Question 1

___________ means that investors want to minimize their risk of loss, usually in real terms: They seek to maintain the purchasing power of their investment. In other words, the return needs to be no less than the rate of inflation.

Accepted Answer

Capital preservation means that investors aim to maintain the value of their investment and avoid losses. They want their investment return to keep up with inflation, so that their purchasing power is not eroded over time. This is often a priority for investors who are risk-averse or have a short-term investment horizon.

Question 2

The objective for the __________ strategy is similar to that of capital appreciation; namely, the investors want the portfolio to grow over time to meet a future need. Whereas the capital appreciation strategy seeks to do this primarily through capital gains, this strategy seeks to increase portfolio value by both capital gains and reinvesting current income.

Accepted Answer

The description given matches the objective of a total return investment strategy. It aims to increase portfolio value through both capital gains and reinvesting current income. The other options (A, C, and D) do not match the given description.

Question 3

Which of the following is a pattern that occurs during high volatility, when a security shows great movement with little direction?

Accepted Answer

A broadening formation is a pattern that occurs during high volatility when a security shows great movement with little direction. It is characterized by higher highs and lower lows, and can be a sign of indecision in the market. The other choices (Relative Strength Index, On Balance Volume, and Bollinger Bands) are technical indicators that can be used to analyze market trends and momentum, but they do not specifically relate to patterns during high volatility with little direction.

Question 4

A sound portfolio statement helps to protect the client against a portfolio manager's:

Accepted Answer

The answer of A sound portfolio statement helps to protect...

Question 5

Buying power of an investor is calculated as:

Accepted Answer

The buying power of an investor is calculated by subtracting the total amount of debt from the total amount of equity. This gives the investor an idea of how much purchasing power they have to invest in additional assets or securities. Therefore, the correct choice is B (Equity-debt balances).

Question 6

Which of the following is not the correct technical indicator?

Accepted Answer

Moving Average Convergence/Divergence, Relative strength index, and On balance volume are all technical indicators commonly used in financial analysis. Broadening formation, however, is not a technical indicator but rather a chart pattern indicating an increase in volatility and uncertainty in the market.

Question 7

Assume our typical 65-year-old investor likewise has adequate insurance coverage and a cash reserve. Let's also assume she is retiring this year. This individual will want less risk exposure than the 25-year-old investor, because her earning power from employment will soon be ending; she will not be able to recover any investment losses by saving more out of her paycheck. Depending on her income from social security and a pension plan, she may need some current income from her retirement portfolio to meet living expenses. Given that she can be expected to live an average of another 20 years, she will need protection against inflation. A risk-averse investor will choose a combination of current income and capital preservation strategy; a more risk-tolerant investor will choose:

Accepted Answer

The answer of Assume our typical 65-year-old investor likewise has...

Question 8

The pro rata portion of premiums written allocable to unexpired policy periods represents unearned premiums, which are reflected as ___________ in the balance sheet.

Accepted Answer

The unearned premiums will be recorded as a liability on the balance sheet until the policy periods expire and the premiums become earned.

Question 9

Insurance coverage provides protection against other uncertainties. Health insurance helps to pay medical bills. Disability insurance provides _____________.

Accepted Answer

Disability insurance provides continuing income if an individual becomes unable to work due to an injury or illness. This helps to cover expenses and maintain financial stability during the period of disability. Monthly expenses, income after death, and benefits on a quarterly basis are not typically included in disability insurance coverage.

Question 10

If you commit $200 to an investment at the beginning of the year, what is your rate of return for the period?

Accepted Answer

The rate of return is calculated by dividing the amount of money gained or lost by the initial investment. In this case, the amount of money gained is $220 - $200 = $20. The rate of return is therefore $20 / $200 = 0.10, or 10%.

Question 11

Capital appreciation is an appropriate objective when the investors want the portfolio to grow in real terms over time to meet some future need. Under this strategy, growth mainly occurs through capital gains. This is an

Accepted Answer

Capital appreciation is an aggressive investment objective as it aims to generate growth mainly through capital gains. Possessive strategy focuses on preserving the capital, risk averse strategy focuses on minimizing the risk, and risk acceptance strategy aims to maximize the return while accepting a high level of risk.

Question 12

Tax Act states that:

Accepted Answer

The Tax Act specifies a 15 percent investment income tax on a life insurer's 'net Canadian life investment income.

Question 13

When policy periods expire, the premiums written are earned and are recognized as __________.

Accepted Answer

Premiums written represent a company's expected revenue from policy sales. When policies expire, the premiums earned from those policies become revenue for the company. Therefore, the correct answer is C) Revenues.

Question 14

Assume our typical 65-year-old investor likewise has adequate insurance coverage and a cash reserve. Let's also assume she is retiring this year. This individual will want less risk exposure than the 25-year-old investor, because her earning power from employment will soon be ending; she will not be able to recover any investment losses by saving more out of her paycheck. Depending on her income from social security and a pension plan, she may need some current income from her retirement portfolio to meet living expenses. Given that she can be expected to live an average of another 20 years, she will need protection against inflation. A risk-averse investor will choose:

Accepted Answer

A risk-averse investor who is retiring soon and needs protection against inflation will want a combination of current income and capital preservation strategy. This means that the investor will want investments that provide regular income (such as bonds, dividend-paying stocks, or real estate investment trusts) while also protecting the principal value of the investment (such as high-quality bonds, cash equivalents, or low-risk stocks). The focus should be on preserving the value of the portfolio and generating income, rather than trying to achieve capital appreciation or total return.

Question 15

The investor's objectives are his or her investment goals expressed in terms of both risk and returns. The relationship between risk and returns requires that goals not be expressed only interms of returns. Expressing goals only in terms of returns can lead to:

Accepted Answer

The relationship between risk and returns requires that goals not be expressed only in terms of returns. Expressing goals only in terms of returns can lead to churning (excessive trading) and inappropriate investment practices by the portfolio manager.

Question 16

Risk tolerance is more than a function of an individual's psychological makeup; it is affected by other factors such as:

Accepted Answer

Risk tolerance is affected by factors such as current insurance coverage, cash reserves, nature of job, family situation (marital status, number and ages of children), and age.

Question 17

An investment is the current commitment of dollars for a period of time in order to derive future payments that will compensate the investor for:

Accepted Answer

All of these factors are considered when making an investment decision. The investor is committing their funds for a period of time and expects future payments to compensate them for the time and inflation risk. There is also uncertainty in future payments, so all of these factors must be taken into account.

Question 18

All of the following are sentiment indicators Except:

Accepted Answer

Quick asset ratio is a liquidity ratio and is not related to measuring sentiment in the market. The other three options, Odd lot short ratio, Shares sold short, and Short interest ratio are all indicators used to measure market sentiment.

Question 19

Companies that have capitalization amounts more than $2 billion are known as:

Accepted Answer

Companies with capitalization amounts over $2 billion are considered to be large cap companies.

Question 20

The process of managing a portfolio never stops. Once the funds are initially invested according to the plan, the real work begins in:

Accepted Answer

Evaluating the portfolio's performance and updating the portfolio based on changes are both crucial ongoing tasks in portfolio management. These tasks ensure that the portfolio continues to align with the investor's goals and objectives, and that any necessary adjustments are made to achieve optimal returns. Additionally, examining current and projected financial goals is an important factor in portfolio management, but this task may not require ongoing attention as frequently as performance evaluation and updates.

Exam 2: Certified Trust and Financial Advisor