Deck 21: Managing Your Financial Assets

Question 1

Based on empirical evidence, which of the following is the most important aspect in explaining portfolio performance?

A) Security selection
B) Market timing
C) Transactions costs
D) Asset allocation

Answer 1

D

Question 2

Which of the following is not part of the portfolio management process?

A) Determining investor objectives, constraints, and preferences
B) Selling weak performing securities from the portfolio
C) Forming expectations for the economy and its sectors
D) Developing and implementing a strategy

Answer 2

B

Question 3

Living expenses are covered from accumulated assets rather than from earned income in the:

A) accumulation phase of the life cycle.
B) consolidation phase of the life cycle.
C) spending phase of the life cycle.
D) saving phase of the life cycle.

Answer 3

C

Question 4

The phases of the life cycle for setting individual investment objectives are:

A) accumulation, consolidation, retirement, and estate planning.
B) accumulation, consolidation, retirement, and gifting.
C) accumulation, consolidation, spending, and retirement.
D) accumulation, consolidation, spending, and gifting.

Question 5

In the investment policy statement (IPS), investor objectives focus on:

A) accumulation and consolidation.
B) return and taxes.
C) risk and return.
D) security selection and asset allocation.

Question 6

According to the life-cycle approach, investors normally assume a moderate trade-off between risk and return in the:

A) accumulation phase.
B) consolidation phase.
C) spending phase.
D) gifting phase.

Question 7

The first step of the portfolio management process is:

A) to assess market conditions.
B) to determine investor objectives, constraints, and preferences.
C) to develop strategies and implement them.
D) portfolio construction.

Question 8

Which of the following is not one of the phases of the life-cycle theory of asset allocation?

A) Accumulation
B) Consolidation
C) Gifting
D) Retirement

Question 9

Which act governs employer-sponsored retirement plans?

A) Investors Advisors Act
B) Investment Company Act
C) Security Investors Protection Act
D) Employment Retirement Income Security Act

Question 10

Which of the following is not a major consideration in the asset allocation process?

A) Return requirements
B) Risk tolerance
C) Ease of monitoring progress
D) Time horizon

Question 11

The document that describes an investor's objectives and constraints is:

A) the prospectus.
B) the indenture.
C) the investment policy statement.
D) the portfolio optimization contract.

Question 12

One aspect of the tax considerations in asset allocation is that:

A) capital gains are often taxed at a higher rate than dividend and interest income.
B) Roth accounts offer a tax savings in the year they are opened.
C) investors are exempt from taxes on capital gains once they reach age 65.
D) taxes on capital gains are deferred until the gain is realized.

Question 13

In order to protect principal against possible loss caused by distressed selling, individuals are typically recommended to have a:

A) 1-month emergency fund.
B) 2-month emergency fund.
C) 6-month emergency fund.
D) 12-month emergency fund

Question 14

Which of the following is not among the usual constraints and preferences considered when formulating an investment policy statement?

A) Avoidance of so-called "sin" stocks (alcohol, tobacco, firearms, etc.)
B) Liquidity needs
C) Economic assessment
D) Time horizon

Question 15

Which of the following is not true regarding the life-cycle approach to investment?

A) It is most appropriate for institutions.
B) It automatically becomes more conservative as the investor nears retirement age.
C) It is suited to 401(k) plans.
D) It can be implemented using life-cycle (also known as target-date) funds.

Question 16

The life-cycle theory of asset allocation proposes that as investors progress through life their:

A) asset allocation will tend to become more conservative.
B) earnings increase in their 20s, reach a peak at about age 45, then decline.
C) assets must grow geometrically in order to achieve reasonable goals.
D) asset allocation should remain fixed in order to avoid short-sighted adjustments.

Question 17

Relative to their holdings in their early careers, conservative retirees likely have greater holdings of:

A) small-cap stocks.
B) international stocks.
C) cyclical stocks.
D) low-beta stocks.

Question 18

Relative to a conservative allocation, an aggressive asset allocation would contain larger proportions of:

A) value stocks and bonds.
B) bonds and large-cap stocks.
C) small-cap and international stocks.
D) defensive stocks.

Question 19

The components of the investment policy statement (IPS) include the:

A) minimum investment and maximum fees.
B) SEC guidelines for prudent investor actions.
C) objectives, constraints, and preferences.
D) asset allocation parameters and time horizons.

Question 20

Historically, the annual return on the U.S. stock market has averaged approximately:

A) 3.0%.
B) 7.0%.
C) 10.0%.
D) 15.0%.

Question 21

Retirement programs offer tax sheltering for individual U.S. investors.

Question 22

Investors following a constant proportion portfolio insurance (CPPI) investment strategy:

A) increase their allocation to stocks after stock prices rise.
B) increase their allocation to bonds after stock prices rise.
C) increase their allocation to cash after stock prices rise.
D) hedge their portfolio after stock prices rise.

Question 23

An investor with high liquidity needs and a short time horizon should have a relatively high allocation to:

A) real estate.
B) bonds.
C) money market securities.
D) low beta stocks.

Question 24

Pension funds are governed by the prudent man rule since specific pension fund legislation has never passed.

Question 25

Which of the following investors should allocate a relatively high portfolio weight to municipal bonds?

