Canadian securities exam -WME Course For Financial Planners (WME-FP) – Quiz-06

D) $74,297: To maintain the purchasing power of $60,000 in today’s dollars in 10 years, we use the formula for future value with inflation: [ \text{Future Value} = \text{Present Value} \times (1 + \text{Inflation Rate})^{\text{Number of Years}} ] [ \text{Future Value} = 60,000 \times (1 + 0.02)^{10} = 60,000 \times 1.219 = 74,297 ]A) $73,220: This is slightly lower than the correct amount and does not account for the precise calculation.B) $72,000: This value incorrectly assumes a different rate or time period.C) $80,000: This value overestimates the required income.Relevant Rule: Understanding the effect of inflation on retirement income needs is crucial for accurate financial planning, as emphasized in retirement planning guidelines under the Income Tax Act (Canada).

D) Life Annuity: A life annuity guarantees regular payments for the lifetime of the annuitant. Payments cease upon the death of the annuitant, providing no further benefits to heirs.A) Deferred Annuity: This type of annuity delays payments until a specified future date.B) Term Certain Annuity: Provides payments for a fixed period, regardless of whether the annuitant is alive.C) Joint and Survivor Annuity: Continues payments to a surviving spouse or another beneficiary after the annuitant’s death.Relevant Rule: Annuities are governed by the guidelines set by the Canadian Life and Health Insurance Association (CLHIA), which stipulates the different types of annuities and their features.

B) Apply for probate through the court: The first step in estate administration is to validate the will through the probate process, which legally recognizes the executor’s authority to manage and distribute the estate.A) Distribute the estate according to the will immediately: This cannot be done until the will is validated through probate.C) Pay any outstanding debts of the deceased: Debts are settled after probate is granted and the estate’s assets are identified.D) Liquidate all the deceased’s assets: This may be part of the administration process but occurs after probate is granted.Relevant Rule: According to provincial probate laws and the Estate Administration Act, the probate process is necessary to confirm the validity of the will and the authority of the executor.

A) RRSP contributions are tax-deductible and reduce taxable income in the contribution year: This is the primary advantage of RRSP contributions. Contributions reduce taxable income in the year they are made, providing immediate tax relief.B) RRSP contributions grow tax-free, with no taxes on withdrawals: While contributions grow tax-deferred, withdrawals are taxed as income.C) RRSP withdrawals are not considered taxable income: Withdrawals from an RRSP are indeed considered taxable income.D) RRSPs allow for unlimited contributions each year: RRSP contributions are limited by annual contribution limits based on income.Relevant Rule: According to the Income Tax Act (Canada), RRSP contributions provide a tax deduction for the contribution year, which is a significant tax planning tool.

A) Guaranteed minimum withdrawal amount: The GMWB contract ensures that James will receive a guaranteed minimum amount each year, regardless of the performance of the underlying investments.B) Guaranteed return on investment: GMWB contracts do not guarantee a specific return on investment but rather a minimum withdrawal amount.C) Guaranteed death benefit: This pertains to the benefit paid upon the policyholder’s death, not the guaranteed income.D) Guaranteed interest rate: GMWB contracts do not guarantee a specific interest rate; they guarantee a minimum withdrawal amount.Relevant Rule: GMWB contracts are regulated by insurance and securities laws, ensuring that retirees receive a stable income regardless of market conditions, as outlined by the Canadian Life and Health Insurance Association (CLHIA).

D) Educational Trust: This type of trust is specifically designed to fund education expenses. It provides income for education until a specified age, at which point the remaining assets are distributed to the beneficiaries.A) Revocable Trust: A trust where the settlor can alter or revoke the trust during their lifetime, typically used for different purposes than strictly educational funding.B) Discretionary Trust: A trust where trustees have discretion over distributions to beneficiaries, not specifically tailored for education expenses.C) Testamentary Trust: A trust established through a will that takes effect upon the settlor’s death, which could be used for various purposes, not necessarily for education.Relevant Rule: According to the Trust and Loan Companies Act and provincial trust legislation, educational trusts are set up to fund education expenses, with provisions for distribution upon reaching a certain age.

B) Modern Portfolio Theory (MPT): MPT proposes that by diversifying investments across assets with low correlation, an investor can achieve a more efficient portfolio that minimizes risk for a given level of return or maximizes return for a given level of risk.A) Efficient Frontier: The efficient frontier represents a set of optimal portfolios that offer the highest expected return for a given level of risk, or the lowest risk for a given level of return, based on MPT principles.C) Capital Market Line (CML): CML represents the line of expected return–standard deviation combinations for a portfolio that consists of a risk-free asset and a risky portfolio, derived from MPT.D) Arbitrage Pricing Theory (APT): APT is an alternative asset pricing theory that focuses on the relationship between expected returns and various sources of risk, not specifically on portfolio diversification.Relevant Rule: Modern Portfolio Theory, developed by Harry Markowitz in 1952 and further advanced by William Sharpe and others, forms the foundation for portfolio construction and risk management strategies in the securities industry.

