Canadian securities exam -WME Course For Financial Planners (WME-FP) – Quiz-08

B) Lower management fees compared to traditional advisors: One of the main benefits of robo-advisors is that they offer automated portfolio management at a lower cost due to reduced human involvement.A) High level of personalized financial advice: While robo-advisors can provide tailored portfolio recommendations based on algorithms, they do not offer the same level of personalized advice as human advisors.C) Complete control over individual security selection: Robo-advisors typically manage investments based on predefined algorithms and model portfolios, not allowing for individual security selection.D) In-person meetings with a financial advisor: Robo-advisors primarily operate online without in-person meetings.Relevant Rule: The regulatory framework for robo-advisors in Canada is overseen by the Canadian Securities Administrators (CSA), which provides guidelines to ensure investor protection and transparency.

B) To determine the validity of the will and appoint the executor: Probate is the legal process of validating a deceased person’s will and officially appointing the executor to administer the estate.A) To distribute the estate’s assets to beneficiaries: This is a subsequent step that occurs after probate.C) To assess the deceased’s outstanding debts and liabilities: While important, this is part of the estate administration process, not the primary purpose of probate.D) To minimize the tax liabilities of the estate: While estate planning can include tax minimization strategies, this is not the purpose of probate.Relevant Rule: The probate process is governed by provincial laws, such as the Ontario Estates Act or the British Columbia Wills, Estates and Succession Act, which outline the procedures for validating a will and appointing an executor.

C) Contributing to an RRSP: Contributions to a Registered Retirement Savings Plan (RRSP) can be deducted from taxable income in the current year, effectively deferring income tax until withdrawal, usually at retirement when the taxpayer may be in a lower tax bracket.A) Income splitting: This involves transferring income to a lower-income spouse or family member to reduce the overall tax burden but does not defer income.B) Tax-loss harvesting: Involves selling investments at a loss to offset capital gains, thereby reducing taxable income in the current year.D) Claiming charitable donations: Provides tax credits in the year the donations are made, reducing the current year’s tax liability.Relevant Rule: The RRSP rules and benefits, including income deferral, are governed by the Income Tax Act (Canada), which outlines the provisions for tax-deferred savings plans.

C) Convert the RRSP to a Registered Retirement Income Fund (RRIF): This option allows Emily to convert her RRSP into a RRIF, from which she can withdraw a specified minimum amount each year, spreading the tax liability over time.A) Withdraw the entire RRSP amount: This would result in the entire balance being taxed as income in the year of withdrawal.B) Transfer the RRSP to a Tax-Free Savings Account (TFSA): This is not permitted under current tax laws. Contributions to a TFSA must come from after-tax dollars.D) Use the RRSP to purchase a GIC: While a GIC can be held within an RRSP, this does not convert the RRSP into a source of retirement income without immediate taxation.Relevant Rule: The conversion of an RRSP to a RRIF is governed by the Income Tax Act (Canada), which allows for tax-deferred growth within the RRIF and mandates minimum annual withdrawals.

C) Impact Investing: This approach explicitly aims to generate positive, measurable social and environmental impact alongside a financial return. It involves investing in projects or companies with a clear mission to address societal challenges.A) Socially Responsible Investing (SRI): Focuses on excluding or including investments based on ethical guidelines but does not necessarily measure impact.B) Environmental, Social, and Governance (ESG) Integration: Incorporates ESG factors into investment analysis and decision-making, but may not specifically target measurable impact.D) Ethical Investing: Similar to SRI, it focuses on aligning investments with ethical beliefs, but does not necessarily measure social or environmental impact.Relevant Rule: Impact investing is guided by principles established by organizations such as the Global Impact Investing Network (GIIN), which provides frameworks for measuring and managing impact.

C) Registered retirement accounts can be rolled over tax-free to a surviving spouse: Upon Mr. Wilson’s death, his registered retirement accounts (such as RRSPs or RRIFs) can be transferred to his surviving spouse or common-law partner on a tax-deferred basis.A) All assets are transferred tax-free to beneficiaries: This is incorrect, as registered accounts are generally subject to tax unless rolled over to a spouse.B) Registered retirement accounts are fully taxed as income in the year of death: This applies if there is no spouse to whom the accounts can be transferred tax-free.D) Only the capital gains on registered retirement accounts are taxed: Registered retirement accounts are taxed as ordinary income, not just on capital gains.Relevant Rule: The rollover provisions for registered retirement accounts are specified in the Income Tax Act (Canada), which allows for tax-deferred transfers to a surviving spouse or common-law partner.

