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标题: Portfolio Management and Wealth Planning【Reading 10】 [打印本页]
作者: prashantsahni    时间: 2012-3-23 11:20     标题: [2012 L3] Portfolio Management and Wealth Planning【Session 4 - Reading 10】

Jennifer Moore has worked in a governmental position (administrative assistant) since graduating from high school. She loves her job because she is very good at following her bosses’ orders. At office functions, many of her colleagues ranted and raved about the quality of her baked goods. Some even suggested that they tasted so good that she should quit her job and sell baked goods. Moore is 50 years old and never paid attention to the suggestions of her colleagues. She plans on retiring from the government in three years.Based on her personality type, what type of investor is Moore?
A)
Methodical.
B)
Cautious.
C)
Individualist.


Moore appears to be a cautious investor. She appears unwilling/unsure about making decisions on her own (following bosses’ orders), which goes against the individualist and methodical investor.
Jennifer Moore recently came into a seven-figure inheritance from a long-lost uncle. Which of the following statements about Moore is most accurate?
A)
Since she didn't count on the inheritance, she will be willing to take on substantial investment risks.
B)
She will be willing to take an active role in the investment process.
C)
Moore has little to no familiarity with risk taking and will tend to be more cautious in her investment approach.


Wealth acquired through inheritance could indicate an individual who has less familiarity with risk taking activity. Given her other personality traits, it appears unlikely that Moore will want to take an active role in the investment process and/or knowledge. She enjoys taking orders.
作者: prashantsahni    时间: 2012-3-23 11:21

Jim Thamen, CFA, recently received an assignment from his supervisor Andy Stone, CFA, to prepare a proposal for managing Ellen and Joe Swathman’s investment portfolio. Ellen, 62, and Joe, 65, recently inherited $2,500,000 from Ellen’s eccentric uncle, Daniel, and wish to invest their money wisely. The Swathmans have two grown children, Marcus, 30, and Sue, 27, who are financially independent from their parents. Although both Marcus and Sue are married, the Swathmans do not have any grandchildren.
For the past 20 years, Ellen has worked as a legal secretary for a regional law practice that specializes in professional malpractice, product liability, and worker’s compensation litigation. Joe is nearing retirement age at the local rock quarry he co-founded with a high school classmate almost 40 years ago. Although the rock quarry has not provided the Swathmans with a large amount of excess discretionary income, they have been able to provide themselves and their children a comfortable living. Joe and his partner Ed Small have executed a buy-sell agreement and maintain life insurance to fund a buy-out in the event of the untimely death of either. Although Ellen is planning to retire within 9 to 12 months, Ed wants to continue working at the quarry for a few more years.
The Swathmans are in relatively good health, have adequate health insurance, property and casualty, disability, liability, and life insurance. All consumer debts have been paid. They plan to spend approximately $200,000 over the next year renovating their home in preparation for retirement.
Thamen recorded the following statements made by Joe Swathman in a recent meeting:

1. “Ellen and I do not consider ourselves wealthy by any measure. Although the inheritance doubles our net worth, I know plenty of others with substantially greater retirement accounts. Besides, we have a quite a bit tied up in the business. On top of that, we will probably live another 25 years. So I think we are average risk-takers.”
2. “Ellen’s work has made her sensitive to potential property and casualty or liability losses. She leaves the investment decisions up to me, but says that we should be careful.”
3. “I had a great return with Netshopper stock and sold it too early. I bought it at $1.25. Last year when they announced a distribution deal with Nike the stock jumped to $8.75 so I sold. It’s still going strong, as both their sales model and management team are winners. Yesterday, I checked and it closed at $26.00.”
4. “I've been following a stock called Computrol which was projected to hit $42.50. New information came out from the company with predictions it should hit $85.00 but analysts predicted it will only hit $65.”

A week later, Thamen is trying to determine the appropriate dynamic asset allocation strategy for the Swathman portfolio given the economic outlook, capital market conditions, and the Swathman’s risk and return objectives. He consults his supervisor, Andy Stone, to discuss it.
Thamen begins by stating that “a buy and hold strategy outperforms a constant mix strategy in a trending market and underperforms the constant proportion portfolio insurance strategy (CPPI) in a flat, but oscillating market."
Stone replies: “I agree that a buy and hold strategy outperforms a constant mix strategy in a trending market but it also outperforms the CPPI strategy in a flat, but oscillating market."
In formulating an investment policy statement for the Swathmans, Thamen decides to develop a brief situational profile for his clients. Which of the following best represents the situational risk profile for the Swathmans?
A)
With respect to source of wealth, measure of wealth, and age, Joe Swathman's statements and the additional supporting information indicate below-average to average risk tolerance.
B)
With respect to source of wealth, measure of wealth, and age, Joe Swathman's statements and the additional supporting information indicate an overall average risk tolerance.
C)
The Swathman’s substantial net worth, the financial independence of their children, and the fact that the Swathman’s have no grandchildren to provide for in the future indicate an above-average to aggressive risk tolerance.

