AWMA Exam 3 QUESTIONS WITH COMPLETE 100% VERIFIED SOLUTIONS 2024/2025, Exams of Business Administration

Download AWMA Exam 3 QUESTIONS WITH COMPLETE 100% VERIFIED SOLUTIONS 2024/2025 and more Exams Business Administration in PDF only on Docsity! AWMA Exam 3 QUESTIONS WITH COMPLETE 100% VERIFIED SOLUTIONS 2024/2025 The top three specialty areas in which high net worth individuals seek advice include all of the following except A)retirement planning. B)tax planning. C)estate planning. D)investment planning. A) The top three specialty areas in which high net worth individuals seek advice are tax, estate, and investment planning. Retirement planning is not as necessary, but may be a minor concern. Mod 1 Concerning behavioral biases and as compared to the mass affluent, high net worth individuals have A) more money-avoidance beliefs. B)less of a tendency for loss aversion. C)fewer money status beliefs. D)more external locus of control. B) The wealthy are more likely than other investors to have a positive view about money. As compared to the mass affluent (with more money biases and some found to be earning 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 two factors: a drive to increase their wealth and a commitment to follow their passions. Mod 1 In the wealth allocation framework, the liquid asset allocation would most likely include which one of the following assets? A)Dividend stocks B)Preferred stocks C)Managed global bonds D)Annuities D) This part of the portfolio contains forms of insurance, such as insurance, home mortgage, annuities, hedging, direct gold, and cash and cash equivalents. Mod 1 In the wealth allocation framework, the risky asset allocation would most likely include A) investment real estate. B)hedges. C)large-cap ETFs. D)balanced mutual funds. A) Risky assets can include many different vehicles, such as investment real estate, a small business, concentrated stock and stock options, global small company stocks, some commodities, aggressive inflation protectors, and out of the money calls/puts on currencies or bonds. Mod 1 In the wealth allocation framework, the main diversified asset allocation would most likely include A)annuities. B)hedges. C)managed global bonds. D)home mortgage C) The main diversified assets category, the largest portion of the portfolio, is still relatively low risk; it can contain managed income investments like dividend stocks, preferred stocks, own company stock (unless risky), and managed global bonds. Mod 1 Concerning the wealth allocation framework, which one of the following portfolio structures is best recommended for a risk averse high net worth investor? A)20% liquid assets/75% main diversified assets/5% risky assets B)30% liquid assets/50% main diversified assets/20% risky assets C)25% liquid assets/60% main diversified assets/15% risky assets D)45% liquid assets/50% main diversified assets/5% risky assets D) In the wealth allocation framework, risky investments for a risk averse high net worth investor are recommended to be only 5% to 10% of the portfolio. A minimum of 20% of liquid assets is recommended for the portfolio allocations of all risk levels. The main portfolio should be only 40%-70% of total assets. Mod 1 In the wealth allocation framework, human capital is in which one of the following portfolio "buckets"? A) Hedging assets B)Main diversified assets A)Event risk B)Liquidity risk C)Financial risk D)Business risk C) Financial risk is the degree to which a company utilizes debt to finance its operations. Mod2 Investors who want to bear the least amount of risk should acquire stocks with beta coefficients A)less than 1.0. B)less than 0.5. C)greater than 1.5. D)greater than 1.0. B) When seeking investments that have the least amount of risk, the lowest beta should be selected. Mod2 If a security has an average return of 14.2% and a standard deviation of 8.4, then A)the security's annual volatility can be expected to be within a range approximately 8.4% above and 8.4% below the current fair market value. B)the security's returns can be expected to be between 5.8% and 22.6% approximately 68% of the time. C)the security's returns can be expected to never be negative. D)the security's returns can be expected to be between 8.4% and 14.2% approximately 95% of the time. B) This security can be expected to have a return that does not range beyond one standard deviation on either side of its average return approximately 68% of the time. Mod2 Which of the following are true regarding Jensen's alpha? I.It compares the risk to an appropriate benchmark. II.It is a stand-alone measure of risk adjusted performance. III.Beta is the relevant risk measurement being used. IV.The greater the positive (negative) alpha, the better (worse) the portfolio manager performed on a risk-adjusted basis. A)II and IV B)I and III C)I, II, and III D)II, III, and IV D) Alpha is a stand-alone or absolute measurement, and not a relative measure of risk adjusted return. All other statements are correct. Mod2 Your client is interested in investing in euro-denominated corporate bonds. Which of the following systematic risks should you discuss with her before making such an investment? I.Exchange rate risk II.Reinvestment risk III.Interest