C) Testamentary Trust: By transferring the cottage to a testamentary trust established in her will, Sarah can specify how and when her children receive the property, potentially minimizing tax consequences and providing asset protection.A) Direct Gift: While Sarah could gift the cottage directly to her children, this may trigger immediate tax consequences, such as capital gains tax.B) Joint Ownership: Joint ownership with her children may expose the cottage to their creditors and divorce settlements, among other risks.D) Life Insurance Policy: While life insurance can provide funds to cover taxes or other costs, it does not directly address the tax consequences of inheriting the cottage.Relevant Rule: Testamentary trusts offer tax planning benefits, including income splitting, deferral of tax liabilities, and creditor protection, under the Income Tax Act (Canada) and provincial trust legislation.

B) Future inflation rate: John should consider the impact of inflation on his current expenses to estimate his retirement income needs accurately. Future expenses are likely to be higher due to inflation.A) Current employment income: John’s current income is relevant for budgeting but not for estimating future retirement income needs.C) Expected investment returns: While investment returns affect the growth of retirement savings, they do not directly determine retirement income needs.D) Healthcare costs: While healthcare costs are an important consideration in retirement planning, they are just one aspect of overall retirement expenses.Relevant Rule: Considering the effects of inflation on retirement income needs is essential for accurate retirement planning, as outlined by retirement planning guidelines under the Income Tax Act (Canada).

A) Principal guarantee: Segregated funds offer a principal guarantee, which means that upon maturity or death, Sophie or her beneficiaries will receive at least the initial investment amount, minus any withdrawals.B) High liquidity: Segregated funds typically have restrictions on withdrawals, especially during the early years of the investment, and may impose penalties for early redemption.C) Tax-deferred growth: Like other tax-deferred investment vehicles, segregated funds allow for tax-deferred growth, but this feature does not directly provide downside protection.D) Potential for high returns: While segregated funds may offer the potential for higher returns compared to traditional insurance products, the primary benefit for risk-averse investors like Sophie is the principal guarantee.Relevant Rule: Segregated funds are regulated by insurance laws and provide investors with principal guarantees and potential creditor protection, as outlined by the Insurance Companies Act (Canada) and provincial insurance regulations.

C) Living Trust: Also known as a revocable trust, a living trust allows David to retain control over the assets during his lifetime. He can amend or revoke the trust at any time and specify how the assets should be managed and distributed after his death.A) Testamentary Trust: A testamentary trust is established through a will and takes effect upon David’s death, offering less control during his lifetime.B) Irrevocable Trust: An irrevocable trust cannot be amended or revoked once established, providing less flexibility than David may desire.D) Discretionary Trust: A discretionary trust gives the trustee discretion over how to distribute trust assets, rather than specifying David’s wishes.Relevant Rule: Living trusts are governed by trust laws and regulations, allowing individuals like David to retain control over their assets during their lifetime and specify their distribution upon death, as outlined by provincial trust legislation.

D) Enhanced portfolio diversification: By investing internationally, Sarah’s client can achieve greater diversification across different geographic regions and economies, potentially reducing overall portfolio risk.A) Higher tax efficiency: Tax efficiency depends on various factors and is not necessarily higher with international investing.B) Reduced currency risk: International investing may expose investors to currency risk, as fluctuations in exchange rates can impact investment returns.C) Lower transaction costs: Transaction costs may vary based on factors such as brokerage fees and market liquidity, but international investing may not necessarily result in lower costs.Relevant Rule: International investing provides opportunities for portfolio diversification, enabling investors to spread risk across different regions and economies, as outlined by securities regulations and guidelines governing cross-border investments.

B) Immediate Annuity: An immediate annuity provides guaranteed income for life, alleviating the risk of outliving retirement savings. Mr. Johnson would receive regular payments, regardless of market fluctuations or longevity.A) Systematic Withdrawal Plan (SWP): SWP allows Mr. Johnson to withdraw a fixed amount from his retirement savings periodically. However, the risk of outliving savings remains, especially if market returns are unfavorable.C) Lump-Sum Withdrawal: Withdrawing a lump sum may provide immediate access to funds, but it does not guarantee income for life and may deplete savings prematurely.D) Variable Withdrawal Strategy: This strategy adjusts withdrawals based on portfolio performance. While flexible, it does not offer the same level of income certainty as an immediate annuity.Relevant Rule: Immediate annuities are regulated by insurance laws, providing retirees with a reliable stream of income in retirement, as outlined by provincial insurance regulations.

