2019 CFA level 3 qbank reading 11 taxes and private wealth management in a global context questions

10/11/2018 Learning Management System Question #1 of 33 Gil Tabor, CFA, and Jan Sills, CFA, are discussing how the choice of account type a ects investment risk and the amount of that risk borne by the government via taxes Tabor says that the government bears some of the tax risk in a tax-exempt account Sills says the government bears some of the risk in a tax-deferred account before withdrawals occur With respect to these assertions: A) both Tabor and Sills are incorrect .in B) both Tabor and Sills are correct en tre C) Tabor is correct and Sills is incorrect bo ok c Question #2 of 33 If an investment is held in a tax-exempt account, then the investor bears: A) all of the investment risk B) some of the investment risk w w o m C) none of the investment risk w Question #3 of 33 An investor faces the periodic payment of investment income taxes With respect to the relationship between investment horizon and investment return, the tax drag is: A) positively related to the horizon and negatively related to the investment return B) negatively related to both the horizon and investment return C) positively related to both the horizon and investment return Question #4 of 33 https://www.kaplanlearn.com/education/dashboard/index/66a9ea0d62bb71ab495925615029a3fd/practice/qbank/24038518/quiz/83414020/print 1/11 10/11/2018 Learning Management System In applying e cient frontier analysis for an investor who uses both taxable and tax-advantaged accounts, A) no considerations need to be made because total taxes will be the same in the long run B) constraints should be imposed to account for the limits that can be put in tax-exempt accounts C) the investor should set up two separate frontiers and optimize each in accordance with in the separation theorem en tre Question #5 of 33 Assume that €125,000 is invested in a tax-exempt account What is the after-tax balance in the account after 15 years if the tax rate is 28% and the pre-tax return is 11%? bo ok c A) €598,074 B) €392,138 m C) €465,613 .o Question #6 of 33 w w If the tax rate is positive and there is periodic payment of investment income taxes, then which of the following relationships is most accurate? w A) Tax drag > tax rate B) Tax drag < tax rate C) Tax drag = tax rate Question #7 of 33 With respect to the "heavy dividend" tax regime and the "heavy interest" tax regime, which if either usually has a progressive ordinary income tax structure? https://www.kaplanlearn.com/education/dashboard/index/66a9ea0d62bb71ab495925615029a3fd/practice/qbank/24038518/quiz/83414020/print 2/11 10/11/2018 Learning Management System A) The heavy interest tax regime only B) Both C) The heavy dividend tax regime only Question #8 of 33 With respect to traders and active investors, which of the following statements is the most in accurate? at lower rates en tre A) Active investors trade less frequently than traders so that many of their gains are taxed B) Active investors trade more frequently than traders so that many of their gains are taxed at lower rates C) Active investors trade as frequently as traders but they use strategies that lead to their m Question #9 of 33 bo ok c gains being taxed at higher rates .o If an investment is held in an account that is taxed annually, the government bears: w w A) some of the investment risk B) all of the investment risk w C) none of the investment risk Question #10 of 33 An investor has €600,000 invested in equity in a TDA and €400,000 invested in bonds in a taxexempt account The relevant tax rate is 35% What is the investor's asset allocation on an after-tax basis? A) 69.8% in stocks and 30.2% in bonds https://www.kaplanlearn.com/education/dashboard/index/66a9ea0d62bb71ab495925615029a3fd/practice/qbank/24038518/quiz/83414020/print 3/11 10/11/2018 Learning Management System B) 49.4% in stocks and 50.6% in bonds C) 44.9% in stocks and 55.1% in bonds Question #11 of 33 An individual, aged 40, is currently in the 25% marginal tax bracket, and expects to be in the 15% bracket when he retires Making contributions today to a tax-deductible individual retirement account is an example of: Question #12 of 33 bo ok c C) deferring the timing of the tax payment en tre B) minimizing the amount of the tax payment .in A) both minimizing the amount and deferring the timing of the tax payment A) Exempt investors w w w C) Traders .o B) Active investors m Which type of equity investor recognizes all gains in the short term? Question #13 of 33 An investor holds the same investment in three di erent accounts Which of the following accounts will have the lowest risk? A) A TDA B) A tax-exempt account C) A taxable account