45) The amount of risk an individual should take depends on his or her:
I. Return requirements
II. Risk tolerance
III. Time horizon
A) I only
B) I and II only
C) II and III only
D) I, II, and III
46) Earnings on variable life and universal life insurance policies are ________.
A) never taxed
B) taxed only at the capital gains tax rate
C) not taxed until the money is withdrawn
D) not taxed at the federal level but are taxed at the state level
47) When a company sets up a defined contribution pension plan, the ________ bears all the risk
and the ________ receives all the return from the plan’s assets.
A) employee; employee
B) employee; employer
C) employer; employee
D) employer; employer
48) Suppose that the pretax 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 a high-tax
rate individual and do not intend to sell the stocks during the holding period, ________.
A) stock A will have a higher after-tax holding-period return than stock B
B) the after-tax holding period returns on stocks A and B will be the same
C) stock B will have a higher after-tax holding-period return than stock A
D) The answer cannot be determined from the information given.
49) The objectives of personal trusts normally are ________ in scope than those of individual
investors, and personal trust managers typically are ________ than individual investors.
A) broader; more risk averse
B) broader; less risk averse
C) more limited; more risk averse
D) more limited; less risk averse
50) The prudent investor rule requires ________.
A) executives of companies to avoid investing in options of companies they work for
B) executives of companies to disclose their transactions in stocks of companies they work for
C) professional investors who manage money for others to avoid all risky investments
D) professional investors who manage money for others to constrain their investments to those
that would be approved by a prudent investor
51) The prudent investor rule is an example of a regulation designed to ensure appropriate
________ by money managers.
A) fiduciary responsibility
B) fiscal responsibility
C) monetary responsibility
D) marketing procedures
52) 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.
A) tax
B) risk-tolerance
C) liquidity
D) social
53) When used in the context of investment decision making, the term liquidity refers to
________.
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
54) The term investment horizon refers to ________.
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
55) The choice of an active portfolio management strategy rather than a passive strategy assumes
________.
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 minimize trading costs
56) Conservative investors are likely to want to invest in ________ mutual funds, while risk-
tolerant investors are likely to want to invest in ________.
A) income; high growth
B) income; moderate growth
C) moderate-growth; high growth
D) high-growth; moderate growth
57) The first step any investor should take before beginning to invest is to ________.
A) establish investment objectives
B) develop a list of investment managers with superior records to interview
C) establish asset allocation guidelines
D) decide between active management and passive management
58) Which of the following is the least likely to be included in the portfolio management
process?
A) monitoring market conditions and relative values
B) monitoring investor circumstances
C) identifying investor constraints and preferences
D) organizing the investment management process itself
59) A clearly understood investment policy statement is not critical for which one of the
following?
I. Mutual funds
II. Individuals
III. Defined benefit pension funds
A) II only
B) III only
C) I only
D) none of these options (A policy statement is necessary for all three.)
60) An investor refuses to invest in any firm that produces alcohol or tobacco. This is an example
of a ________ constraint.
A) return requirement
B) risk-tolerance
C) liquidity
D) social
61) Under the provisions of a typical defined benefit pension plan, the employer is responsible
for ________.
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
62) A life insurance firm wants to minimize its interest rate risk, and it is planning on paying out
$250,000 in 5 years. Which one of the following investments best matches its goal?
A) high-yield utility stocks
B) 5-year zero-coupon bonds
C) 10-year coupon bonds
D) money market investments rolled over as needed
63) 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
reevaluating the fund’s total portfolio of $100 million at this time. She is bullish on stocks and
wants to put the most she can into the stock market, but she cannot risk being unable 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 stocks and still ensure meeting the bond payments?
A) 87.4%
B) 88.5%
C) 90%
D) 91.6%
64) An investor with high risk aversion will likely prefer which of the following risk and return
combinations?
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%
65) An investor with low risk aversion will likely prefer which of the following risk and return
combinations?
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%
66) Medfield College’s $10 million endowment fund is not allowed to spend any contributed
capital or any capital gains. The fund may spend only investment earnings. The fund is expected
to need between $500,000 and $1,000,000 to pay for new lab equipment for the science building.
Which of the following is (are) true?
I. The fund should have a target rate of return of at least 10%.
II. The limitations on spending require that the fund limit its considerations to growth stocks.
III. The requirement to spend money out of the fund this year provides a liquidity constraint that
may reduce the fund’s rate of return.
