Financial CME #5: Test Your Knowledge

October 17th, 2018
17

This is the fifth of a recurring series of quizzes to test your knowledge on physician personal finance and investing topics. Some people learn best by reading textbooks. Others like listening to lectures in a course format. This series of quizzes is designed for the physician or other high-income professional who learns best by doing questions.

Each quiz will have ten or so questions. To see the answer, click the “Show Answer” button under each question.

No actual CME can be earned with these quizzes, but hopefully you’ll learn something by answering the questions and reading the explanations. Good luck!

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The correct answer is D. The daily price correlation between the S&P 500 and the total stock market index is over 99%. While the total stock market does have small-cap and mid-cap exposure that the S&P 500 does not have, funds tracking either index would be reasonable choices for the U.S. stock component of an investor’s portfolio.

Related Article: Should You Invest in the S&P 500 or the Total Stock Market?

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The correct answer is B. A covered call strategy consists of selling a call option while holding the underlying stock. If the stock price closes above the strike price at the expiration date, the option will be exercised and you will sell the stock at the strike price (which is usually selected to be higher than the current stock price). If it closes below the strike price, then the option expires worthless and you collect the premium. While a covered call might appear to be a win-win strategy, you cap much of your upside if the stock closes significantly above the strike price.

Related Article: How Do Stock Options Work? Part 2: Common Options Strategies

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The correct answer is A. The expense ratio is the percentage of your investment which is taken by the mutual fund manager in the form of fees.

Related Article: This Is The First Number I Look At When Choosing Mutual Funds

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The correct answer is D. Capital gains taxes are only paid on investment profits when shares are sold. This provides a strong incentive to minimize trading in taxable accounts. Taxes are due on dividends in the tax year they are paid by the company.

Related Article: Pick Your Taxable Account Allocation Wisely

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The correct answer is B. Since World War II, the stock market has had a correction approximately once every 16 months. You should be mentally prepared to handle these types of volatile moves in the stock market and stay the course.

Related Article: How To Stay The Course And Stick With Your Investment Plan

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The correct answer is A. Backtesting is used by some investors or traders to assess how a proposed trading strategy would have performed using historical data. However, just like retrospective research in medicine, it is prone to multiple hypothesis testing errors (p-hacking) and publication bias. Backtested trading strategies that appear profitable using historical data may not prove to be profitable if used in the future.

Related Article: Backtesting Is Finance’s Version of Retrospective Research

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The correct answer is B. The maximum Roth IRA contribution in 2018 is $5,500. The maximum HSA contribution for a family on a high-deductible health plan is $6,900. The maximum employee 401(k) contribution in 2018 is $18,500.

Related Article: It’s Official: Backdoor Roth IRAs Are Legal!

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The correct answer is C. Contrary to popular belief, the loan forgiveness amount once you complete the PSLF program is not subject to federal taxes. The majority of (but not all) hospital employed positions would qualify for PSLF. The 120 months of qualifying payments do not necessarily begin when you formally enroll in the program; if you are making qualifying loan payments, then you can still apply them to PSLF retroactively if you sign up for the program later. If you are in the PSLF program, you should generally minimize your student loan payments to maximize the amount of eventual loan forgiveness.

Related Article: Debunking 4 Myths About Public Service Loan Forgiveness (PSLF)

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The correct answer is C. The 2017 Tax Cuts and Jobs Act increased the number of families who are eligible for the child tax credit by increasing the income phaseout level from $110,000 to $400,000. The maximum child tax credit is $2,000 per child, and you lose $50 in tax credit for every $1,000 in modified adjusted gross income above $400,000. Therefore, a partial credit can be claimed by married taxpayers earning $400,001-$440,000. This means that many more attending physicians will be eligible for the child tax credit as a result of the tax cut.

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The correct answer is D. In an hourly rate financial advisory model, the client pays the advisor per hour of work. This is similar to how lawyers charge for their services. In this model, financial advisors are incentivized to work and bill as many hours as possible. On the other hand, an assets-under-management model provides only indirect incentives to do extra work for clients since they are paid a percentage of assets regardless of how many hours are spent managing the client’s finances.

Related Article: Understanding The Conflicts Of Interest of Financial Advisors

What do you think? How’d you do on the quiz?

17 COMMENTS

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    Point on #7: Roth IRA can go up to $6,500 for those over 50. Also you can contribute for a non-working spouse. That allows another $5,500 or $6,500 depending on the spouse’s age.

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