Chapter 28

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Johns Hopkins University *

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Jan 9, 2024

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1. Award: 10.00 points Problems? Adjust credit for all students. George More is a participant in a defined contribution pension plan that offers a fixed-income fund and a common stock fund as investment choices. He is 40 years old and has an accumulation of $100,000 in each of the funds. He currently contributes $1,500 per year to each. He plans to retire at age 65, and his life expectancy is age 80. Required: a. Assuming a 3% per year real earnings rate for the fixed-income fund and 6% per year for common stocks, what will be George’s expected accumulation in each account at age 65? b. What will be the expected real retirement annuity from each account, assuming these same real earnings rates? c. If George wanted a retirement annuity of $30,000 per year from the fixed-income fund, by how much would he have to increase his annual contributions?  Required A Required B  Complete this question by entering your answers in the tabs below. Assuming a 3% per year real earnings rate for the fixed-income fund and 6% per year for common stocks, what will be George’s expected accumulation in each account at age 65? Note: Do not round time value factors and round your final answers to the nearest dollar amount. Required A Required B Required C $ $ Fixed income fund 264,067 Common stock fund 511,484 Explanation: a. George More’s expected accumulation is $775,551 ($264,067 + $511,484) at age 65: n i PV PMT FV Fixed income 25 3% $ 100,000 $1,500 FV = $264,067 Common stocks 25 6% $ 100,000 $1,500 FV = $511,484 b. Expected retirement annuity: n i PV FV FV Fixed income 15 3% $264,067 0 PMT = $22,120 Common stocks 15 6% $511,484 0 PMT = $52,664 c. To get a fixed-income annuity of $30,000 per year, his accumulation at age 65 would have to be: n i PMT FV PV Fixed income 15 3% $30,000 0 PV = $358,138 His annual contribution would have to be: n i PV FV PMT Fixed income 25 3% $100,000 −$358,138 PMT = $4,080 This is $2,580 more per year than the $1,500 current contribution. Worksheet Difficulty: 2 Intermediate Source: Investments (Bodie, 13e, ISBN 1266836322) > Chapter 28: Investment Policy and the Framework of the CFA Institute > Chapter 28 Problems - Static References

1. Award: 10.00 points Problems? Adjust credit for all students. George More is a participant in a defined contribution pension plan that offers a fixed-income fund and a common stock fund as investment choices. He is 40 years old and has an accumulation of $100,000 in each of the funds. He currently contributes $1,500 per year to each. He plans to retire at age 65, and his life expectancy is age 80. Required: a. Assuming a 3% per year real earnings rate for the fixed-income fund and 6% per year for common stocks, what will be George’s expected accumulation in each account at age 65? b. What will be the expected real retirement annuity from each account, assuming these same real earnings rates? c. If George wanted a retirement annuity of $30,000 per year from the fixed-income fund, by how much would he have to increase his annual contributions?  Required A Required C  Complete this question by entering your answers in the tabs below. What will be the expected real retirement annuity from each account, assuming these same real earnings rates? Note: Do not round time value factors and round your final answers to the nearest dollar amount. Required A Required B Required C $ $ Fixed income fund 22,120 Common stock fund 52,664 Explanation: a. George More’s expected accumulation is $775,551 ($264,067 + $511,484) at age 65: n i PV PMT FV Fixed income 25 3% $ 100,000 $1,500 FV = $264,067 Common stocks 25 6% $ 100,000 $1,500 FV = $511,484 b. Expected retirement annuity: n i PV FV FV Fixed income 15 3% $264,067 0 PMT = $22,120 Common stocks 15 6% $511,484 0 PMT = $52,664 c. To get a fixed-income annuity of $30,000 per year, his accumulation at age 65 would have to be: n i PMT FV PV Fixed income 15 3% $30,000 0 PV = $358,138 His annual contribution would have to be: n i PV FV PMT Fixed income 25 3% $100,000 −$358,138 PMT = $4,080 This is $2,580 more per year than the $1,500 current contribution. Worksheet Difficulty: 2 Intermediate Source: Investments (Bodie, 13e, ISBN 1266836322) > Chapter 28: Investment Policy and the Framework of the CFA Institute > Chapter 28 Problems - Static References

1. Award: 10.00 points Problems? Adjust credit for all students. George More is a participant in a defined contribution pension plan that offers a fixed-income fund and a common stock fund as investment choices. He is 40 years old and has an accumulation of $100,000 in each of the funds. He currently contributes $1,500 per year to each. He plans to retire at age 65, and his life expectancy is age 80. Required: a. Assuming a 3% per year real earnings rate for the fixed-income fund and 6% per year for common stocks, what will be George’s expected accumulation in each account at age 65? b. What will be the expected real retirement annuity from each account, assuming these same real earnings rates? c. If George wanted a retirement annuity of $30,000 per year from the fixed-income fund, by how much would he have to increase his annual contributions?  Required B Required C  Complete this question by entering your answers in the tabs below. If George wanted a retirement annuity of $30,000 per year from the fixed-income fund, by how much would he have to increase his annual contributions? Note: Do not round time value factors and round your final answer to the nearest dollar amount. Required A Required B Required C $ Increase his annual contributions by 2,580 Explanation: a. George More’s expected accumulation is $775,551 ($264,067 + $511,484) at age 65: n i PV PMT FV Fixed income 25 3% $ 100,000 $1,500 FV = $264,067 Common stocks 25 6% $ 100,000 $1,500 FV = $511,484 b. Expected retirement annuity: n i PV FV FV Fixed income 15 3% $264,067 0 PMT = $22,120 Common stocks 15 6% $511,484 0 PMT = $52,664 c. To get a fixed-income annuity of $30,000 per year, his accumulation at age 65 would have to be: n i PMT FV PV Fixed income 15 3% $30,000 0 PV = $358,138 His annual contribution would have to be: n i PV FV PMT Fixed income 25 3% $100,000 −$358,138 PMT = $4,080 This is $2,580 more per year than the $1,500 current contribution. Worksheet Difficulty: 2 Intermediate Source: Investments (Bodie, 13e, ISBN 1266836322) > Chapter 28: Investment Policy and the Framework of the CFA Institute > Chapter 28 Problems - Static References

