Question 1

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

Accepted Answer

A) True 
 B)False

Question 2

You currently have $150,000 in an IRA designated for retirement. If you save an additional $100 at the end of every month and expect to earn an annual return of 12%, how much do you expect to have in the IRA in 10 years?

Accepted Answer

A) $467,632 
B) $518,062 
C) $732,546 
D) $949,328 
E) $1,215,234 
A) $467,632 
B) $518,062 
C) $732,546 
D) $949,328 
E) $1,215,234

Question 3

An appropriate investment objective for a typical 25-year-old investor is a low-risk strategy, such as capital preservation or current income.

Accepted Answer

A) True 
 B)False

Question 4

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 5

____ gains are taxable and occur when an asset is sold for more than its basis (the value of the asset when it was purchased by the original owner, or inherited by the heirs of the original owner).

Accepted Answer

A) Realized capital 
B) Income 
C) Portfolio 
D) Nominal 
E) Real 
A) Realized capital 
B) Income 
C) Portfolio 
D) Nominal 
E) Real

Question 6

Exhibit 2.1
USE THE TAX TABLE PROVIDED BELOW FOR THE FOLLOWING PROBLEM(S) \(\begin{array} { l  }
&\text { If Taxable Income }&\text { Then }&\text { The Tax is }\
\text { Single }&\begin{array}{|r|r|}
\hline {\text { Is Over }} & \text { But Not Over } \
\hline \$ 0 & \$ 7,150 \
\hline \$ 7,150 & \$ 29,050 \
\hline \$ 29,050 & \$ 70,350 \
\hline \$ 70,350 & \$ 146,750 \
\hline \$ 146,750 & \$ 319,100 \
\hline \$ 319,100 & - \
\hline
\end{array}&&\begin{array}{|r|r|r|}
\hline \text { This Amount } & \text { Plus This } \% & \text { Of The Excess Over } \
\hline 0 & 10 \% & 0 \
\hline 715 & 15 \% & \$ 7,150 \
\hline \$ 4,000 & 25 \% & \$ 29,050 \
\hline \$ 14,325 & 28 \% & \$ 70,350 \
\hline \$ 35,717 & 33 \% & \$ 146,750 \
\hline \$ 92,592.50 & 35 \% & \$ 319,100 \
\hline
\end{array}\\
\begin{array} { l  }
 \text {Married  }\ \text {Filing }\ \text {Jointly }\
\end{array}&\begin{array}{|r|r|}
\hline \$ 0 & \$ 14,300 \
\hline \$ 14,300 & \$ 58,100 \
\hline \$ 58,100 & \$ 117,250 \
\hline \$ 117,250 & \$ 178,650 \
\hline \$ 178,650 & \$ 319,100 \
\hline \$ 319,100 & - \
\hline
\end{array}&&\begin{array}{|r|r|r|}
\hline 0 & 10 \% & 0 \
\hline 1430 & 15 \% & \$ 14,300 \
\hline \$ 8,000 & 25 \% & \$ 58,100 \
\hline \$ 22,787.50 & 28 \% & \$ 117,250 \
\hline \$ 39,979,50 & 33 \% & \$ 178,650 \
\hline \$ 86,328 & 35 \% & \$ 319,100 \
\hline
\end{array}\
\end{array}\)

-Refer to Exhibit 2.1. What is the tax liability for a single individual with taxable income of $85,000?

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 7

The portfolio mixes of institutional investors around the world are approximately the same.

Accepted Answer

A) True 
 B)False

Question 8

Assume that you invest $750 at the end of each quarter for the next 20 years in a mutual fund. The annual rate of interest that you expect to earn in this account is 5.25%. The amount in the account at the end of 20 years is

Accepted Answer

A) $60,000.00 
B) $105,039.84 
C) $37,009.35 
D) $123,510.52 
E) $115,637.37 
A) $60,000.00 
B) $105,039.84 
C) $37,009.35 
D) $123,510.52 
E) $115,637.37

Question 9

For an investor with a time horizon of 4 years and higher risk tolerance, an appropriate asset allocation strategy would be

Accepted Answer

A) 100% cash 
B) 30% cash, 50% bonds, and 20% stocks 
C) 20% cash, 40% bonds, and 40% stocks 
D) 10% cash, 40% bonds, and 50% stocks 
E) 100% bonds 
A) 100% cash 
B) 30% cash, 50% bonds, and 20% stocks 
C) 20% cash, 40% bonds, and 40% stocks 
D) 10% cash, 40% bonds, and 50% stocks 
E) 100% bonds

Question 10

An example of a unique need in an investment policy statement is related to the legal responsibilities of a fiduciary or trustee.

