Reading 49: The Asset Allocation Decision LOS d习题精选 statements, regulatory, investment, 2010

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LOS d: Describe the investment constraints of liquidity, time horizon, tax concerns, legal and regulatory factors, and unique needs and preferences.

Which of the following statements about investment constraints is least accurate?

A) Diversification efforts can increase tax liability.

B) Investors concerned about time horizon are not likely to worry about liquidity.

C) Unwillingness to invest in gambling stocks is a constraint.

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Investors with a time horizon constraint may have little time for capital appreciation before they need the money. Need for money in the near term is a liquidity constraint. Time horizon and liquidity constraints often go hand in hand. Diversification often requires the sale of an investment and the purchase of another. Investment sales often trigger tax liability. Younger investors should take advantage of tax deferrals while they have time for the savings to compound, and while they are in their peak earning years. Many retirees have little income and face less tax liability on investment returns.

 

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Which of the following should least likely be included as a constraint in an investment policy statement (IPS)?

A) Constraints put on investment activities by regulatory agencies.

B) Any unique needs or preferences an investor may have.

C) How funds are spent after being withdrawn from the portfolio.

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How funds are spent after withdrawal would not be a constraint of an IPS.

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Taxes on unrealized capital gains:

A) must be paid when the appreciated assets are passed on to heirs.

B) can be deferred indefinitely.

C) are subject to the alternative minimum tax.

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The investment plan may be complicated by the tax code (tax concerns are an investment constraint).Interest and dividends are taxed at the investor’s marginal tax rate while capital gains are taxed differently.  Taxes on unrealized capital gains can be deferred indefinitely.  Estate taxes must be considered.

There is a trade off between taxes and diversification needs.  The decision to sell some stock to diversify ones portfolio by reinvesting the proceeds in other assets must be balanced against the resulting tax liability.

Another tax factor is that some sources of income are exempt from federal and state taxes.  High-income individuals have an incentive to purchase municipal bonds to reduce their tax liabilities.

The investor must also consider tax deferred investment opportunities such as IRAs, 401(k) and 403(b) plans, and various life insurance contracts.

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All of the following are investment constraints EXCEPT:

A) tax concerns.

B) pension plan contributions of the employer.

C) liquidity needs.

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Investment constraints include: liquidity needs, time horizon, tax concerns, legal and regulatory factors and unique needs and preferences. While employer contributions may be of interest, and an issue in some instances, it is not classified as a specific investment constraint.

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Which of the following constraints concerns individual investors least, with respect to their portfolios?

A) Liquidity.

B) Legal Issues.

C) Political issues.

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Investment constraints include: Liquidity needs, time horizon parameters, tax concerns, legal and regulatory factors, and unique needs and preferences. Political concerns are not a principal constraint, beyond their impact on tax policy and legal issues.

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Which of the following is least likely to be considered a constraint when preparing an investment policy statement?

A) Risk tolerance.

B) Liquidity needs.

C) Tax concerns.

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The constraints are: liquidity needs, time horizon, taxes, legal and regulatory factors, and unique needs and preferences. Risk tolerance is included in the investment objectives of the policy statement, not in the constraints.