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2. Award: 10.00 points Problems? Adjust credit for all students. The difference between a Roth IRA and a traditional IRA is that in a Roth IRA taxes are paid on the income that is contributed, but the withdrawals at retirement are tax-free. In a traditional IRA, however, the contributions reduce your taxable income, but the withdrawals at retirement are taxable. Assume you plan to devote $5,000 to retirement savings in each year. You will retire in 30 years and expect to live for an additional 20 years after retirement. Required: a. Assume the before-tax interest rate is 5%. What will be your after-tax 20-year retirement consumption stream if you choose to save in a traditional IRA? Assume your tax rate is fixed at 30%. b. What will be your 20-year retirement consumption stream if you choose to save in a Roth IRA? c. Which provides better expected results if you expect your tax rate on wage as well as all investment income to decrease from 30% today to 25% at retirement?  Required A Required B  Complete this question by entering your answers in the tabs below. Assume the before-tax interest rate is 5%. What will be your after-tax 20-year retirement consumption stream if you choose to save in a traditional IRA? Assume your tax rate is fixed at 30%. Note: Round your answers to 2 decimal place. Required A Required B Required C $ 20-year consumption stream (assuming monthly payouts) 1,534.63 Explanation: a. Using the financial calculator, first calculate future value, before taxes: n = 30 P ÷ y = 1 i ÷ y = 5 PV = 0 PMT = −$5,000 (Cash outflow into the retirement account) CPT FV = $332,194,24 Therefore, after-tax wealth = $332,194.24 × (1 − 0.3) = $232,535.97 Calculate the 20-year consumption stream of $1,534.63 (assuming monthly payouts): n = 20 × 12 = 240 P ÷ y = 12 i ÷ y = 5 PV = −$232,535.97 (purchase retirement stream) FV = 0 CPT PMT = $1,534.63 b. Using the financial calculator, first calculate future value, before taxes: n = 30 P ÷ y = 1 i ÷ y = 5 PV = 0 PMT = −$5,000 × (1 − 0.3) = −3,500 (after-tax contributions) CPT FV = −232,535.97 Therefore, after-tax wealth = $232,535.97 (since taxes were already taken out) Calculate the 20-year consumption stream (assuming monthly payouts): n = 20 × 12 = 240 P ÷ y = 12 i ÷ y = 5 PV = –$232,535.97 (purchase retirement stream) FV = 0 CPT PMT = $1,534.63 With unchanging tax rates, the Traditional IRA and the Roth IRA are equivalent. c. If you tax rate decreases to 25% upon retirement the Roth IRA still provides a monthly consumption stream of $1,534.63. However, the Traditional IRA now provides (using the financial calculator): n = 30 P ÷ y = 1 i ÷ y = 5 PV = 0 PMT = −$5,000 (cash outflow into the retirement account) CPT FV = $332,194.24 Therefore, after-tax wealth = $332,194.24 × (1 − 0.25) = $249,145.68

Calculate the 20-year consumption stream (assuming monthly payouts): n = 20 × 12 = 240 P ÷ y = 12 i ÷ y = 5 PV = −$249,145.68 (purchase retirement stream) FV = 0 CPT PMT = $1,644.25 If taxes are expected to fall, the Traditional IRA provides a larger consumption stream. Worksheet Difficulty: 2 Intermediate Source: Investments (Bodie, 13e, ISBN 1266836322) > Chapter 28: Investment Policy and the Framework of the CFA Institute > Chapter 28 Problems - Static References

2. Award: 10.00 points Problems? Adjust credit for all students. The difference between a Roth IRA and a traditional IRA is that in a Roth IRA taxes are paid on the income that is contributed, but the withdrawals at retirement are tax-free. In a traditional IRA, however, the contributions reduce your taxable income, but the withdrawals at retirement are taxable. Assume you plan to devote $5,000 to retirement savings in each year. You will retire in 30 years and expect to live for an additional 20 years after retirement. Required: a. Assume the before-tax interest rate is 5%. What will be your after-tax 20-year retirement consumption stream if you choose to save in a traditional IRA? Assume your tax rate is fixed at 30%. b. What will be your 20-year retirement consumption stream if you choose to save in a Roth IRA? c. Which provides better expected results if you expect your tax rate on wage as well as all investment income to decrease from 30% today to 25% at retirement?  Required A Required C  Complete this question by entering your answers in the tabs below. What will be your 20-year retirement consumption stream if you choose to save in a Roth IRA? Note: Round your answers to 2 decimal place. Required A Required B Required C $ 20-year consumption stream (assuming monthly payouts) 1,534.63 Explanation: a. Using the financial calculator, first calculate future value, before taxes: n = 30 P ÷ y = 1 i ÷ y = 5 PV = 0 PMT = −$5,000 (Cash outflow into the retirement account) CPT FV = $332,194,24 Therefore, after-tax wealth = $332,194.24 × (1 − 0.3) = $232,535.97 Calculate the 20-year consumption stream of $1,534.63 (assuming monthly payouts): n = 20 × 12 = 240 P ÷ y = 12 i ÷ y = 5 PV = −$232,535.97 (purchase retirement stream) FV = 0 CPT PMT = $1,534.63 b. Using the financial calculator, first calculate future value, before taxes: n = 30 P ÷ y = 1 i ÷ y = 5 PV = 0 PMT = −$5,000 × (1 − 0.3) = −3,500 (after-tax contributions) CPT FV = −232,535.97 Therefore, after-tax wealth = $232,535.97 (since taxes were already taken out) Calculate the 20-year consumption stream (assuming monthly payouts): n = 20 × 12 = 240 P ÷ y = 12 i ÷ y = 5 PV = –$232,535.97 (purchase retirement stream) FV = 0 CPT PMT = $1,534.63 With unchanging tax rates, the Traditional IRA and the Roth IRA are equivalent. c. If you tax rate decreases to 25% upon retirement the Roth IRA still provides a monthly consumption stream of $1,534.63. However, the Traditional IRA now provides (using the financial calculator): n = 30 P ÷ y = 1 i ÷ y = 5 PV = 0 PMT = −$5,000 (cash outflow into the retirement account) CPT FV = $332,194.24 Therefore, after-tax wealth = $332,194.24 × (1 − 0.25) = $249,145.68

