Question 1

Which one of the following is a life insurance policy that will provide a fixed death benefit and allows the policyholder to choose where to invest the policy's cash value?

Accepted Answer

A)  term life 
B)  whole life 
C)  variable life 
D)  industrial life

Question 2

Under a "passive core" portfolio management strategy, a manager would ________.

Accepted Answer

A)  index the entire portfolio 
B)  index part of the portfolio and actively manage the rest 
C)  delegate the management of core segments of the portfolio to other managers 
D)  actively manage the entire portfolio

Question 3

In a defined benefit pension plan, the ________ bears all of the fund's investment performance risk.

Accepted Answer

A)  employer 
B)  employee 
C)  fund manager 
D)  government

Question 4

Of the following, the most flexible type of life insurance policy from the policyholder's perspective is probably a ________ policy.

Accepted Answer

A)  term life 
B)  whole life 
C)  variable life 
D)  universal life

Question 5

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 that they are primarily focused on safety of principal and 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. 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 stocks, many with high dividend yields 
B)  0% money market; 60% intermediate-term bonds; 40% stocks 
C)  10% money market; 30% intermediate-term bonds; 60% high-dividend-paying stocks 
D)  5% money market; 35% intermediate-term bonds; 60% stocks, most with low dividends

Question 6

An investor with high risk aversion will likely prefer which of the following risk and return combinations?

Accepted Answer

A)  expected return = 12%, historical standard deviation = 17% 
B)  expected return = 14%, historical standard deviation = 19% 
C)  expected return = 16%, historical standard deviation = 21% 
D)  expected return = 18%, historical standard deviation = 23%

Question 7

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 8

Many defined benefit pension plans have a target rate of return on investment that is equal to the ________.

Accepted Answer

A)  firm's return on equity 
B)  plan's assumed actuarial rate of return 
C)  economic inflation rate because wages often increase with inflation 
D)  estimated stock market return

Question 9

The asset universe is the ________.

Accepted Answer

A)  set of investments in which an investment company can legally invest 
B)  existing set of assets the investment company currently owns in one or more of its portfolios 
C)  list of assets approved by the investment committee that may be placed into the investment company's portfolio 
D)  market portfolio of all available risky assets

Question 10

A passive asset allocation strategy involves ________.

Accepted Answer

A)  investing in the stock of companies that are price takers 
B)  maintaining approximately the same proportions of a portfolio in each asset class over time 
C)  varying the proportions of a portfolio in each asset class in response to changing market conditions 
D)  selecting individual securities in different sectors that are believed to be undervalued

Question 11

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 her 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 12

Just 2 months after you put money into an investment, its price falls 25%. Assuming that none of the investment fundamentals have changed, which of the following actions would evidence the greatest risk tolerance?

Accepted Answer

A)  You sell to avoid further worry and buy something else. 
B)  You do nothing and wait for the investment to come back. 
C)  You buy more, thinking that if it was a good investment before, now it's not only good but cheap too. 
D)  You sue your financial adviser.

Question 13

Both a wife and her husband work in the airline industry. They are in their 40s, and they have a high tax bracket and are concerned about their after-tax rate of return. A meeting with their financial planner reveals that they are primarily focused on long-term capital gains and will need at least a 9% to 11% average rate of return to meet their retirement goals. They desire a diversified portfolio, and liquidity is not currently a major concern. Which of the following asset allocations seems to best fit their situation?

Accepted Answer

A)  10% money market; 40% long-term bonds; 10% commodities; 40% high-dividend-paying stocks 
B)  0% money market; 60% long-term bonds; 40% stocks 
C)  10% money market; 30% long-term bonds; 10% commodities; 50% high-dividend-paying stocks 
D)  5% money market; 30% long-term bonds; 5% commodities; 60% stocks, most with low dividends and high growth prospects

Question 14

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 15

To become a CFA, you must do all of the following except which one?

Accepted Answer

A)  Pass three exams designed to ensure that you have sufficient knowledge of investments. 
B)  Obtain 3 years of work experience in money management. 
C)  Become a member of a local Society of the Financial Analysts Federation. 
D)  Divest all your own stock holdings to eliminate any potential conflicts of interest with client recommendations.

Question 16

You are thinking of investing in one of two assets. Asset A has higher systematic risk than asset B. You can be sure that asset A's ________ return will be higher than asset B's, but you can't be sure if asset A's ________ return will be higher than asset B's.

Accepted Answer

A)  realized; expected 
B)  real; nominal 
C)  expected; realized 
D)  nominal; expected

Question 17

The possibility that you are too conservative and your money doesn't grow fast enough to keep pace with inflation is called ________.

Accepted Answer

A)  purchasing power risk 
B)  liquidity risk 
C)  timing risk 
D)  market risk

Question 18

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 19

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)  counseling employees in the selection of asset classes 
D)  paying employees the market rate of return on employee contributions

Question 20

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

Accepted Answer

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

Exam 22: Investors and the Investment Process