Question 1

An important benefit of Keogh plans is that

Accepted Answer

A) they are not taxable until funds are withdrawn as benefits. 
B) they are protected against inflation. 
C) they are automatically insured by the Federal government. 
D) A and B. 
E) A and C 
A) they are not taxable until funds are withdrawn as benefits. 
B) they are protected against inflation. 
C) they are automatically insured by the Federal government. 
D) A and B. 
E) A and C A

Question 2

The stage an individual is in his/her life cycle will affect his/her __________.

Accepted Answer

A) return requirements 
B) risk tolerance 
C) asset allocation 
D) A and B 
E) A,B,and C 
A) return requirements 
B) risk tolerance 
C) asset allocation 
D) A and B 
E) A,B,and C E

Question 3

Variable life insurance

Accepted Answer

A) combines life insurance with a tax-deferred annuity. 
B) provides a minimum death benefit that increases subject to investment performance. 
C) can be converted to a stream of income. 
D) all of the above. 
E) none of the above. 
A) combines life insurance with a tax-deferred annuity. 
B) provides a minimum death benefit that increases subject to investment performance. 
C) can be converted to a stream of income. 
D) all of the above. 
E) none of the above. D

Question 4

The investment horizon is:

Accepted Answer

A) the investor's expected age at death. 
B) the starting date for establishing investment constraints. 
C) based on the investor's risk tolerance. 
D) the date at which the portfolio is expected to be fully or partially liquidated. 
E) none of the above. 
A) the investor's expected age at death. 
B) the starting date for establishing investment constraints. 
C) based on the investor's risk tolerance. 
D) the date at which the portfolio is expected to be fully or partially liquidated. 
E) none of the above.

Question 5

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 above 
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 above

Question 6

U.S.mutual funds are restricted to holding no more than __________ of any publicly traded corporation.

Accepted Answer

A) 1% 
B) 5% 
C) 10% 
D) 25% 
E) There is no restriction on percentage ownership. 
A) 1% 
B) 5% 
C) 10% 
D) 25% 
E) There is no restriction on percentage ownership.

Question 7

The objectives of personal trusts normally are __________ in scope than those of individual investors and personal trust managers typically are __________ than individual investors.

Accepted Answer

A) broader, more risk averse 
B) broader, less risk averse 
C) more limited, more risk averse 
D) more limited, less risk averse 
E) none of the above 
A) broader, more risk averse 
B) broader, less risk averse 
C) more limited, more risk averse 
D) more limited, less risk averse 
E) none of the above

Question 8

Stephanie Watson 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. Stephanie 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%. Stephanie 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 Stephanie 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 9

Deferral of capital gains tax
I.means that the investor doesn't need to pay taxes until the investment is sold.
II.allows the investment to grow at a faster rate.
III.means that you might escape the capital gains tax if you live long enough.
IV.provides a tax shelter for investors.

Accepted Answer

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

Question 10

__________ 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 above 
E) None of the above 
A) Investment constraints 
B) Investment objectives 
C) Investment policies 
D) All of the above 
E) None of the above

Question 11

The prudent investor rule requires __________.

Accepted Answer

A) executives of companies to avoid investing in options of companies by which they are employed 
B) executives of companies to disclose their transactions in stocks of companies by which they are employed 
C) professional investors who manage money for others to avoid all risky investments 
D) professional investors who manage money for others to constrain their investments to those that would have been approved by the prudent investor 
E) none of the above 
A) executives of companies to avoid investing in options of companies by which they are employed 
B) executives of companies to disclose their transactions in stocks of companies by which they are employed 
C) professional investors who manage money for others to avoid all risky investments 
D) professional investors who manage money for others to constrain their investments to those that would have been approved by the prudent investor 
E) none of the above

Question 12

Target-date retirement funds

Accepted Answer

A) change their asset allocation as time passes 
B) are a simple but useful strategy 
C) function much like hedge funds 
D) A and B 
E) all of the above 
A) change their asset allocation as time passes 
B) are a simple but useful strategy 
C) function much like hedge funds 
D) A and B 
E) all of the above

Question 13

General pension funds typically invest __________ of their funds in equity securities.

