Question 1

Investment risk cannot be entirely eliminated through the diversification of an investment portfolio.This risk remaining after diversification is called:&#10;A)Diversifiable risk.&#10;B)Standard deviation.&#10;C)Systematic risk.&#10;D)Total risk.

Accepted Answer

Systematic risk, also known as market risk, is the risk that affects the overall market or economy and cannot be diversified away. It is a risk that affects all investments within a particular market or economy. Therefore, diversification can help reduce diversifiable risk (also known as unsystematic risk) but cannot eliminate systematic risk. Standard deviation and total risk are measures of the variability of returns within a portfolio but do not refer specifically to the remaining risk after diversification.

Question 2

All of the following are constraints in an IPS except:&#10;A)Acknowledgement.This is part of the IPS but it is not listed in constraints.&#10;B)Liquidity.This is a constraint.&#10;C)Taxes.This is a constraint.&#10;D)Time horizon.This is a constraint.

Accepted Answer

Acknowledgement is not listed as a constraint in an IPS.

Question 3

The _____ calculates the required interest rate for a taxable bond to provide the same after-tax return as a municipal bond.&#10;A)Holding period yield is a distractor.&#10;B)Municipal bond yield is a distractor.&#10;C)Standard yield is a distractor.&#10;D)Taxable equivalent yield.

Accepted Answer

The taxable equivalent yield calculates the interest rate of a taxable bond needed to provide the same after-tax return as a municipal bond. It is a common measure used by investors to compare the returns of municipal bonds and taxable bonds. Choices A, B, and C are all distractors and not relevant to calculating the taxable equivalent yield.

Question 4

In those cases in which the personal financial planner isn't acting as the investment manager,the planner should review the IPS to ensure it is properly integrated with the client's:&#10;A)Investment plan.This is the responsibility of the investment manager.&#10;B)Personal financial plan.&#10;C)Risk management plan.This is part of the personal financial plan.&#10;D)Tax plan.This is part of the personal financial plan.

Accepted Answer

The IPS outlines the investment objectives and strategies, and it needs to be properly integrated with the client's overall personal financial plan, which includes goals, risk tolerance, tax considerations, and estate planning. While the investment manager is responsible for implementing the IPS, the personal financial planner should review it to ensure it aligns with the client's holistic financial picture. Option A isn't the best choice as it suggests that the personal financial planner is acting as an investment manager, which the question statement negates. Option C and D are partly correct, but they only represent components of the personal financial plan, whereas option B captures the full scope of the planner's responsibility in the given scenario.

Question 5

Constraints may affect the selection of:&#10;A)Goals are the basis for constraints.&#10;B)Investment adviser.This is a distractor.&#10;C)Securities.&#10;D)Tax regime.This is a distractor.

Accepted Answer

Constraints can affect the selection of securities, as certain constraints such as risk tolerance or ethical considerations may limit the types of securities that can be invested in. A and D are not correct as they do not specifically relate to the selection of securities. B is a distractor as it is not relevant to the question.

Question 6

The holding period return is the _____ return over the period from purchase to sale divided by the _____.&#10;A)Simple / price of the investment.This response is a distractor.&#10;B)Simple / simple return.This response is a distractor.&#10;C)Total / price of the investment.&#10;D)Total / simple return.This response is a distractor.

Accepted Answer

The holding period return is the total return over the period from purchase to sale divided by the price of the investment. This is because the total return accounts for any changes in value (i.e. capital gains/losses) as well as any income earned from the investment (i.e. dividends or interest). Dividing by the price of the investment gives a percentage return that can be compared across different investments regardless of their initial prices.

Question 7

All of the following investments are recommended for tax qualified accounts except:&#10;A)This is recommended.Bonds create ordinary income.&#10;B)This is recommended.Certificates of Deposit create ordinary income.&#10;C)Stock.Creates long-term capital gain income;therefore best used in taxable accounts.&#10;D)This is recommended.Treasury bills create ordinary income.

Accepted Answer

Stocks create long-term capital gain income, which is more tax-efficient when held in taxable accounts rather than tax-qualified accounts like IRAs or 401(k)s. The other options listed (bonds, certificates of deposit, and treasury bills) all create ordinary income, which is taxed at the same rate in tax-qualified accounts as it is in taxable accounts. Therefore, they are all recommended for tax-qualified accounts as well.

Question 8

Where is the value of a personal residence contained in an IPS?&#10;A)Alternative investments.&#10;B)General Financial Goals.&#10;C)Other Assets.&#10;D)Summary information.

Accepted Answer

The value of a personal residence would typically be included under "Other Assets" in an IPS.

Deck 18: Applications in Investment Planning