https://www.kaplanlearn.com/education/dashboard/index/66a9ea0d62bb71ab495925615029a3fd/practice/qbank/24038518/quiz/83414020/print 4/11 10/11/2018 Learning Management System Question #14 of 33 Chris Manning, CFA is advising a client concerning harvesting tax losses The client expects that her tax situation will not change over the next few years She asks about incurring a given loss in the current year or waiting a few years to incur the loss She asks how the decision will a ect the total taxes she pays over her life Manning should advise her that: A) the total tax bill over her life will not change if her tax status does not change B) she should not incur the loss this year because the HIFO principle means her total taxes will be higher if she incurs the loss this year C) she should incur the loss this year because the HIFO principle means her total taxes will en tre in be lower if she does bo ok c Question #15 of 33 When highest-in- rst-out (HIFO) accounting is allowed, it is advisable for: A) an investor to liquidate the portion of a position with the highest cost basis rst, thereby minimizing current taxes m B) an investor to liquidate the portion of a position with the highest cost basis rst, thereby minimizing future taxes .o C) an investor to liquidate the portion of a position with the lowest cost basis rst, thereby w w w minimizing current taxes Question #16 of 33 Which of the following has favorable tax treatment under a " at and heavy" tax regime? A) Dividend income B) Interest income C) Capital gains https://www.kaplanlearn.com/education/dashboard/index/66a9ea0d62bb71ab495925615029a3fd/practice/qbank/24038518/quiz/83414020/print 5/11 10/11/2018 Learning Management System Question #17 of 33 Which of the following moves by a government would most likely lead to the government taking on more investment risk? A) Tax regimes cannot shift investment risk B) Moving from a common progressive tax regime to a heavy dividend tax regime C) Moving from a heavy dividend tax regime to a common progressive tax regime en tre in Question #18 of 33 In a tax-exempt account, contributions to the account are made with: A) pre-tax funds and reduce the investor’s current tax bill bo ok c B) after-tax funds and reduce the investor’s current tax bill C) after-tax funds and not reduce the investor’s current tax bill m Question #19 of 33 o With respect to active investors and the tax structure in many countries, which of the following w w is the most accurate? A) To o set their higher taxation, active investment managers must use tax-exempt w accounts B) To o set their higher taxation, active investment managers must generate higher pretax returns C) As a result of their lower taxation, active investment managers can remain in business even when they generate lower pre-tax returns Question #20 of 33 https://www.kaplanlearn.com/education/dashboard/index/66a9ea0d62bb71ab495925615029a3fd/practice/qbank/24038518/quiz/83414020/print 6/11 10/11/2018 Learning Management System The nation of Pensacola is best described as having a at and heavy tax regime Which of the following assets would be most appropriate for Pensacola investors using a TDA? A) Interest bearing, taxable bonds B) Tax-exempt bonds C) High dividend yielding stocks .in Question #21 of 33 A) reducing both current and future taxes B) saving on future taxes Question #22 of 33 bo ok c C) saving on current taxes en tre The main bene t of tax-loss harvesting is: m The tax rate is 34% An investment of $5,000 earns a pre-tax return equal to 8%, which is w w A) $8,364.00 o taxable each year What will the investment be worth in ten years after taxes? B) $8,056.00 w C) $7,124.00 Question #23 of 33 Sam Conner and Bill Pope live in di erent countries In Conner's country, there is a light capital gain tax regime In Pope's country there is a heavy capital gain tax regime They both are building diversi ed portfolios that hold non-dividend-paying growth stocks, dividend-paying stocks, and coupon-paying bonds They both have a buy-and-hold strategy Which, if either, would probably bene t the most from a tax-deferred account (TDA)? https://www.kaplanlearn.com/education/dashboard/index/66a9ea0d62bb71ab495925615029a3fd/practice/qbank/24038518/quiz/83414020/print 7/11 10/11/2018 Learning Management System A) Neither would bene t because tax-deferred accounts little to enhance the returns of diversi ed portfolios B) Conner would bene t more than Pope C) Pope would bene t more than Conner Question #24 of 33 In applying e cient frontier analysis for an investor who uses both taxable and tax-advantaged in accounts, the mean-variance optimization: en tre A) cannot simultaneously determine both the weights in the available assets and their location in the various accounts, but it can be done in a step-wise fashion Usually the i h d i d d h h l i B) would