Question 1

Questionnaires and attitude surveys suggest that risk tolerance

Accepted Answer

A)  increases with age. 
B)  decreases with age. 
C)  stays constant over the life cycle for most investors. 
D)  cannot be assessed. 
E)  None of the options are correct. 
A)  increases with age. 
B)  decreases with age. 
C)  stays constant over the life cycle for most investors. 
D)  cannot be assessed. 
E)  None of the options are correct. B

Question 2

The feedback phase of the CFA Institute's investment management process

Accepted Answer

A)  uses data about the client and capital market. 
B)  uses details of optimal asset allocation and security selection. 
C)  uses changes in expectations and objectives. 
D)  All of the options are correct. 
E)  None of the options are correct. 
A)  uses data about the client and capital market. 
B)  uses details of optimal asset allocation and security selection. 
C)  uses changes in expectations and objectives. 
D)  All of the options are correct. 
E)  None of the options are correct. C

Question 3

Paulina Lesky is 27 years old and has accumulated $7,500 in her self-directed defined contribution pension plan. Each year she contributes $2,000 to the plan, and her employer contributes an equal amount. Paulina thinks she will retire at age 63 and figures she will live to age 90. The plan allows for two types of investments. One offers a 3% risk-free real rate of return. The other offers an expected return of 12% and has a standard deviation of 39%. Paulina now has 20% of her money in the risk-free investment and 80% in the risky investment. She plans to continue saving at the same rate and keep the same proportions invested in each of the investments. Her salary will grow at the same rate as inflation. Of the total amount of new funds that will be invested by Paulina and by her employer on her behalf, how much will Paulina put into the safe account each year; how much into the risky account?

Accepted Answer

A)  $1,500; $2,500 
B)  $1,200; $1,800 
C)  $800; $3,200 
D)  $1,250; $2,750 
E)  $1,400; $1,600 
A)  $1,500; $2,500 
B)  $1,200; $1,800 
C)  $800; $3,200 
D)  $1,250; $2,750 
E)  $1,400; $1,600 C

Question 4

__________ refer to strategies aimed at attaining the established rate of return requirements while meeting expressed risk tolerance and applicable constraints.

Accepted Answer

A)  Investment constraints 
B)  Investment objectives 
C)  Investment policies 
D)  All of the options are correct. 
E)  None of the options are correct. 
A)  Investment constraints 
B)  Investment objectives 
C)  Investment policies 
D)  All of the options are correct. 
E)  None of the options are correct.

Question 5

Suppose that the pre-tax holding period returns on two stocks are the same. Stock A has a high dividend-payout policy and stock B has a low dividend-payout policy. If you are an individual in a high marginal tax bracket and do not intend to sell the stocks during the holding period,

Accepted Answer

A)  stock A will have a higher after-tax holding period return than stock B. 
B)  the after-tax holding period returns on stocks A and B will be the same. 
C)  stock B will have a higher after-tax holding period return than stock A. 
D)  it is impossible to determine which stock will have a higher after-tax holding period return given the information available. 
A)  stock A will have a higher after-tax holding period return than stock B. 
B)  the after-tax holding period returns on stocks A and B will be the same. 
C)  stock B will have a higher after-tax holding period return than stock A. 
D)  it is impossible to determine which stock will have a higher after-tax holding period return given the information available.

Question 6

For an individual investor, the value of home ownership is likely to be viewed

Accepted Answer

A)  as a hedge against increases in rental rates. 
B)  as a guarantee of availability of a particular residence. 
C)  as a hedge against inflation. 
D)  as a hedge against increases in rental rates and as a guarantee of availability of a particular residence. 
E)  All of the options are correct. 
A)  as a hedge against increases in rental rates. 
B)  as a guarantee of availability of a particular residence. 
C)  as a hedge against inflation. 
D)  as a hedge against increases in rental rates and as a guarantee of availability of a particular residence. 
E)  All of the options are correct.

Question 7

The shortest time horizons are likely to be set by

Accepted Answer

A)  banks. 
B)  property and casualty insurance companies. 
C)  pension funds. 
D)  banks and property and casualty insurance companies. 
E)  property and casualty insurance companies and pension funds. 
A)  banks. 
B)  property and casualty insurance companies. 
C)  pension funds. 
D)  banks and property and casualty insurance companies. 
E)  property and casualty insurance companies and pension funds.

Question 8

One incorrect belief that is often cited as a reason for fully-funded pension funds to invest in equities is

Accepted Answer

A)  stocks have higher risk. 
B)  bonds have lower returns. 
C)  stocks provide a hedge against inflation. 
D)  stocks have higher returns. 
E)  All of the options are incorrect beliefs that are often cited. 
A)  stocks have higher risk. 
B)  bonds have lower returns. 
C)  stocks provide a hedge against inflation. 
D)  stocks have higher returns. 
E)  All of the options are incorrect beliefs that are often cited.

Question 9

Target-date retirement funds

Accepted Answer

A)  are funds of funds diversified across stocks and bonds. 
B)  are inappropriate for most investors. 
C)  have very high fees. 
D)  function much like hedge funds. 
A)  are funds of funds diversified across stocks and bonds. 
B)  are inappropriate for most investors. 
C)  have very high fees. 
D)  function much like hedge funds.