C) Liquidity risk: This is the risk that John may not be able to quickly sell or convert the rental property into cash without a significant loss in value, especially in a market downturn.A) Interest rate risk: This affects the cost of borrowing or the value of fixed-income investments but is less directly related to property concentration.B) Market risk: This is the risk of losses due to overall market movements; while it affects property value, it’s not specific to the concentration of wealth in a single asset.D) Credit risk: This is the risk of a borrower defaulting on a loan, which is more relevant to debt instruments than to owning property.Relevant Rule: Effective risk management in financial planning involves identifying and mitigating specific risks associated with asset concentration, as outlined in the standards set by professional bodies like the Financial Planning Standards Council (FPSC).

B) $9,900: The taxable amount of eligible dividends is calculated by grossing them up by 38%. Therefore, $5,000 x 1.38 = $6,900. Adding the interest income of $3,000, the total taxable amount is $6,900 + $3,000 = $9,900.A) $8,000: This would be the sum of the received amounts without considering the gross-up for dividends.C) $10,400: This overstates the total taxable amount.D) $11,100: This overstates the total taxable amount.Relevant Rule: The Income Tax Act (Canada) outlines the taxation of investment income, including the gross-up and dividend tax credit mechanism for eligible dividends, to integrate personal and corporate taxation and avoid double taxation.

C) A Living Will or Advance Health Care Directive: This document allows Mrs. Jacobs to specify her healthcare wishes and designate someone to make healthcare decisions if she becomes incapacitated.A) A Last Will and Testament: This document outlines the distribution of her assets after death, not healthcare decisions.B) A Power of Attorney for Property: This designates someone to manage her financial affairs, not healthcare decisions.D) A Trust Agreement: This involves the management of assets for beneficiaries and does not address healthcare decisions.Relevant Rule: Powers of attorney and living wills are governed by provincial legislation, such as the Substitute Decisions Act in Ontario or the Personal Directives Act in Alberta, which specify the legal requirements for appointing someone to make healthcare decisions.

C) $67,248: To calculate future living expenses, we use the formula for future value accounting for inflation: ( FV = PV \times (1 + r)^n ), where ( PV = $60,000 ), ( r = 0.02 ) (2% inflation), and ( n = 3 ) years. Thus, ( FV = 60,000 \times (1.02)^3 = 60,000 \times 1.061208 = 67,248 ).A) $63,600: This calculation only accounts for one year of inflation.B) $66,000: This incorrectly assumes linear growth without compounding.D) $68,634: This overestimates the future value, perhaps assuming a higher rate or more years of compounding.Relevant Rule: Retirement planning must consider inflation to accurately project future living expenses, as outlined in financial planning best practices and guidelines by professional bodies like the Financial Planning Standards Council (FPSC).

C) Her accrued benefits will be frozen, but she will retain what she has earned: When Linda leaves her job, her accrued benefits in the DB plan are generally frozen at the value they have reached, and she retains the right to receive them upon retirement.A) Her pension benefits will be forfeited if she leaves the employer: This is incorrect; she retains her accrued benefits.B) Her pension benefits will continue to grow with salary increases from her new job: The benefits in her former employer’s DB plan do not grow with her new salary.D) Her accrued benefits will be transferred to her new employer’s DB plan: DB plans typically do not transfer accrued benefits between employers.Relevant Rule: Defined Benefit (DB) pension plans are governed by provincial pension legislation such as Ontario’s Pension Benefits Act, which protects the accrued benefits of plan members.

B) Employer contributions to a Registered Pension Plan (RPP): These contributions are non-taxable to the employee at the time they are made. They are only taxed when the employee receives benefits from the pension plan.A) Employer-paid group term life insurance premiums: These premiums are considered a taxable benefit to the employee.C) Employer-provided housing: This is generally considered a taxable benefit, except in certain specific circumstances.D) Employer-paid gym membership fees: These are generally considered a taxable benefit.Relevant Rule: The Canada Revenue Agency (CRA) provides guidelines on the tax treatment of employee benefits, specifying which benefits are taxable and which are not, under the Income Tax Act (Canada).