The size of their assets in the context of their age (time horizon), suggests the Swathman’s are unlikely to exhaust their savings during retirement. Thus, their financial situation indicates an above-average ability to incur risk. In contrast, Joe's entrepreneurial background (increased risk tolerance), statement about them being of average risk tolerance, his statement about Ellen saying they should be careful (below average risk tolerance), adequate insurance, and no debt indicates they manage their finances in a responsible manner. Hence their statements and background reflect an average to some what below-average willingness to take risk leaning more towards average. Overall their risk tolerance would be average based on their average willingness to take risk. On the exam you would not want to give a range of risk tolerances but instead state a single level of risk tolerance. For example state something like:
In this particular case of the Swathman's their asset base is not large enough to average the two risk tolerances of ability and willingness together and recommend counseling to reconcile the two. You would instead defer to the lower level of risk tolerance which is their willingness. (Study Session 4, LOS 10.a)
Thamen understands that behavioral finance topics are becoming more important when attempting to better understand the relationship between portfolio manager and client. Which of the following behavioral investor traits were exhibited in Swathman's statements 1-4?
A)
Frame dependence and familiarity.
B)
Representativeness and loss aversion.
C)
Regret and anchoring.


Only statements 3 and 4 describe behavior investor traits. Statement 3 is describing regret where the feeling in hindsight is associated with making a bad decision. Statement 4 is describing anchoring which is the inability to fully incorporate the impact of new information on projections. (Study Session 3, LOS 8.b)
Thamen starts formulating the risk tolerance portion of the investment policy statement. He knows it is important to consider both the willingness and ability to take risk. Which of the following generally has the most impact on an individual’s ability to take risk?
A)
Portfolio size and time horizon.
B)
Liquidity requirements and tax considerations.
C)
Liquidity requirements and portfolio size.


The ability to incur risk is determined by the size of an investor’s portfolio relative to his goals, the time horizon, the importance of the investment goals and the amount of volatility the portfolio can sustain without jeopardizing the goals. Other constraints (taxes, liquidity needs, etc.) may impact both the ability and willingness of and individual to take risk but are not generally considered to be as important as time horizon and portfolio size. (Study Session 4, LOS 10.j)
Regarding the comments by Thamen and Stone about the different dynamic asset allocation strategies:
A)
Stone is correct on Buy and Hold, but incorrect on CPPI; Thamen is correct on both Buy and Hold and CPPI.
B)
Stone is incorrect on both Buy and Hold and CPPI; Thamen is incorrect on Buy and Hold and correct on CPPI.
C)
Stone is correct on both Buy and Hold and CPPI; Thamen is correct on Buy and Hold and incorrect on CPPI.


Stone's statement is correct. The Buy and Hold strategy outperforms a Constant Mix strategy in a trending market and outperforms the CPPI strategy in a flat but oscillating market. Thamen was right about Buy and Hold but wrong on CPPI.
The Constant Mix strategy outperforms a comparable Buy and Hold strategy, which, in turn, outperforms a CPPI strategy in a flat but oscillating market.
The CPPI strategy outperforms a comparable Buy and Hold strategy, which, in turn, outperforms a Constant Mix strategy in trending markets. (Study Session 16, LOS 40.h)

Thamen wants to incorporate the information ratio in the portfolio management process. Which of the following statements best describes the information ratio?
A)
The information ratio uses tracking error in the numerator of the equation which represents the standard deviation of monthly alphas.
B)
The information ratio shows the relationship between the manager's alpha and the standard deviation of alpha.
C)
The lower the information ratio, the more likely it is that a manager's performance is the result of skill rather than luck.


The information ratio is used to determine if a manager's alpha is a result of mere chance, or the manager's skill. It shows the relationship between the manager's alpha and the standard deviation of alpha (tracking error): information ratio = alpha / tracking error. (Study Session 17, LOS 41.p)
Thamen has been reading about the benefits of using Monte Carlo approaches in retirement planning. Which of the following is NOT a correct statement with regard to the benefits of using a Monte Carlo approach?
A)
Monte Carlo forecasting techniques result in greater reliability than deterministic techniques.
B)
Monte Carlo techniques often better represent trade-offs between short term risks and long-term goals.
C)
Probabilistic forecasts are often better than point estimates in financial markets.


