Chapter 28Investment Policy and the Framework of the CFA Institute.docx

Chapter 28Investment Policy and the Framework of the CFA Institute.docx

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Chapter28InvestmentPolicyandtheFrameworkoftheCFAInstitute

Chapter28

InvestmentPolicyandtheFrameworkoftheCFAInstitute

MultipleChoiceQuestions

1. TheCFAInstitutedividestheprocessofportfoliomanagementintothreemainelements,whichare______,______,and______. 

A. planning;execution;results

B. securityselection;assetallocation;action

C. planning;assetallocation;feedback

D. planning;execution;feedback

E. risktolerance;feedback;action

2. TheplanningphaseoftheCFAInstitute'sinvestmentmanagementprocess 

A. usesdataabouttheclientandcapitalmarket.

B. usesdetailsofoptimalassetallocationandsecurityselection.

C. useschangesinexpectationsandobjectives.

D. usesdataabouttheclientandcapitalmarket,usesdetailsofoptimalassetallocationandsecurityselection,anduseschangesinexpectationsandobjectives.

E. Noneoftheseistrue.

3. TheexecutionphaseoftheCFAInstitute'sinvestmentmanagementprocess 

A. usesdataabouttheclientandcapitalmarket.

B. usesdetailsofoptimalassetallocationandsecurityselection.

C. useschangesinexpectationsandobjectives.

D. usesdataabouttheclientandcapitalmarket,usesdetailsofoptimalassetallocationandsecurityselection,anduseschangesinexpectationsandobjectives.

E. Noneoftheseistrue.

4. ThefeedbackphaseoftheCFAInstitute'sinvestmentmanagementprocess 

A. usesdataabouttheclientandcapitalmarket.

B. usesdetailsofoptimalassetallocationandsecurityselection.

C. useschangesinexpectationsandobjectives.

D. usesdataabouttheclientandcapitalmarket,usesdetailsofoptimalassetallocationandsecurityselection,anduseschangesinexpectationsandobjectives.

E. Noneoftheseistrue.

5. __________refertostrategiesaimedatattainingtheestablishedrateofreturnrequirementswhilemeetingexpressedrisktoleranceandapplicableconstraints. 

A. Investmentconstraints

B. Investmentobjectives

C. Investmentpolicies

D. Allofthesearetrue.

E. Noneoftheseistrue.

6. Oneincorrectbeliefthatisoftencitedasareasonforfully-fundedpensionfundstoinvestinequitiesis 

A. stockshavehigherrisk.

B. bondshavelowerreturns.

C. stocksprovideahedgeagainstinflation.

D. stockshavehigherreturns.

E. Alloftheseareincorrectbeliefsthatareoftencited.

7. __________intheprocessofassetallocation. 

A. Derivingtheefficientportfoliofrontierisastep

B. Specifyingassetclassestobeincludedintheportfolioisastep

C. Specifyingthecapitalmarketexpectationsisastep

D. Derivingtheefficientportfoliofrontierisastep,specifyingassetclassestobeincludedintheportfolioisastep,andspecifyingthecapitalmarketexpectationsisastep

E. Noneoftheseistrue.

8. Questionnairesandattitudesurveyssuggestthatrisktolerance 

A. increaseswithage.

B. decreaseswithage.

C. staysconstantoverthelifecycleformostinvestors.

D. cannotbeassessed.

E. Noneoftheseistrue.

9. __________canbeusedtocreateaperfectinflationhedge 

A. Gold

B. Realestate

C. CPI-linkedbonds

D. TheS&P500index

E. Noneoftheseistrue.

10. Afully-fundedpensionplancaninvestsurplusassetsinequitiesprovideditreducestheproportioninequitieswhenthevalueofthefunddropsneartheaccumulatedbenefitobligation.Thisstrategyisreferredtoas 

A. immunization.

B. hedging.

C. diversification.

D. contingentimmunization.

E. overfunding.

11. Workerswhochangejobsmaywindupwithlowerpensionbenefitsatretirementthanotherwiseidenticalworkerswhostaywiththesameemployer,eveniftheemployershavedefinedbenefitplanswiththesamefinal-paybenefitformula.Thisisreferredtoas 

A. anaccumulatedbenefitobligation.

B. anunfundedliability.

C. immunization.

D. indexation.

E. theportabilityproblem.

12. The__________theproportionoftotalreturnthatisintheformofpriceappreciation,the__________willbethevalueofthetax-deferraloptionfortaxableinvestors. 

A. greater;greater

B. greater;lower

C. lower;greater

D. Cannottellfromtheinformationgiven.

E. Noneoftheseistrue.

13. AnimportantbenefitofKeoghplansisthat 

A. theyarenottaxableuntilfundsarewithdrawnasbenefits.

B. theyareprotectedagainstinflation.

C. theyareautomaticallyinsuredbytheFederalgovernment.

D. theyarenottaxableuntilfundsarewithdrawnasbenefitsandtheyareprotectedagainstinflation.

E. theyarenottaxableuntilfundsarewithdrawnasbenefitsandtheyareautomaticallyinsuredbytheFederalgovernment.

14. Variablelifeinsurance 

A. combineslifeinsurancewithatax-deferredannuity.

B. providesaminimumdeathbenefitthatincreasessubjecttoinvestmentperformance.

C. canbeconvertedtoastreamofincome.

D. Allofthesearetrue.

E. Noneoftheseistrue.

15. Endowmentfundsareheldby__________. 

A. charitableorganizations

B. educationalinstitutions

C. forprofitfirms

D. charitableorganizationsandeducationalinstitutions

E. educationalinstitutionsandforprofitfirms

16. __________centeronthetrade-offbetweenthereturntheinvestorwantsandhowmuchrisktheinvestoriswillingtoassume. 