B) Her monthly benefits will be reduced by 0.6% for each month before age 65: This is the correct reduction rate for starting CPP benefits early. Starting at age 60 results in a total reduction of 36% (0.6% x 60 months).A) Her monthly benefits will be reduced by 5% for each year before age 65: This is incorrect; the reduction is 0.6% per month.C) Her monthly benefits will be increased by 0.7% for each month after age 60: The 0.7% increase applies to delaying CPP benefits past age 65, not for starting early.D) Her monthly benefits will remain the same regardless of when she starts: This is incorrect; the benefits are reduced if taken before age 65.Relevant Rule: The Canada Pension Plan (CPP) benefit adjustments for early or late retirement are specified by the Canada Pension Plan regulations, which are administered by Service Canada.

C) Providing tax benefits to minor children and grandchildren: Testamentary trusts can provide tax benefits, including income splitting opportunities, which can be particularly beneficial for minor children and grandchildren by taxing trust income at lower rates.A) Avoiding probate fees entirely: While trusts can help reduce probate fees, they do not avoid them entirely.B) Ensuring immediate distribution of assets to beneficiaries: Testamentary trusts are used to manage the distribution of assets over time, not necessarily immediately.D) Allowing for the tax-free transfer of assets: While trusts offer various tax benefits, they do not enable tax-free transfers of all assets.Relevant Rule: Testamentary trusts are governed by the Income Tax Act (Canada) and provincial estate laws, providing specific tax benefits and structuring options for beneficiaries.

C) By determining the correlation of the new investment with the existing portfolio: Modern Portfolio Theory (MPT) emphasizes the importance of diversification. Adding an asset with low or negative correlation to the existing portfolio can reduce overall risk while potentially increasing returns.A) By comparing the new investment’s volatility to the market volatility: This alone does not consider how the investment interacts with the existing portfolio.B) By calculating the Sharpe ratio of the new investment: While the Sharpe ratio is useful, it evaluates risk-adjusted return in isolation and does not address the impact on the overall portfolio.D) By ensuring the new investment has the highest possible return: High return is important, but without considering correlation and diversification, it may increase portfolio risk disproportionately.Relevant Rule: Modern Portfolio Theory (MPT), developed by Harry Markowitz, is a foundational concept in portfolio management, emphasizing diversification and the correlation of assets to manage risk and return.

B) The portfolio’s returns are expected to be within ± 12% of the average return about 68% of the time: This is the correct interpretation of standard deviation in the context of a normal distribution. Approximately 68% of the time, returns will fall within one standard deviation (± 12%) of the mean (8%), meaning between -4% and 20%.A) The portfolio has low risk because the average return is high: A high average return does not necessarily indicate low risk; standard deviation is the risk measure here.C) The portfolio’s returns will never fall below 8%: This is incorrect; returns can fall below the average return.D) The portfolio has low risk if the standard deviation is lower than 15%: Risk should be assessed relative to the investor’s risk tolerance and other factors, not by an arbitrary standard.Relevant Rule: Understanding portfolio risk involves statistical measures like standard deviation, as outlined in financial analysis frameworks and tools used in investment management.

C) She can recontribute the $20,000 starting in the next calendar year: Withdrawals from a TFSA are added back to the contribution room in the following calendar year, allowing Laura to recontribute the amount withdrawn.A) Her future contribution room will be reduced permanently by $20,000: This is incorrect; the withdrawal amount is added back to future contribution room.B) She can recontribute the $20,000 at any time without impacting her TFSA limit: She must wait until the next calendar year to recontribute without penalty.D) She will be taxed on the withdrawal, reducing her contribution room by $20,000: TFSA withdrawals are not taxed, and the contribution room is restored in the next calendar year.Relevant Rule: The rules regarding TFSA contributions and withdrawals are specified in the Income Tax Act (Canada), which outlines how contribution room is calculated and restored.

B) Incorporating environmental, social, and governance (ESG) factors into investment decisions: This is a hallmark of responsible investing, which considers ESG factors to achieve sustainable and ethical outcomes along with financial returns.A) Focusing solely on investments that yield the highest financial return: Responsible investing balances financial return with ESG factors, not focusing solely on returns.C) Excluding all technology companies from the portfolio: This is not a characteristic of responsible investing; decisions are based on ESG criteria, not excluding entire sectors without consideration.D) Ensuring all investments are in local companies: Responsible investing can be global, focusing on ESG factors rather than geographic restrictions.Relevant Rule: Responsible investment practices are guided by frameworks like the United Nations Principles for Responsible Investment (UN PRI), which provide standards and guidelines for incorporating ESG factors into investment decision-making.