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2. Award: 10.00 points Problems? Adjust credit for all students. The difference between a Roth IRA and a traditional IRA is that in a Roth IRA taxes are paid on the income that is contributed, but the withdrawals at retirement are tax-free. In a traditional IRA, however, the contributions reduce your taxable income, but the withdrawals at retirement are taxable. Assume you plan to devote $5,000 to retirement savings in each year. You will retire in 30 years and expect to live for an additional 20 years after retirement. Required: a. Assume the before-tax interest rate is 5%. What will be your after-tax 20-year retirement consumption stream if you choose to save in a traditional IRA? Assume your tax rate is fixed at 30%. b. What will be your 20-year retirement consumption stream if you choose to save in a Roth IRA? c. Which provides better expected results if you expect your tax rate on wage as well as all investment income to decrease from 30% today to 25% at retirement?  Required B Required C  Complete this question by entering your answers in the tabs below. Which provides better expected results if you expect your tax rate on wage as well as all investment income to decrease from 30% today to 25% at retirement? Required A Required B Required C Better Result Traditional IRA Explanation: a. Using the financial calculator, first calculate future value, before taxes: n = 30 P ÷ y = 1 i ÷ y = 5 PV = 0 PMT = −$5,000 (Cash outflow into the retirement account) CPT FV = $332,194,24 Therefore, after-tax wealth = $332,194.24 × (1 − 0.3) = $232,535.97 Calculate the 20-year consumption stream of $1,534.63 (assuming monthly payouts): n = 20 × 12 = 240 P ÷ y = 12 i ÷ y = 5 PV = −$232,535.97 (purchase retirement stream) FV = 0 CPT PMT = $1,534.63 b. Using the financial calculator, first calculate future value, before taxes: n = 30 P ÷ y = 1 i ÷ y = 5 PV = 0 PMT = −$5,000 × (1 − 0.3) = −3,500 (after-tax contributions) CPT FV = −232,535.97 Therefore, after-tax wealth = $232,535.97 (since taxes were already taken out) Calculate the 20-year consumption stream (assuming monthly payouts): n = 20 × 12 = 240 P ÷ y = 12 i ÷ y = 5 PV = –$232,535.97 (purchase retirement stream) FV = 0 CPT PMT = $1,534.63 With unchanging tax rates, the Traditional IRA and the Roth IRA are equivalent. c. If you tax rate decreases to 25% upon retirement the Roth IRA still provides a monthly consumption stream of $1,534.63. However, the Traditional IRA now provides (using the financial calculator): n = 30 P ÷ y = 1 i ÷ y = 5 PV = 0 PMT = −$5,000 (cash outflow into the retirement account) CPT FV = $332,194.24

Therefore, after-tax wealth = $332,194.24 × (1 − 0.25) = $249,145.68 Calculate the 20-year consumption stream (assuming monthly payouts): n = 20 × 12 = 240 P ÷ y = 12 i ÷ y = 5 PV = −$249,145.68 (purchase retirement stream) FV = 0 CPT PMT = $1,644.25 If taxes are expected to fall, the Traditional IRA provides a larger consumption stream. Worksheet Difficulty: 2 Intermediate Source: Investments (Bodie, 13e, ISBN 1266836322) > Chapter 28: Investment Policy and the Framework of the CFA Institute > Chapter 28 Problems - Static References

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1. Award: 10.00 points 2. Award: 10.00 points 3. Award: 10.00 points 4. Award: 10.00 points The CFA Institute divides the process of portfolio management into three main elements, which are _________, _________, and _________. planning; execution; results security selection; asset allocation; action planning; asset allocation; feedback planning; execution; feedback risk tolerance; feedback; action The three main elements are planning, execution, and feedback. References Multiple Choice Diﬃculty: 1 Basic The planning phase of the CFA Institute's investment management process: uses data about the client and capital market. uses details of optimal asset allocation and security selection. uses changes in expectations and objectives. All of the options are correct. None of the options are correct. The planning phase of the CFA Institute's investment management process uses data about the client and capital market. References Multiple Choice Diﬃculty: 1 Basic The execution phase of the CFA Institute's investment management process: uses data about the client and capital market. uses details of optimal asset allocation and security selection. uses changes in expectations and objectives. All of the options are correct. None of the options are correct. The execution phase of the CFA Institute's investment management process uses details of optimal asset allocation and security selection. References Multiple Choice Diﬃculty: 1 Basic The feedback phase of the CFA Institute's investment management process: uses data about the client and capital market. uses details of optimal asset allocation and security selection. uses changes in expectations and objectives. All of the options are correct. None of the options are correct. The feedback phase of the CFA Institute's investment management process uses changes in expectations and objectives. References Multiple Choice Diﬃculty: 1 Basic                        