A. Investmentconstraints

B. Investmentobjectives

C. Investmentpolicies

D. Allofthesearetrue.

E. Noneoftheseistrue.

17. Thestageanindividualisinhis/herlifecyclewillaffecthis/her__________. 

A. returnrequirements

B. risktolerance

C. assetallocation

D. returnrequirementsandrisktolerance

E. returnrequirements,risktolerance,andassetallocation

18. Aremaindermanis__________. 

A. astockbrokerwhoremainedworkingonWallStreetafterthe1987crash

B. anemployeeofatrustee

C. onewhoreceivesinterestanddividendincomefromatrustduringtheirlifetime

D. onewhoreceivestheprincipalofatrustwhenitisdissolved

E. Noneoftheseistrue.

19. __________areboundariesthatinvestorsplaceontheirchoiceofinvestmentassets. 

A. Investmentconstraints

B. Investmentobjectives

C. Investmentpolicies

D. Allofthesearetrue.

E. Noneoftheseistrue.

20. Theinvestmenthorizonis:

A. theinvestor'sexpectedageatdeath.

B. thestartingdateforestablishinginvestmentconstraints.

C. basedontheinvestor'srisktolerance.

D. thedateatwhichtheportfolioisexpectedtobefullyorpartiallyliquidated.

E. Noneoftheseistrue.

21. Liquidityis 

A. theeasewithwhichanassetcanbesold.

B. theabilitytosellanassetforafairprice.

C. thedegreeofinflationprotectionanassetprovides.

D. Allofthesearetrue.

E. theeasewithwhichanassetcanbesoldandtheabilitytosellanassetforafairprice.

22. Theobjectivesofpersonaltrustsnormallyare__________inscopethanthoseofindividualinvestorsandpersonaltrustmanagerstypicallyare__________thanindividualinvestors. 

A. broader;moreriskaverse

B. broader;lessriskaverse

C. morelimited;moreriskaverse

D. morelimited;lessriskaverse

E. Noneoftheseistrue.

23. Whenacompanysetsupadefinedcontributionpensionplan,the__________bearsalltheriskandthe__________receivesallthereturnfromtheplan'sassets. 

A. employee;employee

B. employee;employer

C. employer;employee

D. employer;employer

E. cannottell;Dependsontheeconomicenvironment.

24. Supposethatthepre-taxholdingperiodreturnsontwostocksarethesame.StockAhasahighdividendpayoutpolicyandstockBhasalowdividendpayoutpolicy.Ifyouareanindividualinahighmarginaltaxbracketanddonotintendtosellthestocksduringtheholdingperiod,__________. 

A. stockAwillhaveahigherafter-taxholdingperiodreturnthanstockB

B. theafter-taxholdingperiodreturnsonstocksAandBwillbethesame

C. stockBwillhaveahigherafter-taxholdingperiodreturnthanstockA

D. Itisimpossibletodeterminewhichstockwillhaveahigherafter-taxholdingperiodreturngiventheinformationavailable.

E. Noneoftheseistrue.

25. Theprudentinvestorrulerequires__________. 

A. executivesofcompaniestoavoidinvestinginoptionsofcompaniesbywhichtheyareemployed

B. executivesofcompaniestodisclosetheirtransactionsinstocksofcompaniesbywhichtheyareemployed

C. professionalinvestorswhomanagemoneyforotherstoavoidallriskyinvestments

D. professionalinvestorswhomanagemoneyforotherstoconstraintheirinvestmentstothosethatwouldhavebeenapprovedbytheprudentinvestor

E. Noneoftheseistrue.

26. Thelongesttimehorizonsarelikelytobesetby 

A. banks.

B. propertyandcasualtyinsurancecompanies.

C. pensionfunds.

D. banksandpensionfunds.

E. propertyandcasualtyinsurancecompaniesandpensionfunds.

27. Thelongesttimehorizonsarelikelytobesetby 

A. banks.

B. propertyandcasualtyinsurancecompanies.

C. endowmentfunds.

D. banksandendowmentfunds.

E. propertyandcasualtyinsurancecompaniesandendowmentfunds.

28. Theshortesttimehorizonsarelikelytobesetby 

A. banks.

B. propertyandcasualtyinsurancecompanies.

C. pensionfunds.

D. banksandpropertyandcasualtyinsurancecompanies.

E. propertyandcasualtyinsurancecompaniesandpensionfunds.

29. U.S.mutualfundsarerestrictedtoholdingnomorethan__________ofanypubliclytradedcorporation. 

A. 1%

B. 5%

C. 10%

D. 25%

E. Thereisnorestrictiononpercentageownership.

30. Institutionalinvestorswillrarelyinvestinwhichoftheseassetclasses?

A. Bonds

B. Stocks

C. Cash

D. Realestate

E. Preciousmetals

31. Foranindividualinvestor,thevalueofhomeownershipislikelytobeviewed 

A. a