AWMA Test Review 1 Exam Questions
Answered Correctly (Qs) 2026 update
If ABC Corporation has net profits of $100,000 and distributes $50,000 as dividends, what is its taxable
income?
A. $0
B. $25,000
C. $50,000
D. $100,000 - CORRECT ANSWERS The net profits of a corporation are subject to federal
income taxation. This tax is levied on corporate taxable income before payment of dividends to common
and preferred shareholders. Thus, if ABC Corporation has net profits of $100,000 and distributes
$50,000 as dividends, its taxable income is still $100,000. Distribution of profits as dividends does not
reduce taxable income for a corporation
Qualified Plans - CORRECT ANSWERS Meet the stringent requirements of the IRC as well as
those of the ERISA and therefore qualify for favorable tax treatment. In pension and profit sharing plans
an employee is generally not taxed on employer contributions or accumulated earnings until the funds
are actually received from the plan. The employer receives a deduction at the time of contribution. for
qualified stock option plans the employee is not taxed until it is sold.
Nonqualified plans - CORRECT ANSWERS Do not qualify for special tax treatment. They don't
permit the employer to take a deduction for plan contributions until the employee reports income from
the plan, which is often at retirement. Earnings not tax deferred - earnings are taxed to the employer or
employee depending on the plans design
Nonqualified deferred comp plan - CORRECT ANSWERS Do not qualify for the same special
tax treatment. They do not permit the employer to take a deduction for plan contributions until the
employee reports income from the plan, which is often at retirement. Also, the earnings on plan assets
are not tax deferred; instead, earnings are taxed to the sponsor(employer) or to the participant
(employee), depending on the plan design. The irs rules do permit an employee to agree to defer
income to a nonqualified plan and not be taxed on the deferral until some point in the future if the 3
rules are followed.
Economic Benefit - CORRECT ANSWERS A taxpayer has income when he receives the
economic benefit of the proceeds. This occurs when the employer irrevocably places funds for the
,benefit of the employee beyond the reach of the employers creditors. Income is thus received if the
employee does not have actual or even constructive receipt.(applies to funded plans)
Corporate owned life insurance - CORRECT ANSWERS commonly used by employers to
informally fund future benefit obligations such as those promised under a deferred comp plan. As the
owner of the policies the employer is responsible for paying the premiums. The employer is also the
beneficiary of the policies and retains all rights to policy benefits, including the cash value buildup and
the death proceeds.
COLI is attractive to employers because it - CORRECT ANSWERS 1. Provides psychological
assurance to deferred comp plan participants that their benefit are secure.
2. reduces strain on the companys cash flow when plan distributions are due
3. provides tax-deferred, and possibly tax free buildup of cash value; and
4. enables the employer to recover some/all of the plan costs.
Changes that have occurred since investment firms changed from private partnerships to publicly traded
companies include all of the following except:
A. risk taking has increased.
B. profits can be privatized (bonuses) and losses socialized (bailouts).
C. there is greater individual accountability.
D. partners no longer share in both the profits and losses of the firm. - CORRECT ANSWERS
C. The repeal of Glass-Steagall accelerated the conversion of investment firms that had been structured
as partnerships into publicly traded companies that took on more risk. This transferred much of the risk
and accountability from general partners to public shareholders
Equity REITS - CORRECT ANSWERS Equity REITs own real estate properties and earn income
from rents, and made up 94.4% of the REIT market (by capitalization) at the end of 2015. Upon the sale
of the properties, a capital gain is earned. Generally, income from rents can be expected to increase
each year. Equity REITs are appropriate when one objective is to provide an inflation hedge
Mortgage REITs. - CORRECT ANSWERS Mortgage REITs are similar to bond mutual funds, and
make up approximately 5.6% of the REIT market. No ownership interest in the underlying real estate
property exists. Instead, the fund invests in mortgages used by equity owners of the real estate
properties to finance their acquisition of the properties. Mortgage REITs may also invest in GNMA. pools
or other mortgage backed securities. They generally do not participate in capital gains on the sale of real
estate properties, but their income is higher than that of equity REITs. Mortgage REITs do not provide
inflation
, protection.