5. Award: 10.00 points 6. Award: 10.00 points 7. Award: 10.00 points 8. Award: 10.00 points _________ refer to strategies aimed at attaining the established rate of return requirements while meeting expressed risk tolerance and applicable constraints. Investment constraints Investment objectives Investment policies All of the options are correct. None of the options are correct. Objectives are goals, constraints refer to actions the investor is unwilling to take; both objectives and constraints determine policies. References Multiple Choice Diﬃculty: 1 Basic One incorrect belief that is often cited as a reason for fully funded pension funds to invest in equities is: stocks have higher risk. bonds have lower returns. stocks provide a hedge against inﬂation. stocks have higher returns. All of the options are incorrect beliefs that are often cited. Nominal returns on stocks are highly correlated with inﬂation, yet many pension managers cite inﬂation protection as a reason for investing in equities. References Multiple Choice Diﬃculty: 2 Intermediate _________ in the process of asset allocation. Deriving the eﬃcient portfolio frontier is a step Specifying asset classes to be included in the portfolio is a step Specifying the capital market expectations is a step All of the options are steps. None of the options are steps. All of the options are steps in the process of asset allocation. References Multiple Choice Diﬃculty: 1 Basic Questionnaires and attitude surveys suggest that risk tolerance: increases with age. decreases with age. stays constant over the life cycle for most investors. cannot be assessed. None of the options are correct. The life cycle view of investment behavior suggests that investors are more risk tolerant when they are younger, and surveys support this view. References Multiple Choice Diﬃculty: 1 Basic                        

9. Award: 10.00 points 10. Award: 10.00 points 11. Award: 10.00 points 12. Award: 10.00 points _________ can be used to create a perfect inﬂation hedge. Gold Real estate TIPS The S&P 500 Index None of the options are correct. The CPI is the rate of inﬂation, thus CPI linked bonds can be used to create a perfect inﬂation hedge. References Multiple Choice Diﬃculty: 2 Intermediate 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: immunization. hedging. diversification. contingent immunization. overfunding. Contingent immunization allows the fund to participate in the higher returns of the equity market while protecting the benefits of plan participants. References Multiple Choice Diﬃculty: 1 Basic 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: an accumulated benefit obligation. an unfunded liability. immunization. indexation. the portability problem. The portability problem results in reduced benefits for workers who change jobs but cannot take accumulated benefits from defined benefit plans when they move. References Multiple Choice Diﬃculty: 1 Basic 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. greater; greater greater; lower lower; greater The answer cannot be determined from the information provided. None of the options are correct. Deferral of the capital gain tax allows the investment to grow at a faster rate until the tax is actually paid. References Multiple Choice Diﬃculty: 1 Basic                        

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13. Award: 10.00 points 14. Award: 10.00 points 15. Award: 10.00 points 16. Award: 10.00 points An important benefit of Keogh plans is that: they are not taxable until funds are withdrawn as benefits. they are protected against inﬂation. they are automatically insured by the Federal government. they are not taxable until funds are withdrawn as benefits, and they are protected against inﬂation. they are not taxable until funds are withdrawn as benefits, and they are automatically insured by the Federal government. Keogh plans, like other tax deferred retirement plans, are not subject to taxes until funds are withdrawn as benefits. References Multiple Choice Diﬃculty: 1 Basic Variable life insurance: combines life insurance with a tax deferred annuity, only. provides a minimum death benefit that increases subject to investment performance, only. can be converted to a stream of income, only. All of the options are correct. None of the options are correct. Variable life insurance includes all of the listed features. References Multiple Choice Diﬃculty: 1 Basic Endowment funds are held by: charitable organizations, only. educational institutions, only. for profit firms, only. charitable organizations and educational institutions. educational institutions and for profit firms. Endowments are funds established for not for profit organizations, such as colleges, universities, charities, hospitals, etc. References Multiple Choice Diﬃculty: 1 Basic _________ center on the trade off between the return the investor wants and how much risk the investor is willing to assume. Investment constraints Investment objectives Investment policies All of the options are correct. None of the options are correct. The objective is to earn the maximum return, given the amount of risk the investor is willing to assume. References Multiple Choice Diﬃculty: 2 Intermediate                        

17. Award: 10.00 points 18. Award: 10.00 points 19. Award: 10.00 points 20. Award: 10.00 points The stage an individual is in her life cycle will affect her: return requirements. risk tolerance. asset allocation. return requirements and risk tolerance. All of the options are correct. The stage in the life cycle affects risk tolerance and therefore affects return requirements and asset allocation. References Multiple Choice Diﬃculty: 1 Basic The stage an individual is in his life cycle will not affect his: return requirements. risk tolerance. asset allocation. return requirements and risk tolerance. All of the options lists items that are affected by the stage in the life cycle. The stage in the life cycle affects risk tolerance and therefore affects return requirements and asset allocation. References Multiple Choice Diﬃculty: 1 Basic _________ are boundaries that investors place on their choice of investment assets. Investment constraints Investment objectives Investment policies All of the options are correct None of the options are correct. Investment constraints consist of actions the investor is unwilling to take. References Multiple Choice Diﬃculty: 1 Basic The investment horizon is: the investor's expected age at death. the starting date for establishing investment constraints. based on the investor's risk tolerance. the date at which the portfolio is expected to be fully or partially liquidated. None of the options are correct. The investment horizon is the planned liquidation date. References Multiple Choice Diﬃculty: 1 Basic                        

21. Award: 10.00 points 22. Award: 10.00 points 23. Award: 10.00 points 24. Award: 10.00 points Liquidity is: the ease with which an asset can be sold. the ability to sell an asset for a fair price. the degree of inﬂation protection an asset provides. the ease with which an asset can be sold and the ability to sell an asset for a fair price. All of the options are correct. Liquidity refers to the speed at which an asset can be sold for a fair price. References Multiple Choice Diﬃculty: 2 Intermediate The objectives of personal trusts normally are _________ in scope than those of individual investors, and personal trust managers typically are _________ than individual investors. broader; more risk averse broader; less risk averse more limited; more risk averse more limited; less risk averse None of the options are correct. The objectives of personal trusts normally are more limited in scope than those of individual investors and personal trust managers typically are more risk averse than individual investors. References Multiple Choice Diﬃculty: 2 Intermediate 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. employee; employee employee; employer employer; employee employer; employer Cannot determine; depends on the economic environment. With a defined contribution plan, the employee bears the risk of the portfolio returns and thus risk of benefit levels. However, the employee also receives all of the returns generated by the defined contribution plan. References Multiple Choice Diﬃculty: 2 Intermediate 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, stock A will have a higher after tax holding period return than stock B. the after tax holding period returns on stocks A and B will be the same. stock B will have a higher after tax holding period return than stock A. it is impossible to determine which stock will have a higher after tax holding period return given the information available. None of the options are correct. Taxes are not paid on capital gains until the stock is sold. If the pre tax holding period returns on the two stocks are the same, more taxes will be paid on the stock with the high dividend payout policy (stock A) and thus the after tax returns of A will lower than the after tax returns of B. References Multiple Choice Diﬃculty: 2 Intermediate                        

