If Linda tells you that she bought a stock at 5 dollars and says it is currently 4 dollars, so she doesn’t want to sell it. What behavioral bias is she exhibiting?
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If Linda tells you that she bought a stock at 5 dollars and says it is currently 4 dollars, so she doesn’t want to sell it. What behavioral bias is she exhibiting?
Behavioral bias occurs when people attach emotions to their investments, leading to irrational and illogical investment decisions.
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- Suppose that Ike is loss averse. In the morning, Ike’s stockbroker calls to tell him that he has gained $1,000 on his stock portfolio. In the evening, his accountant calls to tell him that he owes an extra $1,000 in taxes. At the end of the day, does Ike feel emotionally neutral since the dollar value of the gain in his stock portfolio exactly offsets the amount of extra taxes he has to pay? Explain.If a client had used a commission-free broker to trade stock options, but the client is dependent in college, and the client LOST money; would the client have to pay a tax?Cara wants to make sure that her stock portfolio will not have to go through probate when she dies. She wants these stocks to go to her daughter, Jolene, but does not want Jolene to have any control of the stocks until Cara dies. Cara wants to continue having exclusive right to the income from the stocks until she dies. Cara does not want to pay any gift tax. Which one of the following is the most appropriate form of will substitute for Cara to use? A)Place the stocks in joint tenancy with right of survivorship with Jolene B)Place the stocks in an inter vivos irrevocable trust C)Give Jolene a general power of appointment over the portfolio D)Name Jolene as the transfer on death beneficiary of the portfolio
- JoJo is a doctor by day but her favorite evening activity is her stock portfolio. She usually spends at least a couple of hours every evening – sometimes a few hours on weekends, too – studying the market and deciding what stocks to buy, hold, or sell. JoJo started with $10,000 five years ago and is justifiably proud that she has grown her portfolio to more than $25,000 as of today. JoJo is your new tax return client. She clearly isn’t a “dealer,” so it’s up to you to analyze her portfolio-related activity and classify her for FIT purposes as either – an investor, or a trader. Which category do you conclude is the correct one for JoJo, and why?Understand the reporting effect: If Brooke sells the stock and includes the $80,000 gain in pretax income, will she get her bonus? Assume any bonus paid to Brooke is not included in calculating pretax income. Specify the options: Instead of reporting the gain as part of pretax income, how else might Brooke report the gain on the sale? Identify the impact: Does Brooke's decision to classify the gain on the sale of treasury stock as part of pretax income affect the company?Miss Good wants to buy BAD stock, which is selling for $5 per share. She can buy on margin. The initial margin requirement is 40%, and the maintenance margin is 30%. If the price decreases to $3.5, will Miss Good receive a margin call? If she does receive a margin call, but she does nothing (because she is traveling to the Moon). Then how many shares should the broker sell to keep the margin above the maintenance margin?
- Brittany Callihan sold stock (basis of 184,000) to her son, Ridge, for 160,000, the fair market value. a. What are the tax consequences to Brittany? b. What are the tax consequences to Ridge if he later sells the stock for 190,000? For 152,000? For 174,000? c. Prepare your solution using spreadsheet software such as Microsoft Excel. The spreadsheet should compute the gain or loss for Ridge for all scenarios. Use the IF function to compute the right of offset. d. Write a letter to Brittany in which you inform her of the tax consequences if she sells the stock to Ridge for 160,000. Explain how a sales transaction could be structured that would produce better tax consequences for her. Brittanys address is 32 Country Lane, Lawrence, KS 66045.Kathy Myers frequently purchases stocks and bonds, but she is uncertain how to determine the rate of return that she is earning. For example, three years ago she paid $24,000 for 980 shares of Malti Company’s common stock. She received a $823 cash dividend on the stock at the end of each year for three years. At the end of three years, she sold the stock for $22,000. Kathy would like to earn a return of at least 10% on all of her investments. She is not sure whether the Malti Company stock provide a 10% return and would like some help with the necessary computations. Required: 1. Compute the net present value that Kathy earned on her investment in Malti Company stock. 2. Did the Malti Company stock provide a 10% return?Michael has decided to retire from his business and pass the business on to his oldest child, Taylor. He does not want the value of his shares to grow over time. Michael’s shares have an ACB and PUC of $200 and a FMV of $300,000. He plans to use an estate freeze using Section 86. If Michael plans only to take shares as consideration for the exchange, describe the shares that he’ll take as exactly as you can. The type of shares, what happens to their value over time, their attributes such as ACB/PUC/FMV.
- Barbara Simmons purchased 100 shares of Home Depot stock for $187 per share, using as little of her own money as she could. Her broker has a 55% initial margin requirement and a 45% maintenance margin requirement. If the price of Home Depot stock falls to $142 per share, what does Barbara need to do?Sarah Mix is a single 30-year-old business owner who has $500 a month toinvest. This money is in excess of the contribution to her company pensionplan. Sarah hears that many of her friends are investing in mutual funds. Hergrandfather, Grandpa Russ, invested in the stock market and lost everything.He advises her to invest only in bonds. Her uncle, Sam, thinks thatshe should invest in stock mutual funds, but only in conservatively managedfunds that invest in U.S. blue-chip stocks. Sarah notes that her Grandpais 70 years old and her uncle is 55 years old. Her friend Jane, who is also30 years old, said she only invests in small capital growth funds.a. What should you advise Sarah to invest in?b. Why do you think these people have different investment strategies?Suppose you are 28 and married. You and your spouse file for income taxes jointly. You are in the 25% tax bracket. You are considering a few personal investment issues. Suppose you believe that the security market is at efficient in the semi-strong form. You are considering buying some mutual fund shares in your investment accounts. Which of the following statements is correct? a. Actively managed funds are good choices because they may consistently beat the market, they are tax efficient and have lower expenses. b. Actively managed funds are not good choices because they cannot consistentlybeat the market although they are tax efficient and have lower expenses. c. Index funds are not good choices because they are not tax efficient, their management fees are higher although actively managed funds cannot consistently beat the market. d. Index funds are good choices because they are tax efficient and have lower expenses and because actively managed funds cannot consistently beat the…