A) I only
B) II only
C) I and III only
D) I, II, and III
67) 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?
A) fixed annuity
B) defined benefit plan
C) defined contribution plan
D) bonds invested in a retirement plan
68) 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?
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
69) 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?
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
70) Your sister, an avid outdoors person, works in the airline industry, and she has come to you
(the financial guru) for investment advice. She is looking into purchasing stocks she knows
something about. She is considering purchasing stock in Boeing, Lockheed Martin, United
Technologies (maker of aircraft engines), and Cabela’s Sporting Goods. Based only on the
information given, which stock should you recommend for her?
A) Boeing
B) Lockheed Martin
C) United Technologies
D) Cabela’s
71) In 1937 the Eli Lilly family donated millions of dollars in stock to fund a not-for-profit
charitable organization. Such organizations are typically called ________.
A) annuities
B) endowments
C) mutual funds
D) personal trusts
72) Which one of the following institutions typically has the longest investment horizon?
A) mutual funds
B) pension funds
C) property and casualty insurers
D) banks
73) For which one of the following institutions is liquidity usually the most important?
A) mutual funds
B) pension funds
C) life insurers
D) banks
74) One of the major functions of the investment committee is to ________.
A) determine security selection of each portfolio operated by the investment company
B) translate the objectives and constraints of the investment company into an asset universe
C) determine the percentages of each security in the total investment company portfolio
D) calculate and report the overall rate of return to investment company constituents
75) For an investor concerned with maximizing liquidity, which of the following investments
should be avoided?
A) real estate
B) bonds
C) domestic stocks
D) international stocks
76) The asset universe is the ________.
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
77) Go Global Investment Management has an asset allocation strategy of 70% U.S. investments
and 30% global investments. Within the United States, Go Global has allocated 65% of its
portfolio to equities and 35% to bonds. Go Global now holds 4% of its U.S. equity portfolio in
the stock of Wally World. Internationally, Go Global has allocated 62% to equities and 38% to
bonds. About what percentage of Go Global’s total portfolio is invested in Wally World?
A) 1%
B) 1.26%
C) 1.5%
D) 1.82%
78) Major functions of the investment committee include all but which one of the following?
A) Engage in security selection for each portfolio managed.
B) Broadly determine the overall asset allocation of the investment company.
C) Determine the asset-class weights for each portfolio.
D) Determine the asset universe.
79) A portfolio consists of three index funds: an equity index, a bond index, and an international
index. The portfolio manager changes the weights periodically according to forecasts for each
sector. This is an example of ________.
A) a passively managed core with an actively managed component
B) a totally passively managed fund
C) passive asset allocation with active security selection
D) active asset allocation with passive security selection
80) A portfolio consists of three index funds: an equity index accounting for 40% of the total
portfolio, a bond index accounting for 30% of the total portfolio, and an international index
accounting for 30% of the total portfolio. After each quarter the portfolio manager buys and sells
some of each sector to preserve the original weights for each sector. This is an example of
________.
A) a passively managed core with an actively managed component
B) a totally passively managed fund
C) passive asset allocation with active security selection
D) active asset allocation with passive security selection
81) One way that life insurance firms can hedge the risk created by offering whole-life insurance
policies is by ________.
A) holding long-term bonds
B) holding equities
C) holding short-term bonds
D) exercising its right to terminate the policy
82) A pension fund manager who decided to move money out of an index fund and into a
socially responsible fund is ________.
A) violating the prudent investor rule
B) conducting best practices of investing
C) conforming to CFA ethics requirements
D) planning for the future
83) When life insurance companies seek long term investments, they are focusing on________.
A) maximizing returns
B) smoothing out long-term returns
C) tax considerations
D) the investment horizon
84) Which of the following is typically concerned with their investment assets having relatively
fixed returns and their liabilities having relative variable returns?
A) banks
B) insurance companies
C) mutual funds
D) pension funds
85) Which type of insurance product allows policyholders to adjust their death benefit according
to their needs?
A) term
B) variable life
C) universal life
D) whole life
86) Which type of insurance product gives policyholders a fixed death benefit and a selection of
investment alternatives?
A) term
B) variable life
C) universal life
D) whole life