David Hoch, a graduate student at Miami University, is putting together a research paper on differences in asset allocations between countries. Hoch’s paper contains the following statements: Statement 1: Countries with higher income tax rates typically have lower allocations to bonds. Statement 2: Countries with older populations typically have lower allocations to equities. Statement 3: A strong government pension program may decrease the average equity allocation of a country’s citizens. Statement 4: Countries with an historical aversion to financial risk typically have lower allocations to equities. Hoch’s finance professor, Walter Denk, reads his research paper. Which of the following conclusions would be most valid for Denk to make? A) Statement 2 reflects a common reason why average asset allocations differ across countries, but Statement 3 does not. B) Both Statements 1 and 4 reflect common reasons why average asset allocations differ across countries. C) Statement 1 reflects a common reason why average asset allocations differ across countries, but Statement 2 does not. D) Statement 3 reflects a common reason why average asset allocations differ across countries, but Statement 1 does not. Your answer: D was incorrect. The correct answer was B) Both Statements 1 and 4 reflect common reasons why average asset allocations differ across countries. Average asset allocations differ across countries for reasons related to demographics, social factors, legal constraints, and taxation. Each of the four statements made by Hoch are an example of one of these factors, therefore all four of the statements reflect common reasons why average asset allocations differ across countries. I am not able to understand why statement 1 is true… Is it b/k bonds pay interest which is taxed at higher rate than capital gain? But on the otger side, wont they invest more in tax free bonds? pls help…
High allocations to muni bonds in a country with high taxation would be very common. But, corporate bonds would pay coupons that are taxed heavily. This is a bad question in my opinion.
Ya i think the tax on the interst income is the reason…capital gains tax can be postponed but one has to pay the tax on the periodic interest income…but phew!!! requires a lot of thinking…
What is the source? I find some Schweser questions are stupid like this one.
Schweser Q-bank