C) Active stock selection based on specific factors: Smart Beta ETFs employ alternative weighting methodologies, selecting stocks based on specific factors such as value, size, or volatility, aiming to outperform the market.A) Lower management fees: Management fees can vary, but Smart Beta ETFs may have similar or slightly higher fees compared to traditional ETFs due to the additional research and portfolio management involved.B) Passive investment approach: While Smart Beta ETFs track an index, they deviate from traditional market-capitalization-weighted indexes by selecting stocks based on predetermined factors.D) Higher tracking error: Smart Beta ETFs may exhibit higher tracking error compared to traditional market-capitalization-weighted ETFs due to their deviation from market-capitalization-weighted indexes.Relevant Rule: Smart Beta ETFs are subject to securities regulations governing ETFs, offering investors exposure to specific investment factors beyond traditional market-capitalization-weighted indexes.

B) Power of Attorney for Personal Care: This legal document allows Sophia to appoint a trusted individual to make healthcare decisions on her behalf if she becomes incapacitated or unable to communicate her wishes.A) Last Will and Testament: A will outlines Sophia’s wishes regarding the distribution of her assets after her death and does not address healthcare decisions.C) Enduring Power of Attorney: This document appoints someone to make financial and legal decisions on Sophia’s behalf if she becomes incapable of managing her affairs, but it does not cover healthcare decisions.D) Living Will (Advance Health Care Directive): While a living will outlines Sophia’s healthcare preferences, it does not appoint someone to make decisions on her behalf; it provides guidance to healthcare providers.Relevant Rule: Powers of Attorney for Personal Care are governed by provincial laws, allowing individuals like Sophia to designate a substitute decision-maker for healthcare matters in the event of incapacity.

B) Sharpe Ratio: The Sharpe Ratio measures the risk-adjusted return of an investment or portfolio by comparing the portfolio’s return to its volatility (standard deviation). A higher Sharpe Ratio indicates better risk-adjusted performance.A) Coefficient of Variation (CV): The CV measures the relative variability of returns compared to their mean and is useful for comparing risk across different investments, but it does not incorporate returns.C) Standard Deviation: Standard deviation measures the dispersion of returns around the mean and is a common measure of volatility but does not consider returns.D) Mean Absolute Deviation (MAD): MAD measures the average deviation of returns from the mean but does not incorporate returns in assessing risk.Relevant Rule: The Sharpe Ratio, developed by William F. Sharpe, is widely used in finance to assess the risk-adjusted performance of investment portfolios, as outlined by modern portfolio theory principles.

D) Joint and Survivor Annuity: This type of annuity provides income for both spouses, with payments continuing to the surviving spouse after the death of the annuitant.A) Deferred Annuity: A deferred annuity delays payments until a specified future date and does not provide immediate income.B) Term Certain Annuity: A term certain annuity provides income for a fixed period but does not continue payments to a surviving spouse.C) Life Annuity with Guaranteed Period: This annuity provides income for life with a guaranteed period, but payments cease upon the annuitant’s death, regardless of the spouse’s status.Relevant Rule: Joint and Survivor Annuities are regulated by insurance laws, providing retirees with income for life and ensuring continued payments to surviving spouses, as outlined by provincial insurance regulations.

C) Special Needs Trust: This type of trust is specifically designed to provide financial support for individuals with disabilities while preserving their eligibility for government benefits. The trustee has discretion over distributions to supplement rather than replace government benefits.A) Irrevocable Trust: An irrevocable trust cannot be amended or revoked once established, which may not provide the flexibility needed for the niece’s changing needs.B) Revocable Trust: A revocable trust can be altered or revoked by the grantor during their lifetime, potentially impacting the niece’s eligibility for government benefits.D) Discretionary Trust: While a discretionary trust allows the trustee discretion over distributions, it may not specifically address the preservation of government benefits for individuals with disabilities.Relevant Rule: Special Needs Trusts are governed by trust laws and regulations, providing a means for individuals like Rachel to provide financial support for disabled beneficiaries while protecting their eligibility for government benefits, as outlined by provincial trust legislation.

