Sample Questions
Question 1
Easy
"Tax alpha" in private wealth management refers to:
Solution
A is correct.
Tax alpha represents the additional after-tax return that can be generated through deliberate tax management strategies. These include: asset location (placing tax-inefficient assets in tax-advantaged accounts), tax-loss harvesting (realizing losses to offset gains), withdrawal sequencing (strategically ordering distributions from different account types), holding period management (achieving long-term capital gains treatment), and charitable giving optimization (donating appreciated securities). Tax alpha can add 0.5% to 1.5% per year in after-tax returns.
Tax alpha represents the additional after-tax return that can be generated through deliberate tax management strategies. These include: asset location (placing tax-inefficient assets in tax-advantaged accounts), tax-loss harvesting (realizing losses to offset gains), withdrawal sequencing (strategically ordering distributions from different account types), holding period management (achieving long-term capital gains treatment), and charitable giving optimization (donating appreciated securities). Tax alpha can add 0.5% to 1.5% per year in after-tax returns.
Question 2
Medium
Based on Exhibits 2 and 3, the single module from Tiber's menu that is the most appropriate match for the lifestyle spending sub-portfolio is the:
Solution
C is correct. Module selection in a goals-based framework aligns the module's expected return to the goal's required return while keeping the downside consistent with the horizon and confidence. The lifestyle goal requires 5.55% with a 7-year deferral and 27-year payout horizon; the Needs priority argues for a moderate, not aggressive, risk profile. The diversified market module's 6.5% expected return comfortably covers the required return, and its −12% 1-year minimum expected return is tolerable over a multi-decade horizon.
Question 3
Hard
Marchetti wants to raise the lifestyle goal's target confidence from 90% to 95% without changing the module selected for the lifestyle sub-portfolio. Among the following actions, the one most consistent with the goals-based framework is to:
Solution
B is correct. Raising a goal's confidence level with the module held constant is achieved by allocating more capital to that sub-portfolio, which lowers its required return and therefore the probability of shortfall. The capital should be sourced from the lowest-priority goal first, which in a goals-based hierarchy is the aspirational legacy goal. Pulling from legacy (Aspirational, 60% confidence) preserves the higher-priority Needs goals while improving lifestyle confidence to 95%.
