Chapter 02 – Asset Allocation and Security Selection
1. Experts suggest life insurance coverage should be seven to ten times an individual’s annual salary.
a.
True
b.
False
2. Term life insurance provides both a death benefit and a savings plan.
a.
True
b.
False
3. Most experts recommend a cash reserve of at least one year’s worth of living expenses.
a.
True
b.
False
4. The spending phase occurs when investors are relatively young.
a.
True
b.
False
Chapter 02 – Asset Allocation and Security Selection
5. The gifting phase is similar to, and may be concurrent with, the spending phase.
a.
True
b.
False
6. Long-term, high-priority goals include some form of financial independence.
a.
True
b.
False
7. It is not a good idea to get too specific when constructing your policy statement.
a.
True
b.
False
8. It is essential that both the client and the portfolio manager agree on an appropriate benchmark portfolio.
a.
True
b.
False
9. The third step of the portfolio management process is to construct the portfolio.
a.
True
b.
False
10. Asset allocation is the process of dividing funds into different classes of assets.
a.
True
b.
False
11. The typical investor’s goals rarely change during his/her lifetime.
a.
True
b.
False
12. Return is the only important consideration when establishing investment objectives.
a.
True
b.
False
13. In constructing the portfolio, the manager should maximize the investor’s risk level.
a.
True
b.
False
14. Risk tolerance is exclusively a function of an individual’s psychological makeup.
a.
True
b.
False
15. An appropriate investment objective for a typical 25-year-old investor is a low-risk strategy, such as capital
preservation or current income.
a.
True
b.
False
16. Investment planning is complicated by tax concerns.
a.
True
b.
False
17. The ability to retire at a certain age is a typical example of a long-term, lower-priority goal.
a.
True
b.
False
18. An example of a unique need in an investment policy statement is related to the legal responsibilities of a fiduciary or
trustee.
a.
True
b.
False
19. Investing 30 to 40 percent of your retirement funds in the company you work for is reasonable when they match funds.
a.
True
b.
False
20. Individual security selection is far more important than the asset allocation decision.
a.
True
Chapter 02 – Asset Allocation and Security Selection
b.
False
21. Average tax rate is defined as total tax payment divided by total income.
a.
True
b.
False
22. The majority of a pension fund’s return is explained by asset allocation.
a.
True
b.
False
23. The portfolio mixes of institutional investors around the world are approximately the same.
a.
True
b.
False
24. Equity allocations of pension funds in Japan and Germany are similar to those in the United States.
a.
True
b.
False
25. Arts and antiques are inferior inflation hedges compared to long-term bonds and common stocks.
a.
True
b.
False
26. Individual real estate assets had much lower standard deviations and either low positive or negative correlations with
other asset classes in a portfolio context.
a.
True
b.
False
27. The current outlay of money to guard against a potentially large future loss is commonly known as
a.
asset management.
b.
portfolio management.
c.
minimizing risk.
d.
loss control.
e.
insurance.
28. The ____ phase is the stage when investors in their early-to-middle earning years attempt to accumulate assets to
satisfy near-term needs, e.g., children’s education or down payment on a home.
a.
accumulation
b.
spending
c.
gifting
d.
consolidation
e.
divestiture
29. Which of the following is NOT a life cycle phase?
a.
discovery phase
b.
accumulation phase
c.
consolidation phase
d.
spending phase
Chapter 02 – Asset Allocation and Security Selection
e.
gifting phase
30. John is 55 years old and has $55,000 outstanding on a mortgage and no other debt. John typically saves $5,000 in an
IRA account and another $10,000 in a company pension. John is most likely in the
a.
discovery phase.
b.
accumulation phase.
c.
consolidation phase.
d.
spending phase.
e.
gifting phase.
31. In an investment policy statement, the objectives of an investor are expressed in terms of
a.
risk and return.
b.
risk.
c.
return.
d.
time horizon.
e.
liquidity needs.
32. Which of the following is NOT a step in the portfolio management process?
a.
develop a policy statement
b.
study current financial and economic conditions
c.
construct the portfolio
d.
monitor investor’s needs and market conditions
e.
sell all assets and reinvestment proceeds at least once a year
33. The first step in the investment process is the development of a(n)
a.
objective statement.
b.
policy statement.
c.
financial statement.
d.
statement of cash needs.
e.
statement of cash flows.
34. Once the portfolio is constructed, it must be continuously
a.
rebalanced.
b.
recycled
c.
reinvested
d.
monitored.
e.
manipulated.
35. The policy statement may include a ____ against which a portfolio’s or portfolio manager’s performance can be
measured.
a.
milestone
b.
benchmark
c.
landmark
d.
reference point
e.
market pair
36. One of the reasons for constructing a policy statement is it
a.
creates a standard by which to judge the performance of the investor.
b.
helps the investor decide on realistic investment goals.
c.
is open-ended in order to provide guidance for specific investments and time frames.
d.
guarantees success.
e.
helps the portfolio manager to become familiar with financial markets and investing risks.
37. Which of the following is NOT considered to be an investment objective?
a.
capital preservation
b.
capital appreciation
c.
current income
d.
total return
e.
nominal preservation
38. ____ must be stated in terms of expected returns and risk. An investor’s tolerance for risk must be established before
returns objectives can be stated.
a.
Investment requirements
b.
Investment constraints
c.
Investment rewards
d.
Investment objectives
e.
Investment policy
39. ____ is an appropriate objective for investors who want their portfolio to grow in real terms, i.e., exceed the rate of
inflation.
a.
Capital preservation
b.
Capital appreciation
c.
Portfolio growth
d.
Value additivity
e.
Nominal preservation
40. ____ refer(s) to the ability to convert assets to cash quickly and at a fair market price and often increase(s) as one
approaches the later stages of the investment life cycle.
a.
Liquidity needs
b.
Time horizons
c.
Liquidation values
d.
Liquidation essentials
e.
Capital liquidations
41. Which of the following statements is FALSE?
a.
Unrealized capital gains are taxable.
b.
Realized capital gains are taxable.
c.
Tax-exempt investments are attractive to individuals with high tax liabilities.
d.
Returns comparisons should be made on an equivalent tax basis.
e.
Tax exempt investors prefer tax exempt investments.
42. ____ gains are taxable and occur when an asset is sold for more than its basis (the value of the asset when it was
purchased by the original owner or inherited by the heirs of the original owner).
Chapter 02 – Asset Allocation and Security Selection
a.
Realized capital
b.
Income
c.
Portfolio
d.
Nominal
e.
Real
43. Which of the following statements is TRUE?
a.
Except for tax-exempt investors and tax-deferred accounts, annual tax payments increase investment returns.
b.
The only way to maintain purchasing power over time is to invest in bonds.
c.
After adjusting for taxes, long-term bonds consistently outperform stocks.
d.
An asset allocation decision for a taxable portfolio that does not include a substantial commitment to common
stocks may make it difficult for the portfolio to maintain real value over time.
e.
None of these are correct.
44. Which of the following strategies seeks to increase the portfolio value by reinvesting current income in addition to
capital gains?
a.
capital appreciation
b.
capital preservation
c.
return preservation
d.
current income
e.
total return