Practice Quiz 6

Question 1

Which of the following statements regarding the capital asset pricing model (CAPM) is NOT correct?
A)
The CAPM assumes that the only pertinent risks are market risk and unsystematic risk.
B)
The CAPM is based on a market portfolio containing all possible assets.
C)
The CAPM can be used to find the required rate of return of an investment.
D)
The CAPM assumes capital markets are in constant equilibrium establishing a baseline by which to evaluate the suitability of any investment.

Answer 1

A

The CAPM assumes that only systematic risk of an asset is relevant. Unsystematic risk is not relevant because rational investors will diversify all unsystematic risk by holding diversified portfolios.

Question 2

In an enforceable contract, "legal capacity" means that both parties must:
A)
have a legal purpose for entering into the contract.
 B)
be compensated equally.
 C)
be of majority age and of sound mind.
 D)
provide something of value.

Answer 2

C

Legal capacity means that both parties to the contract must have the ability to understand the terms and conditions of the contract. Therefore, the parties must be of majority age and must be mentally competent.

Question 3

Which of the following are approved Practice Standards issued by CFP Board?

1. Establishing and defining the planner’s relationship with the client.
2. Gathering client data and sharing it with the planner’s vendors if the client does not ‘opt out.’
3. Analyzing and evaluating the client’s financial status.
4. Developing and presenting the financial planning recommendations.

Answer 3

1, 3, and 4

Question 4

Which of the following statements concerning the designation of an irrevocable beneficiary on a life insurance policy is (are) CORRECT?

1. The policyowner cannot change the beneficiary designation without the beneficiary’s consent.
2. A policy loan or surrender of the contract requires the consent of the beneficiary.
3. The beneficiary receives the death benefit only if the primary beneficiary dies before the insured.

Answer 4

1 and 2

Question 5

Limited-pay whole life insurance policies:

1. Require the owner to pay premiums for a shorter period than traditional whole life insurance policies.
2. Provide lifetime coverage.
3. Have cash value accumulation.
4. Require premiums to be paid for the entire life of the insured.

Answer 5

1, 2, and 3

Question 6

Marie, a CFP® certificant, believes some illegal money laundering is taking place at her brokerage firm. She has tried to investigate, but has been unable to ascertain if her assumptions are correct and has not yet notified anyone within her firm of her suspicions. Marie should make timely disclosure of the available evidence to all of the following EXCEPT:
A)
CFP Board.
 B)
A partner in the firm.
 C)
Her direct supervisor.
 D)
A co-owner of the firm.

Answer 6

A

Question 7

Purposes of the Federal Reserve include:

1. Establishing the prime lending rate (PLR).
2. Influencing and monitoring the flow of capital.
3. Establishing federal income tax rates.
4. Maintaining steady economic growth with moderate inflation.

Answer 7

2 and 4

Commercial banks establish the prime rate. The executive branch or Congress initiates any changes regarding federal income tax rates with legislation. Controlling the flow of capital to maintain steady economic growth with moderate inflation is the primary purpose of the Fed.

Question 8

Which of the following statements regarding choosing the most appropriate vesting schedule-restrictive vs. liberal-is(are) CORRECT?

1. Two advantages of choosing a restrictive vesting schedule are that it may be able to cut costs attributable to employee turnover and actually help retain employees.
2. Three advantages of choosing a liberal vesting schedule-to have immediate and full vesting-are that it fosters employee morale, keeps the plan competitive in attracting employees, and can meet the designs of the small employer who desires few encumbrances to participation for the employee family.

Answer 8

both statements are correct

Question 9

Ben,a CFP® professional, is compiling separate financial statements for each of Margery's businesses, which are all sole proprietorships. When reviewing the balance sheets for each business, which of the following assets are NOT Section 1231 assets?
A)
Rental apartment acquired last tax year.
 B)
Color copier used in a business office.
 C)
Jewelry storeowner's stock of diamonds.
 D)
Timber on an inherited tree farm.

Answer 9

C

Section 1231 assets are certain assets used in a taxpayer’s trade or business that are held for the long-term. Assets include depreciable tangible and intangible personal property, real property, timber, certain livestock, and unharvested crops. Not included: inventory, copyrights and property held for sale to customers.

Question 10

Under the Investment Adviser Act of 1940, an investment adviser may not use the term “investment counsel” or hold himself/herself out to be an investment counsel unless:

1. The primary business is providing investment advice.
2. The major portion of the business is providing investment supervisory services.
3. Investments are limited to mutual funds only.
4. Insurance products are recommended.

Answer 10

1 and 2

Question 11

Which of the following statements regarding Social Security integration and defined contribution plans are CORRECT?

1. The integration level can be less than the Social Security taxable wage base.
2. The maximum permitted disparity will depend on whether the integration level is equal to the taxable wage base or below it.
3. Integration can be used to enhance an owner’s contribution to the plan if the owner’s compensation is in excess of the Social Security wage base.
4. The integration level cannot be greater than the Social Security taxable wage base.

Answer 11

all of the statements are correct

Question 12

Preferred stocks are considered a hybrid security because they:

1. Offer guaranteed income.
2. Represent equity ownership.
3. Pay dividends based on a stated percentage of the par value of the stock.
4. Are issued for perpetuity.

