CEP Investment Strategies 3

Question 1

A financial advisor suggests using a 'collar strategy' on concentrated employer stock. What does a collar involve?

Accepted Answer

Buying put options and selling call options to bracket the stock price

Answer

A collar limits both downside risk (via a purchased put) and upside gain (via a sold call), protecting the value of a concentrated position within a defined price range.

Question 2

Which of the following is a primary benefit of using an exchange fund to diversify a concentrated stock position?

Accepted Answer

It allows the investor to diversify without triggering an immediate taxable event

Answer

An exchange fund allows an investor to contribute appreciated shares and receive a partnership interest in a diversified pool, deferring the capital gain that would otherwise arise from an outright sale.

Question 3

When must a Section 83(b) election be filed after receiving restricted property subject to a substantial risk of forfeiture?

Accepted Answer

Within 30 days of the transfer

Answer

An 83(b) election must be filed with the IRS within 30 days of the date of transfer of the restricted property; missing this deadline permanently forfeits the election.

Question 4

An employee exercises NQSOs and immediately sells the acquired shares. Which tax rates apply to the transaction?

Accepted Answer

The spread is taxed as ordinary income; any additional post-exercise gain is capital gain

Answer

For NQSOs, the spread at exercise is ordinary compensation income (subject to payroll taxes), and any subsequent appreciation from exercise price to sale price is a short- or long-term capital gain.

Question 5

What is the purpose of a 'Rule 144' filing when a company affiliate sells restricted or control securities?

Accepted Answer

To satisfy volume, holding period, and manner-of-sale conditions allowing affiliate sales without full registration

Answer

Rule 144 provides a safe harbor for affiliates and holders of restricted securities to sell without registration, provided they comply with holding period, volume limits, current public information, and manner-of-sale requirements.

(CEP) Certified Equity Professional Practice Test

(CEP) Certified Equity Professional Practice Test

CEP Investment Strategies 3