Rabbi trust

B Stock appreciation rights (SARs) would be the best choice because there would be no dilution of ownership while compensating Frank for his efforts in increasing the value of the company. Since Frank would not own actual stock, no dilution would occur, yet he would benefit directly from any increase in the value of the stock. SARs are granted with a set exercise price and they have a vesting period and an expiration date. Once a SAR vests an employee can exercise it at any time prior to expiration at no cost.

Which of these is NOT one of the requirements found in the five-part test under ERISA that determines whether an individual giving advice regarding a company-sponsored retirement plan would be considered a fiduciary? A)Any advice provided would serve as the primary basis for any decisions. B)Compensation is received for any advice provided. C)Advice is provided on a regular basis. D)None of these determine whether an individual is a fiduciary.

B The five-part test under ERISA does not address whether compensation is received. The five criteria are: (1) rendering advice as to the purchasing or selling of a security; (2) on a regular basis; (3) pursuant to a mutual agreement; (4) any advice serves as the primary basis for investment decisions; and (5) any advice is individualized based on the particular needs of the plan.

In 2007 the SEC commissioned the RAND Corporation to do a study to better understand the financial landscape. Which statement about the study is NOT accurate? A)The study found that there was confusion over services offered by investment advisers and broker-dealers, and the fees they charge. B)The study found that the public generally has a good understanding about the differences between the suitability and fiduciary standards. C)The study found the financial landscape to be complex and confusing for both financial professionals and investors. D)The study found that there was confusion over titles and credentials used in the field, including generic titles such as financial adviser.

B The study found that the public does not have a good understanding about the different standards that investment advisers and broker-dealers are held to. In fact, most participants in the study believed that investment advisers and broker-dealers are held to the same standard, namely being a fiduciary and looking out for the best interests of their clients.

Why might a client prefer to form a private foundation rather than a donor-advised fund? A)To obtain the best tax advantage for the entity B)To keep the purpose of the entity and its values intact C)To keep the entity donor(s) private D)To keep the entity beneficiary(ies) private

B Though a private foundation is less tax efficient and there is public acknowledgement of donors and beneficiaries, an individual wanting to permanently set the values of the entity would choose a private foundation.

The Care Obligation found under Regulation Best Interest requires which of the following? A)Reasonable prudence, diligence, care, and skill B)Reasonable diligence, care, and skill C)None of these D)Reasonable care, prudence, and loyalty

B Under Regulation BI a broker-dealer must exercise reasonable diligence, care, and skill in recommending any transaction or series of transactions. The term "prudence" is not used, but it has historically been one of the requirements under the fiduciary duty of care. Regulation BI stops short of requiring broker-dealers to be fiduciaries. The duty of loyalty is required of investment advisers who are considered fiduciaries.

Which private equity investment is NOT tied to the performance of the overall stock market? A)Cut and run LBO B)Distressed debt C)Repackaging LBO D)Venture capital

B Venture capital and LBOs are generally tied to market performance, meaning they do best when the market is rising, and they tend to not do so well when the market is declining. Distressed debt is generally not correlated with, nor dependent upon, positive performance by the overall stock market. Distressed debt is much more company specific and its performance and fate is tied to the business itself rather than the broader market.

Which statement is correct regarding federal transfer taxation? A)Use of the estate tax marital deduction exempts the subject property from further transfer taxation. B)Direct payment of tuition expenses to an educational institution by a decedent's estate for the benefit of a surviving child is exempt from transfer taxation. C)The generation-skipping transfer tax (GSTT) can be applied to transfers of wealth between parties who are not related to each other. D)The gift tax is tax inclusive.

C *If the transferor and transferee are not related to each other in any way, the GSTT can still apply if the transferee is more than 37.5 years younger than the transferor. *The gift tax is tax exclusive. Direct payment of tuition expenses is exempt from gift tax and GSTT, but is not exempt from estate tax. *The marital deduction merely delays application of the gift or estate tax until the recipient spouse dies. If handled properly, the unused portion of the first spouse's exclusion amount is portable to the surviving spouse.

