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

Question 1

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

A) return requirements.
B) risk tolerance.
C) asset allocation.
D) return requirements and risk tolerance.
E) All of the options are correct.

Answer 1

E

Question 2

__________ in the process of asset allocation.

A) Deriving the efficient portfolio frontier is a step
B) Specifying asset classes to be included in the portfolio is a step
C) Specifying the capital market expectations is a step
D) All of the options are steps.
E) None of the options are steps.

Answer 2

D

Question 3

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

A) Investment constraints
B) Investment objectives
C) Investment policies
D) All of the options are correct.
E) None of the options are correct.

Answer 3

B

Question 4

The investment horizon is

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.

Question 5

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

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 6

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

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 7

An important benefit of Keogh plans is that

A) they are not taxable until funds are withdrawn as benefits.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D) they are not taxable until funds are withdrawn as benefits, and they are protected against inflation.
E) they are not taxable until funds are withdrawn as benefits, and they are automatically insured by the Federal government.

Question 8

__________ are boundaries that investors place on their choice of investment assets.

A) Investment constraints
B) Investment objectives
C) Investment policies
D) All of the options are correct
E) None of the options are correct.

Question 9

Workers who change jobs may wind up with lower pension benefits at retirement than otherwise identical workers who stay with the same employer, even if the employers have defined benefit plans with the same final-pay benefit formula. This is referred to as

A) an accumulated benefit obligation.
B) an unfunded liability.
C) immunization.
D) indexation.
E) the portability problem.

Question 10

Endowment funds are held by

A) charitable organizations.
B) educational institutions.
C) for-profit firms.
D) charitable organizations and educational institutions.
E) educational institutions and for-profit firms.

Question 11

A fully-funded pension plan can invest surplus assets in equities provided it reduces the proportion in equities when the value of the fund drops near the accumulated benefit obligation. This strategy is referred to as

A) immunization.
B) hedging.
C) diversification.
D) contingent immunization.
E) overfunding.

Question 12

Questionnaires and attitude surveys suggest that risk tolerance

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 13

The __________ the proportion of total return that is in the form of price appreciation, the __________ will be the value of the tax-deferral option for taxable investors.

A) greater; greater
B) greater; lower
C) lower; greater
D) The answer cannot be determined from the information provided.
E) None of the options are correct.

Question 14

Liquidity is

A) the ease with which an asset can be sold.
B) the ability to sell an asset for a fair price.
C) the degree of inflation protection an asset provides.
D) the ease with which an asset can be sold and the ability to sell an asset for a fair price.
E) All of the options are correct.

Question 15

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

A) Investment constraints
B) Investment objectives
C) Investment policies
D) All of the options are correct.
E) None of the options are correct.

Question 16

A remainderman is

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.

Question 17

__________ can be used to create a perfect CPI-measured inflation hedge.

A) Gold
B) Real estate
C) TIPS
D) The S&P 500 Index
E) None of the options are correct.

Question 18

One incorrect belief that is often cited as a reason for fully-funded pension funds to invest in equities is

A) stocks have higher risk.
B) bonds have lower returns.
C) stocks provide a hedge against inflation.
D) stocks have higher returns.
E) All of the options are incorrect beliefs that are often cited.

Question 19

Variable life insurance

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 20

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

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 21

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

A) broader; more risk averse
B) broader; less risk averse
C) more limited; more risk averse
D) more limited; less risk averse

Question 22

Assume that at retirement you have accumulated $500,000 in a variable annuity contract. The assumed investment return is 6%, and your life expectancy is 15 years. What is the hypothetical constant-benefit payment?

A) $30,000.00
B) $33,333.33
C) $51,481.38
D) $52,452.73
E) The answer cannot be determined from the information provided.

Question 23

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.

A) tax shelter
B) defined contribution plan
C) personal trust
D) fixed annuity
E) Keogh plan

Question 24

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

A) the investor's degree-of-risk tolerance.
B) the coefficient, A, which is a measure of risk aversion.
C) the investor's required rate of return.
D) the investor's degree-of-risk tolerance and the investor's required rate of return.
E) the investor's degree-of-risk tolerance and the coefficient, A, which is a measure of risk aversion.

Question 25

Deferral of capital gains tax does notI) 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.

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

Question 26

The longest time horizons are likely to be set by

A) banks.
B) property and casualty insurance companies.
C) pension funds.
D) banks and pension funds.
E) property and casualty insurance companies and pension funds.

Question 27

When a company sets up a defined contribution pension plan, the __________ bears all the risk, and the __________ receives all the return from the plan's assets.

A) employee; employee
B) employee; employer
C) employer; employee
D) employer; employer
E) Cannot determine; depends on the economic environment.

Question 28

Assume that at retirement you have accumulated $500,000 in a variable annuity contract. The assumed investment return is 6%, and your life expectancy is 15 years. If the first year's actual investment return is 8%, what is the starting benefit payment?