The results of Monte Carlo techniques are only as good as the inputs used. A weakness of Monte Carlo simulations is the need to pre-specify the distribution of the variables used or rely on historical distributions. (Study Session 4, LOS 10.n)
作者: prashantsahni    时间: 2012-3-23 11:21

Which of the following is NOT determined using situational profiling? Investor:
A)
behavior.
B)
biases.
C)
philosophy.


Situational profiling does not determine investor behavior, but represents an analysis of behavior in determining preferences and biases, as well as philosophy.
作者: prashantsahni    时间: 2012-3-23 11:22

Sheryl Rubenstein is a stunt double in Hollywood. Her studio took out a life insurance policy on her. What method of handling risk is her studio using? Risk:
A)
transference.
B)
reduction.
C)
avoidance.


The studio is using a risk transference method by purchasing life insurance. That way, they will not bear the risk of lost income if she dies while performing a stunt. Instead, they will receive the insurance proceeds.
作者: prashantsahni    时间: 2012-3-23 11:22

Which of the following statements regarding situational profiling is least accurate?
A)
Situational profiling considers an individual's preferences, economic resources, goals, and desires.
B)
With situational profiling, the source of an investor's wealth is considered an indicator of the investor's risk tolerance.
C)
When properly used, situational profiling will provide a great degree of insight into an investor's preferences, economic situation, goals, and desires.


Due to the extensive number of possible individual situations, situational profiling must be applied cautiously. It should be applied as only an initial step in developing an understanding of an individual’s preferences, economic situation, goals, and desires.
作者: prashantsahni    时间: 2012-3-23 11:23

An investor’s source of wealth is often considered important in determining attitudes towards risk taking. Which source of wealth is considered commensurate with greater risk tolerant profiles?
A)
Passively acquired sources of wealth.
B)
Actively acquired sources of wealth.
C)
Inherited sources of wealth.


Actively acquired sources of wealth are often associated with entrepreneurial or other risk taking activities. Individuals with actively acquired sources of wealth are often considered to have taken risk and know and understand what it means to take risks in order to create wealth.
作者: prashantsahni    时间: 2012-3-23 11:23

Situational profiling often uses measures of wealth in determining investor risk preferences. Which of the following is the best definition for measure of wealth within a situational profiling context? The:
A)
absolute amount of wealth held.
B)
amount of wealth held in the stock market.
C)
perceived amount of wealth held.


The amount of wealth important to an investor in a situational profile is the amount of wealth perceived as large or small by the investor. If the investor perceives his amount of wealth to be large, he may be more tolerant of risk taking activities. If the amount of wealth is perceived to be small, the investor may be less tolerant of risk taking activities.
作者: prashantsahni    时间: 2012-3-23 11:24

Andirah Wang is a new client of Willowtree Investment Advisors (Willowtree). As part of her initial meeting with her advisor, Anita Reinholt, CFA, Wang completed a questionnaire designed to profile her personality type. The results indicated that she is a person who has a conservative investing nature, but is confident in her own ability to research investment options in a careful, systematic manner.
Reinholt believes in modern portfolio theory (MPT), but after years of experience knows that an individual’s investment preferences and decisions are not always congruent with MPT. She has become increasingly interested in the tenets of behavioral finance theory in hopes that it will help her understand each client’s motivations and biases. When meeting with prospects or clients, she is careful to document comments and observations relative to the portfolio management process. Reinholt recorded the following statements made by Wang during the initial consultation:
Reinholt is considering the appropriate risk and return objectives for Wang’s account. Wang said that she would like a “moderately aggressive” portfolio. Upon reviewing her balance sheet, however, Reinholt notes that Wang already has a significant allocation to a few high-risk securities. In addition she has some other illiquid and personal use assets, such as her residence, a time share condominium, and an interest in a local miniature golf course. Relative to her stated spending and retirement goals, her total net worth appears to not be adequate to meet those goals.The analysis of Wang’s personality questionnaire indicates that she most likely is a:
A)
individualistic investor.
B)
methodical investor.
C)
cautious investor.


Wang’s systematic research, confidence in her own ability and conservative nature place her in the general category of methodical investors. Note that cautious investors are the most risk averse and that individualistic investors tend to be more aggressive. (Study Session 4, LOS 10.e)
Statement 1 by Wang is reflective of which of the following basic principles of the behavioral finance investment framework?
A)
Loss aversion.
B)
Asset integration.
C)
Asset segregation.