Which statement correctly compares and contrasts a trust protector and a directed trustee? A)A trust protector and a directed trustee must be appointed by a court upon proper petition. B)A trust protector may not amend the trust agreement, but may enforce it, while a directed trustee may amend certain provisions of the trust agreement. C)A trust protector may overpower a trustee, while a directed trustee is required to seek advice from a specified third party prior to making discretionary distributions. D)A trust protector may not be used in foreign asset protection trust planning, while a directed trustee may be used in foreign asset protection trust planning.

C A trust protector may overpower a trustee, amend a trust agreement, or be used in foreign asset protection trust planning, and is appointed in the trust agreement by the grantor. A directed trustee is required to seek advice from a specified third party, such as a financial professional, prior to making discretionary distributions, is appointed in the trust agreement by the grantor, and may not amend provisions of the trust agreement.

Which of these describe Jensen's alpha? I.Alpha is a relative measure used to compare the manager's performance to the appropriate benchmark. II.Standard deviation is the risk measure used to calculate alpha. III.The calculation includes the use of the CAPM formula. V.The risk-free rate is determined by the Federal Reserve on an annual basis. A)I only B)I, III, and IV C)II only D)III only

C Alpha is a stand-alone measure of the manager's performance, while Sharpe and Treynor are relative measures. Alpha relies on beta for the risk measurement. The calculation consists of the realized return minus the CAPM formula. The risk-free rate is the market rate for the U.S. Treasury security that one wishes to use.

Which of these is a behavioral finance attitude usually found in high net worth clients, as opposed to the mass affluent? A)There is a greater tendency toward loss aversion. B)Fewer attribute financial success as a commitment to follow their passion. C)More admit to making significant investment mistakes. D)Fewer have money status beliefs.

C As compared to the mass affluent (who have more money biases and may earn less as a result), the high net worth individuals were found to have fewer money-avoidance beliefs, more money-status beliefs, a more internal locus of control, less of a tendency for loss aversion, and significantly more attribution of their financial success to both a drive to increase their wealth and a commitment to follow their passions. In addition, the wealthy, again compared to the mass affluent, were more likely to report workaholic behaviors, and admit to making significant investment mistakes.

Within what time period must a valuation be done for nontraded REITs following the close of a nontraded REIT offering? A)12 months B)6 months C)18 months D)3 months

C Broker-dealers are required to provide a valuation to investors in nontraded REITs within 18 months after cessation of a nontraded REIT's offering of shares. An updated valuation must also be calculated at least every 18 months thereafter. Nontraded REITs should only be considered for accredited and sophisticated investors with a long-term time horizon.

What factors differentiate an individual investor from an endowment approach to investing? Individuals have a longer time horizon. Time diversification works in favor of the endowment portfolio. The endowment portfolio is considered a permanent portfolio. The endowment approach will invest a greater percentage in bonds. A)II, III, and IV B)I and II C)II and III D)II and IV

C Endowment funds are considered to be permanent, while individual investors will have much more finite time horizons. The endowment fund can ride out the volatility of equity investments due to the long, unconstrained time horizon, which is known as time diversification.

Which of these are correct statements about a rabbi trust? Payment of FICA taxes and income taxes are deferred until the future when benefits are paid. The rabbi trust must contain an insolvency trigger. Benefits may be paid on account of unforeseeable emergency involving the participant or termination of the nonqualified plan. An informally funded rabbi trust is treated as being unfunded for ERISA purposes. A)I, II, and IV B)I and II C)III and IV D)I, II, and III

C FICA taxes are imposed when the employee-participant in a rabbi trust is paid for performing services, even though some of his or her compensation is deferred and not subject to income taxes until such time as the benefits are paid. A rabbi trust cannot contain an "insolvency trigger" under which payments would be made to participating employees if the employer becomes insolvent. This provision would violate the requirement that benefits must be subject to the claims of the employer's creditors. A rabbi trust can provide for payment of benefits on account of the following events recognized by IRC Section 409A: retirement, separation from service, death, disability, specified time or pursuant to affixed schedule, unforeseeable emergency involving the participant, or change in ownership or control of the employer. Rabbi trusts are unfunded, unsecured, and do not have a substantial risk of forfeiture provision. An informally funded rabbi trust is treated as being unfunded for purposes of government regulations; i.e., the IRS and the Department of Labor.