A) $30,000.00
B) $33,333.33
C) $51,481.38
D) $52,452.73
E) The answer cannot be determined from the information provided.

Question 29

The prudent investor rule requires

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.

Question 30

Institutional investors will rarely invest in which of these asset classes?

A) Bonds
B) Stocks
C) Cash
D) Real estate
E) Precious metals

Question 31

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,

A) stock A will have a higher after-tax holding period return than stock B.
B) the after-tax holding period returns on stocks A and B will be the same.
C) stock B will have a higher after-tax holding period return than stock A.
D) it is impossible to determine which stock will have a higher after-tax holding period return given the information available.

Question 32

The shortest time horizons are likely to be set by

A) banks.
B) property and casualty insurance companies.
C) pension funds.
D) banks and property and casualty insurance companies.
E) property and casualty insurance companies and pension funds.

Question 33

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

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

Question 34

For an individual investor, the value of home ownership is likely to be viewed

A) as a hedge against increases in rental rates.
B) as a guarantee of availability of a particular residence.
C) as a hedge against inflation.
D) as a hedge against increases in rental rates and as a guarantee of availability of a particular residence.
E) All of the options are correct.

Question 35

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

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.

Question 36

Target-date retirement funds are not

A) funds of funds diversified across stocks and bonds.
B) designed to change their asset allocation as time passes.
C) a simple, but useful, strategy.
D) designed to function much like hedge funds.

Question 37

Professional financial planners should

A) assess their client's risk-and-return requirements on a one-time basis.
B) explain the investment plan to the client.
C) inform the client about the outcome of the plan.
D) assess their client's risk-and-return requirements on a one-time basis, explain the investment plan to the client, and inform the client about the outcome of the plan.
E) explain the investment plan to the client and inform the client about the outcome of the plan.

Question 38

Deferral of capital gains taxI) 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.

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

Question 39

The optimal portfolio on the efficient frontier for a given investor depends on

A) the investor's degree-of-risk tolerance.
B) the coefficient, A, which is a measure of risk aversion.
C) the investor's required rate of return.
D) the investor's degree-of-risk tolerance and the investor's required rate of return.
E) the investor's degree-of-risk tolerance and the coefficient, A, which is a measure of risk aversion.

Question 40

The longest time horizons are likely to be set by

A) banks.
B) property and casualty insurance companies.
C) endowment funds.
D) banks and endowment funds.
E) property and casualty insurance companies and endowment funds.

Question 41

Paulina Lesky 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. Paulina 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%. Paulina 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 Paulina expect to have in her risky account at retirement?

A) $1,800,326
B) $1,905,095
C) $1,743,781
D) $1,224,651
E) $345,886

Question 42

Dusty Jones 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. Dusty 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%. Dusty 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 Dusty currently have in the safe account; how much in the risky account?

A) $3,800; $200
B) $2,000; $2,000
C) $200; $3,800
D) $2,500; $1,500
E) $1,500; $2,500

Question 43

Paulina Lesky 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. Paulina 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%. Paulina Lesky is 27 years old and has accumulated $7,500 in her self 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 Paulina be sure of having in the safe account at retirement?

A) $45,473
B) $62,557
C) $78,943
D) $54,968
E) $74,643

Question 44

Dusty Jones 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. Dusty 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%. Dusty 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 Dusty expect to have in her risky account at retirement?

A) $2,731,838
B) $2,915,415
C) $1,425,316
D) $224,651
E) $3,545,886

Question 45

Paulina Lesky 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. Paulina 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%. Paulina 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 Paulina and by her employer on her behalf, how much will Paulina put into the safe account each year; how much into the risky account?

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 46

Chris Silvers 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. Chris 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%. Chris 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 Chris expect to have in his risky account at retirement?

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

Question 47

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

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 48

Alex Moore 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. Alex 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%. Alex 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 does Alex currently have in the safe account; how much in the risky account?

A) $31,200; $46,800
B) $39,000; $39,000
C) $15,900; $62,100
D) $45,300; $32,700
E) $64,000; $14,000

Question 49

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

A) $1,500; $1,500
B) $1,200; $1,800
C) $2,000; $1,000
D) $2,500; $500
E) $1,400; $1,600

Question 50

Pension fundsI) 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.

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

Question 51

Chris Silvers 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. Chris 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%. Chris 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 Chris be sure of having in the safe account at retirement?

A) $132,473
B) $162,557
C) $178,943
D) $189,211
E) $124,643

Question 52

Dusty Jones 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. Dusty 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%. Dusty 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 Dusty be sure of having in the safe account at retirement?

