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.

Accepted Answer

The stage an individual is in his/her life cycle affects return requirements, risk tolerance, and asset allocation. As individuals progress through different life stages, their financial goals, risk capacity, and investment horizons change, necessitating adjustments in their investment strategies to meet evolving needs.

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.

Accepted Answer

All the options listed are steps in the process of asset allocation. Deriving the efficient portfolio frontier helps in understanding the best possible returns for a given level of risk. Specifying asset classes to be included in the portfolio is essential for diversification and achieving the investment objectives. Specifying the capital market expectations involves making assumptions about future market returns, volatilities, and correlations, which are crucial for strategic asset allocation.

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.

Accepted Answer

Investment objectives typically focus on the trade-off between the desired return and the level of risk an investor is willing to accept to achieve those returns.

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.

Accepted Answer

The investment horizon refers to the period of time an investor expects to hold an investment before taking money out, which is essentially 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.

Accepted Answer

The execution phase involves implementing the investment strategy, which includes optimal asset allocation and security selection based on the client's objectives and market analysis.

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.

Accepted Answer

The planning phase involves gathering data about the client and the capital market to create an investment policy statement.

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.

Accepted Answer

Keogh plans, which are retirement plans for self-employed individuals and their employees, offer tax-deferred benefits. This means that contributions to the plan are tax-deductible, and taxes on earnings are deferred until funds are withdrawn, typically at retirement. They are not inherently protected against inflation, nor are they 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.

Accepted Answer

Investment constraints are limitations that investors set to guide their selection of assets, including factors like risk tolerance, time horizon, liquidity needs, legal requirements, and tax considerations. These constraints help in shaping the investment strategy to meet specific goals and requirements.

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.

Accepted Answer

The portability problem refers to the issue where workers who change jobs may end up with lower pension benefits at retirement compared to those who stay with the same employer, even if the pension plans have the same final-pay benefit formula. This is because pension benefits often depend on factors like length of service with the employer, and changing jobs can reset these factors.

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.

Accepted Answer

Endowment funds are typically held by charitable organizations and educational institutions to support their operations, programs, and long-term financial stability. For-profit firms generally do not hold endowment funds as they operate on a profit-making basis rather than relying on endowed funds for support.

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.

Accepted Answer

Contingent immunization is a strategy that allows for investing in equities or other growth-oriented assets when the fund is fully funded or has a surplus. However, it requires shifting to more conservative investments, like bonds, to ensure obligations are met if the fund's value approaches the accumulated benefit obligation level. This approach combines active management with a safety net to protect against underfunding.

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.

Accepted Answer

Risk tolerance generally decreases with age. As individuals get older, they tend to become more risk-averse, particularly because they have a shorter time horizon for recovering from potential financial losses.

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.

Accepted Answer

The greater the proportion of total return that is in the form of price appreciation, the greater will be the value of the tax-deferral option for taxable investors. This is because price appreciation can benefit from deferral of capital gains taxes, enhancing the investment's after-tax return.

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.

Accepted Answer

Liquidity refers to both the ease with which an asset can be sold (how quickly it can be converted into cash) and the ability to sell that asset without significantly affecting its price, which implies selling it for a fair price.

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.

Accepted Answer

Investment policies are strategies designed to achieve the desired rate of return while adhering to the investor's risk tolerance and any specific constraints.

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.

Accepted Answer

A remainderman is the person who inherits or is entitled to inherit property upon the termination of the estate of the former owner. In the context of a trust, this is the individual who receives the principal of the trust after the death of the income beneficiaries or after the trust terms are otherwise satisfied.

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.

Accepted Answer

TIPS, or Treasury Inflation-Protected Securities, are designed to provide protection against inflation. The principal value of TIPS increases with inflation and decreases with deflation, which is measured by the Consumer Price Index (CPI). This makes them an effective hedge against CPI-measured inflation.

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.

Accepted Answer

Stocks providing a hedge against inflation is often cited as a reason for investing in equities, but it is not always true or guaranteed, making it an incorrect belief.

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.

Accepted Answer

Variable life insurance combines life insurance with a tax-deferred investment feature (similar to an annuity), provides a minimum death benefit that can increase based on the performance of the policy's investments, and can indeed be converted into a stream of income, making all the provided options 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.

Accepted Answer

The feedback phase involves adjusting the investment strategy based on changes in expectations and objectives, reflecting new information or changes in the client's situation or market conditions.

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

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

__________ in the process of asset allocation.

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

The investment horizon is

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

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

An important benefit of Keogh plans is that

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

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

Endowment funds are held by

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

Questionnaires and attitude surveys suggest that risk tolerance

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.

Liquidity is

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

A remainderman is

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

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

Variable life insurance

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