Portfolio Management & Strategy Flashcards

A client holds a concentrated position in a single stock with a very low cost basis. Which tax-efficient strategy allows diversification without immediately triggering capital gains?

Answer: Use an exchange fund to swap shares for diversified interests

An exchange fund (partnership swap) lets the investor contribute appreciated shares and receive a diversified interest, deferring the gain until the fund interest is sold.

Under the wash-sale rule, a loss is disallowed if the taxpayer purchases substantially identical securities within how many days before or after the sale?

Answer: 30 days

IRC §1091 disallows the loss if substantially identical securities are purchased within 30 days before or after the sale, creating a 61-day window.

A high-net-worth client wants to transfer a concentrated stock position to heirs at minimal transfer tax cost. Which strategy uses options to freeze current value for gift tax purposes?

Answer: GRAT funded with appreciated stock

A GRAT (Grantor Retained Annuity Trust) funded with low-basis stock allows future appreciation above the §7520 hurdle rate to pass estate-tax-free to heirs.

Which portfolio rebalancing method is generally most tax-efficient for taxable accounts?

Answer: Cash-flow rebalancing — direct new contributions to underweight assets

Cash-flow rebalancing uses new contributions or dividends to buy underweight positions, avoiding sales and therefore avoiding realized capital gains.

A CTC is advising a client on asset location. Which type of asset is typically BEST placed in a tax-deferred account such as a traditional IRA?

Answer: High-yield taxable bonds

High-yield bonds generate ordinary interest income that is fully taxable, so sheltering them in a tax-deferred account prevents annual taxable income.

A taxpayer sells covered call options against appreciated stock. If the call is exercised, how is the premium treated for tax purposes?

Answer: Added to the proceeds of the stock sale in the year of exercise

When a covered call is exercised, the premium received is added to the sale proceeds of the underlying stock, affecting the gain or loss on the stock sale.

Which of the following correctly describes a tax-managed fund's primary strategy to enhance after-tax returns?

Answer: Systematically harvesting losses to offset gains while avoiding wash sales

Tax-managed funds systematically harvest capital losses throughout the year to offset gains, while carefully avoiding wash-sale rule violations.