Accepted Answer

A) True 
 B)False

Question 11

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 12

Which of the following strategies seeks to increase the portfolio value by reinvesting current income in addition to capital gains?

Accepted Answer

A) Capital appreciation 
B) Capital preservation 
C) Return preservation 
D) Current income 
E) Total return 
A) Capital appreciation 
B) Capital preservation 
C) Return preservation 
D) Current income 
E) Total return

Question 13

For an investor with a time horizon of 15 years and moderate risk tolerance, an appropriate asset allocation strategy would be

Accepted Answer

A) 100% stocks 
B) 40% cash and 60% stocks 
C) 30% cash, 50% bonds, and 20% stocks 
D) 50% bonds, and 50% stocks 
E) 20% bonds, and 80% stocks 
A) 100% stocks 
B) 40% cash and 60% stocks 
C) 30% cash, 50% bonds, and 20% stocks 
D) 50% bonds, and 50% stocks 
E) 20% bonds, and 80% stocks

Question 14

Which of the following is not considered to be an investment objective?

Accepted Answer

A) Capital preservation 
B) Capital appreciation 
C) Current income 
D) Total return 
E) None of the above (that is, all are considered investment objectives) 
A) Capital preservation 
B) Capital appreciation 
C) Current income 
D) Total return 
E) None of the above (that is, all are considered investment objectives)

Question 15

Suppose the 8 percent investment of the previous problem is taxable rather than tax-deferred. What will be the after-tax value of his $10,000 investment after 5 years (assuming annual compounding)?

Accepted Answer

A) $10,680 
B) $11,765 
C) $13,895 
D) $14,693 
E) $15,528 
A) $10,680 
B) $11,765 
C) $13,895 
D) $14,693 
E) $15,528

Question 16

Non-life insurance companies have somewhat unpredictable cash outflows and are therefore faced with different investment constraints than life insurance companies.

Accepted Answer

A) True 
 B)False

Question 17

Return is the only important consideration when establishing investment objectives.

Accepted Answer

A) True 
 B)False

Question 18

The ability to retire at a certain age is a typical example of a long-term, lower-priority goal.

Accepted Answer

A) True 
 B)False

Question 19

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 20

What would the after-tax yield be on an investment that offers a 6 percent fully taxable yield? Assume a marginal tax rate of 31%.

Accepted Answer

A) 2.79% 
B) 6.48% 
C) 4.14% 
D) 7.20% 
E) 12.50% 
A) 2.79% 
B) 6.48% 
C) 4.14% 
D) 7.20% 
E) 12.50%

Exam 2: The Asset Allocation Decision

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

You currently have $150,000 in an IRA designated for retirement. If you save an additional $100 at the end of every month and expect to earn an annual return of 12%, how much do you expect to have in the IRA in 10 years?

An appropriate investment objective for a typical 25-year-old investor is a low-risk strategy, such as capital preservation or current income.

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?

____ gains are taxable and occur when an asset is sold for more than its basis (the value of the asset when it was purchased by the original owner, or inherited by the heirs of the original owner).

The portfolio mixes of institutional investors around the world are approximately the same.

Assume that you invest $750 at the end of each quarter for the next 20 years in a mutual fund. The annual rate of interest that you expect to earn in this account is 5.25%. The amount in the account at the end of 20 years is

For an investor with a time horizon of 4 years and higher risk tolerance, an appropriate asset allocation strategy would be

An example of a unique need in an investment policy statement is related to the legal responsibilities of a fiduciary or trustee.

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

Which of the following strategies seeks to increase the portfolio value by reinvesting current income in addition to capital gains?

For an investor with a time horizon of 15 years and moderate risk tolerance, an appropriate asset allocation strategy would be

Which of the following is not considered to be an investment objective?

Suppose the 8 percent investment of the previous problem is taxable rather than tax-deferred. What will be the after-tax value of his $10,000 investment after 5 years (assuming annual compounding)?

Non-life insurance companies have somewhat unpredictable cash outflows and are therefore faced with different investment constraints than life insurance companies.

Return is the only important consideration when establishing investment objectives.

The ability to retire at a certain age is a typical example of a long-term, lower-priority goal.

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

What would the after-tax yield be on an investment that offers a 6 percent fully taxable yield? Assume a marginal tax rate of 31%.

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

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