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25. Award: 10.00 points 26. Award: 10.00 points 27. Award: 10.00 points 28. Award: 10.00 points The prudent investor rule requires: executives of companies to avoid investing in options of companies by which they are employed. executives of companies to disclose their transactions in stocks of companies by which they are employed. professional investors who manage money for others to avoid all risky investments. professional investors who manage money for others to constrain their investments to those that would have been approved by the prudent investor. None of the options are correct. The prudent investor rule allows one to diversify, which means that some risky investments are allowed in a portfolio. However, the riskiness of the portfolio should be such that a prudent investor would be willing to assume. References Multiple Choice Diﬃculty: 2 Intermediate The longest time horizons are likely to be set by: banks, only. property and casualty insurance companies, only. pension funds, only. banks and pension funds. property and casualty insurance companies and pension funds. Banks and non-life insurance companies typically have short time horizons. References Multiple Choice Diﬃculty: 2 Intermediate The longest time horizons are likely to be set by: banks. property and casualty insurance companies. endowment funds. banks and endowment funds. property and casualty insurance companies and endowment funds. Endowment funds, pension funds, and life insurance companies typically have long time horizons. References Multiple Choice Diﬃculty: 2 Intermediate The shortest time horizons are likely to be set by: banks. endowments. pension funds. endowments and property and casualty insurance companies. property and casualty insurance companies and pension funds. Banks and non life insurance companies typically have short time horizons. References Multiple Choice Diﬃculty: 2 Intermediate                        

29. Award: 10.00 points 30. Award: 10.00 points 31. Award: 10.00 points 32. Award: 10.00 points Institutional investors will rarely invest in which of these asset classes? Bonds Stocks Cash Real estate Precious metals Institutional investors typically limit their holdings to the first four of these asset classes. References Multiple Choice Diﬃculty: 2 Intermediate For an individual investor, the value of home ownership is likely to be viewed: as a hedge against increases in rental rates, only. as a guarantee of availability of a particular residence, only. as a hedge against inﬂation, only. as a hedge against increases in rental rates and as a guarantee of availability of a particular residence. All of the options are correct. Real estate has not been shown to be an effective hedge against inﬂation. References Multiple Choice Diﬃculty: 2 Intermediate 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? $30,000.00 $33,333.33 $51,481.38 $52,452.73 The answer cannot be determined from the information provided. N = 15; I / Y = 6; PV = − 500000; PMT = ?; FV = 0 → PMT = $51,481.38 References Multiple Choice Diﬃculty: 2 Intermediate 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? $30,000.00 $33,333.33 $51,481.38 $52,452.73 The answer cannot be determined from the information provided. N = 15; I / Y = 6; PV = −500000; PMT = ? ; FV = 0 PMT = $51,481.38 Payment Starting = $51,481.38 × 1.08 ÷ 1.06 = $52,452.73 References Multiple Choice Diﬃculty: 3 Challenge                        

33. Award: 10.00 points 34. Award: 10.00 points 35. Award: 10.00 points 36. Award: 10.00 points The first step a pension fund should take before beginning to invest is to: establish investment objectives. develop a list of investment managers with superior records to interview. establish asset allocation guidelines. decide between active and passive management. None of the options are correct. The first step for any investor is to determine the goals and objectives of the portfolio. All subsequent steps in the investment process follow. References Multiple Choice Diﬃculty: 1 Basic General pension funds typically invest _________ of their funds in equity securities. none 5–10% 15–35% 40–60% more than 60% Pension funds can theoretically maximize tax benefits and minimize administrative costs by investing in fixed income securities, yet they remain highly invested in equities. References Multiple Choice Diﬃculty: 2 Intermediate The optimal portfolio on the eﬃcient frontier for a given investor depends on: the investor's degree of risk tolerance, only. the coeﬃcient, A, which is a measure of risk aversion, only. the investor's required rate of return, only. the investor's degree of risk tolerance and the investor's required rate of return. the investor's degree of risk tolerance and the coeﬃcient, A, which is a measure of risk aversion. The investor's position on the eﬃcient frontier is determined by the investor's degree of risk tolerance and the coeﬃcient, A, which is a measure of risk aversion. The investor will opt for the portfolio with the maximum returns at the acceptable level of risk tolerance, which will be on the eﬃcient frontier. References Multiple Choice Diﬃculty: 2 Intermediate The optimal portfolio on the eﬃcient frontier for a given investor does not depend on: the investor's degree of risk tolerance, only. the coeﬃcient, A, which is a measure of risk aversion, only. the investor's required rate of return, only. the investor's degree of risk tolerance and the investor's required rate of return. the investor's degree of risk tolerance and the coeﬃcient, A, which is a measure of risk aversion. The investor's position on the eﬃcient frontier is determined by the investor's degree of risk tolerance and the coeﬃcient, A, which is a measure of risk aversion. The investor will opt for the portfolio with the maximum returns at the acceptable level of risk tolerance, which will be on the eﬃcient frontier. References Multiple Choice Diﬃculty: 2 Intermediate                        

