Question 1

The planning 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.

Question 2

Assume that at retirement you have accumulated $825,000 in a variable annuity contract. The assumed investment return is 5.5%, and your life expectancy is 18 years. If the first year's actual investment return is 7%, what is the starting benefit payment?

Accepted Answer

A)  $30,000.00 
B)  $74,401.95 
C)  $51,481.38 
D)  $52,452.73 
E)  The answer cannot be determined from the information provided. 
A)  $30,000.00 
B)  $74,401.95 
C)  $51,481.38 
D)  $52,452.73 
E)  The answer cannot be determined from the information provided.

Question 3

Institutional investors will rarely invest in which of these asset classes?

Accepted Answer

A)  Bonds 
B)  Stocks 
C)  Cash 
D)  Real estate 
E)  Precious metals 
A)  Bonds 
B)  Stocks 
C)  Cash 
D)  Real estate 
E)  Precious metals

Question 4

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 can Paulina expect to have in her risky account at retirement?

Accepted Answer

A)  $1,800,326 
B)  $1,905,095 
C)  $1,743,781 
D)  $1,224,651 
E)  $345,886 
A)  $1,800,326 
B)  $1,905,095 
C)  $1,743,781 
D)  $1,224,651 
E)  $345,886

Question 5

Which of the following is considered a passive investment?

Accepted Answer

A)  income fund 
B)  value fund 
C)  growth fund 
D)  target date fund 
A)  income fund 
B)  value fund 
C)  growth fund 
D)  target date fund

Question 6

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. How much can Chris be sure of having in the safe account at retirement?

Accepted Answer

A)  $132,473 
B)  $162,557 
C)  $178,943 
D)  $189,211 
E)  $124,643 
A)  $132,473 
B)  $162,557 
C)  $178,943 
D)  $189,211 
E)  $124,643

Question 7

A ___________ is established when an individual confers legal title to property to another person or institution to manage the property for one or more beneficiaries.

Accepted Answer

A)  tax shelter 
B)  defined contribution plan 
C)  personal trust 
D)  fixed annuity 
E)  Keogh plan 
A)  tax shelter 
B)  defined contribution plan 
C)  personal trust 
D)  fixed annuity 
E)  Keogh plan

Question 8

Pension funds do notI) 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)  III and IV 
B)  II and III 
C)  I and II 
D)  I, II, and IV 
E)  I, II, III, and IV 
A)  III and IV 
B)  II and III 
C)  I and II 
D)  I, II, and IV 
E)  I, II, III, and IV

Question 9

Assume that at retirement you have accumulated $825,000 in a variable annuity contract. The assumed investment return is 5.5%, and your life expectancy is 18 years. What is the hypothetical constant-benefit payment?

Accepted Answer

A)  $73,358.93 
B)  $33,333.33 
C)  $51,481.38 
D)  $52,452.73 
E)  The answer cannot be determined from the information provided. 
A)  $73,358.93 
B)  $33,333.33 
C)  $51,481.38 
D)  $52,452.73 
E)  The answer cannot be determined from the information provided.

Question 10

The desirable components of an Investment Policy Statement for individual investors can be divided into

Accepted Answer

A)  three main elements consisting of scope and purpose, governance, and risk management. 
B)  three main elements consisting of scope and purpose, governance, and investment, return-and-risk objectives. 
C)  four main elements consisting of scope and purpose, governance, risk management, and feedback. 
D)  four main elements consisting of scope and purpose, governance, risk management, and investment, return-and-risk objectives. 
E)  five main elements consisting of scope and purpose, governance, risk management, investment, return-and-risk objectives, and evaluation. 
A)  three main elements consisting of scope and purpose, governance, and risk management. 
B)  three main elements consisting of scope and purpose, governance, and investment, return-and-risk objectives. 
C)  four main elements consisting of scope and purpose, governance, risk management, and feedback. 
D)  four main elements consisting of scope and purpose, governance, risk management, and investment, return-and-risk objectives. 
E)  five main elements consisting of scope and purpose, governance, risk management, investment, return-and-risk objectives, and evaluation.

Question 11

Endowment funds are held by

Accepted Answer

A)  charitable organizations. 
B)  educational institutions. 
C)  for-profit firms. 
D)  charitable organizations and educational institutions. 
E)  educational institutions and for-profit firms. 
A)  charitable organizations. 
B)  educational institutions. 
C)  for-profit firms. 
D)  charitable organizations and educational institutions. 
E)  educational institutions and for-profit firms.

Question 12

__________ center on the trade-off between the return the investor wants and how much risk the investor is willing to assume.