Kristen received 500 shares of stock as a gift from her Aunt Ethel. Ethel purchased the stock 11 years ago for $100,000. Kristen received the stock from Aunt Ethel nine months ago, when the fair market value was $110,000, and she sold the stock this week for $150,000. What is the amount and character of Kristen's gain from the sale of the stock? A)$40,000 long-term capital gain B)$50,000 short-term capital gain C)$50,000 long-term capital gain D)$40,000 short-term capital gain

C In the case of an asset received as a gift, where the fair market value on the date of the gift is greater than the donor's adjusted basis, the recipient has a carryover basis. In this case, Aunt Ethel had purchased the stock for $100,000 and gifted it to Kristen when the fair market value was $110,000. Kristen subsequently sold the stock for $150,000. Thus, the carryover basis from Aunt Ethel would be $100,000. In a situation where the recipient of the gift takes the donor's basis, the holding period is "tacked." In other words, the donor's holding period is added to the donee's holding period. Thus, Kristen is treated as holding the stock for over 11 years.

Which of these are allowable itemized deductions for purposes of computing the alternative minimum tax? I. Charitable deductions II. Qualified housing interest III.Medical expenses in excess of 10% of AGI (for 2020) V. Real estate taxes

C Option IV, real estate taxes, is the only itemized deduction listed that is not allowed for AMT purposes.

Which of these is a function of the Elder Abuse Prevention and Prosecution Act of 2017? A)Grants immunity from culpability when financial employees are reporting elder abuse B)Requires financial institution employees to make a reasonable effort to record a "trusted person" for each client C)Mandates stricter penalties than before the act for those prosecuted in elder abuse cases D)Allows financial advisers to put a temporary hold on an account distribution if elder abuse is suspected

C The Elder Abuse Prevention and Prosecution Act of 2017 coordinates activities of the Department of Justice, Department of Health and Human Services, the Office for Victims of Crime, and interstate agreements, with the Comptroller General and Attorney General helping with elder abuse. The act also mandates stricter penalties than previously for those prosecuted for elder abuse and promotes ongoing development of new initiatives in this area. FINRA Rule 4512 requires employees of a financial institution to attempt, with reasonable effort, to get contact information for a "trusted person." FINRA Rule 2165 allows advisers to put a temporary hold (up to 25 days) on distributions from an elder account if elder abuse is suspected. The Senior Safe Act grants immunity from culpability when financial employees are reporting elder abuse.

XYZ Inc., an S corporation, has $200,000 in income this tax year, including $100,000 in cash dividends from other corporations. As far as XYZ Inc. is concerned, which one of these amounts, if any, is subject to the federal corporate income tax? A)$130,000 B)$200,000 C)$0 D)$100,000

C The S corporation is, for tax purposes, a "conduit"; that is, an entity that pays no income taxes but merely funnels corporate earnings (or losses or credits) to its shareholders. The individual shareholders pay taxes on these earnings at their personal tax rates.

Brian has income from a single-member LLC of $150,000. He also has a flow-through of net income from an S corporation of $50,000. What is the amount of his self-employment tax liability? A)$30,600 B)$21,194 C)$21,092 D)$22,950

C The flow-through of net income from an S corporation is not subject to the self-employment tax. Actual earnings$150,000Less 7.65%(11,475)Net earnings from self-employment$138,525LESSMaximum amount of SE earnings subject to 15.3% tax(137,700)Excess over wage base$825Medicare rate2.9%$24($137,700 × 15.3%)$21,068$21,092 Or, as an alternative: Self-employment income$150,000Less 7.65% of S/E income($11,475)Self-employment earnings subject to self-employment taxes$138,525 Social Security Tax Calculation (OASDI)Medicare Tax Calculation (HI)Earnings subject to self-employment tax$137,700$138,525Times tax rate 12.4% (OASDI tax rate) = 2.9% (HI tax rate) = Equals self-employment taxes $17,075 (Social Security taxes) $4,017 (Medicare taxes) Total self-employment tax$21,092 Also remember that one-half of the self-employment tax is deductible as an adjustment to income.

