Question 1

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 a constraint in an IPS. The other options listed, including liquidity, taxes, and time horizon, are all potential constraints that must be considered when creating an investment policy statement.

Question 2

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 one would divide the total return by the initial investment to calculate the return as a percentage of the initial investment. Therefore, the correct answer is C.

Question 3

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 is the risk that is inherent in the overall market and cannot be diversified away. It is also known as non-diversifiable risk or market risk. Therefore, option C is the correct answer. Option A refers to the risk that can be reduced through diversification and is also known as specific risk or unsystematic risk. Option B refers to the measure of volatility in investment returns. Option D includes both systematic and unsystematic risk.

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 personal financial planner should review the IPS to ensure it is properly integrated with the client's personal financial plan, as that is their area of expertise. The investment manager is responsible for integrating the IPS with the client's investment plan. The risk management plan is part of the personal financial plan, but not the focus of the IPS. The tax plan is also part of the personal financial plan, but not directly related to the IPS.

Question 5

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

Stock creates long-term capital gain income, which is more tax-efficient when held in taxable accounts rather than tax-qualified accounts (such as IRAs or 401k plans). The other three options (bonds, certificates of deposit, and treasury bills) all create ordinary income, which is subject to income tax regardless of whether they are held in a tax-qualified or taxable account. Therefore, they are all suitable for tax-qualified accounts.

Question 6

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 have a significant impact on the selection of securities. Constraints may include factors such as investor risk tolerance, time horizon, liquidity needs, and legal restrictions. Therefore, the selection of securities may need to be adjusted based on these constraints in order to meet the investor's goals and preferences.

Question 7

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 is included under the category of "Other Assets" in an IPS, which includes assets such as cars, jewelry, artwork, and other valuable possessions. This information is important to include in an IPS as it provides a comprehensive picture of a client's net worth and helps the advisor make informed investment decisions.

Question 8

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 is a measure that calculates the interest rate that a taxable bond needs to provide to have the same after-tax return as a municipal bond. It is a useful tool for investors who are considering buying municipal bonds but want to compare their returns to taxable bonds. The other options (holding period yield, municipal bond yield, and standard yield) are not directly related to the calculation of taxable equivalent yield.

Deck 18: Applications in Investment Planning