Question 1

If you save monthly for retirement,which of the following would be used to determine how much you would ultimately have in your retirement account?

Accepted Answer

The future value of an annuity formula is used to determine how much you would ultimately have in your retirement account if you save monthly. This formula takes into account the monthly payment, interest rate, and number of years of contributions to calculate the future value of the annuity. The present value of an annuity formula, present value of $1 formula, and future value of a lump sum formula are not relevant for determining how much you would have in your retirement account from your monthly savings.

Question 2

The purpose of financial planning is to help do all of the following except

Accepted Answer

The purpose of financial planning is to help individuals set goals, become financially educated, and increase their net worth. However, decreasing food expenses is not necessarily a primary focus or goal of financial planning.

Question 3

Property and casualty insurance protects your

Accepted Answer

Property and casualty insurance covers damage or loss to your car and home, as well as liability for any injuries or property damage you cause to others. It does not cover health or income. Therefore, option B is the best choice.

Question 4

Disability insurance protects your

Accepted Answer

Disability insurance protects your income in case you are unable to work due to a disability, injury or illness. This ensures that you can continue to meet your financial obligations and maintain your standard of living even if you are unable to work.

Question 5

Financial documents should be

Accepted Answer

The answer of Financial documents should be
...

Question 6

Even average earners can accumulate wealth by

Accepted Answer

Spending less than one makes means that there is money left over which can be saved and invested to accumulate wealth over time. Saving more than one makes would also be a valid answer, but spending less ensures there will always be money available for saving and investing. Borrowing to buy what one wants would likely result in accumulating debt, which would not lead to wealth accumulation. Winning the lottery is not a reliable or sustainable way to accumulate wealth.

Question 7

In deciding how much to contribute to your retirement savings,which of the following should you ignore?

Accepted Answer

Anticipated inheritances are uncertain and may not come to fruition. It is important to focus on your current financial situation and not count on future windfalls. B, C, and D are all important factors to consider when deciding how much to contribute to retirement savings. Other financial goals, such as saving for a down payment on a house or paying off debt, should be balanced with retirement savings contributions. Liquidity needs, such as an emergency fund, should also be considered to ensure you can meet unexpected expenses without derailing your retirement savings plan. And current expenses are important to consider because they determine how much disposable income you have to allocate towards retirement savings.

Question 8

To increase your net worth,you should

Accepted Answer

By paying off a loan with cash flow, you reduce your liabilities, which in turn increases your net worth. This is because your net worth is calculated as your assets minus your liabilities. Spending all cash remaining in your budget may provide short-term gratification, but it does not necessarily increase your net worth in the long run. Investing in household assets can increase your net worth if the assets appreciate in value over time, but this is not always guaranteed. Buying a luxury car is likely to decrease your net worth as it is a depreciating asset.

Question 9

Which of the following will decrease your net worth?

Accepted Answer

Increasing your liabilities will decrease your net worth, as your debts and obligations will have a negative impact on your overall financial position.

Question 10

Which of the following will increase your net worth over time?

Accepted Answer

Buying a house will increase your net worth over time as the value of the property appreciates and you build equity.

Question 11

Which of the following statements about insurance is true?

Accepted Answer

Insurance is a critical component of financial planning, providing a safety net against unforeseen events that could have devastating financial impacts. It should be prioritized to ensure that you and your assets are protected before allocating funds to investments, which carry their own risks.

Question 12

Which of the following increases your net worth?

Accepted Answer

Experiencing investment growth in your retirement savings increases your net worth because it adds value to your overall financial assets.

Answer: B
 Starting a pension plan increases your net worth because it adds value to your overall financial assets and provides a form of savings for your retirement.

Therefore, the best choices are A and B.

Question 13

Which of the following investments reduces your taxable income?

Accepted Answer

RRSP (Registered Retirement Savings Plan) contributions are a tax-deductible investment, which means that the amount you contribute to your RRSP can be deducted from your taxable income. This reduces the amount of income tax that you need to pay, and therefore, reduces your taxable income. Stock investments, RESP (Registered Education Savings Plan) contributions, and TFSA (Tax-Free Savings Account) contributions do not provide the same tax deduction benefit.

Question 14

Which of the following investments achieves the greatest diversification?

Accepted Answer

A balanced mutual fund typically invests in a diversified mix of stocks, bonds, and other assets. This provides a greater diversification than just owning ten international stocks or a TSX ETF that only tracks Canadian stocks. Additionally, a GIC is not diversified at all, as it is a single fixed-income investment.

Question 15

Compared to the stocks of larger firms,the stocks of smaller firms are

Accepted Answer

Smaller firms typically have less established and stable operations, making their stock prices more susceptible to fluctuations in the market. Therefore, the stocks of smaller firms are generally more volatile.

Question 16

Which of the following should you do first?

Accepted Answer

Before embarking on any financial planning, it is crucial to make a budget. This will help you understand your income, expenses and identify areas you can cut back. It will also highlight where you can you put aside savings towards retirement and insurance. Once you have a proper budget in place, you can proceed to pay off any loans and purchase insurance.

Question 17

If you want investment income,which of the following investments should you purchase?

Accepted Answer

Bonds and dividend producing equities are typically considered "income" investments as they provide regular payments to investors. Stocks with high betas and growth mutual funds are typically focused on capital appreciation rather than income, and IPOs are often too risky and speculative for investors seeking stable investment income.

Question 18

A financial plan should be prepared when you graduate from college or university

Accepted Answer

A financial plan should be reviewed periodically as life events and changes in circumstances can affect financial goals and needs. It is important to make adjustments as necessary to ensure that the plan remains aligned with your goals and objectives. Following the plan without any changes may lead to missed opportunities or unexpected financial difficulties. Option A and B are too rigid and do not account for changes in life circumstances, while option D suggests that a financial plan doesn't need to be detailed or comprehensive, which is not true.

Question 19

You are 25 years old and saving for an early retirement.Assuming that you have a high risk tolerance,which of the following can best help you reach your goal of retiring early?

Accepted Answer

As someone with a high risk tolerance, investing in a growth fund can offer the potential for higher returns over the long-term. While there may be more volatility in the short-term, historically growth funds have provided higher returns over time. Choosing a bond fund or money market fund may be more suitable for individuals with a lower risk tolerance who prioritize capital preservation over growth. A dividend fund may offer some potential for both growth and income, but may not provide the same level of growth potential as a growth fund.

Question 20

Which of the following accounts offers tax deferral,tax sheltering,and tax deduction for contributions?

Accepted Answer

Only Registered Retirement Savings Plans (RRSPs) offer tax deferral, tax sheltering, and tax deductions for contributions. Tax-Free Savings Accounts (TFSAs) do not offer a tax deduction for contributions, and Registered Education Savings Plans (RESPs) have different tax advantages primarily for education savings.

Quiz 6: Synthesis of Financial Planning - Integrating the Components of a Financial Plan