Concerning the wealth allocation framework, which allocation would suit a more risk-tolerant high net worth investor? A)40% main diversified assets/50% liquid assets/10% risky assets B)75% main diversified assets/10% liquid assets/15% risky assets C)60% main diversified assets/20% liquid assets/20% risky assets D)45% main diversified assets/20% liquid assets/35% risky assets

C The highest percentage of risky investments, in addition to a high percentage in the main portfolio, creates the riskiest portfolio in the wealth allocation framework. Suggested minimums and maximums for the wealth allocation framework are as follows: 20% is the largest suggested allocation to risky assets, 70% is the suggested maximum for the main portfolio (50% is the suggested minimum), and 20% is the suggested minimum for liquid assets.

Which of these is a characteristic of an unfunded excess benefit plan? A)The plan must comply with the reporting requirements, but not the disclosure requirements under ERISA. B)The plan must comply with both the disclosure and reporting requirements under ERISA. C)The plan generally need not comply with either the disclosure or reporting requirements of ERISA. D)The plan must comply with the disclosure requirements, but not the reporting requirements under ERISA.

C Unfunded excess benefit plans need not comply with ERISA disclosure or filing requirements; however, excess benefit plans that are funded do need to comply. Top-hat plans and SERPs also are subject to some reporting and disclosure requirements under ERISA.

Molly owns the following property: A house owned in fee simple A joint bank account with her husband A life insurance policy whereby she is the insured and her husband is the beneficiary A solely owned vehicle Molly has a will that leaves all of her property to her husband, except for her vehicle, which is to be distributed to her neighbor. Unfortunately, her neighbor has since disappeared and cannot be located anywhere, and her will does not provide for a residuary/contingent beneficiary. Which one of the following statements correctly distinguishes these testamentary transfers? A)The house and the vehicle will be subject to intestacy proceedings, and the bank account and the life insurance policy will be subject to probate. B)The house, the bank account, and the vehicle will be subject to probate. C)The house will be subject to probate, the bank account and the life insurance are will substitutes, and the vehicle will be subject to intestacy. D)The house and the vehicle will be subject to probate and will pass pursuant to the will, the bank account will be subject to intestacy, and the life insurance policy is a will substitute.

C The house will be subject to probate and distributed pursuant to the will since it is owned in fee simple. The joint bank account and life insurance policy are will substitutes. The vehicle will be subject to intestacy since the will does not provide for a residuary/contingent distribution.

Which statement is NOT correct? A)A gift tax liability is reported on Form 709 and is due by April 15th of the year following the gift. B)Gift splitting is available for lifetime transfers, but not for transfers at death. C)The annual exclusion is available only for lifetime transfers. D)A lifetime transfer will allow a donee to receive a stepped-up income tax basis in the gifted asset.

D A lifetime transfer will allow a donee to receive the carryover basis from the donor, not a stepped-up basis. Gift splitting and the annual exclusion up to $15,000 are available only for lifetime transfers. Gifts are reported on the Form 709 and are due by April 15th of the year following the gift.

First-to-die life insurance policies, as used in a personal situation, are primarily structured to A)provide funds for a buy-sell or cross-purchase agreement. B)provide funds to pay estate taxes. C)cover disability-related business overhead expenses. D)cover a mortgage or college education fund.

D Among the personal uses for a first-to-die policy is to fund a mortgage payoff for the survivor or to perhaps fund college education for the dependent children. Funding a buy-sell is a business use of a first-to-die policy. Disability-related overhead expenses would be covered under a business disability policy. A second-to-die policy is primarily used to help pay estate taxes.

Which of these statements might be found in an investment policy statement? A)The portfolio will be reviewed annually and rebalanced at that time. B)Both spouses will discuss investment decisions, but the adviser will make final decisions for the portfolio. C)The adviser-determined inflation rate is 2.4%, to be reviewed if rates are increasing. D)Loss limits are 15% in a single year and 5% over a five-year period.

D An investment policy statement (IPS) contains the client's financial goals, a clear statement of risk parameters and asset allocation, agreement on underlying assumptions, loss limits, and other information decided on solely by the client. An adviser provides information, but leaves the final decisions to the client, even those regarding an assumed inflation rate for the planning horizon. Portfolios follow the IPS guidelines and should be reviewed at least annually and often more frequently.