Which one of the following is an advantage of equity REITs over mortgage REITs? - CORRECT ANSWERS
Equity REITs can participate in the appreciation of the underlying properties.
Equity REITs own the underlying real estate properties, giving the owners an opportunity to participate
in the net cash flows from the operation of the properties and in any appreciation in the market price of
the properties.
- CORRECT ANSWERS The intent of Dodd-Frank was to "harmonize" and blend fiduciary
rules that would pertain to both broker-dealers and investment advisers. Investment advisers are held
to a fiduciary standard and broker-dealers to a suitability standard under the current rules
One of the most important financial goals of wealthy individuals is - CORRECT ANSWERS The
most-stated life goals for wealthy individuals are having good health, travelling the world, and achieving
financial success. To achieve financial success, the most common financial goals are protecting wealth,
assuring retirement lifestyle, minimizing taxes, and leaving an estate to their heirs.
There are several kinds of strategies hedge funds use, and some approaches can be categorized. The
CAIA divides hedge funds into four main categories: - CORRECT ANSWERS 1. market
directional,
2. corporate restructuring,
3. convergence trading, and
4. opportunistic.
Equity (sector) long/short (market Directional) - CORRECT ANSWERS This is your classic
hedge fund approach, where the fund manager goes long a core group of stocks while also being short
other stocks, and/or futures or stock index options. At any given time the fund manager may be net long
or net short. For example, in bull markets, managers tend to be
net long, and in a bear market they may be net short. Sector long/short funds are just that—where a
fund manager specializes in a particular sector of the market, such as technology or health care. The
fund manager would go long stocks in the
category he or she believes will go up more in bull markets than the stocks he or she is short, and in bear
markets the expectation would be that the short stock positions would go down more than the long
stock positions.
Emerging markets (market Directional) - CORRECT ANSWERS Investing in emerging markets
primarily involves long positions, and the inefficiencies in terms of market and company information in
emerging markets may give hedge fund managers an edge if they study and get to know the market.
Answered Correctly (Qs) 2026 update
If ABC Corporation has net profits of $100,000 and distributes $50,000 as dividends, what is its taxable
income?
A. $0
B. $25,000
C. $50,000
D. $100,000 - CORRECT ANSWERS The net profits of a corporation are subject to federal
income taxation. This tax is levied on corporate taxable income before payment of dividends to common
and preferred shareholders. Thus, if ABC Corporation has net profits of $100,000 and distributes
$50,000 as dividends, its taxable income is still $100,000. Distribution of profits as dividends does not
reduce taxable income for a corporation
Qualified Plans - CORRECT ANSWERS Meet the stringent requirements of the IRC as well as
those of the ERISA and therefore qualify for favorable tax treatment. In pension and profit sharing plans
an employee is generally not taxed on employer contributions or accumulated earnings until the funds
are actually received from the plan. The employer receives a deduction at the time of contribution. for
qualified stock option plans the employee is not taxed until it is sold.
Nonqualified plans - CORRECT ANSWERS Do not qualify for special tax treatment. They don't
permit the employer to take a deduction for plan contributions until the employee reports income from
the plan, which is often at retirement. Earnings not tax deferred - earnings are taxed to the employer or
employee depending on the plans design
Nonqualified deferred comp plan - CORRECT ANSWERS Do not qualify for the same special
tax treatment. They do not permit the employer to take a deduction for plan contributions until the
employee reports income from the plan, which is often at retirement. Also, the earnings on plan assets
are not tax deferred; instead, earnings are taxed to the sponsor(employer) or to the participant
(employee), depending on the plan design. The irs rules do permit an employee to agree to defer
income to a nonqualified plan and not be taxed on the deferral until some point in the future if the 3
rules are followed.
