Chapter 28 – Investment Policy and the Framework of the CFA Institute
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Chapter 28
Investment Policy and the Framework of the CFA Institute
Multiple Choice Questions
1. The CFA Institute divides the process of portfolio management into 3 main elements,
which are ______, ______, and ______.
Difficulty: Moderate
2. The planning phase of the CFA Institute’s investment management process
Difficulty: Moderate
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3. The execution phase of the CFA Institute’s investment management process
Difficulty: Moderate
4. The feedback phase of the CFA Institute’s investment management process
Difficulty: Moderate
5. __________ refer to strategies aimed at attaining the established rate of return requirements
while meeting expressed risk tolerance and applicable constraints.
Difficulty: Moderate
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6. One incorrect belief that is often cited as a reason for fully-funded pension funds to invest
in equities is
Difficulty: Moderate
7. __________ in the process of asset allocation.
Difficulty: Easy
8. Questionnaires and attitude surveys suggest that risk tolerance
Difficulty: Easy
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9. __________ can be used to create a perfect inflation hedge
Difficulty: Moderate
10. 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
Difficulty: Easy
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11. 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
Difficulty: Easy
12. 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.
Difficulty: Easy
13. An important benefit of Keogh plans is that
Difficulty: Easy
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14. Variable life insurance
Difficulty: Easy
15. Endowment funds are held by __________.
Difficulty: Easy
16. __________ center on the trade-off between the return the investor wants and how much
risk the investor is willing to assume.
Difficulty: Easy
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17. The stage an individual is in his/her life cycle will affect his/her __________.
Difficulty: Moderate
18. A remainderman is __________.
Difficulty: Easy
19. __________ are boundaries that investors place on their choice of investment assets.
Difficulty: Easy
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20. The investment horizon is:
Difficulty: Easy
21. Liquidity is:
Difficulty: Moderate
22. The objectives of personal trusts normally are __________ in scope than those of
individual investors and personal trust managers typically are __________ than individual
investors.
Difficulty: Moderate
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23. 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.
Difficulty: Moderate
24. 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, __________.
Difficulty: Moderate
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25. The prudent man law requires __________.
Difficulty: Moderate
26. The longest time horizons are likely to be set by
Difficulty: Moderate
27. The longest time horizons are likely to be set by
Difficulty: Moderate
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28. The shortest time horizons are likely to be set by
Difficulty: Moderate
29. U.S. mutual funds are restricted to holding no more than __________ of any publicly
traded corporation.
Difficulty: Moderate
30. Institutional investors will rarely invest in which of these asset classes?
Difficulty: Moderate
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31. For an individual investor, the value of home ownership is likely to be viewed
Difficulty: Moderate
32. 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?
Difficulty: Moderate
33. 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?
Difficulty: Difficult
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34. The first step a pension fund should take before beginning to invest is to __________.
Difficulty: Easy
35. General pension funds typically invest __________ of their funds in equity securities.
Difficulty: Moderate
36. The optimal portfolio on the efficient frontier for a given investor depends on
Difficulty: Moderate
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37. The optimal portfolio on the efficient frontier for a given investor not depend on
Difficulty: Moderate
38. Investment objectives
Difficulty: Easy
39. 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.
Difficulty: Easy
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40. Professional financial planners should
Difficulty: Easy
41. Deferral of capital gains tax
I) means that the investor doesn’t need to pay taxes until the investment is sold.
II) allows the investment to grow at a faster rate.
III) means that you might escape the capital gains tax if you live long enough.
IV) provides a tax shelter for investors.
Difficulty: Easy
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42. Deferral of capital gains tax does not
I) mean that the investor doesn’t need to pay taxes until the investment is sold.
II) allow the investment to grow at a faster rate.
III) mean that you might escape the capital gains tax if you live long enough.
IV) provide a tax shelter for investors.
Difficulty: Easy
43. Which of the following investments does not allow the investor to choose how to allocate
assets?
Difficulty: Moderate