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 13

The execution 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.

Question 14

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 can Dusty be sure of having in the safe account at retirement?

Accepted Answer

A)  $37,221 
B)  $16,423 
C)  $11,856 
D)  $21,156. 
E)  $49,219 
A)  $37,221 
B)  $16,423 
C)  $11,856 
D)  $21,156. 
E)  $49,219

Question 15

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. How much can Alex expect to have in his risky account at retirement?

Accepted Answer

A)  $158,982 
B)  $309,530 
C)  $543,781 
D)  $224,651 
E)  $345,886 
A)  $158,982 
B)  $309,530 
C)  $543,781 
D)  $224,651 
E)  $345,886

Question 16

When a company sets up a defined contribution pension plan, the __________ bears all the risk, and the __________ receives all the return from the plan's assets.

Accepted Answer

A)  employee; employee 
B)  employee; employer 
C)  employer; employee 
D)  employer; employer 
E)  Cannot determine; depends on the economic environment. 
A)  employee; employee 
B)  employee; employer 
C)  employer; employee 
D)  employer; employer 
E)  Cannot determine; depends on the economic environment.

Question 17

Liquidity is

Accepted Answer

A)  the ease with which an asset can be sold. 
B)  the ability to sell an asset for a fair price. 
C)  the degree of inflation protection an asset provides. 
D)  the ease with which an asset can be sold and the ability to sell an asset for a fair price. 
E)  All of the options are correct. 
A)  the ease with which an asset can be sold. 
B)  the ability to sell an asset for a fair price. 
C)  the degree of inflation protection an asset provides. 
D)  the ease with which an asset can be sold and the ability to sell an asset for a fair price. 
E)  All of the options are correct.

Question 18

The optimal portfolio on the efficient frontier for a given investor does not depend on

Accepted Answer

A)  the investor's degree-of-risk tolerance. 
B)  the coefficient, A, which is a measure of risk aversion. 
C)  the investor's required rate of return. 
D)  the investor's degree-of-risk tolerance and the investor's required rate of return. 
E)  the investor's degree-of-risk tolerance and the coefficient, A, which is a measure of risk aversion. 
A)  the investor's degree-of-risk tolerance. 
B)  the coefficient, A, which is a measure of risk aversion. 
C)  the investor's required rate of return. 
D)  the investor's degree-of-risk tolerance and the investor's required rate of return. 
E)  the investor's degree-of-risk tolerance and the coefficient, A, which is a measure of risk aversion.

Question 19

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. How much does Alex currently have in the safe account; how much in the risky account?

Accepted Answer

A)  $31,200; $46,800 
B)  $39,000; $39,000 
C)  $15,900; $62,100 
D)  $45,300; $32,700 
E)  $64,000; $14,000 
A)  $31,200; $46,800 
B)  $39,000; $39,000 
C)  $15,900; $62,100 
D)  $45,300; $32,700 
E)  $64,000; $14,000

Question 20

__________ in the process of asset allocation.

Accepted Answer

A)  Deriving the efficient portfolio frontier is a step 
B)  Specifying asset classes to be included in the portfolio is a step 
C)  Specifying the capital market expectations is a step 
D)  All of the options are steps. 
E)  None of the options are steps. 
A)  Deriving the efficient portfolio frontier is a step 
B)  Specifying asset classes to be included in the portfolio is a step 
C)  Specifying the capital market expectations is a step 
D)  All of the options are steps. 
E)  None of the options are steps.

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

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

Assume that at retirement you have accumulated $825,000 in a variable annuity contract. The assumed investment return is 5.5%, and your life expectancy is 18 years. If the first year's actual investment return is 7%, what is the starting benefit payment?

Institutional investors will rarely invest in which of these asset classes?

Which of the following is considered a passive investment?

A ___________ is established when an individual confers legal title to property to another person or institution to manage the property for one or more beneficiaries.

Pension funds do notI) 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.

Assume that at retirement you have accumulated $825,000 in a variable annuity contract. The assumed investment return is 5.5%, and your life expectancy is 18 years. What is the hypothetical constant-benefit payment?

The desirable components of an Investment Policy Statement for individual investors can be divided into

Endowment funds are held by

__________ center on the trade-off between the return the investor wants and how much risk the investor is willing to assume.

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

When a company sets up a defined contribution pension plan, the __________ bears all the risk, and the __________ receives all the return from the plan's assets.

Liquidity is

The optimal portfolio on the efficient frontier for a given investor does not depend on

__________ in the process of asset allocation.

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

When a company sets up a defined contribution pension plan, the bears all the risk, and the receives all the return from the plan's assets.