Question 1

Research from the 1970s to the 1990s found that over 90 percent of a fund's returns over time is explained by:

Accepted Answer

A) Market timing 
B) Stock selection 
C) Manager selection 
D) Asset allocation 
E) All of the above 
A) Market timing 
B) Stock selection 
C) Manager selection 
D) Asset allocation 
E) All of the above

Question 2

The majority of a pension fund's return is explained by asset allocation.

Accepted Answer

A) True 
 B)False

Question 3

In a defined contribution pension plan,

Accepted Answer

A) The plan does not promise to pay the retiree a specific income stream after retirement. 
B) The plan does promise to pay the retiree a specific income stream after retirement. 
C) The employee's retirement income is not an obligation of the firm. 
D) The company carries the risk of paying future pension benefits to retirees. 
E) Choices a and c 
A) The plan does not promise to pay the retiree a specific income stream after retirement. 
B) The plan does promise to pay the retiree a specific income stream after retirement. 
C) The employee's retirement income is not an obligation of the firm. 
D) The company carries the risk of paying future pension benefits to retirees. 
E) Choices a and c

Question 4

The typical investor's goals rarely change during his/her lifetime.

Accepted Answer

A) True 
 B)False

Question 5

Asset allocation is the process of dividing funds into different classes of assets.

Accepted Answer

A) True 
 B)False

Question 6

Which of the following is not true regarding defined contribution pension plans?

Accepted Answer

A) Employees make regular contributions to the plan. 
B) Employers make regular contributions to the plan. 
C) The employer bears all of the investment risk. 
D) Benefits are directly related to the earnings of the funds investments. 
E) The number of defined contribution plans is increasing. 
A) Employees make regular contributions to the plan. 
B) Employers make regular contributions to the plan. 
C) The employer bears all of the investment risk. 
D) Benefits are directly related to the earnings of the funds investments. 
E) The number of defined contribution plans is increasing.

Question 7

In constructing the portfolio, the manager should maximize the investor's risk level.

Accepted Answer

A) True 
 B)False

Question 8

An individual in the 36% tax bracket has $20,000 invested in a tax-exempt account. If the individual earns 10% annually before taxes and inflation is 3.0% per year, what is the real value of the investment in 10 years?

Accepted Answer

A) $31,000 
B) $33,200 
C) $38,614 
D) $39,343 
E) $47,823 
A) $31,000 
B) $33,200 
C) $38,614 
D) $39,343 
E) $47,823

Question 9

An individual in the 15% tax bracket has $10,000 invested in a tax-exempt IRA account. If the individual earns 8% annually before taxes and inflation is 2.5% per year, what is the real value of the investment in 20 years?

Accepted Answer

A) $23,211 
B) $28,467 
C) $29,178 
D) $37,276 
E) $46,610 
A) $23,211 
B) $28,467 
C) $29,178 
D) $37,276 
E) $46,610

Question 10

Exhibit 2.1
USE THE TAX TABLE PROVIDED BELOW FOR THE FOLLOWING PROBLEM(S)
  
-Refer to Exhibit 2.1. What is the average tax for a single individual with taxable income of $85,000?

Accepted Answer

A) 13.57% 
B) 15.68% 
C) 21.68% 
D) 25.74% 
E) 29.55% 
A) 13.57% 
B) 15.68% 
C) 21.68% 
D) 25.74% 
E) 29.55%

Question 11

Return is the only important consideration when establishing investment objectives.

Accepted Answer

A) True 
 B)False

Question 12

Exhibit 2.1
USE THE TAX TABLE PROVIDED BELOW FOR THE FOLLOWING PROBLEM(S)
  
-Refer to Exhibit 2.1. What is the tax liability for a married couple filing jointly with taxable income of $125,000?

Accepted Answer

A) $23,800 
B) $18,427 
C) $24,958 
D) $16,867 
E) $19,650 
A) $23,800 
B) $18,427 
C) $24,958 
D) $16,867 
E) $19,650

Question 13

Cash flows for nonlife insurance companies, such as property and casualty, are similar to cash flows of life insurance companies.

Accepted Answer

A) True 
 B)False

Question 14

Exhibit 2.1
USE THE TAX TABLE PROVIDED BELOW FOR THE FOLLOWING PROBLEM(S)
  
-Refer to Exhibit 2.1. What is the marginal tax rate for a single individual with taxable income of $85,000?

Accepted Answer

A) 15% 
B) 25% 
C) 28% 
D) 33% 
E) 35% 
A) 15% 
B) 25% 
C) 28% 
D) 33% 
E) 35%

Question 15

The retirement plan that promises to pay a specific benefit to its beneficiaries is

Accepted Answer

A) A defined contribution plan. 
B) A defined benefit pension plan. 
C) A non-contribution pension plan. 
D) An actuarial pension plan. 
E) Supplemental Retirement Account (SR
A) . 
A) A defined contribution plan. 
B) A defined benefit pension plan. 
C) A non-contribution pension plan. 
D) An actuarial pension plan. 
E) Supplemental Retirement Account (SR
A) .