rate risk IV.Credit risk A) II and III B) I, II, and III C) II, III, and IV D) I and II B) Recall the P.R.I.M.E mnemonic for systematic (nondiversifiable) risk. Credit risk is a valid risk, but is not a systematic risk, as it can be diversified away by including companies with lower credit risk. Mod2 Which one of the following is a better comparative measure of a mutual fund portfolio manager's performance? A)Dollar-weighted returns because cash flows are taken into consideration B)Time-weighted returns because cash flows are taken into consideration C)Time-weighted returns because cash flows are not taken into consideration D)Dollar-weighted returns because cash flows are not taken into consideration C) Dollar-weighted returns take cash flows into consideration and are a better measure of investor performance. Time-weighted returns, on the other hand, negate the effects of contributions and withdrawals made by investors and are therefore a better measure of a manager's performance. Mod2 Five years ago, Robert received an inheritance of his grandfather's employer stock worth $125,000. You have analyzed Robert's portfolio and advised him to sell most of the stock because it represents over half of his total net worth. Robert says that he cannot carry out your recommendation because it is his "grandfather's stock" and is separate from his other investments. This is an example of A)rationalization. B)availability. C)hindsight bias. D)mental accounting. D) Mental accounting is the separation of finances into sections based on an investor's subjective reasons, such as funds from a certain source or those to be used for a certain purpose. Mod 3 A client who is making judgments based on stereotypes (such as not trusting a certain industry because of past stock losses in that industry) is exhibiting which behavioral finance bias? A)Overconfidence B)Availability C)Hindsight D)Representativeness D) Representativeness bias involves making judgments based on stereotypes. Mod 3 Which one of the following is NOT a typical key element that separates hedge funds from mutual funds? A)Illiquid securities are often used B)Derivatives are used extensively C)Many are broadly diversified D)Leverage is often used C) Hedge funds are private investment vehicles that tend to be more heavily concentrated than mutual funds. They often use leverage, use derivatives, employ narrow investment strategies, and invest in nonpublic and illiquid securities. Mod 3 The CAIA divides hedge funds into four main categories. Which of the following strategies is NOT one of these four main approaches? A)Corporate restructuring B)Opportunistic C)Market directional D)Mezzanine financing D) The four main hedge fund categories are market directional, corporate restructuring, convergence trading, and opportunistic. Mezzanine financing is a private equity strategy. Mod 3 Which one of these various types of potential private equity investments would generally be considered the most risky when compared to the others? A)Distressed debt B)LBOs C)a directors and officers insurance policy. D)a liability umbrella policy. C) Since liability umbrella policies exclude coverage for these actions, high net worth clients who serve on boards should be protected by directors and officers (D&O) insurance. The organization itself may have an employment practices liability policy as well as a D&O policy. If so, those serving on the board should obtain a copy and review it to ensure they are insured adequately. If not, they should purchase their own. Homeowners policies would not provide coverage either. Even volunteering for the role, as many high net worth clients do, still exposes the board member to risk. Mod 4 When traveling overseas, which policy that provides coverage in the United States also can provide coverage in the foreign country? A)A health insurance policy B) A homeowners policy C)An inland marine policy D)An automobile policy C) Auto, home, and health insurance policies only provide coverage in the U.S. and perhaps Canada and parts of Mexico. Overseas, only an inland marine policy with worldwide coverage included can protect assets overseas as it would in the U.S. Mod 4 Which of the following are common reasons to value a closely held business? I.For estate planning II.In the situation of a divorcing business owner III.For calculation of annual business property taxes that are due IV.In order to establish the value of a gift or charitable contribution of shares A)I and II B)I only C)I, II, and IV D)II, III, and IV C) Item III is not a valid reason to obtain a business valuation. Mod 4 The tax benefits related to an ESOP include the following, except A)earnings within the ESOP grow tax-deferred and are only taxed at distribution. B)the seller of S corporation shares are able to defer a capital gain event through the Section 1042 provisions. C)the earnings of S corporation shares held in the ESOP are not subject to federal income taxes. D)the company is able to deduct contributions into the ESOP. B) Sellers of C corporation shares are able to defer capital gains by reinvesting into allowable securities under the Section 1042 provisions. Sellers of S corporation shares do not have this option. Mod 4 The following are