Investment Strategies Flashcards
7 cards from real CEP practice questions. Tap to flip, then mark Knew It or Still Learning — missed cards come back until you master them.
Read the first 7 Investment Strategies flashcards as text
A financial advisor suggests using a 'collar strategy' on concentrated employer stock. What does a collar involve?
Answer: Buying put options and selling call options to bracket the stock price
A collar limits both downside risk (via a purchased put) and upside gain (via a sold call), protecting the value of a concentrated position within a defined price range.
Which of the following is a primary benefit of using an exchange fund to diversify a concentrated stock position?
Answer: It allows the investor to diversify without triggering an immediate taxable event
An exchange fund allows an investor to contribute appreciated shares and receive a partnership interest in a diversified pool, deferring the capital gain that would otherwise arise from an outright sale.
When must a Section 83(b) election be filed after receiving restricted property subject to a substantial risk of forfeiture?
Answer: Within 30 days of the transfer
An 83(b) election must be filed with the IRS within 30 days of the date of transfer of the restricted property; missing this deadline permanently forfeits the election.
An employee exercises NQSOs and immediately sells the acquired shares. Which tax rates apply to the transaction?
Answer: The spread is taxed as ordinary income; any additional post-exercise gain is capital gain
For NQSOs, the spread at exercise is ordinary compensation income (subject to payroll taxes), and any subsequent appreciation from exercise price to sale price is a short- or long-term capital gain.
What is the purpose of a 'Rule 144' filing when a company affiliate sells restricted or control securities?
Answer: To satisfy volume, holding period, and manner-of-sale conditions allowing affiliate sales without full registration
Rule 144 provides a safe harbor for affiliates and holders of restricted securities to sell without registration, provided they comply with holding period, volume limits, current public information, and manner-of-sale requirements.
Which of the following best describes 'dollar-cost averaging' as applied to equity compensation decisions?
Answer: Exercising or selling equity grants in scheduled increments to reduce timing risk
Dollar-cost averaging in this context means systematically exercising or selling equity awards in regular installments to reduce the risk of choosing a single unfavorable price point.
Under Section 409A, what is the consequence of a non-compliant deferred compensation arrangement?
Answer: The deferred amount becomes immediately taxable plus a 20% excise tax and interest penalty
Section 409A violations cause the deferred amount to be included in gross income immediately, subject to an additional 20% excise tax plus premium interest, making compliance critical.