Sample Questions
Question 1
Easy
Tax-loss harvesting is most beneficial for investors who:
Solution
A is correct.
Tax-loss harvesting is most beneficial for investors who have realized capital gains in taxable accounts because the harvested losses can offset those gains, reducing the current-year tax liability. The strategy involves selling depreciated securities to realize losses and reinvesting in similar (but not substantially identical) securities to maintain market exposure.
Tax-loss harvesting is most beneficial for investors who have realized capital gains in taxable accounts because the harvested losses can offset those gains, reducing the current-year tax liability. The strategy involves selling depreciated securities to realize losses and reinvesting in similar (but not substantially identical) securities to maintain market exposure.
Question 2
Medium
A portfolio has an R-squared of 0.92 relative to the Russell 2000 index. Which interpretation is most accurate?
Solution
B is correct.
R-squared (coefficient of determination) measures the percentage of a portfolio's return variability that is explained by the benchmark index. An R-squared of 0.92 means 92% of the portfolio's return movements can be attributed to the Russell 2000's movements, indicating the portfolio closely tracks this benchmark.
R-squared (coefficient of determination) measures the percentage of a portfolio's return variability that is explained by the benchmark index. An R-squared of 0.92 means 92% of the portfolio's return movements can be attributed to the Russell 2000's movements, indicating the portfolio closely tracks this benchmark.
Question 3
Hard
A client invests in a REIT ETF. Which of the following most accurately describes the typical tax treatment of REIT distributions?
Solution
B is correct.
REIT distributions typically consist of three components: ordinary dividends (taxed as ordinary income at the investor's marginal rate), capital gains distributions (taxed at preferential capital gain rates), and return of capital (tax-deferred but reduces cost basis). Most REIT dividends do not qualify for the 15%/20% qualified dividend rate because REITs pass through rental income. The 20% pass-through deduction under QBI rules may reduce the effective rate on REIT ordinary dividends.
REIT distributions typically consist of three components: ordinary dividends (taxed as ordinary income at the investor's marginal rate), capital gains distributions (taxed at preferential capital gain rates), and return of capital (tax-deferred but reduces cost basis). Most REIT dividends do not qualify for the 15%/20% qualified dividend rate because REITs pass through rental income. The 20% pass-through deduction under QBI rules may reduce the effective rate on REIT ordinary dividends.