requirements of S corporations, except A)they may have multiple classes of stock. B)they must be a domestic corporation. C)they have no more than 100 shareholders. D)shareholders are limited to individuals, certain trusts, and estates. A) S corporations are limited to one class of stock. Mod 4 Which of the following are unique tax benefits for C corporations? I. An income tax exclusion for the cost of providing the first $75,000 of group life insurance II. An income tax deduction for meals and lodging furnished for the convenience of the employer III. An income tax exclusion for dividends paid to shareholders IV. An employee income tax exclusion for benefits received from an accident or health plan sponsored by the employer A) I only B) III and IV C) I and II D) II and IV D) Only the first $50,000 of group life insurance coverage is deductible to the corporation. Corporations do not receive a deduction for dividend distributions, but corporations that own another company's stock can exclude 70% of the dividends received. Mod 4 The defined benefit plan benefit formula that provides $250 per month of service, 30 years maximum is known as a A)unit benefit percentage formula. B)flat benefit or fixed benefit percentage formula. C)unit benefit dollar formula. D)flat benefit or fixed benefit dollar formula. C) A set monthly benefit multiplied by the number of years of service is a unit benefit dollar formula. Mod 4 The retirement plan that would allow an older, high income, self-employed individual to maximize their retirement savings would be a A) solo 401(k) plan. B)a simplified employee pension (SEP) plan. C)defined benefit plan. D)a SIMPLE IRA plan. C) The solo defined benefit plan would allow for the greatest annual contribution. The annual contribution is actuarially determined and a small business owner should have sustainable income of at least $250,000 per one source. Mod 4 Grayson's 2019 income tax return, which was for a full year, showed an AGI of $320,000 and a tax liability of $66,000. He estimates his 2020 tax to be $75,000 and his total wage withholding to be $50,000. What minimum amount of estimated tax payments must Grayson pay (in equal quarterly installments) for 2020? A)$32,600 B)$0 C)$17,500 D)$22,600 C) Grayson should pay $17,500 of estimated tax payments for the year—these are required to be paid in equal quarterly installments. The amount withheld ($50,000) is compared to the lesser of (1) 90% of the 2020 tax ($67,500) or (2) 110% of the 2019 tax ($72,600). The 110% of the prior year rule is due to the prior year's AGI in excess of $150,000. Mod 5 Which one of the following is a viable strategy for reducing or avoiding the alternative minimum tax? A) Maximizing the deductible state and local taxes B) Investing in private-activity municipal bonds issued in 2012 C) Investing in a private, offshore holding company D) Utilizing a disqualifying disposition D) The use of a disqualifying disposition eliminates the preference item for the bargain element on the exercise of an incentive stock option. Mod 5 Which one of the following statements is correct regarding the qualified charitable distribution (QCD) rules? A) The donor is entitled to a reduced charitable contribution deduction. C) the taxpayer must be over age 72. D) the taxpayer must be over age 59½. B) The amounts contributed to the charitable organization can be used to satisfy the owner's required minimum distribution (RMD) for the year in which it is withdrawn, up to $100,000. Taxpayers age 70½ and up are eligible to make qualified charitable distributions. Mod 5 Assume that a taxpayer has a self-employment tax liability of $21,000 and an additional Medicare tax of $150. What is the amount of the adjustment to income as a result of these additional taxes? A) $10,500 B) $12,516 C) $21,000 D) $10,575 A) A taxpayer is allowed to deduct one-half of his or her self-employment tax liability as an adjustment to income. The adjustment is computed without regard to the additional Medicare tax. Mod 5 PHD Inc. is a software engineering firm traded in the OTC market. The firm's stock has been rising steadily over the last six months. The firm's president, Will Gaits, is leery of being bought out by a competitor, since he has heard rumors about this. Because of Will's value to the firm, the board of directors wants to provide additional incentive to keep Will on board now. Which one of the following would best serve Will? A) Incentive stock option B) Stock appreciation right C) Tin parachute D) Golden parachute D) A golden parachute would be ideal for Will's situation, given the probability of a takeover. His situation is the reason for such plans. He may not be employed long enough to take full advantage of a stock appreciation right or incentive stock option. Tin parachutes are for middle management. Mod 6 Which of the following is a tax preference item or adjustment for purposes of the alternative minimum tax? A) All medical expenses B) Tax-exempt interest on all municipal bonds C) Bargain element on exercise of an incentive stock option D) Home mortgage interest C) The bargain element on the exercise of an incentive stock option is an AMT preference item. (The bargain element is the difference between