Asset segregation is the tendency to evaluate a manager or investment in isolation instead of measuring the impact on the overall portfolio. (Study Session 4, LOS 10.b)
The statement by Wang about Pharmitrol is most reflective of which of the following behavioral tendencies?
A)
Familiarity.
B)
Overconfidence.
C)
Anchoring.


Wang is overconfident about the information she has about Pharmitrol’s prospects and is making an unjustified bet. She doesn’t realize she doesn’t have all the information necessary to form an unbiased projection. Anchoring refers to the inability to fully incorporate (adjust) the impact of new information on projections. Familiarity is when investors invest in securities they are familiar with such as their own company’s stock or domestic versus international equities. (Study Session 3, LOS 9.b)
Which of the following is NOT one of the behavioral finance traits that leads to market inefficiency? Investors:
A)
all have the same information and interpret it the same way.
B)
think a well run company will be a good investment.
C)
are overconfident in their ability to interpret information and predict performance.


Market efficiency assumes all investors have the same information, interpret it the same way, and make the same forecasts.  Some behavioral finance traits can lead to market inefficiencies such as representativeness, anchoring-and-adjustment, loss aversion, frame dependence, and overconfidence. Representativeness can take many forms and can be characterized as any time an investor bases expectations for the future on some past characteristic. Anchoring-and-adjustment refers to the inability to fully incorporate the impact of new information on previous projections. Loss aversion can lead to investors holding on to a losing stock too long or to increased risk seeking behavior to recover from a loss. Frame dependence refers to investors' tendency to frame their tolerance on the current direction of the market or in the context of the information received rather than on its own merits. Overconfidence is when people place too much confidence in their ability to predict resulting in unjustified bets. (Study Session 4, LOS 10.c)
For understanding an individual’s preferences, goals and desires, situational profiling:
A)
places individuals into categories according to sources of wealth and level of risk aversion.
B)
is superior to psychological profiling.
C)
places individuals into categories according to stage of life and economic circumstances.


Situational profiling can enhance an advisor’s understanding of an investor’s preferences, goals, and desires by categorizing individuals according to sources and measures of wealth as well as stage of life. (Study Session 4, LOS 10.b)
Which of the following statements about Wang's ability and willingess to take on risk is most accurate? Wang’s
A)
willingness to take risk is more important than her ability to take risk.
B)
ability to take risk is determined by her time horizon and portfolio size.
C)
willingness and ability to take risk are incongruent therefore Rineholt should defer to Wang’s desire for a moderately aggressive portfolio.


Willingness to take on risk is the investor's own personal view of their level of risk aversion. Ability to take on risk is determined by several factors such as length of lifespan and portfolio size relative to goals. It is usually best to defer to a person's willingness to take on risk unless a conflict arises and their willingness is greater than their ability. Under the current circumstances, it appears that Wang’s stated risk tolerance is not only incongruent with her economic status, but is also in conflict with her personality profile. Rinehart should meet with Wang for education purposes and to explore the inconsistencies. (Study Session 4, LOS 10.j)
作者: prashantsahni    时间: 2012-3-23 11:24

Which of the following is a reason why psychological profiling is important for understanding individual investor behavior? Investors:
A)
are assumed to only select portfolios that maximize a return for a given level of risk.
B)
focus on individual asset risk/return characteristics as well as how the individual asset interacts with other assets in the portfolio.
C)
are loss averse.


Psychological profiling is important because investors tend to exhibit certain psychological characteristics which are not rational and are not consistent with modern portfolio theory. One of these psychological characteristics is loss aversion, which means that investors would prefer larger uncertain losses to smaller certain losses (risk seeking behavior). The concept of loss aversion conflicts with the assumption of risk aversion under modern portfolio theory, which says that investors minimize risk for a given level of return. Note that the other answer choices are all assumptions under modern portfolio theory (MPT).
作者: prashantsahni    时间: 2012-3-23 11:25

Steve Smith is 55 years old. He has just been promoted to VP of manufacturing of a well established manufacturing conglomerate. Recently, Smith received a substantial inheritance from a wealthy relative. Given this information, how would Smith be classified along a risk tolerance spectrum?
A)
Not enough information to tell.
B)
Low-to-moderate.
C)
Moderate-to-high.