simultaneously determine both the weights in the available assets and their bo ok c location in the various accounts C) cannot simultaneously determine both the weights in the available assets and their location in the various accounts, but it can be done in a step-wise fashion Usually the i d i d d h h i h m l o Question #25 of 33 for: w w Among global tax regimes, the common progressive tax regime has a favorable tax treatment w A) interest income, dividend income, and capital gain income B) interest income and dividend income but not capital gain income C) dividend income and capital gain income but not interest income Question #26 of 33 Which of the following most accurately describes the process for adjusting the returns when applying e cient frontier analysis for an investor who uses both taxable and tax-advantaged accounts? https://www.kaplanlearn.com/education/dashboard/index/66a9ea0d62bb71ab495925615029a3fd/practice/qbank/24038518/quiz/83414020/print 8/11 10/11/2018 Learning Management System A) Accrual equivalent before-tax returns would be substituted for after-tax returns and after-tax risk would be substituted for before-tax risk B) Accrual equivalent after-tax returns would be substituted for before-tax returns and after-tax risk would be substituted for before-tax risk C) Accrual equivalent before-tax returns would be substituted for after-tax returns and before-tax risk would be substituted for after-tax risk .in Question #27 of 33 An investor who lives in a country with a at tax regime is trying to decide whether to open a en tre tax-deferred account or a tax-exempt account for retirement savings The investor would: A) be indi erent between the two accounts as long as the at tax rate does not change B) choose a tax exempt account over a tax-deferred account if the investor thought her bo ok c income would be lower after retirement C) choose a tax exempt account over a tax-deferred account if the investor thought her m income would be higher after retirement w w o Question #28 of 33 Assume that €125,000 is invested in a TDA What is the after-tax balance in the account after 15 w years if the tax rate is 28% and the pre-tax return is 11%? A) €392,138 B) €430,613 C) €598,074 Question #29 of 33 https://www.kaplanlearn.com/education/dashboard/index/66a9ea0d62bb71ab495925615029a3fd/practice/qbank/24038518/quiz/83414020/print 9/11 10/11/2018 Learning Management System On a graph where the risk is on the horizontal axis and the returns are on the vertical axis, the existence of taxes on investment returns would probably shift the mean-variance optimization portfolio: A) down only, and there would not be a shift left or right B) down and to the right C) down and to the left .in Question #30 of 33 en tre Of traders, active investors, and passive investors, which probably forgo the most tax advantages of equity? A) Passive investors C) Traders .o m Question #31 of 33 bo ok c B) Active investors w w The tax drag from both longer investment horizons and higher investment returns: A) are unrelated, and each has a linear relationship with cash drag that is independent of the other w B) have a multiplicative e ect, so that the tax drag amount increases rapidly as the investment horizon and the returns increase C) have an o setting e ect, so the tax drag can be zero in some cases where the investment horizon and returns are greater than zero Question #32 of 33 A stock is expected to increase in value from $500 to $1,000 over a ve-year period The applicable capital gains tax rate is 28% What is the expected after-tax value in ve years? https://www.kaplanlearn.com/education/dashboard/index/66a9ea0d62bb71ab495925615029a3fd/practice/qbank/24038518/quiz/83414020/print 10/11 10/11/2018 Learning Management System A) $781.00 B) $552.00 C) $860.00 Question #33 of 33 All else being equal, which of the following investors will have the highest future in accumulations? A) An active investor en tre B) A trader w w w o m bo ok c C) A passive investor https://www.kaplanlearn.com/education/dashboard/index/66a9ea0d62bb71ab495925615029a3fd/practice/qbank/24038518/quiz/83414020/print 11/11 ... regime has a favorable tax treatment w A) interest income, dividend income, and capital gain income B) interest income and dividend income but not capital gain income C) dividend income and capital... taxable and tax-advantaged accounts? https://www.kaplanlearn.com/education/dashboard/index/6 6a9 ea0d62bb71ab49592561502 9a3 fd/practice /qbank/ 24 038 518/quiz/ 834 14020/print 8 /11 10 /11/ 2018 Learning... https://www.kaplanlearn.com/education/dashboard/index/6 6a9 ea0d62bb71ab49592561502 9a3 fd/practice /qbank/ 24 038 518/quiz/ 834 14020/print 4 /11 10 /11/ 2018 Learning Management System Question #14 of 33 Chris Manning, CFA is advising a client