Question 1

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)  inappropriate for most investors or very high in fees. 
E)  All of the options are correct. 
A)  inappropriate for most investors. 
B)  very high in fees. 
C)  designed to function much like hedge funds. 
D)  inappropriate for most investors or very high in fees. 
E)  All of the options are correct.

Question 2

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

Accepted Answer

A)  relevant constraints. 
B)  other relevant considerations. 
C)  performance measurement accountabilities, metrics for risk measurement, and the rebalancing process. 
D)  relevant constraints and other relevant considerations. 
E)  All of the options are correct. 
A)  relevant constraints. 
B)  other relevant considerations. 
C)  performance measurement accountabilities, metrics for risk measurement, and the rebalancing process. 
D)  relevant constraints and other relevant considerations. 
E)  All of the options are correct.

Question 3

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 options are correct. 
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 options are correct.

Question 4

Alex Goh 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. Alex 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%. Alex 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 Alex expect to have in his risky account at retirement?

Accepted Answer

A)  $1,400,326 
B)  $1,309,529 
C)  $1,543,781 
D)  $1,224,651 
E)  $1,345,886 
A)  $1,400,326 
B)  $1,309,529 
C)  $1,543,781 
D)  $1,224,651 
E)  $1,345,886

Question 5

Which of the following investments allows 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)  All of the options are correct. 
A)  Variable Life insurance policies 
B)  Keogh plans 
C)  Personal funds 
D)  Tax qualified defined contribution plans 
E)  All of the options are correct.

Question 6

__________ refer to strategies aimed at attaining the established rate of return requirements while meeting expressed risk tolerance and applicable constraints.

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 7

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

Accepted Answer

A)  $1,500; $2,500 
B)  $1,200; $1,800 
C)  $800; $3,200 
D)  $1,250; $2,750 
E)  $1,400; $1,600 
A)  $1,500; $2,500 
B)  $1,200; $1,800 
C)  $800; $3,200 
D)  $1,250; $2,750 
E)  $1,400; $1,600

Question 8

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 9

Pension funds do not 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)  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 10

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 11

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 12

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 options are correct. 
E)  None of the options are correct. 
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 options are correct. 
E)  None of the options are correct.

Question 13

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 be sure of having in the safe account at retirement?

Accepted Answer

A)  $59,473 
B)  $62,557 
C)  $78,943 
D)  $89,211 
E)  $104,632 
A)  $59,473 
B)  $62,557 
C)  $78,943 
D)  $89,211 
E)  $104,632

Question 14

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 15

An income beneficiary is

Accepted Answer

A)  a stockbroker who remained working on Wall Street after the 1987 crash. 
B)  an employee of a trustee. 
C)  one who receives interest and dividend income from a trust during their lifetime. 
D)  one who receives the principal of a trust when it is dissolved. 
E)  None of the options are correct. 
A)  a stockbroker who remained working on Wall Street after the 1987 crash. 
B)  an employee of a trustee. 
C)  one who receives interest and dividend income from a trust during their lifetime. 
D)  one who receives the principal of a trust when it is dissolved. 
E)  None of the options are correct.

Question 16

Which of the following are commonly thought to be bad 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.

Accepted Answer

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

Question 17

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

Target date retirement funds are not

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

Questionnaires and attitude surveys suggest that risk tolerance

Which of the following investments allows the investor to choose how to allocate assets?

__________ refer to strategies aimed at attaining the established rate of return requirements while meeting expressed risk tolerance and applicable constraints.

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

Pension funds do not 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.

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

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

Variable life insurance

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.

An income beneficiary is

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

Risk, Return, and the Historical Record

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

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