mouse123

In general, an individual facing retirement has a greater amount of:

A) financial capital than human capital.

B) human capital than financial capital.

C) both human and financial capital than when they first started working.

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An individual facing retirement has a decreased amount of human capital, but most likely has accumulated a significant amount of financial capital. On the other hand, a young individual beginning their career most likely has minimal financial capital but a great amount of human capital.

mouse123

Financial wealth and the demand for life insurance have:

A) a negative relationship.

B) a positive relationship.

C) either a positive or a negative relationship depending upon the individual’s level of wealth.

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Financial wealth and the demand for life insurance have a negative relationship which means if a person has a lot of financial wealth their need for life insurance is small and visa versa.

mouse123

Which of the following statements regarding human capital volatility is most accurate? When human-capital is bond-like, an investor’s financial assets should be:

A) allocated towards low risk assets and their demand for life insurance will increase.

B) more aggressively allocated and their demand for life insurance will decrease.

C) more aggressively allocated and their demand for life insurance will increase.

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When human-capital is bond-like, an investor’s financial assets can be more aggressively allocated and the demand for life insurance will increase. On the other hand, when human-capital is equity-like, an investor’s financial assets should be allocated towards low risk assets and their demand for life insurance will decrease.

mouse123

Factors that are positively related to the demand for life insurance include:

A) human capital volatility and risk aversion.

B) financial wealth and probability of death.

C) risk aversion and probability of death.

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As either risk aversion or probability of death increase, so does the demand for life insurance. Human capital volatility and financial wealth are both negatively correlated with the demand for life insurance.

mouse123

The volatility of human capital and the demand for life insurance are:

A) negatively correlated.

B) positively correlated.

C) uncorrelated.

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Human capital volatility and demand for life insurance are negatively correlated. Life insurance acts as a substitute for human capital, so its face value depends on the perceived value of the human capital it replaces. If the human capital has high volatility (equity-like), a higher discount rate is used to estimate its present value. Thus, human capital with high volatility has a smaller present value than human capital with low volatility.

mouse123

Which of the following is NOT an example of a cause of savings risk?

A) The financial markets drop significantly wiping out a significant portion of a person’s wealth.

B) A person expects to average a 12% rate of return in their 401k retirement account.

C) A person fails to determine how much they need to save given an assumed rate of return and time frame.

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A drop in a person’s financial wealth due to a drop in the equity markets is an example of financial market risk and not savings risk. Savings risk is when a person doesn’t save enough for retirement and spends more than they should during the accumulation phase. Savings risk usually arises from a lack of long-term planning and is the result of consuming too much current income rather than saving it. Relying too much on growth in a 401k to make up for a lack of saving is an example of savings risk.

mouse123

The three primary risks that could jeopardize the desired lifestyle and/or bequest of an individual include which of the following?

A) Longevity risk, savings risk, and inflation risk.

B) Savings risk, financial market risk, maturity risk.

C) Financial market risk, longevity risk, and savings risk.

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The three primary risks that could jeopardize an individual’s retirement plans are: financial market risk, longevity risk, and savings risk. Financial market risk refers to the effects of volatility in the financial markets that could result in significant drops in portfolio values. Longevity risk refers to the chance of out-living one’s financial assets. Savings risk refers to the chance of an individual spending more than they should so that they save less than needed during the accumulation stage. This is usually the result of poor long-term planning. Inflation risk is included in savings risk.

mouse123

Which of the following is least likely to jeopardize an individual’s desired lifestyle and/or bequest?

A) Savings risk.

B) Longevity risk.

C) Liquidity risk.

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The three primary risks that could jeopardize an individual’s desired lifestyle and/or bequest are: (1) financial market risk, (2) longevity risk, and (3) savings risk. Liquidity risk is not a factor in determining an individual’s desired lifestyle or bequest.

mouse123

Which of the following is least likely a solution to longevity risk?

A) SMarT programs.

B) Social Security.

C) Pension plans.

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SMarT (Save More Tomorrow) programs are considered solutions to savings risk (not longevity risk) because in the SMarT programs individuals pledge to save a portion of future raises.

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An advantage of a fixed annuity over a variable annuity is:

A) the fixed annuity’s income stream is stable throughout the life of the annuity purchaser.

B) the fixed annuity’s income offers a hedge against inflation during periods of stagflation.

C) fixed annuities are easier to terminate than variable annuities.

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One advantage of a fixed annuity over the variable annuity is the stable income stream offered by the fixed annuity. Since the variable annuity’s income is tied to the return of underlying assets, which are usually equity-like the annuity’s income also fluctuates as the return on the underlying assets fluctuates. A disadvantage of fixed annuities is since their income stream is fixed they lose real earning power over time due to inflation. Once the fixed or variable contracts are annuitized meaning the investor decides to have the payments sent to them for life, both fixed and variable annuities are equally difficult to terminate.