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CFA LEVEL III QUESTIONS AND ANSWERS GRADED A+
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Exam of 20 pages for the course CFA at CFA (CFA LEVEL III)
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CFA LEVEL IIIEstate definition - answer is everything a person owns
Probate - answer the legal process to confirm the validity of the will.
what is intestate - answer when you die without a will and a court has to decide who
gets what
civil law vs common law courts - answer civil law is predominant legal system, apply
abstract rules or thoughts to case. Common law (Britain and USA) uses the rulings in
previous court cases to defend claims
communal vs separate property regimes - answer separate: each spouse can control
property independently
in community property regime there is always a 1/2 split regardless
4 ways taxes are levied - answer tax on income, tax on wealth, tax on spending, tax on
wealth transfers
testamentary gratuitous transfer - answermeans a transfer of wealth to another person
made after death
human capital - answeran implied asset that people have. basically their ability to work
and generate money
Formula for how much you should save based on probability of survival -
answer[(psurvival) * Spending]/(1+r)
psurvival=probability of surviving until that year and the cash spend expected in that
year
r=risk free rate
why discount probability of spending flows with risk free rate - answerbeacuse these
flows risk is unrelated to market forces and the probability of dying is unrelated to
market forces
formula for geometric average return - answerFV= (1+rg)^n which is equal to each
periods return times the next ie...(1+r)*(1+r1)*(1+r2)*(1+r3)
how to calculate Rg - answerRg= r-(.5*std. dev.)
r= arithmetic average return
,how are compounding returns organized and how do withdrawals effect it - answerif you
have poor performance to start strong to end and dont take anything out your returns
would be the same. If you are liquidating a portion of the portfolio then the sequence
matter a great deal
relative value of tax free gift equation - answerFVgift/FVbequest= 1+[r*(1-t)]^n / [1+r*(1-
t)]^n*(1-T)
Big T is tax on transfer. Little T tax on returns for that person. Top is recipient
relative value of taxed gift - answerFV gift/ FV bequest = [1+r*(1-t)]^n*(1-T) / [1+r*1-
T)]^n
this assumes that there are different interest rates on lifetime gifts than bequests...
Bit T tax on transfer. Little T tas on returns. Top is recipient
relative value of gift when gifter pays the tax - answer[1+r*(1-tg)]^n*(1-T+TgTe)/(1+r*(1-
tg)]^n*(1-te))
deemed dispositions - answermeans that at death and transfer there is no tax on
transfer but all unrecognized gains and losses become realized and are taxed
themselves.
relative value charitable gift to taxed bequest - answer(1+r)^n
+T[1+r*(1-t)]^N*(1-t)/[1+r*(1-t)]^n *(1-t)]
trust settlor or grantor is who - answerman who makes the trust. Beneficiary is not the
owner of the trust but gets benefits
revocable vs irrevocable - answerrevoke: can call back but also responsible for taxes
and creditors can make claims on assets. Not the case in irrevocable trust.
foundation vs trust - answerfoundation set up for particular cause or purpose instead of
person. Reasons for both are asset control, minimize taxes, asset protection
use of life insurance - answerto create liquidity for transfer of hard assets to heirs. also
allows you to transfer wealth in some ways where trusts are not acceptable to common
law
CFC and reasons for it - answercontrolled foreign corporation. basically shell company
off shore where you can hide gains until they are distributed to shareholders and avoid
paying taxes until a certain point in time.
, Deemed distribution - answerif you own too much of CFC or other things the IRS can
just determine you are hiding money offshore and tax you in deemed distribution case.
Hague Conference - answerits an international conference that works to conform private
international law
source vs residence tax system - answersource: country where revenue comes from
taxes product
Residence: tax is placed on resident of country regardless of revenue source
united states taxes on assets and real estate in US - answerthey tax everything
regardless of place of residence. UK not bad as you can avoid taxes if you are not a
permanent citizen and do not repatriate your money. many HNW people there keep off
shore accounts in sing a pore and other counties
Double tax in US? - answeryes beacause we tax everything even if foregin resident. but
through tax treaties can usually avoid issues.
types of doubel tax issues - answerresidence residence = 2 counties claim as resident
source source= 2 countries calim as source
resident source most common.
foreign tax credit provision - answeryou get tax credit in one country for taxes paid in the
other. This results in generally you paying higher of 2 possible tax pools...
exemption method foreign tax provision - answerresidence country imposes no tax on
income generated and taxed in foreign country
deduction method foreign tax provision - answerTax paid= tax residence * tax
source*(1-tax residence)
how are gains on sale of property typically taxed - answerbased on location of property
tax avoidance vs tax evasion and offshore banking - answeravoidance: means you are
being smart but only doing things that obey the letter and spirit of law
Evasion: illegal
offshore banking: not related to any of the above. Can be a way to hid things from family
and not conceal all of your assets at one.
how is low basis stock acquired? - answereither entrepreneurial success (starting own
business), executive success (stock options) or investment success (buy extremely low
sell high).
what risk is left after diversification - answercounterparty risk, and regulatory risks still
exist in terms of them taxing you more than you think on your position or that you cant
sell in market to another party.
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