LOS g: Explain how taxes affect investment risk.

Q1. Gil Tabor, CFA and Jan Sills, CFA are discussing how the choice of account type affects investment risk and the amount of that risk borne by the government via taxes. Tabor says that the government bears some of the tax risk in a tax-exempt account. Sills says the government bears some of the risk in a tax-deferred account. With respect to these assertions:

A)   both Tabor and Sills are incorrect.

B)   both Tabor and Sills are correct.

C)   Tabor is correct and Sills is incorrect.

Q2. Which of the following moves by a government would most likely lead to the government taking on more investment risk?

A)   Moving from a common progressive tax regime to a heavy dividend tax regime.

B)   Moving from a heavy dividend tax regime to a common progressive tax regime.

C)   Tax regimes cannot shift investment risk.

Q3. If an investment is held in an account that is taxed annually, the government bears:

A)   none of the investment risk.

B)   all of the investment risk.

C)   some of the investment risk.

Q4. If an investment is held in a tax-exempt account, then the investor bears:

A)   none of the investment risk.

B)   some of the investment risk.

C)   all of the investment risk.

[此贴子已经被作者于2009-4-2 14:25:14编辑过]

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Q1. Gil Tabor, CFA and Jan Sills, CFA are discussing how the choice of account type affects investment risk and the amount of that risk borne by the government via taxes. Tabor says that the government bears some of the tax risk in a tax-exempt account. Sills says the government bears some of the risk in a tax-deferred account. With respect to these assertions:

A)   both Tabor and Sills are incorrect.

B)   both Tabor and Sills are correct.

C)   Tabor is correct and Sills is incorrect.

Correct answer is A)

If the investment is held in a tax-exempt account, then the investor bears all the investment risk. This is also true for tax-deferred accounts because even though the government taxes the future accumulation, the variability of returns is not reduced by taxes levied at the time of withdrawal.

Q2. Which of the following moves by a government would most likely lead to the government taking on more investment risk?

A)   Moving from a common progressive tax regime to a heavy dividend tax regime.

B)   Moving from a heavy dividend tax regime to a common progressive tax regime.

C)   Tax regimes cannot shift investment risk.

Correct answer is A)

Moving from a common progressive tax regime to a heavy dividend tax regime would increase the tax on dividends, which are taxed annually, and this would shift some of the investment risk to the government.

Q3. If an investment is held in an account that is taxed annually, the government bears:

A)   none of the investment risk.

B)   all of the investment risk.

C)   some of the investment risk.

Correct answer is C)

If the investment returns are taxed solely as income at the tax rate t and the pre-tax standard deviation of returns is S, then the investor’s after-tax risk is S × (1 ? t), and the government bears a portion of the risk.

Q4. If an investment is held in a tax-exempt account, then the investor bears:

A)   none of the investment risk.

B)   some of the investment risk.

C)   all of the investment risk.

Correct answer is C)

In a taxable account, losses realized result in a reduction in taxes that serve to offset the magnitude of the loss. Thus, some of the downside risk is transferred to the government. In a tax-exempt account, the variability of returns is not affected by the taxes.

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