Accepted Answer

A) none 
B) 5-10% 
C) 15-35% 
D) 40-60% 
E) more than 60% 
A) none 
B) 5-10% 
C) 15-35% 
D) 40-60% 
E) more than 60%

Question 14

The first step a pension fund should take before beginning to invest is to __________.

Accepted Answer

A) establish investment objectives 
B) develop a list of investment managers with superior records to interview 
C) establish asset allocation guidelines 
D) decide between active and passive management 
E) none of the above 
A) establish investment objectives 
B) develop a list of investment managers with superior records to interview 
C) establish asset allocation guidelines 
D) decide between active and passive management 
E) none of the above

Question 15

Target-date retirement funds are not

Accepted Answer

A) inappropriate for most investors 
B) very high in fees 
C) designed to function much like hedge funds 
D) A and B 
E) all of the above 
A) inappropriate for most investors 
B) very high in fees 
C) designed to function much like hedge funds 
D) A and B 
E) all of the above

Question 16

The principle of duration matching is

Accepted Answer

A) used only in bond portfolio management 
B) a useful concept for investments with target dates 
C) means matching one's assets to one's objectives 
D) B and C are correct 
E) none of the above 
A) used only in bond portfolio management 
B) a useful concept for investments with target dates 
C) means matching one's assets to one's objectives 
D) B and C are correct 
E) none of the above

Question 17

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) A, B, and C 
E) none of the above 
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) A, B, and C 
E) none of the above

Question 18

The principle of duration matching is not

Accepted Answer

A) used only in bond portfolio management 
B) a useful concept for investments with target dates 
C) a means matching one's assets to one's objectives 
D) B and C are correct 
E) none of the above 
A) used only in bond portfolio management 
B) a useful concept for investments with target dates 
C) a means matching one's assets to one's objectives 
D) B and C are correct 
E) none of the above

Question 19

Which of the following investments does not allow the investor to choose how to allocate assets?

Accepted Answer

A) Variable Life insurance policies 
B) Keogh plans 
C) Personal funds 
D) Tax qualified defined contribution plans 
E) Universal Life policies 
A) Variable Life insurance policies 
B) Keogh plans 
C) Personal funds 
D) Tax qualified defined contribution plans 
E) Universal Life policies

Question 20

Pension funds
I.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

Exam 28: Investment Policy and the Framework of the CFA Institute Appendices

An important benefit of Keogh plans is that

The stage an individual is in his/her life cycle will affect his/her __________.

Variable life insurance

The investment horizon is:

Questionnaires and attitude surveys suggest that risk tolerance

U.S.mutual funds are restricted to holding no more than __________ of any publicly traded corporation.

The objectives of personal trusts normally are __________ in scope than those of individual investors and personal trust managers typically are __________ than individual investors.

Deferral of capital gains tax I.means that the investor doesn't need to pay taxes until the investment is sold. II.allows the investment to grow at a faster rate. III.means that you might escape the capital gains tax if you live long enough. IV.provides a tax shelter for investors.

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

The prudent investor rule requires __________.

Target-date retirement funds

General pension funds typically invest __________ of their funds in equity securities.

The first step a pension fund should take before beginning to invest is to __________.

Target-date retirement funds are not

The principle of duration matching is

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

The principle of duration matching is not

Which of the following investments does not allow the investor to choose how to allocate assets?

Pension funds I.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.

The Investment Environment

Asset Classes and Financial Instruments

How Securities are Traded

Mutual Funds and Other Investment Companies

Introduction to Risk,return,and the Historical Record

Risk Aversion and Capital Allocation to Risky Assets

Optimal Risky Portfolios

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

Options Markets: Introduction

Option Valuation

Futures Markets

Futures, swaps, and Risk Management

Macroeconomic and Industry Analysis

Equity Valuation Models

Financial Statement Analysis

Portfolio Performance Evaluation

International Diversification

Hedge Funds

The Theory of Active Portfolio Management

Filters

The objectives of personal trusts normally are in scope than those of individual investors and personal trust managers typically are than individual investors.