Test Bank Questions, Chapter 17
1. What is financial integration?
a. Using all assets and liabilities, all cash flows, all household activities, and
all future plans to arrive at decisions
b. Including all current and future resources and information in decision
making
c. Making one decision at a time based strictly on the merits of that item
d. Both a and b
e. Both b and c
2. Which of the following is not a way through which to make integrated financial
decisions?
a. Total portfolio management
b. Capital needs risk management
c. Simple capital needs analysis
d. Capital needs analysis incorporating risk
e. All of the above are ways through which to make integrated financial
decisions.
3. Why does capital needs analysis qualifies as a PFP integration approach?
a. It takes into account all current and projected income and expenses and
assets and liabilities over our life cycle.
b. It takes into account projected income and expenses and assets and
liabilities over our life cycle.
c. It takes into account current income and expenses and assets and
liabilities.
d. It takes into account past income and expenses and assets and liabilities.
e. None of the above.
4. Which of the following is a method that is commonly used to incorporate risk?
a. Avoid risky capital needs projections
b. Use Monte Carlo simulation
c. Be more conservative in our simple capital needs projections
d. Both a and b
e. Both b and c
5. Which of the following is an advantage associated with being more conservative in
one’s simple capital needs projections?
a. You have no benchmark to determine how much to alter each calculation
b. Errors associated with this approach will not change one’s lifestyle
c. It is easy to understand and to execute
d. Both a and b
e. Both b and c
6. Which of the following is a disadvantage associated with using Monte Carlo
simulation?
a. Overly precise calculations
b. People prefer one clear figure to probabilities
c. Effectively represents a “guesstimated” risk– adjusted approach
d. Assumes that the key factors are correlated with each other
e. All of the above are disadvantages
7. Total Portfolio Management:
a. Includes all assets and liabilities
b. Includes financial assets and liabilities exclusively
c. Includes only marketable assets and liabilities
d. Both b and c
e. None of the above
8. Which of the following asset categories are not included in Total Portfolio
Management?
a. Human assets.
b. House.
c. Pension assets.
d. Social Security.
e. All of the above are included.
9. Why does Total Portfolio management include correlations among assets and
liabilities?
a. Because the household is the sum of its separate assets less its liabilities
b. Because the household is an operating enterprise in which the individual
activities influence each other
c. Because correlations measure the riskiness of individual assets and
liabilities
d. Both a and b
e. Both b and c
10. Can Total Portfolio Management be used to determine asset selection alone?
a. Yes
b. No
c. Only when assets and liabilities are correlated
d. Only when assets and liabilities are not correlated
e. None of the above
11. Which of the following methods presents probabilities of success?
a. Simple capital needs analysis
b. Monte Carlo simulation
c. Total Portfolio Management
d. Both a and b
e. Both b and c
12. Which of the following methods incorporates correlations of factor inputs?
a. Simple capital needs analysis
b. Monte Carlo simulation
c. Total Portfolio Management
d. Both a and b
e. Both b and c
13. Which of the following is not a characteristic of Total Portfolio Management?
a. Uses market based returns as inputs
b. Provides a one number savings figure
c. Adjusts for risk
d. Presents probability of success
e. All of the above
14. Which of the following is not a characteristic of Simple Capital Need Analysis Adjusted
for Risk?
a. Uses market based returns as inputs
b. Provides a one number savings figure
c. Adjusts for risk
d. Presents probability of success
e. All of the above
15. What is the third step of a retirement needs analysis?
a. Establish risks and tolerance for them
b. Determine rates and ages to be used for calculations
c. Develop retirement income, expenses, and required capital withdrawals.
d. Calculate lump sum needed at retirement
e. None of the above
16. Which of the following is a key retirement goal?
a. The age at which retirement is to take place
b. The standard of living desired at that time
c. To retire as early as possible
d. Both a and b
e. Both b and c
17. Which of the following is not a major category of retirement risk?
a. Longevity risk
b. Extraordinary expenses
c. Liquidity risk
d. Inflation risk
e. All of the above are major categories of retirement risk
18. Rates of return should normally be expressed on an aftertax basis, which means that:
a. Returns on tax-sheltered pensions would be compounding at a different
rate than personal sums
b. Returns on tax-sheltered pensions would be compounding at the same rate
as personal sums
c. Returns are generally inaccurate
d. Both a and b
e. Both b and c
19. According to data provided by the Social Security Administration, what percentage of
the average retiree’s retirement income came from asset income in 2001?