the fair market value of the stock and the exercise price on the date that the option is exercised. In essence, the bargain element or "spread" represents the amount of compensation that is included as a preference item for AMT purposes.) Most medical expenses that are deducted for regular tax purposes are allowed for AMT purposes. In fact, for taxpayers 65 or older, the floor on medical expenses is the same for regular tax and AMT purposes—10% of AGI. Only interest from private-activity municipal bonds is a preference item. Note that interest from private-activity municipal bonds issued in 2009 and 2010 is not a preference item for AMT purposes. Home mortgage interest is allowed for both regular tax and AMT.Mod 6 All of the following describe contrasting characteristics of qualified and nonqualified plans except A) the requirement that the plan must benefit a specific percentage of nonhighly compensated employees. B) the ability to defer the employee's tax liability until actual receipt of the funds at retirement. C) the availability of rollover provisions to preserve tax deferral after a distribution. D) the timing of the tax deductibility of the employer's contribution to the plan. B) Both qualified and nonqualified plans enable the employee to defer taxation on the plan funds until retirement. Mod 6 Which of the following statements accurately describe limits that apply to qualified defined contribution plans? I. The employer contribution to a profit sharing plan is limited to 25% of covered payroll. II. The employer's contributions to all defined contribution plans is a combined limit of 25% of covered payroll. III. "Annual additions" are limited to the lesser of 25% of the participant's compensation or $57,000 (for 2020). IV. "Annual additions" are aggregated and limited to the lesser of 100% of the participant's compensation or $57,000 (for 2020) for all defined contribution plans of the employer or related employers. A) II and IV B) II, III, and IV C) I, II, and IV D) I and II C) The annual additions limit (the lesser of 100% of pay or $57,000 for 2020) applies to additions to a participant's account in all types of defined contribution plans. The employer deduction limit is a separate limit; it is 25% for profit sharing plans, money purchase plans, target plans, and multiple defined contribution plans. The annual additions limit for a participant in multiple defined contribution plans of the employer or related employers must also be aggregated. Mod 6 Larry is an employee of the Binder Box Co. Larry began working for Binder in 1999 as an executive in charge of the production department. As part of Larry's employment contract, Binder contributes to a separate account for Larry's benefit an amount equaling 10% of his salary each year. The terms of this nonqualified plan state that the contribution of these amounts will cease and Larry will have no rights to the income if he dies or becomes permanently disabled. Otherwise, Larry is given the right to receive the deferred cash amounts upon termination of employment with Binder. This nonqualified deferred compensation plan segregates property for the benefit of Larry. Which one of the following is an income tax implication of this plan for Larry, and why? A) The employer contributions to the plan are taxable to Larry currently because they are not subject to a substantial risk of forfeiture. B) The employer contribu A) The plan has not established substantial risk of forfeiture conditions—Larry will receive the deferred amounts when he terminates with the company. (Death and disability do not establish substantial risk of forfeiture.) Mod 6 Which of the following statements accurately describe characteristics of using life insurance for the informal funding of a nonqualified deferred compensation plan? I.It represents an asset that may be purchased to fund the employer's unsecured promise to pay deferred amounts to the employee. II.It offers the advantage of being able to fund a death benefit immediately. III.It offers the advantage of various settlement options. IV.It offers the advantage of simplified administration since death proceeds are paid directly to an employee's surviving spouse or other beneficiary. A) II and IV B) I, II, and III C) I and II D) I and III B) Life insurance is used to informally fund a nonqualified deferred compensation plan because it can immediately fund a death benefit and offers several settlement options. However, the proceeds from the policy are paid to the employer. Mod 6 Which statement is NOT correct regarding a preferred stock recapitalization freeze transaction? A) One of the donor's planning goals in the recapitalization freeze is maintaining control of the business. B) If shares are gifted to other family members, they are valued as of the date of completion of the recapitalization. C) If shares are gifted to other family members, the donor may be able to claim discounts for minority interest and lack of marketability. D) If shares are gifted to other family members, the Chapter 14 rules may apply. B) Such shares would be valued as of the date of completion of the gift. Mod 7 Which one of the following constitutes the unauthorized practice of law? A) Advising a client