Investment Policy & Planning Flashcards

A tenured professor with a very stable salary has human capital that resembles which asset?

Answer: Bonds

Stable, low-risk labor income behaves like a bond, so the financial portfolio can hold more equities.

What is the main tax advantage of a Roth IRA compared with a traditional IRA?

Answer: Qualified withdrawals are tax-free

Roth contributions are made after tax, and qualified distributions are entirely tax-free.

An executive holds a large, low-basis stock position and wants diversification without triggering immediate capital gains tax. Which strategy fits?

Answer: Contributing the shares to an exchange fund

An exchange fund pools concentrated positions from many investors and provides diversification without an immediate taxable sale.

Under typical asset location guidance, which holding belongs in a tax-deferred account?

Answer: Taxable high-yield corporate bonds

Assets whose returns are taxed as ordinary income gain the most from tax deferral.

A client keeps holding losing stocks while quickly selling winners. Which bias does this most reflect?

Answer: Loss aversion (the disposition effect)

Investors who feel losses more strongly than gains avoid realizing losses and lock in gains too early.

Under SECURE 2.0, required minimum distributions generally start at what age for people who turn 73 between 2023 and 2032?

Answer: 73

SECURE 2.0 raised the RMD age to 73, and it rises to 75 starting in 2033.

What is a key advantage of Monte Carlo simulation in retirement planning?

Answer: It estimates the probability of meeting goals across many return paths

Monte Carlo models path dependency and gives a probability of success instead of a single deterministic projection.