Question 1

When used in the context of investment decision making, the term 'liquidity' refers to ________.

Accepted Answer

A) the ease and speed with which an asset can be sold at any value possible 
B) the ease and speed with which an asset can be sold without having to discount the value 
C) an aspect of monetary policy 
D) the proportion of short-term to long-term investments held in an investor's portfolio

Question 2

An investor refuses to invest in any firm that produces alcohol or tobacco. This is an example of a ________ constraint.

Accepted Answer

A) return requirement 
B) risk tolerance 
C) liquidity 
D) social

Question 3

If a defined benefit pension fund's actual rate of return is ________ than the actuarial assumed rate then the ________.

Accepted Answer

A) greater; employees will benefit 
B) greater; firm's shareholders will benefit 
C) lower; employees will benefit 
D) lower; firm's shareholders will benefit

Question 4

To ________ means to mitigate a financial risk.

Accepted Answer

A) invest 
B) speculate 
C) hedge 
D) renege

Question 5

Under the provisions of a typical defined benefit pension plan, the employer is responsible for ________.

Accepted Answer

A) investing in conservative fixed-income assets 
B) paying benefits to retired employees 
C) counselling employees in the selection of asset classes 
D) paying employees the market rate of return on employee contributions

Question 6

The major asset most people have during their early working years is their ________.

Accepted Answer

A) home 
B) share portfolio 
C) earning power derived from their skills 
D) bond portfolio

Question 7

Empirical evidence suggests that investors become ________ as they approach retirement.

Accepted Answer

A) greedier 
B) less interested in investments 
C) more risk averse 
D) more risk tolerant

Question 8

My pension plan will pay me a yearly retirement amount equal to 2% of my highest annual salary for each year of service. I must have ________.

Accepted Answer

A) a defined benefit plan 
B) a defined contribution plan 
C) an endowment fund 
D) a variable annuity

Question 9

An institutional investor will have to pay off a maturing bond issue in 3 years. The institution has 10 000 bonds outstanding each with a $1 000 par value. The institutional money manager is re-evaluating the fund's $100 million portfolio at this time. She is bullish on shares and wants to put the most she can into the share market but she cannot risk not being able to pay off the bonds. Three year zero coupon bonds are available paying 6% interest. What percentage of the total $100 million portfolio can she put in shares and still ensure meeting the bond payments?

Accepted Answer

A) 87.4% 
B) 88.5% 
C) 90.0% 
D) 91.6%

Question 10

The term 'hedge' refers to an investment that is used ________.

Accepted Answer

A) primarily for tax-loss selling purposes 
B) to mitigate specific financial risks 
C) to conceal one's true investment strategy from other market participants 
D) primarily to defer capital losses

Question 11

An investor is looking at different retirement investment choices and he is willing to accept one with upside potential even if that means sacrificing certainty. Which of the following will he most likely select?

Accepted Answer

A) Fixed annuity 
B) Defined benefit plan 
C) Defined contribution plan 
D) Bonds invested in an IRA

Question 12

The choice of an active portfolio management strategy rather than a passive strategy assumes ________.

Accepted Answer

A) the ability to continuously adjust the portfolio to provide superior returns 
B) asset allocation involving only domestic securities 
C) stable economic conditions over the short term 
D) the ability to minimise trading costs

Question 13

For a bank, the difference between the interest rate charged to borrowers and the interest rate paid on liabilities is called the ________.

Accepted Answer

A) insurance premium 
B) interest rate spread 
C) risk premium 
D) term premium

Question 14

A family will retire in a few years. They have a high tax bracket and are concerned about their after-tax rate of return. A meeting with their financial planner reveals they are primarily focused on safety of principal and they will need a 6% to 8% average rate of return on their portfolio. They desire a diversified portfolio and liquidity is likely to be a concern due to health reasons. If you had to choose from the list below which of the following asset allocations seems to best fit this family's situation?

Accepted Answer

A) 10% money market; 50% intermediate term bonds; 40% blue chip shares, many with high dividend yields 
B) 0% money market; 60% intermediate term bonds; 40% shares 
C) 10% money market; 30% intermediate term bonds; 60% high dividend paying shares 
D) 5% money market; 35% intermediate term bonds; 60% shares, most with low dividends

Question 15

An investor has a long time horizon and desires to earn the market rate of return. However, the investor will need to withdraw funds each year from their investment portfolio. The biggest constraint a planner would face with this client is a ________ constraint.

Accepted Answer

A) tax 
B) risk tolerance 
C) liquidity 
D) social

Question 16

The term 'investment horizon' refers to ________.

Accepted Answer

A) the proportion of short-term to long-term investments held in an investor's portfolio 
B) the planned liquidation date of an investment 
C) the average maturity date of investments held in a portfolio 
D) the maturity date of the longest investment in the portfolio

Question 17

An investor with low risk aversion will likely require which of the following risk return combinations?

Accepted Answer

A) Expected return = 11%; Historical standard deviation = 12% 
B) Expected return = 12%; Historical standard deviation = 14% 
C) Expected return = 14%; Historical standard deviation = 18% 
D) Expected return = 17%; Historical standard deviation = 21%

Question 18

Of the following, the investment time horizon is typically the shortest for ________.

Accepted Answer

A) banks 
B) endowment funds 
C) life insurance companies 
D) pension funds

Question 19

A life insurance firm wants to minimise its interest rate risk and it is planning on paying out $250 000 in five years. Which one of the following investments best matches its goal?

Accepted Answer

A) High yield utility shares 
B) 5-year zero coupon bonds 
C) 10-year coupon bonds 
D) Money market investments rolled over as needed

Question 20

A pension fund will owe $15 million to retirees in 20 years. An actuary assumes a 6% rate of return on the funds invested in the pension plan but the fund actually earns 8%. The pension plan receives annual contributions from the company sponsor. If the 8% rate of return is expected to continue, by how much can the company reduce its pension payments per year?

Accepted Answer

A) $65 437 
B) $79 985 
C) $89 462 
D) $95 320

Exam 16: Investors and the Investment Process