CFA Private Wealth Management 2

Question 1

Which of the following investment accounts provides tax-DEFERRED growth in the United States?

Accepted Answer

Traditional IRA

Answer

A Traditional IRA provides tax-deferred growth, meaning contributions may be tax-deductible and all taxes are paid only upon withdrawal, unlike a Roth IRA which offers tax-free growth.

Question 2

What is 'asset location' in the context of tax-efficient portfolio management?

Accepted Answer

Placing different asset types in accounts with the most favorable tax treatment for each

Answer

Asset location involves strategically placing assets in taxable versus tax-advantaged accounts to minimize the overall tax burden, such as placing tax-inefficient assets in tax-sheltered accounts.

Question 3

Which of the following BEST describes the strategy of 'tax-loss harvesting'?

Accepted Answer

Selling losing positions to realize capital losses that offset gains and reduce tax liability

Answer

Tax-loss harvesting involves selling securities at a loss to offset realized capital gains, thereby reducing the current tax liability while maintaining the desired portfolio exposure through a similar replacement security.

Question 4

In estate planning, what is the primary advantage of the 'step-up in cost basis' rule for inherited assets in the United States?

Accepted Answer

It resets the cost basis to fair market value at death, eliminating embedded capital gains tax

Answer

The step-up in basis rule resets an inherited asset's cost basis to its fair market value at the date of death, effectively eliminating the capital gains tax liability on appreciation that occurred during the decedent's lifetime.

Question 5

Which trust structure allows the grantor to retain full control of assets and revoke or modify the trust during their lifetime?

Accepted Answer

Revocable living trust

Answer

A revocable living trust allows the grantor to maintain complete control of assets and modify or revoke the trust at any time during their lifetime, though it does not provide estate tax reduction benefits.

CFA Practice Test

CFA Practice Test

CFA Private Wealth Management 2