Economic Benefit - CORRECT ANSWERS A taxpayer has income when he receives the
economic benefit of the proceeds. This occurs when the employer irrevocably places funds for the
,benefit of the employee beyond the reach of the employers creditors. Income is thus received if the
employee does not have actual or even constructive receipt.(applies to funded plans)
Corporate owned life insurance - CORRECT ANSWERS commonly used by employers to
informally fund future benefit obligations such as those promised under a deferred comp plan. As the
owner of the policies the employer is responsible for paying the premiums. The employer is also the
beneficiary of the policies and retains all rights to policy benefits, including the cash value buildup and
the death proceeds.
COLI is attractive to employers because it - CORRECT ANSWERS 1. Provides psychological
assurance to deferred comp plan participants that their benefit are secure.
2. reduces strain on the companys cash flow when plan distributions are due
3. provides tax-deferred, and possibly tax free buildup of cash value; and
4. enables the employer to recover some/all of the plan costs.
Changes that have occurred since investment firms changed from private partnerships to publicly traded
companies include all of the following except:
A. risk taking has increased.
B. profits can be privatized (bonuses) and losses socialized (bailouts).
C. there is greater individual accountability.
D. partners no longer share in both the profits and losses of the firm. - CORRECT ANSWERS
C. The repeal of Glass-Steagall accelerated the conversion of investment firms that had been structured
as partnerships into publicly traded companies that took on more risk. This transferred much of the risk
and accountability from general partners to public shareholders
Equity REITS - CORRECT ANSWERS Equity REITs own real estate properties and earn income
from rents, and made up 94.4% of the REIT market (by capitalization) at the end of 2015. Upon the sale
of the properties, a capital gain is earned. Generally, income from rents can be expected to increase
each year. Equity REITs are appropriate when one objective is to provide an inflation hedge
Mortgage REITs. - CORRECT ANSWERS Mortgage REITs are similar to bond mutual funds, and
make up approximately 5.6% of the REIT market. No ownership interest in the underlying real estate
property exists. Instead, the fund invests in mortgages used by equity owners of the real estate
properties to finance their acquisition of the properties. Mortgage REITs may also invest in GNMA. pools
or other mortgage backed securities. They generally do not participate in capital gains on the sale of real
estate properties, but their income is higher than that of equity REITs. Mortgage REITs do not provide
inflation
, protection.
Which one of the following is an advantage of equity REITs over mortgage REITs? - CORRECT ANSWERS
Equity REITs can participate in the appreciation of the underlying properties.
Equity REITs own the underlying real estate properties, giving the owners an opportunity to participate
in the net cash flows from the operation of the properties and in any appreciation in the market price of
the properties.
- CORRECT ANSWERS The intent of Dodd-Frank was to "harmonize" and blend fiduciary
rules that would pertain to both broker-dealers and investment advisers. Investment advisers are held
to a fiduciary standard and broker-dealers to a suitability standard under the current rules
One of the most important financial goals of wealthy individuals is - CORRECT ANSWERS The
most-stated life goals for wealthy individuals are having good health, travelling the world, and achieving
financial success. To achieve financial success, the most common financial goals are protecting wealth,
assuring retirement lifestyle, minimizing taxes, and leaving an estate to their heirs.
There are several kinds of strategies hedge funds use, and some approaches can be categorized. The
CAIA divides hedge funds into four main categories: - CORRECT ANSWERS 1. market
directional,
2. corporate restructuring,
3. convergence trading, and
4. opportunistic.
Equity (sector) long/short (market Directional) - CORRECT ANSWERS This is your classic
hedge fund approach, where the fund manager goes long a core group of stocks while also being short
other stocks, and/or futures or stock index options. At any given time the fund manager may be net long
or net short. For example, in bull markets, managers tend to be
net long, and in a bear market they may be net short. Sector long/short funds are just that—where a
fund manager specializes in a particular sector of the market, such as technology or health care. The
fund manager would go long stocks in the
category he or she believes will go up more in bull markets than the stocks he or she is short, and in bear
markets the expectation would be that the short stock positions would go down more than the long
stock positions.
Emerging markets (market Directional) - CORRECT ANSWERS Investing in emerging markets
primarily involves long positions, and the inefficiencies in terms of market and company information in
emerging markets may give hedge fund managers an edge if they study and get to know the market.