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37. Award: 10.00 points 38. Award: 10.00 points 39. Award: 10.00 points 40. Award: 10.00 points Target date retirement funds are not: funds of funds diversified across stocks and bonds. designed to change their asset allocation as time passes. a simple, but useful, strategy. designed to function much like hedge funds. None of the options are correct. Target date retirement funds are funds of funds diversified across stocks and bonds, change their asset allocation as time passes, and are a simple but useful strategy. References Multiple Choice Diﬃculty: 2 Intermediate 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. tax shelter defined contribution plan personal trust fixed annuity Keogh plan Personal trusts are to be managed for the benefit of the beneficiary. Managers of these trusts are often more risk averse than the individual investors. References Multiple Choice Diﬃculty: 1 Basic Professional financial planners should: assess their client's risk and return requirements on a one-time basis, only. explain the investment plan to the client, only. inform the client about the outcome of the plan, only. 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. explain the investment plan to the client and inform the client about the outcome of the plan. They should assess risk and return requirements on an ongoing basis as their clients advance through the life cycle and their needs change. References Multiple Choice Diﬃculty: 1 Basic Deferral of capital gains tax: 1. means that the investor doesn't need to pay taxes until the investment is sold. 2. allows the investment to grow at a faster rate. 3. means that you might escape the capital gains tax if you live long enough. 4. provides a tax shelter for investors. 2 and 3 1, 2, and 4 1, 3, and 5 2, 3, and 4 None of the options are correct. The only incorrect response is 3. Capital gains tax will have to be paid eventually when the assets are sold. References Multiple Choice Diﬃculty: 1 Basic                        

41. Award: 10.00 points 42. Award: 10.00 points 43. Award: 10.00 points 44. Award: 10.00 points Deferral of capital gains tax does not: 1. mean that the investor doesn't need to pay taxes until the investment is sold. 2. allow the investment to grow at a faster rate. 3. mean that you might escape the capital gains tax if you live long enough. 4. provide a tax shelter for investors. 3 2 1, 2, and 5 2, 3, and 4 None of the options are correct. Capital gains tax will have to be paid eventually when the assets are sold. References Multiple Choice Diﬃculty: 1 Basic Which of the following investments does not allow the investor to choose how to allocate assets? Variable Life insurance policies Keogh plans Personal funds Tax qualified defined contribution plans Universal Life policies Universal Life policies are managed by the insurance company, whose portfolio managers make the decisions about asset allocation. References Multiple Choice Diﬃculty: 2 Intermediate Which of the following investments allows the investor to choose how to allocate assets? Variable Life insurance policies Keogh plans Personal funds Tax qualified defined contribution plans All of the options are correct. Keogh plans, personal funds, variable life insurance policies, and tax qualified defined contribution plans allow investors to choose how assets are allocated. References Multiple Choice Diﬃculty: 2 Intermediate Pension funds: 1. accept contributions from employers, which are tax deductible. 2. pay distributions that are taxed as ordinary income. 3. pay benefits only from the income component of the fund. 4. accept contributions from employees, which are not tax deductible. 1 and 4 2 and 3 1 and 2 1, 2, and 4 1, 2, 3, and 4 The funds aren't limited to using only the income component for payouts and employees' contributions are tax deductible. References Multiple Choice Diﬃculty: 2 Intermediate                        

45. Award: 10.00 points 46. Award: 10.00 points 47. Award: 10.00 points 48. Award: 10.00 points Pension funds do not: 1. accept contributions from employers, which are tax deductible. 2. pay distributions that are taxed as ordinary income. 3. pay benefits only from the income component of the fund. 4. accept contributions from employees, which are not tax deductible. 3 and 4 2 and 3 1 and 2 1, 2, and 4 1, 2, 3, and 4 The funds aren't limited to using only the income component for payouts and employees' contributions are tax deductible. References Multiple Choice Diﬃculty: 2 Intermediate 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? $3,800; $200 $2,000; $2,000 $200; $3,800 $2,500; $1,500 $1,500; $2,500 The safe account has 0.05 × $4,000 = $200 and the risky account has 0.95 × $4,000 = $3,800. References Multiple Choice Diﬃculty: 1 Basic 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? $3,800; $200 $2,000; $2,000 $200; $3,800 $2,500; $1,500 $1,500; $2,500 The safe account gets 0.05 × ($2,000 + $2,000) = $200 and the risky account gets 0.95 × ($2,000 + $2,000) = $3,800. References Multiple Choice Diﬃculty: 1 Basic 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? $37,221 $16,423 $11,856 $21,156 $49,219 The value in the safe account in 44 years will be $200 × (1.035) 44 + $200 × FVIFA 3.5%,44 = $21,156.33. References Multiple Choice Diﬃculty: 2 Intermediate                        

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49. Award: 10.00 points 50. Award: 10.00 points 51. Award: 10.00 points 52. Award: 10.00 points 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? $2,731,838 $2,915,415 $1,425,316 $224,651 $3,545,886 The value in the risky account in 44 years will be $3,800 × (1.10) 44 + $3,800 × FVIFA 10%,44 = $2,731,838.38. References Multiple Choice Diﬃculty: 2 Intermediate 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? $1,500; $6,000 $3,000; $4,500 $2,000; $5,500 $4,800; $2,700 $3,500; $3,500 The safe account has 0.20 × $7,500 = $1,500 and the risky account has 0.80 × $7,500 = $6,000. References Multiple Choice Diﬃculty: 1 Basic 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? $1,500; $2,500 $1,200; $1,800 $800; $3,200 $1,250; $2,750 $1,400; $1,600 The safe account gets 0.20 × ($2,000 + $2,000) = $800 and the risky account gets 0.80 × ($2,000 + $2,000) = $3,200. References Multiple Choice Diﬃculty: 1 Basic 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 be sure of having in the safe account at retirement? $45,473 $62,557 $78,943 $54,968 $74,643 The value in the safe account in 36 years will be $1,500 × (1.03) 36 + $800 × FVIFA 3%,36 = $54,968.17. References Multiple Choice Diﬃculty: 2 Intermediate                        