D) ESG integration: This approach involves systematically incorporating ESG factors into financial analysis and investment decision-making to identify investments with strong sustainability characteristics.A) Exclusionary screening: Exclusionary screening involves excluding certain companies or industries based on specific criteria, such as tobacco or weapons production.B) Impact investing: Impact investing seeks to generate positive, measurable social or environmental impact alongside financial returns, often through direct investments in projects or organizations.C) Shareholder advocacy: Shareholder advocacy involves actively engaging with companies to promote ESG-related changes through dialogue, proxy voting, or shareholder resolutions.Relevant Rule: ESG integration is becoming increasingly prevalent in investment management practices, guided by international standards such as the United Nations Principles for Responsible Investment (PRI) and recommendations from regulatory bodies like the Ontario Securities Commission (OSC) on climate-related disclosure.

D) Risk management: This principle underscores the importance of managing risk through diversification and asset allocation strategies to protect wealth and achieve long-term financial goals.A) Capital preservation: While capital preservation is an important aspect of wealth preservation, it focuses more on safeguarding the initial investment rather than mitigating risk through diversification.B) Tax minimization: Tax minimization strategies aim to reduce the tax burden on investment income and distributions but are not directly related to managing investment risk.C) Wealth transfer: Wealth transfer strategies involve the efficient transfer of assets to heirs or beneficiaries, which is important for estate planning but not synonymous with risk management.Relevant Rule: Risk management is a fundamental aspect of strategic wealth preservation, guided by principles outlined in regulatory frameworks such as the Investment Industry Regulatory Organization of Canada (IIROC) guidelines on risk management and suitability.

D) Living trust: A living trust allows assets to be transferred to named beneficiaries outside of the probate process, reducing probate fees and delays in asset distribution.A) Joint tenancy: Joint tenancy with rights of survivorship allows assets to pass directly to the surviving joint owner(s) upon death but may not provide the same level of control and flexibility as a living trust.B) Testamentary trust: Testamentary trusts are established through a will and come into effect after death, requiring probate and potentially incurring fees and delays.C) Life insurance policy: Life insurance proceeds are generally paid directly to named beneficiaries outside of probate, but this applies specifically to the insurance policy and not to other assets.Relevant Rule: Living trusts offer a mechanism to avoid probate fees and streamline the distribution of assets, as governed by trust laws and regulations outlined in provincial legislation.

C) Low-cost automated investment management: Robo-advisors use algorithms and automation to manage investment portfolios at lower costs compared to traditional human advisors.A) Customized investment strategies: While robo-advisors may offer some level of customization, their primary advantage lies in providing automated, standardized investment strategies.B) Human interaction and personalized advice: Traditional human advisors offer personalized advice and human interaction, which may not be a prominent feature of robo-advisory services.D) Active trading and market timing: Robo-advisors typically follow passive investment strategies, avoiding active trading and market timing.Relevant Rule: Robo-advisory services are subject to securities regulations governing investment management and automated advice platforms, ensuring compliance with suitability and disclosure requirements outlined by regulatory bodies like the Canadian Securities Administrators (CSA).

D) Event risk: Event risk refers to the possibility of unexpected events, such as job loss, disability, or legal liabilities, that could negatively impact the client’s financial stability.A) Inflation risk: Inflation risk relates to the loss of purchasing power over time due to rising prices, affecting the real value of the client’s assets and income.B) Market risk: Market risk refers to the potential for investment losses due to fluctuations in financial markets, such as stock market downturns.C) Liquidity risk: Liquidity risk arises from the inability to access funds when needed without incurring significant losses, such as during a financial crisis.Relevant Rule: Identifying and addressing event risk is crucial in retirement planning to ensure financial preparedness for unforeseen circumstances, as outlined by risk management principles and guidelines provided by regulatory authorities like the Financial Planning Standards Council (FPSC).

D) Power of Attorney for Property: This legal document allows Sarah to appoint a trusted individual to manage financial affairs and make decisions on behalf of her minor children if she becomes incapacitated or dies.A) Power of Attorney for Personal Care: This document appoints someone to make healthcare decisions on Sarah’s behalf if she becomes incapacitated but does not address financial matters for her children.B) Guardianship designation: A guardianship designation in a will appoints individuals to care for minor children after the testator’s death but does not cover financial decision-making during the testator’s lifetime.C) Holographic will: A holographic will is a handwritten will, which Sarah may use to specify her wishes regarding asset distribution but does not address ongoing financial management for her children.Relevant Rule: Power of Attorney for Property allows individuals like Sarah to designate a trusted individual to manage financial affairs for minor children, ensuring their financial well-being in the event of the testator’s incapacity or death, as governed by provincial legislation on powers of attorney.

