CFAI 2012 exam Q 1E:
” Although amortizing ABS payments are not typically indexed for inflation (as Alonso’s salary is), the structure and payment stream of corporate amortizing ABS most closely resemble his human capital, from among the choices given”
I have trouble undersatnding this reasoning
also Q 2A ii- investment risk:
“Tax exempt investors bear all of the risk associated with returns in their accounts. Taxable accounts have the effect of sharing investment risk between the investor and the taxing authority. In negative-return years, losses can offset taxes on other income or gains. In positive-return years, after-tax return is lower than pre-tax return. This smoothing effect of taxes on investment returns (lower returns in positive years and higher returns in negative years) reduces the overall volatility of the return stream and, all else equal, reduces investment risk.”
How does it have a smoothing effect?
” Although amortizing ABS payments are not typically indexed for inflation (as Alonso’s salary is), the structure and payment stream of corporate amortizing ABS most closely resemble his human capital, from among the choices given”
I have trouble undersatnding this reasoning
also Q 2A ii- investment risk:
“Tax exempt investors bear all of the risk associated with returns in their accounts. Taxable accounts have the effect of sharing investment risk between the investor and the taxing authority. In negative-return years, losses can offset taxes on other income or gains. In positive-return years, after-tax return is lower than pre-tax return. This smoothing effect of taxes on investment returns (lower returns in positive years and higher returns in negative years) reduces the overall volatility of the return stream and, all else equal, reduces investment risk.”
How does it have a smoothing effect?