Cumulative level test: Documents, Advisers, and Risk Transfer: Judgment at the Point of Decision

Check understanding, separately from reading

12 questions · 80% to pass · no timer. This longer test revisits both units in the level. These authored questions assess recognition and application of the taught distinctions, not professional qualification. You may review the lessons and retry. Repeat attempts reuse the question bank; a remembered answer is not proof of transfer to a new situation.

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Question 1

You are comparing two ways to hold the same fund at the same firm: a brokerage account where you pay a 3.75% sales charge on purchase, and an advisory account where the firm charges 1.00% a year on assets and buys the same fund's no-load share class with an expense ratio 0.20 percentage points lower. Using only the fee table and the firm's Form CRS, list the four figures that must be compared to price each route over your own horizon, and explain why neither route can be declared cheaper without the horizon.The sales charge, both share classes' expense ratios, the advisory fee, and the year in which cumulative advisory fees overtake the sales chargeThe sales charge, the advisory fee, and the fund's past performance record, since performance determines which structure earns its cost back

Question 2

An investor wrote a policy statement with a 60/40 target and a five-point band, then during a 30% market fall moved the whole portfolio to cash and rewrote the target as 20/80. Which element of the policy statement failed, and what would the correct arithmetic have required on a $100,000 portfolio that reached $82,000 with $42,000 in stocks?The risk-tolerance section failed; the correct response was to lower the target allocation and accept the loss without tradingThe pre-committed rebalancing rule failed; the band required buying $7,200 of stocks to restore 60/40

Question 3

A household holds the same two asset types in both a taxable account and a tax-deferred account: a bond fund whose return arrives as interest taxed annually at ordinary rates, and an equity fund whose return arrives mainly as price appreciation. Explain which asset belongs in which account, using the mechanism of annual taxation rather than a rule of thumb, and state the two inputs that can reverse the conclusion.The bond fund belongs in the tax-advantaged account because its tax is paid every year and cannot compound; the reversal inputs are the withdrawal rate and the preferential rate on long-term gainsThe equity fund belongs in the tax-advantaged account because equities grow more, and deferral is most valuable on the largest balance

Question 4

A retiree near the withdrawal date holds a target date fund whose glide path stops changing at the target year and an immediate annuity is also being considered. Explain what each instrument does about the risk that the first retirement years produce poor returns, and name the specific exposure each leaves open.The fund removes the timing risk by becoming conservative, and the annuity removes the inflation risk because payments continue for lifeThe fund changes the allocation but keeps the market risk; the annuity transfers longevity and payment risk but adds issuer credit risk

Question 5

A variable annuity contract is being considered for money currently in an individual retirement account. Recompute the consequence of the contract's costs on $200,000 over twenty-five years at an assumed 6% gross annual return, comparing total costs of 0.35 percentage points with total costs of 2.25 percentage points, and state the tax conclusion for money already inside an IRA.About $790,256 against about $502,033, a difference of about $288,222, and the wrapper adds no tax advantage inside an IRAAbout $288,222 against about $790,256, a difference of about $502,033, and the wrapper defers tax that the IRA would otherwise pay annually

Question 6

A $400,000 tax-deferred account is inherited by an adult child who is not an eligible designated beneficiary, while a $400,000 taxable brokerage account is inherited by the same child. Describe the difference in what the child must do and in the tax character of the money, and state why the answer depends on the beneficiary category.Both accounts must be emptied within ten years, but only the brokerage account produces taxable income as it is soldThe retirement account must generally be emptied within ten years, with distributions taxed as ordinary income; the brokerage account receives a basis treatment that differs and has no such deadline

Question 7

A message claims that a strategy has never had a losing year, has returned an average of 11% annually, and is fully protected. Design the audit steps you would take, naming the three instruments from this level that address the guarantee, the stated average, and the identity of the seller, and state what conclusion the audit permits if the documents cannot be located.Locate the promisor of the protection, recompute the compound rate from the actual annual returns, and verify the seller's registration; if the documents cannot be located the conclusion is unverifiedReport the claim as false, since an average return of 11% with no losing year is inconsistent with the dispersion of market returns

Question 8

You are told that a professional is a fiduciary, holds a state insurance license, and earns a commission on the product being recommended. Explain what each of those three facts establishes about the standard that applies and the disclosure you are owed, and name the specific document that would resolve the ambiguity about capacity.A fiduciary cannot earn a commission on a recommended product, so the commission proves the fiduciary statement is inaccurateThe fiduciary statement and the insurance license describe different regimes, so the resolving document is a Form CRS or its state insurance equivalent

Question 9

A household wants a $600,000 nominal goal in fifteen years and can save $2,000 a month. At an assumed 6% nominal annual return the contributions reach $581,637.42, a shortfall of $18,362.58, and the household's response is to raise the assumed return to 7% instead of raising the contribution. Explain why that response is a defect in the policy statement and what the four honest alternatives are.The assumption is being used as a control rather than as an input, and the alternatives are to contribute more, extend the horizon, lower the goal, or accept more risk with a wider range of outcomesThe response is acceptable because a longer horizon supports a higher assumed return, which is the standard approach to closing a shortfall

Question 10

An investor refuses to sell a position that is down 30% because selling would make the loss final, while selling a different position that is up 40% to lock in the gain. Using the tax treatment of realized gains and losses and the lesson on loss aversion, explain the two costs of acting on that preference.The realized gain is taxed twice because the offsetting loss remains unrealized, and the position that fell will recover because losses reverseThe unrealized loss forgoes its offset against the realized gain, and the decision is being driven by the discomfort of the loss rather than by either position's prospects

Question 11

A saver plans to leave a retirement account and a payable-on-death bank account to two adult children, and to route everything else through the will. Explain how a beneficiary designation changes both the transfer channel and a dollar amount of protection, giving the federal deposit insurance formula and the cap that applies to an owner with five or more beneficiaries.The designation transfers both accounts by contract outside the estate, and coverage is owners times distinct beneficiaries times $250,000, capped at $1,250,000 per owner at one bankThe designation moves the accounts outside the estate, and coverage is a flat $250,000 per depositor regardless of how many beneficiaries are named

Question 12

You receive a fund fact sheet showing a ten-year annualized return with no statement about fees or taxes. Walk through the four questions the audit requires before that figure can be used in any comparison, and state what the audit may and may not conclude if the prospectus cannot be obtained.Whether the return exceeds the inflation rate, whether the manager is registered, whether the fund is a mutual fund or an exchange-traded fund, and over what exact periodNet or gross of fees, which benchmark, which averaging or weighting method, and over what exact period; if the prospectus cannot be obtained the figure is recorded as unverified

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