a. 3%.
b. 16%
c. 24%
d. 39%
e. None of the above
20. Large unreconciled differences between projected savings figures and current actual
savings often come about through:
a. Underestimating future expenses
b. Overestimating future expenses
c. Underestimating future savings
d. Overestimating future savings
e. None of the above
21. Which of the following is not a question that should be asked to finalize the
retirement needs analysis?
a. Are the assumptions those that you believe in?
b. Will you be able to carry out this plan?
c. Is this particular plan what you want to do, assuming you had resources
that are currently unavailable to you?
d. Both a and b are not questions that should be asked
e. Both b and c are not questions that should be asked
22. In which of the following situations is a reappraisal of retirement projections called
for?
a. When actual resources differ substantially from projected ones
b. When circumstances change significantly
c. Upon retirement
d. Both a and b
e. Both b and c
23. To which of the following is the real rate equal?
a. ((1 + inflation rate)/(1 + investment rate) – 1) x 100
b. ((1 + investment rate)/(1 + inflation rate) – 1) x 100
c. ((1 – investment rate)/(1 – inflation rate) + 1) x 100
d. ((1 – inflation rate)/(1 – investment rate) + 1) x 100
e. None of the above
24. When performing retirement needs calculations, to what is the cash shortfall equal?
a. Current yearly cash inflows minus cash outflows
b. Current yearly cash outflows minus cash inflows
c. Current yearly cash inflows minus cash outflows, brought forward to the
beginning of the payout period
d. Current yearly cash outflows minus cash inflows, brought forward to the
beginning of the payout period
e. None of the above
25. To bring current cash shortfall to future period when performing retirement needs
calculations, which of the following rates do we use?
a. Investment rate
b. Inflation rate
c. Real rate
d. Both a and b
e. Both b and c
26. To establish lump sum shortfall from the amount of payouts when performing
retirement needs calculations, which of the following rates do we use?
a. Investment rate
b. Inflation rate
c. Real rate
d. Both a and b
e. Both b and c
27. For which of the following steps associated with retirement needs calculations is the
inflation rate used?
a. To bring current cash shortfall to future period
b. To establish lump sum shortfall from the amount of payouts
c. To bring current investment sum to future period
d. Both a and b
e. Both b and c
28. For which of the following steps associated with retirement needs calculations is the
investment rate used?
a. To bring current cash shortfall to future period.
b. To establish lump sum shortfall from the amount of payouts.
c. To bring current investment sum to future period
d. Both a and b
e. Both b and c
Answer: c
29. What is the standard rate used in the withdrawal rate method?
a. 1%
b. 2%
c. 3%
d. 4%
e. 5%
30. John is 64 and will retire at 65. He has $1,324,000 accumulated today and when
taking out steadily the income he receives from his job he has been withdrawing
$65,000 from his savings each year. Using the withdrawal rate method how much
money can be withdrawn from his investment assets the first year of retirement.
a. $65,000
b. $52,960
c. $50,360
d. $48,724
e. $67,542
31. Ravi, age 42 has $250,000 saved and plans to retire at age 67. Ravi is saving an
additional $10,000 each year from 42 until retirement. Ravi’s asset allocation is 65%
stocks and 35% bonds. The investment return on stocks is 6% and the return on bonds
is 3%. Calculate the amount of financial assets Ravi will have at retirement.
a. $1,310,562
b. $1,621,613
c. $888,037
d. $1,093,791
e. $1,197,011
Essay questions:
32. Please detail the steps associated with retirement needs calculations, and indicate
whether the investment rate, inflation rate, or real rate is used in the step.
Solution:
33. Please list the 11 steps associated with a retirement needs analysis.
34. Please indicate whether Monte Carlo simulation and Total Portfolio Management
includes each of the following:
• Solves for Life Cycle Needs
• Integrates Financial Planning Process
• Tells You How Much to Save
• Uses Market Based Returns as Inputs
• Provides a One Number Savings Figure
• Adjusts for Risk
• Presents Probability of Success
• Includes All Assets and Liabilities in Investment Decisions
• Incorporates Correlations of Factor Inputs
• Provides Full Integration of Planning and Investing
Investing