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53. Award: 10.00 points 54. Award: 10.00 points 55. Award: 10.00 points 56. Award: 10.00 points 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? $1,800,326 $1,905,095 $1,743,781 $1,224,651 $345,886 The value in the risky account in 36 years will be $6,000 × (1.12) 36 + $3,200 × FVIFA 12%,36 = $1,905,095.42. References Multiple Choice Diﬃculty: 2 Intermediate 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? $31,200; $46,800 $39,000; $39,000 $32,000; $96,000 $45,300; $32,700 $64,000; $14,000 The safe account has 0.25 × $128,000 = $32,000 and the risky account has 0.75 × $128,000 = $96,000. References Multiple Choice Diﬃculty: 1 Basic 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? $2,500; $2,500 $3,200; $1,800 $3,000; $2,000 $1,250; $3,750 $2,400; $2,600 The safe account gets 0.25 × ($2,500 + $2,500) = $1,250 and the risky account gets 0.75 × ($2,500 + $2,500) = $3,750. References Multiple Choice Diﬃculty: 1 Basic 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? $132,473 $162,557 $178,943 $189,211 $124,643 The value in the safe account in 23 years will be $32,000 × (1.04) 23 + $1,250 × FVIFA 4%,23 = $124,643.26. References Multiple Choice Diﬃculty: 2 Intermediate                        

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57. Award: 10.00 points 58. Award: 10.00 points 59. Award: 10.00 points 60. Award: 10.00 points 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? $1,400,326 $1,309,529 $1,543,781 $1,224,651 $1,345,886 The value in the risky account in 23 years will be $96,000 × (1.11) 23 + $3,750 × FVIFA 11%,23 = $1,400,326. References Multiple Choice Diﬃculty: 2 Intermediate 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? $31,200; $46,800 $39,000; $39,000 $15,900; $62,100 $45,300; $32,700 $64,000; $14,000 The safe account has 0.4 × $78,000 = $31,200 and the risky account has 0.6 × $78,000 = $46,800. References Multiple Choice Diﬃculty: 1 Basic 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? $1,500; $1,500 $1,200; $1,800 $2,000; $1,000 $2,500; $500 $1,400; $1,600 The safe account gets 0.4 × ($1,500 + $1,500) = $1,200 and the risky account gets 0.6 × ($1,500 + $1,500) = $1,800. References Multiple Choice Diﬃculty: 1 Basic 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? $59,473 $62,557 $78,943 $89,211 $104,632 The value in the safe account in 17 years will be $31,200 × (1.04) 17 + $1,200 × FVIFA 4%,17 = $89,211 . References Multiple Choice Diﬃculty: 2 Intermediate                        

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61. Award: 10.00 points 62. Award: 10.00 points 63. Award: 10.00 points 64. Award: 10.00 points 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? $158,982 $309,529 $543,781 $224,651 $345,886 The value in the risky account in 17 years will be $46,800 × (1.10) 17 + $1,800 × FVIFA 10%,17 = $309,529. References Multiple Choice Diﬃculty: 2 Intermediate An income beneficiary is: a stockbroker who remained working on Wall Street after the 1987 crash. an employee of a trustee. one who receives interest and dividend income from a trust during their lifetime. one who receives the principal of a trust when it is dissolved. None of the options are correct. An income beneficiary is one who receives interest and dividend income from a trust during their lifetime. References Multiple Choice Diﬃculty: 1 Basic 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? $30,000.00 $33,333.33 $51,481.38 $76,354.69 The answer cannot be determined from the information provided. N = 25; I / Y = 9; PV = −750000; PMT = ? ; FV = 0 PMT = $76,354.69 References Multiple Choice Diﬃculty: 2 Intermediate 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? $30,000.00 $33,333.33 $76,354.69 $52,452.73 The answer cannot be determined from the information provided. N = 25; I / Y = 9; PV = −750000; PMT = ? ; FV = 0 PMT = $76,354.69 Payment Starting = $76,354.69 × 1.09 ÷ 1.09 = $76,354.69 References Multiple Choice Diﬃculty: 3 Challenge                        

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65. Award: 10.00 points 66. Award: 10.00 points 67. Award: 10.00 points 68. Award: 10.00 points 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? $73,358.93 $33,333.33 $51,481.38 $52,452.73 The answer cannot be determined from the information provided. N = 18; I / Y = 5.5; PV = −825000; PMT = ? ; FV = 0 PMT = $73,358.93 References Multiple Choice Diﬃculty: 2 Intermediate 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? $30,000.00 $74,401.95 $51,481.38 $52,452.73 The answer cannot be determined from the information provided. N = 18; I / Y = 5.5; PV = −825000; PMT = ? ; FV = 0 PMT = $73,358.93 Payment Starting = $73,358.93 × 1.07 ÷ 1.055 = $74,401.95 References Multiple Choice Diﬃculty: 3 Challenge Which of the following are commonly thought to be good general investment guidelines? 1. Don't try to outguess the market, buying and holding generally pays off. 2. Diversify investments to spread risk. 3. Investments should be highly concentrated in your company's stock. 4. 401K money is best placed in money market accounts because risk is very low. 5. Investments should be allocated to stocks, bonds, and money market funds. 1, 3, and 4 1, 2, and 5 2, 4, and 5 3, 4, and 5 1, 2, 4, and 5 Don't try to outguess the market, buying and holding generally pays off, diversify investments to spread risk, investments should be allocated to stocks, bonds, and money market funds. References Multiple Choice Diﬃculty: 2 Intermediate Which of the following are commonly thought to be bad general investment guidelines? 1. Don't try to outguess the market, buying and holding generally pays off. 2. Diversify investments to spread risk. 3. Investments should be highly concentrated in your company's stock. 4. 401K money is best placed in money market accounts because risk is very low. 5. Investments should be allocated to stocks, bonds, and money market funds. 1, 3, and 4 1, 2, and 4 2, 4, and 5 3 and 4 1, 2, 4, and 5 Good advice would be that investors should not try to outguess the market, buying and holding generally pays off, to diversify investments to spread risk, and that investments should be allocated to stocks, bonds, and money market funds. References Multiple Choice Diﬃculty: 2 Intermediate                        

