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

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

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. Of the total amount of new funds that will be invested by Stephanie and by her employer on her behalf, how much will she put into the safe account each year; how much into the risky account?

The principle of duration matching is

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

The governance section of an Investment Policy Statement for individual investors typically contains

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?

Which of the following are commonly thought to be good general investment guidelines? I. Don't try to outguess the market, buying and holding generally pays off. II. Diversify investments to spread risk. III. Investments should be highly concentrated in your company's stock. IV. 401K money is best placed in money market accounts because risk is very low. V. Investments should be allocated to stocks, bonds, and money market funds.

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

Endowment funds are held by

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

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

__________ in the process of asset allocation.

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.

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. If the first year's actual investment return is 9%, what is the starting benefit payment?

Genny Webb 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. Genny 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%. Genny 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 Genny expect to have in her risky account at retirement?

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

The CFA Institute divides the process of portfolio management into three main elements, which are ______, ______, and ______.

Alan Barnett 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. Alan 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%. Alan 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 Alan expect to have in his risky account at retirement?

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,

The longest time horizons are likely to be set by