B) Tax deferral: Incorporating a business allows John to defer personal tax on income retained within the corporation until it is distributed to him as dividends or salary.A) Lower corporate tax rates: While corporations may benefit from lower tax rates on active business income, this does not directly relate to deferring personal tax.C) Income splitting: Income splitting involves distributing income among family members in lower tax brackets to reduce the overall tax burden, which is a separate tax strategy.D) Lifetime capital gains exemption: This exemption allows individuals to shelter capital gains on the sale of qualified small business corporation shares, but it does not apply to deferring tax on retained earnings within a corporation.Relevant Rule: Tax deferral through incorporation is a common strategy utilized by high-income earners to manage tax liabilities, guided by the Income Tax Act (Canada) and corporate tax laws governing the taxation of Canadian-controlled private corporations (CCPCs).

A) Needs-based approach: This approach focuses on estimating the client’s future income needs by assessing their desired lifestyle, expenses, and anticipated retirement expenses.B) Goals-based approach: The goals-based approach involves setting specific financial goals and objectives for retirement but may not directly address income needs based on expenses.C) Risk-based approach: The risk-based approach focuses on assessing the client’s risk tolerance and investment preferences rather than estimating income needs.D) Asset-based approach: This approach emphasizes building and managing investment assets but does not necessarily consider income needs based on expenses.Relevant Rule: The needs-based approach to retirement planning is guided by principles outlined in financial planning standards and regulations, ensuring alignment with the client’s lifestyle and financial goals.

C) Irrevocable trust: An irrevocable trust allows Alex to transfer assets to beneficiaries outside of the probate process, potentially reducing probate fees and taxes while providing asset protection and control over distribution.A) Joint tenancy: Joint tenancy with rights of survivorship allows assets to pass directly to the surviving joint owner(s) upon death but may not provide the same level of control and tax planning benefits as an irrevocable trust.B) Life insurance policy: Life insurance proceeds are generally paid directly to named beneficiaries outside of probate, but this applies specifically to insurance proceeds and not to other assets.D) Pour-over will: A pour-over will transfers assets into a trust upon the testator’s death, but assets still go through probate before being transferred to the trust, potentially subjecting them to probate fees and taxes.Relevant Rule: Irrevocable trusts offer a mechanism to transfer assets outside of probate, potentially minimizing tax consequences for heirs, as governed by trust laws and regulations outlined in provincial legislation.

D) Diversification: Diversification involves spreading investments across different asset classes, regions, and industries to reduce overall portfolio risk by offsetting the negative performance of some assets with the positive performance of others.A) Efficient frontier: The efficient frontier represents the set of optimal portfolios that offer the highest expected return for a given level of risk, as determined by the risk-return tradeoff.B) Modern portfolio theory (MPT): MPT emphasizes diversification to maximize portfolio return for a given level of risk and is foundational to understanding the benefits of diversification.C) Capital asset pricing model (CAPM): CAPM is a model used to determine the expected return on an investment based on its risk relative to the market, but it does not directly address the benefits of diversification.Relevant Rule: Diversification is a fundamental principle of portfolio management, guided by modern portfolio theory principles outlined by financial theorists such as Harry Markowitz

C) Tax deduction on contributions: RRSP contributions are tax-deductible, meaning the contribution amount can be deducted from taxable income, reducing the contributor’s current tax liability.A) Tax-free withdrawals in retirement: While RRSP withdrawals are taxed as income in retirement, they are not tax-free, making this option incorrect.B) Tax-deferred growth on investments: RRSP investments grow tax-deferred, meaning taxes are deferred until funds are withdrawn, but this does not directly relate to the tax advantage of contributions.D) Tax credit for low-income earners: While low-income earners may benefit from certain tax credits, such as the Canada Workers Benefit (CWB), this does not specifically relate to RRSP contributions.Relevant Rule: The tax deduction on RRSP contributions is governed by the Income Tax Act (Canada), providing individuals like Matthew with a tax incentive to save for retirement while reducing current tax liabilities.

C) Segregated funds: Segregated funds are investment products offered by insurance companies that allow investors to hold a diversified portfolio of securities managed by professional fund managers within an RRSP.A) Self-directed RRSP: A self-directed RRSP allows investors to choose and manage their own investments, offering flexibility but requiring active involvement in investment decisions.B) Guaranteed Investment Certificate (GIC): GICs provide a guaranteed rate of return over a specified period, but they do not offer the same level of diversification as segregated funds.D) Annuities: Annuities provide a guaranteed stream of income in retirement but are not investment options within an RRSP for accumulating retirement savings.Relevant Rule: Segregated funds offer investors the benefits of professional management and diversification within an RRSP, regulated by insurance laws and subject to disclosure requirements outlined by regulatory authorities such as the Financial Services Regulatory Authority of Ontario (FSRA).