C is correct because a balanced portfolio for a moderate risk tolerance and long-term horizon should have a diversified mix that includes a significant portion in equities for growth, fixed income for stability, and cash for liquidity.A is incorrect as it is too aggressive for a moderate risk tolerance, being heavily weighted towards equities.B is incorrect because it is too conservative for someone with a long-term horizon, reducing potential growth opportunities.D is incorrect due to the inclusion of commodities, which may introduce unnecessary volatility for a moderate-risk investor.Relevant regulation: The asset allocation process should comply with the client’s investment policy statement (IPS) as per the Canadian Securities Administrators’ (CSA) regulations on Know Your Client (KYC) and suitability obligations.

C is correct because the intrinsic value using the DCF model can be calculated using the formula:[ \text{Value} = \frac{\text{FCF}}{WACC – g} ]Where FCF is the free cash flow for next year, WACC is the weighted average cost of capital, and g is the growth rate. Plugging in the values:[ \text{Value} = \frac{50,000,000}{0.10 – 0.05} = \frac{50,000,000}{0.05} = 1,000,000,000 ]A, B, and D are incorrect as they result from incorrect calculations or misunderstandings of the DCF formula.Relevant regulation: This method follows principles of fundamental analysis as outlined in CSA regulations and best practices in the investment industry.

B is correct because Bond B, with its longer duration, is more sensitive to changes in interest rates. When interest rates fall, the price of longer-duration bonds increases more than shorter-duration bonds.A is incorrect because although Bond A has a higher coupon rate, the focus should be on interest rate sensitivity (duration) rather than cash flow in this scenario.C is incorrect because a lower yield to maturity is less relevant in the context of interest rate changes compared to duration.D is incorrect because while a higher yield to maturity generally implies higher returns, it doesn’t account for the impact of falling interest rates on bond prices.Relevant regulation: Understanding bond pricing and volatility is crucial for adhering to CSA guidelines on portfolio management and client suitability.

A is correct because the PEG ratio is calculated as:[ \text{PEG ratio} = \frac{P/E \text{ ratio}}{\text{Earnings growth rate}} ]Given the P/E ratio of 25 and the growth rate of 15% (0.15 in decimal form):[ \text{PEG ratio} = \frac{25}{0.15} = 1.67 ]A PEG ratio of 1 or less is generally considered attractive as it indicates the stock may be undervalued relative to its growth prospects. Although 1.67 is higher than 1, it is still considered relatively attractive in certain contexts, especially if the growth prospects are robust.B, C, and D are incorrect due to incorrect calculations or misinterpretation of the PEG ratio metric.Relevant regulation: This method aligns with the principles of equity analysis and valuation as recommended by the Canadian Securities Administrators (CSA).

B is correct because the yield to maturity (YTM) for a zero-coupon bond can be calculated using the formula:[ P = \frac{F}{(1 + r)^n} ]Where:( P ) is the current price of the bond ($376.89)( F ) is the face value of the bond ($1,000)( r ) is the yield to maturity( n ) is the number of years to maturity (15)Rearranging for ( r ):[ r = \left(\frac{F}{P}\right)^{1/n} – 1 = \left(\frac{1000}{376.89}\right)^{1/15} – 1 ]Plugging in the numbers:[ r = \left(\frac{1000}{376.89}\right)^{1/15} – 1 \approx 0.05 \text{ or } 5% ]A, C, and D are incorrect due to miscalculations or misinterpretation of the YTM formula.Relevant regulation: Calculating the YTM of bonds is essential for compliance with investment performance evaluation standards as per CSA guidelines.

B is correct because a Market Neutral strategy aims to mitigate risk by taking equal long and short positions in the market, seeking to profit from relative value differences while reducing overall market exposure. This strategy aligns with Mr. Thompson’s goal of risk mitigation and potential for capital appreciation.A is incorrect because Global Macro strategies involve significant exposure to macroeconomic trends and can be highly volatile.C is incorrect because Long/Short Equity strategies, while potentially lucrative, still carry substantial market risk due to directional bets on stock prices.D is incorrect because Distressed Securities strategies focus on investing in troubled companies, which can be highly risky and may not align with the goal of risk mitigation.Relevant regulation: Understanding different hedge fund strategies is crucial for compliance with portfolio management and diversification standards as outlined by the CSA.