Question 10

Dusty Jones is 23 years old and has accumulated $4,000 in her self-directed defined contribution pension plan. Each year she contributes $2,000 to the plan, and her employer contributes an equal amount. Dusty thinks she will retire at age 67 and figures she will live to age 81. The plan allows for two types of investments. One offers a 3.5% risk-free real rate of return. The other offers an expected return of 10% and has a standard deviation of 23%. Dusty now has 5% of her money in the risk-free investment and 95% in the risky investment. She plans to continue saving at the same rate and keep the same proportions invested in each of the investments. Her salary will grow at the same rate as inflation. How much does Dusty currently have in the safe account; how much in the risky account?

Accepted Answer

A)  $3,800; $200 
B)  $2,000; $2,000 
C)  $200; $3,800 
D)  $2,500; $1,500 
E)  $1,500; $2,500 
A)  $3,800; $200 
B)  $2,000; $2,000 
C)  $200; $3,800 
D)  $2,500; $1,500 
E)  $1,500; $2,500

Question 11

The __________ the proportion of total return that is in the form of price appreciation, the __________ will be the value of the tax-deferral option for taxable investors.

Accepted Answer

A)  greater; greater 
B)  greater; lower 
C)  lower; greater 
D)  The answer cannot be determined from the information provided. 
E)  None of the options are correct. 
A)  greater; greater 
B)  greater; lower 
C)  lower; greater 
D)  The answer cannot be determined from the information provided. 
E)  None of the options are correct.

Question 12

Paulina Lesky is 27 years old and has accumulated $7,500 in her self-directed defined contribution pension plan. Each year she contributes $2,000 to the plan, and her employer contributes an equal amount. Paulina thinks she will retire at age 63 and figures she will live to age 90. The plan allows for two types of investments. One offers a 3% risk-free real rate of return. The other offers an expected return of 12% and has a standard deviation of 39%. Paulina Lesky is 27 years old and has accumulated $7,500 in her self now has 20% of her money in the risk-free investment and 80% in the risky investment. She plans to continue saving at the same rate and keep the same proportions invested in each of the investments. Her salary will grow at the same rate as inflation. How much can Paulina be sure of having in the safe account at retirement?

Accepted Answer

A)  $45,473 
B)  $62,557 
C)  $78,943 
D)  $54,968 
E)  $74,643 
A)  $45,473 
B)  $62,557 
C)  $78,943 
D)  $54,968 
E)  $74,643

Question 13

Alex Moore is 43 years old and has accumulated $78,000 in his self-directed defined contribution pension plan. Each year he contributes $1,500 to the plan, and his employer contributes an equal amount. Alex thinks he will retire at age 60 and figures he will live to age 83. The plan allows for two types of investments. One offers a 4% risk-free real rate of return. The other offers an expected return of 10% and has a standard deviation of 34%. Alex now has 40% of his money in the risk-free investment and 60% in the risky investment. He plans to continue saving at the same rate and keep the same proportions invested in each of the investments. His salary will grow at the same rate as inflation. Of the total amount of new funds that will be invested by Alex and by his employer on his behalf, how much will he put into the safe account each year; how much into the risky account?

Accepted Answer

A)  $1,500; $1,500 
B)  $1,200; $1,800 
C)  $2,000; $1,000 
D)  $2,500; $500 
E)  $1,400; $1,600 
A)  $1,500; $1,500 
B)  $1,200; $1,800 
C)  $2,000; $1,000 
D)  $2,500; $500 
E)  $1,400; $1,600

Question 14

Chris Silvers is 39 years old and has accumulated $128,000 in his self-directed defined contribution pension plan. Each year he contributes $2,500 to the plan, and his employer contributes an equal amount. Chris thinks he will retire at age 62 and figures he will live to age 86. The plan allows for two types of investments. One offers a 4% risk-free real rate of return. The other offers an expected return of 11% and has a standard deviation of 37%. Chris now has 25% of his money in the risk-free investment and 75% in the risky investment. He plans to continue saving at the same rate and keep the same proportions invested in each of the investments. His salary will grow at the same rate as inflation. Of the total amount of new funds that will be invested by Chris and by his employer on his behalf, how much will Chris put into the safe account each year; how much into the risky account?

Accepted Answer

A)  $2,500; $2,500 
B)  $3,200; $1,800 
C)  $3,000; $2,000 
D)  $1,250; $3,750 
E)  $2,400; $2,600 
A)  $2,500; $2,500 
B)  $3,200; $1,800 
C)  $3,000; $2,000 
D)  $1,250; $3,750 
E)  $2,400; $2,600

Question 15

Which of the following has a different tax treatment than the others?.

Accepted Answer

A)  traditional IRA. 
B)  Roth IRA 
C)  401k plan 
D)  deferred annuity 
A)  traditional IRA. 
B)  Roth IRA 
C)  401k plan 
D)  deferred annuity

Question 16

Assume that at retirement you have accumulated $750,000 in a variable annuity contract. The assumed investment return is 9%, and your life expectancy is 25 years. What is the hypothetical constant-benefit payment?