Which of these is a characteristic of retirement income benefits received from a defined contribution plan? A)Specified in the plan document B)Determinable in advance C)Fixed once distributions begin D)Variable depending upon several factors

D Defined contribution plans typically provide for an employer contribution but, unlike defined benefit plans, do not specify the benefit that will be paid from the plan. The amount of a participant's retirement benefit is based on the value of the participant's account balance at retirement. In a defined contribution plan, each participant's plan funds are maintained in an individual account.

Which industry would be expected to perform well in a recession? A)Plastics B)Trucking C)Machinery Manufacturers D)Drugs

D Drug industry stocks generally perform well in a recession because the need for drugs exists regardless of the economy being in a recession. Other consumer staple stocks, such as food, cosmetics, and so-called "sin" stocks such as tobacco and liquor, can also do well, along with utility stocks.

During the current tax year, Adriane has a short-term capital loss of $40,000 from the sale of securities. She also has a long-term capital gain from the sale of a rare painting of $30,000 and has unrecaptured Section 1250 income of $80,000. Adriane is in the 35% marginal income tax bracket. What is the tax result of her capital transactions? A)$70,000 capital gain taxed at 28% B)$40,000 capital gain taxed at 25%, $30,000 capital gain taxed at 25% C)$70,000 capital gain taxed at 35% D)$70,000 capital gain taxed at 25%

D Her short-term capital loss of $40,000 is first used to offset the collectibles gain (potential tax rate of 28%) of $30,000. This leaves a short-term capital loss of $10,000. This is next used to offset the unrecaptured Section 1250 gain (25% gain). The $10,000 loss partially offsets the $80,000 of unrecaptured Section 1250 income, taxed at a maximum 25% rate. This leaves $70,000 of unrecaptured Section 1250 income to be taxed at a rate of 25%.

Karen is an employee of a corporation that sponsors a profit sharing plan. Over the years, the company contributed 2,500 shares of its stock to Karen's plan account. The total value of these shares at the time they were contributed to her account was $60,000. She is very happy to find that the 2,500 shares are now worth $500,000. Karen is at retirement age, and is trying to determine her best course of action. Which of these options would be appropriate advice for Karen's situation? A)None of these options are appropriate for her situation. B)Karen can roll the shares of stock to an IRA to avoid current taxation. C)Karen could split the distribution over two tax years to keep from taking a large tax hit in a single year. D)Karen could take a lump-sum distribution and utilize net unrealized appreciation treatment.

D If Karen utilizes NUA treatment, she is taxed on the cost, or basis, of the securities received, at ordinary income rates at the time of distribution. Thus, Karen would include $60,000 in her ordinary income for the current tax year. The NUA of $440,000 is not taxed until Karen sells the shares. When these shares are sold, the NUA that has been deferred is taxed as a long-term capital gain.

Which of these is NOT a true statement regarding a life insurance policy that is classified as a modified endowment contract (MEC)? A)Any cash withdrawal may be subject to may be subject to a 10% early withdrawal penalty. B)All or part of the death benefit must be returned to the grantor. C)The MEC status cannot be reversed by underfunding the policy for the next seven years. D)The life insurance benefit is no longer excluded from income taxation.

D MEC status does not change the nature of the tax-free death benefit.

What is the type of private equity that is a hybrid since it is oftentimes debt with embedded stock warrants to purchase stock? A)Distressed debt B)Leveraged buyouts C)Venture capital D)Mezzanine debt

D Mezzanine debt is a hybrid investment since it is debt or preferred stock with an equity component, typically embedded stock warrants, to purchase stock.