A is correct because the percentage change in bond price is approximately equal to the negative duration multiplied by the change in interest rates. For Bond X:[ \text{Price change} = -7 \times 1% = -7% ]For Bond Y:[ \text{Price change} = -12 \times 1% = -12% ]B, C, and D are incorrect due to incorrect calculations or misinterpretation of the duration impact.Relevant regulation: Understanding the duration and its impact on bond pricing is crucial as per CSA guidelines on fixed income securities.

B is correct because the time-weighted rate of return (TWRR) eliminates the impact of cash flows and measures the compound rate of growth. The TWRR is calculated as follows:[ \text{TWRR} = \left(\frac{1,150,000 – 50,000}{1,000,000}\right) \times 100 = \left(\frac{1,100,000}{1,000,000}\right) \times 100 = 1.15 \times 100 = 15% ]A, C, and D are incorrect due to miscalculations or misunderstandings of the TWRR formula.Relevant regulation: Accurate performance measurement and reporting are mandated by the Global Investment Performance Standards (GIPS) and CSA regulations.

C is correct because in Canada, both capital gains and dividend distributions from ETFs are subject to taxation in the year they are received. Investors must report these distributions on their tax returns.A is incorrect because distributions are taxed in the year they are received, not just when the ETF is sold.B is incorrect as it incorrectly states that dividend distributions are not taxed, whereas they are.**D is partially correct but does not apply to general tax treatment; it only applies if the ETF is held in a TFSA, where earnings are tax-free.Relevant regulation: The Income Tax Act governs the taxation of investment income in Canada, including distributions from ETFs.

A is correct because the current yield is calculated as:[ \text{Current Yield} = \frac{\text{Annual Coupon Payment}}{\text{Current Market Price}} = \frac{50}{950} = 5.26% ]The yield to maturity (YTM) can be approximated using the following formula:[ \text{YTM} \approx \frac{\text{Annual Interest Payment} + \frac{\text{Face Value} – \text{Current Price}}{\text{Years to Maturity}}}{\frac{\text{Face Value} + \text{Current Price}}{2}} ]Plugging in the values:[ \text{YTM} \approx \frac{50 + \frac{1000 – 950}{10}}{\frac{1000 + 950}{2}} \approx \frac{50 + 5}{975} \approx \frac{55}{975} \approx 5.59% ]B, C, and D are incorrect due to incorrect calculations or misunderstanding of the formulas.Relevant regulation: Understanding bond yields is crucial for compliance with CSA guidelines on fixed income securities and accurate performance evaluation.

C is correct because this allocation balances low risk with a steady income. A high allocation to fixed income (60%) provides steady interest payments, while a smaller allocation to equities (20%) offers potential for some growth. The cash (20%) ensures liquidity and safety.A is incorrect because it is too aggressive for someone with low risk tolerance, with a high allocation to equities.B is incorrect because it includes real estate, which might not provide the steady income and low risk that Mr. Williams requires.D is incorrect because it includes a significant allocation to commodities, which can be highly volatile and unsuitable for a low-risk retiree.Relevant regulation: This strategy aligns with CSA guidelines on asset allocation and suitability based on risk tolerance and investment horizon.

B is correct because the geometric average return is calculated as follows:[ \text{Geometric Average Return} = \left( \prod_{i=1}^{n} (1 + R_i) \right)^{\frac{1}{n}} – 1 ]Where ( R_i ) are the annual returns. The returns for each year are:Year 1: (\frac{540,000 – 500,000}{500,000} = 0.08 \text{ or } 8%)
Year 2: (\frac{580,000 – 540,000}{540,000} = 0.0741 \text{ or } 7.41%)
Year 3: (\frac{620,000 – 580,000}{580,000} = 0.06897 \text{ or } 6.897%)Thus,[ \text{Geometric Average Return} = \left( (1 + 0.08) \times (1 + 0.0741) \times (1 + 0.06897) \right)^{\frac{1}{3}} – 1 \approx 1.0500 – 1 = 0.05 \text{ or } 5.00% ]A, C, and D are incorrect due to miscalculations of the geometric average return formula.Relevant regulation: Accurate performance measurement is essential for adherence to GIPS standards and CSA regulations on portfolio performance evaluation.