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69. Award: 10.00 points 70. Award: 10.00 points 71. Award: 10.00 points 72. Award: 10.00 points The principle of duration matching is: used only in bond portfolio management, only. a useful concept for investments with target dates, only. matching one's assets to one's objectives, only. a useful concept for investments with target dates and means matching one's assets to one's objectives. None of the options are correct. The principle of duration matching is a useful concept for investments with target dates and means matching one's assets to one's objectives. References Multiple Choice Diﬃculty: 2 Intermediate The principle of duration matching is not: used only in bond portfolio management. a useful concept for investments with target dates. matching one's assets to one's objectives. a useful concept for investments with target dates or matching one's assets to one's objectives. None of the options are correct. The principle of duration matching is a useful concept for investments with target dates and means matching one's assets to one's objectives. References Multiple Choice Diﬃculty: 2 Intermediate Target date retirement funds: are funds of funds diversified across stocks and bonds. are inappropriate for most investors. have very high fees. function much like hedge funds. None of the options are correct. Target date retirement funds are funds of funds diversified across stocks and bonds. References Multiple Choice Diﬃculty: 2 Intermediate Target date retirement funds are not: inappropriate for most investors. very high in fees. designed to function much like hedge funds. concentrated only in bonds All of the options are correct. Target date retirement funds are funds of funds diversified across stocks and bonds. References Multiple Choice Diﬃculty: 2 Intermediate                        

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73. Award: 10.00 points 74. Award: 10.00 points 75. Award: 10.00 points 76. Award: 10.00 points Target date retirement funds: change their asset allocation as time passes, only. are a simple, but useful, strategy, only. function much like hedge funds, only. change their asset allocation as time passes and are a simple, but useful, strategy. All of the options are correct. Target date retirement funds are funds of funds diversified across stocks and bonds, change their asset allocation as time passes, and are a simple but useful strategy. References Multiple Choice Diﬃculty: 2 Intermediate The desirable components of an Investment Policy Statement for individual investors can be divided into: three main elements consisting of scope and purpose, governance, and risk management. three main elements consisting of scope and purpose, governance, and investment, return and risk objectives. four main elements consisting of scope and purpose, governance, risk management, and feedback. four main elements consisting of scope and purpose, governance, risk management, and investment, return and risk objectives. five main elements consisting of scope and purpose, governance, risk management, investment, return and risk objectives, and evaluation. The desirable components of an Investment Policy Statement for individual investors can be divided into four main elements consisting of scope and purpose, governance, risk management, and investment return and risk objectives. References Multiple Choice Diﬃculty: 2 Intermediate The scope and purpose section of an Investment Policy Statement for individual investors typically consists of defining the: : return, distribution, and risk requirements. process for review of the IPS. appropriate metrics for risk measurement. relevant constraints. context, investor, and structure. The scope and purpose section of an Investment Policy Statement for individual investors typically consists of defining the context, investor, and structure. References Multiple Choice Diﬃculty: 2 Intermediate The governance section of an Investment Policy Statement for individual investors typically contains: assigning the responsibility for determining investment policy, only. the review process for the IPS, only. assigning the responsibility for risk management, only. the review process for the IPS and assigning the responsibility for risk management. All of the options are correct. The governance section of an Investment Policy Statement for individual investors typically contains assigning the responsibility for determining investment policy, the review process for the IPS, and assigning the responsibility for risk management. References Multiple Choice Diﬃculty: 2 Intermediate                        

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77. Award: 10.00 points 78. Award: 10.00 points 79. Award: 10.00 points 80. Award: 10.00 points The risk management section of an Investment Policy Statement for individual investors typically contains: relevant constraints, only. other relevant considerations, only. performance measurement accountabilities, metrics for risk measurement, and the rebalancing process. relevant constraints and other relevant considerations. All of the options are correct. The risk management section of an Investment Policy Statement for individual investors typically contains performance measurement accountabilities, metrics for risk measurement, and the rebalancing process. References Multiple Choice Diﬃculty: 2 Intermediate The standard by which broker-dealers must select investments for their clients is _________. clients’ interests brokers’ interest suitability optimal return None of the options are correct. Brokers or advisors working for a broker-dealer firm are subject to a lower standard of suitability, meaning that their investment recommendations need to be acceptable, but not necessarily defensible as the best choice for the client. References Multiple Choice Diﬃculty: 2 Intermediate The fiduciary standard for investment advisors requires they must select investments for their clients which are classified as _________. clients’ interests brokers’ interest suitability optimal return None of the options are correct. Investment advisors working directly for individuals or institutional clients such as pension funds are bound by a fiduciary standard, meaning that they are required to work in the best interests of their clients, specifically, that they must place their clients’ interests above their own. References Multiple Choice Diﬃculty: 2 Intermediate Which of the following is considered a passive investment? Income fund Value fund Growth fund Target date fund None of the options are correct. Target date retirement funds are funds of funds diversified across stocks and bonds, change their asset allocation as time passes, and use index funds instead of actively managed funds. References Multiple Choice Diﬃculty: 2 Intermediate                        

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81. Award: 10.00 points 82. Award: 10.00 points The main benefit of a Roth retirement plan is that _________. withdrawals are tax free contributions are made tax free interest is tax deferred no income limits exist on participation None of the options are correct. Roth plans are taxed when the money is contributed and not when withdrawn. References Multiple Choice Diﬃculty: 1 Basic Which of the following has a different tax treatment than the others? Traditional IRA Roth IRA 401k Plan Deferred annuity None of the options are correct. Roth plans are taxed when the money is contributed. The others are taxed when withdrawn. References Multiple Choice Diﬃculty: 1 Basic            

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Chapter 28

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