Kevin, a 56-year-old corporate executive, wants advice as to when he can retire. His current salary is $240,000 and he receives an annual bonus of $300,000; he also has annual stock options and restricted stock awards valued at $100,000. His employer contributes to a cash balance pension plan and matches his contributions to a 401(k). Kevin owns a whole life insurance policy with a $500,000 death benefit and is considering the purchase of a term policy with a $2 million death benefit. He and his wife, Anne, age 55, believe they can live on an after-tax income of $180,000. Assume a federal income tax rate of 32%. Kevin's nonqualified stock options are as follows: 2,000 shares, strike price $34 5,000 shares, strike price $30 Current stock price: $65 Kevin has decided to exercise the above stock option awards, which will expire in the next two years. Assuming he exercises them today, what is his tax liability? A)$61,660 B)$58,250 C)$35,550 D)$75,840

D Nonqualified stock options are taxed on the "bargain element" (difference between the market price and the strike price) as ordinary income when exercised. (Market Price − Strike Price) × Number of Shares × Tax Rate = Tax Therefore, on the first NQ grant of 2,000 shares the tax is: ($65 − $34) × 2,000 shares = $62,000 in ordinary income At a 32% tax rate the tax is $62,000 × .32 = $19,840.00 And On the second NQ grant of 5,000 shares the tax is: ($65 − $30) × 5,000 shares = $175,000 in ordinary income At a 32% tax rate the tax is $175,000 × .32 = $56,000.00 Total tax therefore is $19,840.00 + $56,000.00 = $75,840.00

Which of these are characteristics of the Sharpe performance evaluation ratio? It adjusts the return for variability by using standard deviation as the measure of risk. It assumes that the portfolio being evaluated is well diversified. Both alpha and beta appear in the formula for the ratio. It indicates by how much the realized return differs from the return required by the capital asset pricing model. A)II and III B)III and IV C)I and II D)I only

D Options II, III, and IV are true of Jensen's alpha; option II is true of the Treynor ratio. The Sharpe ratio uses standard deviation as the measure of risk, which takes into account total risk, both systematic and unsystematic.

Which statement comparing the fiduciary and suitability standards is NOT correct? A)It is possible for an adviser to be regulated under both the suitability and fiduciary standards. B)The suitability standard is primarily rules-based whereas the fiduciary standard primarily principle-based. C)The primary regulators for the suitability standard are the SEC, FINRA, and the states, and the primary regulators for the fiduciary standard are the SEC, states, and DOL. D)Regulation Best Interest requires both broker-dealers and investment advisers to look out for the best interest of the client.

D Regulation Best Interest applies only to broker-dealers and requires them to look out for the best interest of the client. It does not apply in investment advisers, who are regulated under the Investment Adviser Act. The SEC has provided additional guidance recently to investment advisers in SEC Release IA-5248.

Which of these is a correct statement? A)Standard deviation measures only unsystematic risk. B)A portfolio that is diversified eliminates systematic risk. C)An investment with a low beta means that investment has low risk. D)Beta measures only systematic risk.

D Standard deviation measures total risk; that is, both unsystematic and systematic risk. Beta measures systematic risk only. A diversified portfolio eliminates unsystematic risk. A low beta does not necessarily mean low risk because if the correlation between the asset and the market is low, the beta will be low. For example, a gold fund is not low risk but it will have a low correlation with the stock market, thereby giving it a low beta.

Which statement regarding a self-cancelling installment note (SCIN) is NOT correct? A)If the buyer pays a proper premium for the right of cancellation of the note at the seller's death, the seller's estate will not have to report any unpaid installments at death in the gross estate. B)This technique is a type of installment sale whereby the purchaser's obligation to pay the note will be cancelled at the seller's death. C)The seller will have to report all gain due on the sale if the purchaser makes all payments due under the note. D)The term of the SCIN may exceed the holder's life expectancy.

D The term of the SCIN must not exceed the holder's life expectancy. A SCIN does relieve the purchaser of their obligation to pay the note at the seller's death if the seller dies prior to the note being paid in full. The seller will have to report all gain due on the sale if the purchaser makes all payments due under the note. The premium payment enables the seller's estate to not report unpaid installments at death in the gross estate.

A funded deferred compensation plan: A)will provide tax deferral for an employer. B)must be made available to all employees. C)will provide an immediate deduction to an employer. D)will be taxable to an employee if nonforfeitable.

D Unless the plan benefits are subject to substantial risk of forfeiture provisions, contributions to a funded nonqualified deferred compensation plan will be constructively received by the participants and subject to tax, and the employer would be allowed to take a tax deduction. Oftentimes funded deferred compensation is subject to substantial risk of forfeiture, meaning the employee will not be taxed, and the employer will not get a tax deduction, until the employee becomes vested.