Question 16

The first step in the investment process is the development of a(n)

Accepted Answer

A) Objective statement. 
B) Policy statement. 
C) Financial statement. 
D) Statement of cash needs. 
E) Statement of cash flows. 
A) Objective statement. 
B) Policy statement. 
C) Financial statement. 
D) Statement of cash needs. 
E) Statement of cash flows.

Question 17

Research has shown that the asset allocation decision explains ____% of the variation in fund returns across all funds, and ____% of the variation in returns for a particular fund over time.

Accepted Answer

A) 90 and 100. 
B) 100 and 40. 
C) 90 and 40. 
D) 40 and 100. 
E) 40 and 90. 
A) 90 and 100. 
B) 100 and 40. 
C) 90 and 40. 
D) 40 and 100. 
E) 40 and 90.

Question 18

Defined contribution pension plans promise to pay retirees a specific income stream after retirement.

Accepted Answer

A) True 
 B)False

Question 19

For an investor with a time horizon of 8 years and higher risk tolerance, an appropriate asset allocation strategy would be

Accepted Answer

A) 100% stocks 
B) 100% cash 
C) 30% cash, 50% bonds, and 20% stocks 
D) 10% cash, 30% bonds, and 60% stocks 
E) 100% bonds 
A) 100% stocks 
B) 100% cash 
C) 30% cash, 50% bonds, and 20% stocks 
D) 10% cash, 30% bonds, and 60% stocks 
E) 100% bonds

Question 20

The policy statement may include a ____ against which a portfolio's or portfolio manager's performance can be measured.

Accepted Answer

A) Milestone 
B) Benchmark 
C) Landmark 
D) Reference point 
E) Market pair 
A) Milestone 
B) Benchmark 
C) Landmark 
D) Reference point 
E) Market pair

Exam 2: The Asset Allocation Decision

Research from the 1970s to the 1990s found that over 90 percent of a fund's returns over time is explained by:

The majority of a pension fund's return is explained by asset allocation.

In a defined contribution pension plan,

The typical investor's goals rarely change during his/her lifetime.

Asset allocation is the process of dividing funds into different classes of assets.

Which of the following is not true regarding defined contribution pension plans?

In constructing the portfolio, the manager should maximize the investor's risk level.

An individual in the 36% tax bracket has $20,000 invested in a tax-exempt account. If the individual earns 10% annually before taxes and inflation is 3.0% per year, what is the real value of the investment in 10 years?

An individual in the 15% tax bracket has $10,000 invested in a tax-exempt IRA account. If the individual earns 8% annually before taxes and inflation is 2.5% per year, what is the real value of the investment in 20 years?

Exhibit 2.1 USE THE TAX TABLE PROVIDED BELOW FOR THE FOLLOWING PROBLEM(S) -Refer to Exhibit 2.1. What is the average tax for a single individual with taxable income of $85,000?

Return is the only important consideration when establishing investment objectives.

Exhibit 2.1 USE THE TAX TABLE PROVIDED BELOW FOR THE FOLLOWING PROBLEM(S) -Refer to Exhibit 2.1. What is the tax liability for a married couple filing jointly with taxable income of $125,000?

Cash flows for nonlife insurance companies, such as property and casualty, are similar to cash flows of life insurance companies.

Exhibit 2.1 USE THE TAX TABLE PROVIDED BELOW FOR THE FOLLOWING PROBLEM(S) -Refer to Exhibit 2.1. What is the marginal tax rate for a single individual with taxable income of $85,000?

The retirement plan that promises to pay a specific benefit to its beneficiaries is

The first step in the investment process is the development of a(n)

Research has shown that the asset allocation decision explains ____% of the variation in fund returns across all funds, and ____% of the variation in returns for a particular fund over time.

Defined contribution pension plans promise to pay retirees a specific income stream after retirement.

For an investor with a time horizon of 8 years and higher risk tolerance, an appropriate asset allocation strategy would be

The policy statement may include a ____ against which a portfolio's or portfolio manager's performance can be measured.

The Investment Setting

Selecting Investments in a Global Market

Organization and Functioning of Securities Markets

Security-Market Indexes

Efficient Capital Markets

An Introduction to Portfolio Management

An Introduction to Asset Pricing Models

Multifactor Models of Risk and Return

Analysis of Financial Statements

Introduction to Security Valuation

Macroanalysis and Microvaluation of the Stock Market

Industry Analysis

Company Analysis and Stock Valuation

Technical Analysis

Equity Portfolio Management Strategies

Bond Fundamentals

The Analysis and Valuation of Bonds

Bond Portfolio Management Strategies

An Introduction to Derivative Markets and Securities

Forward and Futures Contracts

Option Contracts

Swap Contracts, Convertible Securities, and Other Embedded Derivatives

Professional Money Management, Alternative Assets, and Industry Ethics

Evaluation of Portfolio Performance

Filters

Research has shown that the asset allocation decision explains % of the variation in fund returns across all funds, and % of the variation in returns for a particular fund over time.