that their will might need to be amended in light of changes in the law. B) Informing a client which assets will or will not be subject to probate. C) Advising a client that they should establish an irrevocable instead of a revocable trust. D) Advising a client as to potential "red flags" in their estate documents. C) This constitutes legal advice regarding actions that will affect the client's property or legal rights and is the unauthorized practice of law. Mod 7 Which one of these owners will NOT have their personal assets protected from business debts? A) An owner of stock in a regular C corporation B) An owner of stock in an S corporation C) An individual owner of a limited partnership interest D) An individual owner of a general partnership interest D) An individual general partner is personally liable for business debts. Mod 7 Which statement regarding portability of the deceased spousal unused exclusion amount (DSUE) is correct? A) It can be applied only to inter vivos transfers. B) It is automatic. C) It can be applied only to testamentary transfers. D) A surviving spouse may only use the DSUE amount of the last deceased spouse. D) A surviving spouse may only use the DSUE amount of the last deceased spouse. Mod 7 Which gift is exempt from gift tax? A) Payment for books for a grandchild B) Direct payment of room and board to a university for a grandchild C) Direct payment of tuition to a university for a grandchild D) Payment to a child to cover the costs of anticipated medical expenses C) Only direct payment of tuition to a university for a grandchild is exempt from gift tax. Mod 7 All of the following are disadvantages of making a lifetime gift except A) loss of control over the gifted asset. B) use of the unified exclusion, which is currently $11.58 million in 2020. C) removal of the appreciation from the estate of the donor. D) loss of the opportunity for a stepped-up basis at death of donor. C) Removal of the appreciation from the estate of the donor is an advantage, not a disadvantage. Mod 7 The grantor of an inter vivos QTIP trust A) must make a QTIP election for all assets in the trust. B) can make a partial QTIP election for assets in the trust. C) cannot retain any control of the trust after formation. D) none of the aforementioned statements are correct since a QTIP election may only be made at the death of a decedent. B) The grantor of an inter vivos QTIP trust can make the QTIP election for less than all assets in the trust. Such an election is called a "partial" QTIP election. The executor of a decedent's estate may make a testamentary QTIP election if deemed appropriate. Mod 7 A qualified domestic trust (QDOT) A) is a technique for dividing retirement assets upon death or divorce. B) is used for deferring estate taxes on property given to a non-U.S. citizen spouse at the donor's death. C) requires the marital transfer to be only in the form of an estate trust. D) is primarily used to receive the gift tax marital deduction for a gift to a non-U.S. citizen spouse. B) A qualified domestic trust (QDOT) is used for deferring estate taxes on property transferred to a non- U.S. citizen spouse at the donor's death. The form of the martial transfer may be in any form otherwise qualifying for a marital deduction including but not limited to an estate trust. Mod 7 What is the primary function of central clearing counterparties (CCPs) that have been set up as required by the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010? A) To allow government oversight B) To eliminate counterparty risk C) To regulate hedge fund transactions D) To facilitate the netting of swap contracts D) CCPs facilitate the netting of swap contracts in order to reduce systematic risk. Mod 8 The SEC commissioned a RAND study, which found that there was a great deal of confusion for investors as far as understanding the differences between A) broker-dealers and investment advisers. B) captive insurance agents and brokers. C) advisers and insurance agents. D) insurance agents and broker-dealers. A) The RAND study found that there was a great deal of investor confusion between investment advisers and broker-dealers, including confusion over their duties, the titles they use, the services they offer, and the fees they charge. Mod 8 The impartial conduct standards that were enacted by the Department of Labor as part of their Best Interest Contract Exemption (and then vacated by the court) required all of the following except A) eliminate conflicts of interest. B) give advice that is in the best interest of the client. C) charge reasonable compensation. D) do not make misleading statements. A) The impartial conduct standards required that any advice be in the best interest of the client, that any fee be reasonable, and that the adviser does not make any misleading statements. It required that conflicts of interest must be disclosed, not eliminated. Mod 8 What is the estimated annual cost of conflicted advice according to the 2015 White House report? A) 1.5% B) 0.2% C) 0.5% D) 1.0% D) The annual cost of conflicted advice is about 1% a year, according to the White House report. Various sources and other research have questioned this amount, but the general consensus is that there are