A) $37,221
B) $16,423
C) $11,856
D) $21,156.
E) $49,219

Question 53

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

A) $158,982
B) $309,530
C) $543,781
D) $224,651
E) $345,886

Question 54

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

A) $2,500; $2,500
B) $3,200; $1,800
C) $3,000; $2,000
D) $1,250; $3,750
E) $2,400; $2,600

Question 55

Alex Moore 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. Alex 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%. Alex 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 Alex be sure of having in the safe account at retirement?

A) $59,473
B) $62,557
C) $78,943
D) $89,212
E) $104,632

Question 56

Chris Silvers 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. Chris 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%. Chris 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 does Chris currently have in the safe account; how much in the risky account?

A) $31,200; $46,800
B) $39,000; $39,000
C) $32,000; $96,000
D) $45,300; $32,700
E) $64,000; $14,000

Question 57

Dusty Jones 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. Dusty 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%. Dusty 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 Dusty and by her employer on her behalf, how much will she put into the safe account each year; how much into the risky account?

A) $3,800; $200
B) $2,000; $2,000
C) $200; $3,800
D) $2,500; $1,500
E) $1,500; $2,500

Question 58

Paulina Lesky 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. Paulina 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%. Paulina 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 does Paulina currently have in the safe account; how much in the risky account?

A) $1,500; $6,000
B) $3,000; $4,500
C) $2,000; $5,500
D) $4,800; $2,700
E) $3,500; $3,500

Question 59

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

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

Question 60

Pension funds do notI) 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.

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

Question 61

The standard by which broker-dealers must select investments for their clients is __________________?

A) clients' interests
B) brokers' interest
C) suitability
D) optimal return

Question 62

Target-date retirement funds are not

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 63

The fiduciary standard for investment advisors requires they must select investments for their clients which are classified as __________________?

A) clients' interests
B) brokers' interest
C) suitability
D) optimal return

Question 64

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. What is the hypothetical constant-benefit payment?

A) $30,000.00
B) $33,333.33
C) $51,481.38
D) $76,354.69
E) The answer cannot be determined from the information provided.

Question 65

Target-date retirement funds

A) are funds of funds diversified across stocks and bonds.
B) are inappropriate for most investors.
C) have very high fees.
D) function much like hedge funds.

Question 66

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

A) three main elements consisting of scope and purpose, governance, and risk management.
B) three main elements consisting of scope and purpose, governance, and investment, return-and-risk objectives.
C) four main elements consisting of scope and purpose, governance, risk management, and feedback.
D) four main elements consisting of scope and purpose, governance, risk management, and investment, return-and-risk objectives.
E) five main elements consisting of scope and purpose, governance, risk management, investment, return-and-risk objectives, and evaluation.

Question 67

Which of the following is considered a passive investment?

A) income fund
B) value fund
C) growth fund
D) target date fund

Question 68

Assume that at retirement you have accumulated $825,000 in a variable annuity contract. The assumed investment return is 5.5%, and your life expectancy is 18 years. What is the hypothetical constant-benefit payment?

A) $73,358.93
B) $33,333.33
C) $51,481.38
D) $52,452.73
E) The answer cannot be determined from the information provided.

Question 69

The main benefit of a Roth retirement plan is that _____________________.

A) withdrawals are tax free.
B) contributions are made tax free
C) interest is tax deferred
D) no income limits exist on participation

Question 70

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?

A) $30,000.00
B) $33,333.33
C) $76,354.69
D) $52,452.73
E) The answer cannot be determined from the information provided.

Question 71

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

A) assigning the responsibility for determining investment policy.
B) the review process for the IPS.
C) assigning the responsibility for risk management.
D) the review process for the IPS and assigning the responsibility for risk management.
E) All of the options are correct.

Question 72

An income beneficiary is

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 73

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.

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

Question 74

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

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 75

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.

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 76

Assume that at retirement you have accumulated $825,000 in a variable annuity contract. The assumed investment return is 5.5%, and your life expectancy is 18 years. If the first year's actual investment return is 7%, what is the starting benefit payment?

A) $30,000.00
B) $74,401.95
C) $51,481.38
D) $52,452.73
E) The answer cannot be determined from the information provided.

Question 77

Target-date retirement funds

A) change their asset allocation as time passes.
B) are a simple, but useful, strategy.
C) function much like hedge funds.
D) change their asset allocation as time passes and are a simple, but useful, strategy.
E) All of the options are correct.

Question 78

The scope and purpose section of an Investment Policy Statement for individual investors typically consists of defining the

A) return, distribution, and risk requirements.
B) process for review of the IPS.
C) appropriate metrics for risk measurement.
D) relevant constraints.
E) context, investor, and structure.

Question 79

The principle of duration matching is not

A) used only in bond portfolio management.
B) a useful concept for investments with target dates.
C) matching one's assets to one's objectives.
D) a useful concept for investments with target dates or matching one's assets to one's objectives.
E) None of the options are correct.

Question 80

The principle of duration matching is

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