Answer 12

2, 3, and 4

Question 13

Jonathan wants to use $10,000 from his traditional IRA as collateral for a business loan. All of his contributions to the IRA were deductible. As his financial planner, you advise him that:
A)
the transaction incurs no tax consequences but may incur a penalty.
B)
the $10,000 will not be a taxable distribution to Jonathan if it is only used as collateral.
C)
the $10,000 will be considered a taxable distribution, even though he does not remove it from the IRA.
D)
using the IRA as collateral for the loan is a permitted transaction and Jonathan will not incur a penalty.

Answer 13

C

Question 14

CFP Practice Standard 200-1 pertains to ‘Gathering Client Data’ and involves:
A)
developing and presenting the financial planning recommendations.
B)
obtaining client information and determining the client’s financial goals and priorities.
C)
evaluating financial planning alternatives.
D)
implementing the financial planning recommendations.

Answer 14

B

Question 15

Vince died during the current year. His estate consisted of the following assets:

1. Traditional IRA invested in a global stock fund and a balanced mutual fund-Vince’s cousin, who died 2 years ago, was the designated beneficiary. This beneficiary designation was never changed by Vince.
2. Life insurance policy with a cash value of $55,000 and death benefit of $500,000-the policy is on the life of Vince’s sister. Vince’s daughter is the named beneficiary.
3. An installment note receivable, with a 9% interest rate and a remaining term of 7 years.
4. Land held as tenancy by the entirety with Vince’s wife.
   Which assets listed above will be included in Vince’s probate estate?

Answer 15

1, 2, and 3

Question 16

Marvin has all of the items listed below. All of them are alternative minimum tax preference items EXCEPT:
A)
percentage depletion in excess of adjusted basis on a mining property.
B)
accelerated depreciation on certain property placed in service before 1987.
C)
tax-exempt income from a State of Iowa municipal revenue bond.
D)
exclusion of gain on the sale of certain qualified small business corporation stock.

Answer 16

C

Question 17

A type of income, normally tax-free, that may trigger the alternative minimum tax (AMT) for taxpayers

Answer 17

AMT preference items

Question 18

CDE, Inc., has recently started paying for the long-term care policies for their 45 employees. How are the payments treated for federal income tax purposes if the policies are qualified policies?
A)
Employer payments for the group premiums are not tax deductible to the employer but are taxable income to the employee on the basis of the coverage schedule.
B)
Employer payments for group premiums are tax deductible to the employer but are taxable income to the employee on the basis of the coverage schedule.
C)
Employer payments for the group premiums are not tax deductible to the employer and not taxable income to the employee.
D)
Employer payments for group premiums are tax deductible to the employer and not taxable income to the employee.

Answer 18

D

Question 19

Michael, a CFP® professional, is working on a financial plan for his new client. According to the Practice Standards, all of the following should be used to develop the recommendations EXCEPT?

A)
Guaranteeing a minimum rate of return consistent with the client’s financial goals.
B)
Reviewing all personal and economic assumptions.
C)
Defining the client’s goals, needs, and priorities.
D)
Analyzing all quantitative data provided by the client.

Answer 19

A

Question 20

Which of the following statements regarding security market indexes is CORRECT?
A)
Market indexes reflect the average price behavior of a group of stocks at a given point in time.
B)
The Wilshire 100 Index is used as a measure of the financial stock sector.
C)
The S&P 500 Index automatically adjusts for stock splits and dividends by focusing on market value instead of price.
D)
The Russell 2000 Index is a well-known index used to benchmark large capitalization companies.

Answer 20

C

The S&P 500 Index automatically adjusts for stock splits and dividends by focusing on market value instead of price. The Russell 2000 Index is a well-known index used to benchmark small capitalization companies. A market average, not a market index, reflects the average price behavior of a group of stocks at a given point in time. An index measures the current price behavior of a group of stocks in relation to a base value. The Wilshire 5000 index is used as a measure of the U.S. broad market.

Question 21

Which of the following circumstances would cause the date-of-death value of the gifted property to be included in the donor’s gross estate?

1. Donor transfers property to a revocable trust.
2. Donor makes a gift of real estate and retains a life estate in the gifted property.
3. Donor gives $35,000 to his sister one month before he dies.
4. Donor makes a gift of real estate and dies within 3 years of the date of the gift.

Answer 21

1 and 2

Question 22

Which of the following statements accurately list items that will increase or decrease a partner’s basis in the partnership?

1. A partner’s basis is increased by his or her capital contributions, his or her distributive share of partnership income, and his or her share of liabilities assumed.
2. A partner’s basis is reduced by his or her share of losses, his or her distributions or draws, and his or her share of liabilities relieved.

Answer 22

both statements are correct

Question 23

Which of the following are exclusions under the Coverage E (Personal Liability) portion of Section II of homeowners policies?

1. Personal liability.
2. Business activities.
3. Intentional injury.
4. Uninsured locations.

Answer 23

2, 3, and 4

Question 24

Which of the following are forms of the interest-adjusted method of comparing life insurance policy costs?

1. Net-cost method.
2. Surrender cost index.
3. Net payment cost index.
4. Annuity method.

Answer 24

2 and 3

Question 25

Stock TTY has a mean return of 11% and a standard deviation of 5%. What is the probability of a return less than 6% assuming a normal distribution of returns?
A)
16%.
 B)
50%.
 C)
84%.
 D)
68%.

Answer 25

A

The probability of Stock TTY returning more than 11% is 50%. Additionally, the probability that the stock’s return lies within 1 standard deviation of the mean is 68%. Because the distribution is symmetric, there is a 34% chance that returns will be between 6% and 11%. Therefore, the probability of a return less than 6% is 16% (100% − 50% − 34%).