Your client's unused RRSP contribution room is $46,000. He contributes $15,000 in the current taxation year. How much RRSP contribution room can he carry forward?
Answer(s): A
Unused RRSP contribution room can be carried forward indefinitely. The carry-forward amount is the unused room minus the current year's contribution: $46,000 - $15,000 = $31,000. The feedback from the document states:"Any RRSP contribution room that is not used in a taxation year can be carried forward to be used in future years. There is no limit on the amount that can be carried forward. In this example, $46,000 - $15,000 = $31,000."
Chapter 6 Tax and Retirement PlanningLearning Domain: The Know Your Client Communication Process
What is a key difference between marketable government bonds and treasury bills?
Treasury bills (T-bills) have short maturities and are sold at a discount, with the return being the difference between the purchase price and par value at maturity, without coupon interest. Marketable bonds, however, pay coupon interest. The feedback from the document states:"Because T-bills have such short maturities, they do not pay any coupon interest; instead, they are sold to investors at a discount from par value. When the T-bill matures, you receive par value. The difference between the price paid and the par value represents your return."
Chapter 7 Types of Investment Products and How They Are TradedLearning Domain:Understanding Investment Products and Portfolios
Which security is most likely to provide a capital gain if held to maturity?
A corporate bond bought at a discount will provide a capital gain at maturity, as the investor receives the par value, which is higher than the purchase price. The feedback from the document states:"Bond prices are quoted using an index with a base value of 100. A bond trading at 100 is said to be trading at face value, or par. A bond trading below par, say at a price of 98, is said to be trading at a discount... So if you buy a bond at a discount, at maturity, you will receive the par or face value. The difference between the discounted price and the par value received at maturity is considered a capital gain."
For the last year, an investor earned a return before adjustment for inflation of 2% on a money market fund, while inflation averaged 1.5%. What was his nominal rate of return?
Answer(s): D
The nominal rate of return is the return before adjustment for inflation, which is given as 2%. The real rate of return would be adjusted for inflation (2% - 1.5% = 0.5%), but the question asks for the nominal rate. The feedback from the document states:"It is important to consider the effects of inflation on investments because we can isolate the difference between nominal and real returns. Investors are more concerned with the real rate of return the return adjusted for the effects of inflation. A nominal return is a return that has not been adjusted for the impact of inflation. The approximate real rate of return is calculated as: Real Return = Nominal Rate - Annual Inflation Rate."
Chapter 8 Constructing Investment PortfoliosLearning Domain: Understanding Investment Products and Portfolios
Fund A has a 5-year average return of 10% and a standard deviation of 5%. Fund B has a 5-year average return of 8% and a standard deviation of 2%. Select the most accurate statement about Funds A and B.
A lower standard deviation indicates lower volatility and thus lower risk. Fund B, with a standard deviation of 2%, is less risky than Fund A, with a standard deviation of 5%. The feedback from the document states:"We can find the probable range of returns as follows: Average Return + Standard deviation = Positive outcome. Average Return - Standard deviation = Negative outcome. In any given year Fund A, which has the higher standard deviation, could fluctuate much more widely, making it less attractive as an investment, even over the long-term. Volatility is the most common measure of risk."
Calculate the 2-year simple return for the AAA Mutual Fund.AAA Mutual Fund PerformanceYear | Price at Beginning | Distribution | Price at End | Simple 1-Yr Return1st Year | $10.00 | $0.25 | $11.00 | 12.50%2nd Year | $11.00 | $0.25 | $10.20 | -5.00%
The 2-year simple return is calculated as:Return = (Price at the end of the period + total cash flow earned during the period - Price at the beginning of the period) / Price at the beginning of the period.Total cash flow = $0.25 (Year 1) + $0.25 (Year 2) = $0.50.Return = ($10.20 + $0.50 - $10.00) / $10.00 = $0.70 / $10.00 = 7.00%.The feedback from the document confirms:"Return = (Price at the end of the period + cash flow earned during the period - Price at the beginning of the period) / Price at the beginning of the period. In this case, ($10.20 + $0.50 - $10.00) / $10.00 = 7.00%."
Which statement best describes what a rational investor will do when comparing the risk and return of two investments?
Answer(s): C
A rational investor seeks to maximize return for a given level of risk or minimize risk for a given level of return. The feedback from the document states:"Given a choice between two investments with the same amount of risk, a rational investor would always take the security with the higher return. Given two investments with the same expected return, the investor would always choose the security with the lower risk. Investors are risk averse, but not all to the same degree. Each investor has a different risk profile."
Why do speculators tend to avoid diversification?
Speculators avoid diversification because it reduces the potential for both large losses and large gains, which they seek to achieve significant wealth. The feedback from the document states:"Diversification affects the returns that investors hope to earn. Diversification tends to reduce the probability of both very large losses and very large gains. Speculators tend to avoid diversification for this reason. Great wealth can be achieved only through an absence of diversification."
Chapter 8 Constructing Investment Portfolios
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