CFA Level 3 answers 2011

Topics: Investment, Bond, Risk aversion Pages: 56 (9038 words) Published: May 15, 2014
LEVEL III
Question:
Topic:
Minutes:

1
Individual PM/Behavioral
15

Reading References:
2011 Level III, Volume 2, Study Session 3, Reading 7, pp. 5–12 “Heuristic-Driven Bias: The First Theme,” Beyond Greed and Fear: Understanding Behavioral Finance and the Psychology of Investing, Hersh Shefrin (Oxford University School Press, 2002) 2011 Level III, Volume 2, Study Session 3, Reading 8, pp13–20 “Frame Dependence: The Second Theme,” Beyond Greed and Fear: Understanding Behavioral Finance and the Psychology of Investing, Hersh Shefrin (Oxford University School Press, 2002)

2011 Level III, Volume 2, Study Session 4, Reading 16, pp. 246–250 “Estate Planning in a Global Context,” Stephen M. Horan, CFA, and Thomas R. Robinson, CFA (CFA Institute, 2009).
LOS:
2011-III-3-7-a
7. “Heuristic-Driven Bias: The First Theme”
The candidate should be able to
a) evaluate the impact of heuristic-driven biases (including representativeness, overconfidence, anchoring-and-adjustment, aversion to ambiguity) on investment decision making.
2011-III-3-8-a
8. “Frame Dependence: The Second Theme”
The candidate should be able to:
a) explain how loss aversion can result in investors’ willingness to hold on to deteriorating investment positions;
b) evaluate the impacts that the emotional frames of self-control, regret minimization, and money illusion have on investor behavior.
2010-III-4-16-a, b, f, g
16. “Estate Planning in a Global Context”
The candidate should be able to:
a) discuss the purpose of estate planning and explain the basic concepts of domestic estate planning, including estates, wills, and probate;
b) explain the two principal forms of wealth transfer taxes and discuss the impact of important non-tax issues, such as legal system, forced heirship, and marital property regime;
c) determine a family’s core capital and excess capital, based on mortality probabilities and Monte Carlo analysis;

2011 Level III Guideline Answers
Morning Session - Page 1 of 39

LEVEL III
Question:
Topic:
Minutes:

1
Individual PM/Behavioral
15

d) evaluate the relative after-tax value of lifetime gifts and testamentary bequests; e) explain the estate planning benefit of making lifetime gifts when gift taxes are paid by the donor, rather than the recipient;

f) evaluate the after-tax benefits of basic estate planning strategies, including generation skipping, spousal exemptions, valuation discounts, and charitable gifts; g) explain the basic structure of a trust and discuss the differences between revocable and irrevocable trusts;

h) explain how life insurance can be a tax-efficient means of wealth transfer; i) discuss the two principal systems (source jurisdiction and residence jurisdiction) for establishing a country’s tax jurisdiction;

j) discuss the possible income and estate tax consequences of foreign situated assets and foreign-sourced income;
k) evaluate a client’s tax liability under each of three basic methods (credit, exemption, and deduction) that a country may use to provide relief from double taxation; l) describe the impact of increasing international transparency and information exchange on international estate planning.

2011 Level III Guideline Answers
Morning Session - Page 2 of 39

LEVEL III
Question:
Topic:
Minutes:

1
Individual PM/Behavioral
15

Guideline Answer:
PART A
Template for Question 1-A
Note: Consider each objective independently.
Determine which
trust (irrevocable,
revocable, or both
Justify your response with one reason for each
Objective
equally) is more
objective.
appropriate for
each objective.
(circle one)
Becker should sell the shares in the revocable trust.
Current taxes on realized capital gains will be the
same for either trust (20% × USD 1.8 million).
irrevocable
1. Sell USD 1.0
Assets in the irrevocable trust are not subject to
million of Buildco
estate tax. Assets in the revocable trust are subject
shares while
to estate taxes upon Becker’s...

References: E. Tierney, Managing Investment Portfolios: A Dynamic Process, 3rd edition (CFA Institute,
2010)
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