Accepted Answer

A)  $30,000.00 
B)  $33,333.33 
C)  $51,481.38 
D)  $76,354.69 
E)  The answer cannot be determined from the information provided. 
A)  $30,000.00 
B)  $33,333.33 
C)  $51,481.38 
D)  $76,354.69 
E)  The answer cannot be determined from the information provided.

Question 17

The main benefit of a Roth retirement plan is that _____________________.

Accepted Answer

A)  withdrawals are tax free. 
B)  contributions are made tax free 
C)  interest is tax deferred 
D)  no income limits exist on participation 
A)  withdrawals are tax free. 
B)  contributions are made tax free 
C)  interest is tax deferred 
D)  no income limits exist on participation

Question 18

Paulina Lesky is 27 years old and has accumulated $7,500 in her self-directed defined contribution pension plan. Each year she contributes $2,000 to the plan, and her employer contributes an equal amount. Paulina thinks she will retire at age 63 and figures she will live to age 90. The plan allows for two types of investments. One offers a 3% risk-free real rate of return. The other offers an expected return of 12% and has a standard deviation of 39%. Paulina now has 20% of her money in the risk-free investment and 80% in the risky investment. She plans to continue saving at the same rate and keep the same proportions invested in each of the investments. Her salary will grow at the same rate as inflation. How much does Paulina currently have in the safe account; how much in the risky account?

Accepted Answer

A)  $1,500; $6,000 
B)  $3,000; $4,500 
C)  $2,000; $5,500 
D)  $4,800; $2,700 
E)  $3,500; $3,500 
A)  $1,500; $6,000 
B)  $3,000; $4,500 
C)  $2,000; $5,500 
D)  $4,800; $2,700 
E)  $3,500; $3,500

Question 19

Pension fundsI) accept contributions from employers, which are tax deductible.II) pay distributions that are taxed as ordinary income.III) pay benefits only from the income component of the fund.IV) accept contributions from employees, which are not tax deductible.

Accepted Answer

A)  I and IV 
B)  II and III 
C)  I and II 
D)  I, II, and IV 
E)  I, II, III, and IV 
A)  I and IV 
B)  II and III 
C)  I and II 
D)  I, II, and IV 
E)  I, II, III, and IV

Question 20

Target-date retirement funds are not

Accepted Answer

A)  funds of funds diversified across stocks and bonds. 
B)  designed to change their asset allocation as time passes. 
C)  a simple, but useful, strategy. 
D)  designed to function much like hedge funds. 
A)  funds of funds diversified across stocks and bonds. 
B)  designed to change their asset allocation as time passes. 
C)  a simple, but useful, strategy. 
D)  designed to function much like hedge funds.

Exam 28: Investment Policy and the Framework of the Cfa Institute

Questionnaires and attitude surveys suggest that risk tolerance

The feedback phase of the CFA Institute's investment management process

__________ refer to strategies aimed at attaining the established rate of return requirements while meeting expressed risk tolerance and applicable constraints.

Suppose that the pre-tax holding period returns on two stocks are the same. Stock A has a high dividend-payout policy and stock B has a low dividend-payout policy. If you are an individual in a high marginal tax bracket and do not intend to sell the stocks during the holding period,

For an individual investor, the value of home ownership is likely to be viewed

The shortest time horizons are likely to be set by

One incorrect belief that is often cited as a reason for fully-funded pension funds to invest in equities is

Target-date retirement funds

The __________ the proportion of total return that is in the form of price appreciation, the __________ will be the value of the tax-deferral option for taxable investors.

Which of the following has a different tax treatment than the others?.

Assume that at retirement you have accumulated $750,000 in a variable annuity contract. The assumed investment return is 9%, and your life expectancy is 25 years. What is the hypothetical constant-benefit payment?

The main benefit of a Roth retirement plan is that _____________________.

Pension fundsI) accept contributions from employers, which are tax deductible.II) pay distributions that are taxed as ordinary income.III) pay benefits only from the income component of the fund.IV) accept contributions from employees, which are not tax deductible.

Target-date retirement funds are not

The Investment Environment

Asset Classes and Financial Instruments

How Securities Are Traded

Mutual Funds and Other Investment Companies

Risk, Return, and the Historical Record

Capital Allocation to Risky Assets

Efficient Diversification

Index Models

The Capital Asset Pricing Model

Arbitrage Pricing Theory and Multifactor Models of Risk and Return

The Efficient Market Hypothesis

Behavioral Finance and Technical Analysis

Empirical Evidence on Security Returns

Bond Prices and Yields

The Term Structure of Interest Rates

Managing Bond Portfolios

Macroeconomic and Industry Analysis

Equity Valuation Models

Financial Statement Analysis

Options Markets: Introduction

Option Valuation

Futures Markets

Futures, Swaps, and Risk Management

Portfolio Performance Evaluation

International Diversification

Hedge Funds

The Theory of Active Portfolio Management

Filters

The the proportion of total return that is in the form of price appreciation, the will be the value of the tax-deferral option for taxable investors.