A) A tax-exempt institution
B) An individual investor in the accumulation phase of the life cycle
C) An individual investor with high liquidity needs
D) An individual investor in a high tax bracket

Question 26

Monitoring and revision are part of the portfolio management process.

Question 27

The Prudent Man Rule, which applies to fiduciaries, is a relatively new concept in investment management.

Question 28

The buy-and-hold strategy generally results in a portfolio's risk increasing over time.

Question 29

Which of the following statements about investment strategies is true? Constant proportion portfolio insurance is a:

A) contrarian strategy, whereas constant mix is a momentum strategy.
B) momentum strategy, whereas constant mix is a contrarian strategy.
C) contrarian strategy as is constant mix.
D) momentum strategy as is constant mix.

Question 30

Over the past 10 years, Gordon has maintained his portfolio as 40% bonds and 60% stocks. The strategy Gordon has followed over this period is best described as:

A) constant proportion portfolio insurance (CPPI).
B) buy-and-hold.
C) constant mix.
D) portfolio optimization.

Question 31

Investor expectations about expected returns from various asset classes should start with:

A) long-term returns of those asset classes.
B) last month's return of those asset classes.
C) last year's return of those asset classes.
D) the correlation of returns from asset classes over the past two years.

Question 32

The long-term geometric mean return for the S&P 500 is between 15 and 20%.

Question 33

Which of the following is an advantage of monitoring and rebalancing a portfolio over time?

A) Lower commissions
B) Lower taxes
C) A portfolio that is better aligned with objectives
D) A portfolio with greater expected return

Question 34

Financial plans should be monitored and updated on an ongoing basis. Examples of changes that can necessitate financial plan updating include changes in wealth, time horizon, liquidity requirements, tax circumstances, and regulations.

Question 35

An individual investor's marginal tax rate is:

A) higher than the investor's effective tax rate.
B) lower than the investor's effective tax rate.
C) equal to the investor's effective tax rate.
D) higher than the investor's effective tax rate only when the investor is wealthy.

Question 36

The "lockup" problem involved in rebalancing refers to the problem that:

A) retirement accounts cannot be liquidated prior to retirement.
B) trust accounts cannot be traded without incurring administrative costs.
C) taxable accounts are subject to capital gains taxes if appreciated assets are sold.
D) illiquid fixed income securities must be held until maturity.

Question 37

Once a year, Rita resets the weights of her largest client's portfolio to 50% debt and 50% equity. Which of the following best describes Rita's actions with respect to the client's portfolio? Rita is following a:

A) buy-and-hold approach with calendar rebalancing.
B) constant mix approach with calendar rebalancing.
C) constant proportion portfolio insurance approach with corridor rebalancing.
D) buy-and-hold approach with corridor rebalancing.

Question 38

In order to arrive at an investment policy, it is necessary to determine whether the market is headed for a bull or bear market.

Question 39

The Markowitz model identifies the set of portfolios that offers the:

A) highest return for any given level of risk.
B) least-risk for conservative investors.
C) long-run approach to wealth accumulation for young investors.
D) risk-free alternative for risk-averse investors.

Question 40

A market timing approach that increases the proportion of funds in stocks when the stock market is expected to rise, and increases cash when stocks are expected to fall is a:

A) strategic asset allocation.
B) tactical asset allocation.
C) portfolio optimization.
D) liquidity timing allocation.

Question 41

Actively managed funds tend to be more tax efficient than index funds.

Question 42

Under the life cycle approach, the lowest risk and lowest return should come during the spending and gifting stages.

Question 43

The constant mix strategy is viewed as a contrarian strategy.

Question 44

What are the two primary methods that an investment manager can use to produce alpha?

Question 45

An investor's marginal tax rate is equal to total taxes paid divided by total income.

Question 46

Portfolio performance evaluation is an important determinant of your success in financial planning.

Question 47

One of the costs of portfolio rebalancing is taxes.

Question 48

How does the prudent investor rule affect asset allocation?

Question 49

An efficient set of portfolios offers maximum risk for any level of return.

Question 50

During periods of uncertainty there is often a flight to safety, which tends to push the prices of Treasury securities to low levels.

Question 51

Rebalancing is difficult for many investors because it represents a contrarian strategy.

Question 52

Common stocks are not always an inflationary hedge but have a long history of strong performance over time.

Question 53

The spending phase of the life cycle is avoided by investors who follow the prudent man rule.

Question 54

What is the difference between strategic asset allocation and tactical asset allocation?

Question 55

The consolidation phase of the life cycle begins when the investor reaches retirement.

Question 56

Give an example of how individual investors' preferences are taken into account by institutional managers?

Question 57

What are the differences between individual investors and institutional investors?

Question 58

Retirees would likely have a greater percentage of their wealth in common stock than would a recent college graduate.

Question 59

Explain the life-cycle theory of portfolio policies.

Question 60

What are the steps in the portfolio management process?

Question 61

Mr. Baker, a single person in early retirement, owns a house, a well-used car, and minimal life insurance. He has pension assets of about half a million dollars. He wants it all in tax-exempt municipal bonds so that "I won't lose any money, and I won't have to pay taxes." Considering the life-cycle theory of asset allocation, would you suggest any alternatives to this client?