Steve Smith could be classified on the low-to-moderate range of a risk tolerance spectrum. His age classifies him as getting closer to retirement. His sources of wealth have been attained through relatively passive means (inheritance and well-established conglomerate). His perception of wealth, however, may be high given the recent inheritance and may indicate a moderating risk stance.
作者: prashantsahni    时间: 2012-3-23 11:26

Kent Andling is 55 years old and recently sold his high tech manufacturing company, which was started in his father’s basement 35 years ago. Andling’s two children are grown and have been featured in recent entrepreneur magazine articles as up and coming entrepreneurs. How would Andling be classified given this brief profile?
A)
Not enough information to tell.
B)
Low-to-moderate risk tolerant.
C)
Moderate-to-high risk tolerant.



Although Andling is approaching the latter stage of life, his participation as an entrepreneur of a high-tech manufacturing firm indicates knowledge of risk-taking activities. Apparently, he has brought up his children to understand risk-taking activities, too. These factors indicate a moderate-to-high risk tolerant profile.
作者: prashantsahni    时间: 2012-3-23 11:26

Dan Newsmith is 35 and was recently promoted to regional sales manager of a national trading company. Newsmith has no credit card debt, he does not have an automobile loan, and his home is mortgage free. Newsmith’s salary and bonus more than adequately cover living expenses. Given this brief profile, classify Newsmith’s ability to tolerate risk when investing excess funds.
A)
Low-to-moderate risk tolerance.
B)
Moderate-to-high risk tolerance.
C)
Not enough information to tell.


Newsmith’s stage of life (young age) and low requirement for current liquidity (no debts, living expenses covered) indicate a situational profile to tolerate moderate-to-high risk.
作者: prashantsahni    时间: 2012-3-23 11:26

In creating an investment policy statement, a portfolio manager needs to be aware that an investor’s psychological profile may impact:
A)
neither the investor’s risk tolerance nor their return objective.
B)
the investor’s risk tolerance and return objective.
C)
the investor’s risk tolerance only.


Psychological profiling is important for understanding individual investor behavior because defense mechanisms of the brain often cause investors to violate standard finance assumptions (MPT), resulting in irrational decisions. These psychological tendencies can impact client preferences, goals and constraints. When constructing an investment policy statement, these psychological preferences can have a direct impact on a client’s willingness to take risk as well as their desired return.
作者: prashantsahni    时间: 2012-3-23 11:27

Amy Tillman and Josh Northrup are portfolio managers for Parquet Asset Management. Tillman and Northrup are discussing the process their firm uses to identify an individual investor’s objectives and constraints, and ultimately construct an investment policy statement. Tillman makes the following statements to Northrup during the course of their conversation:
Statement 1:Since investors tend to exhibit irrational, psychological characteristics, the investor should be educated so that these characteristics are put aside and rational expectations can be the sole determinant of the investor’s risk and return objectives.
Statement 2: Investors that exhibit the characteristic of asset segregation may tend to take on more risk than necessary in their portfolios.

With regard to Tillman’s statements:
Statement 1Statement 2
A)
CorrectIncorrect
B)
CorrectCorrect
C)
IncorrectCorrect


Psychological/behavioral patterns can have a significant influence on an investor’s decision making process. Statement 1 is incorrect – the role of a portfolio manager is not to eliminate the effect of these psychological patterns on decision making, but to know and understand the investor’s situation, and use these psychological characteristics when discussing risk and return objectives with the client. The client may need education, but the psychological characteristics a client has should be a key consideration when setting risk and return objectives. Statement 2 is correct. Asset segregation refers to focusing on individual assets instead of evaluating the asset’s impact on the portfolio. Asset segregation tends to lead to the investor taking on more risk than is necessary in their portfolio – the investor may dismiss a particular asset because “it is too risky” however, in a portfolio context, the asset would actually reduce the risk of the portfolio as a whole.
作者: prashantsahni    时间: 2012-3-23 11:27

When investors choose riskier investments over less risky choices in the domain of losses, they exhibit which of the following characteristics?
A)
Risk aversion.
B)
Asset segregation.
C)
Loss aversion.


When investors chose larger uncertain losses over smaller losses that are certain, they exhibit loss averse behavior.
作者: kim226    时间: 2012-3-23 11:29

Focusing on asset-by-asset characteristics is an example of asset:
A)
assimilation.
B)
integration.
C)
segregation.


Asset segregation occurs when investors focus on asset-by-asset characteristics rather than how assets fit into an overall portfolio.
作者: kim226    时间: 2012-3-23 11:29

Behavioral finance indicates investors do NOT exhibit which of the following?
A)
Biased expectations.
B)
Asset integration.
C)
Asset segregation.


Behavioral investors exhibit biased expectations and asset segregation, as well as loss aversion. Rational investors exhibit asset integrations.
作者: kim226    时间: 2012-3-23 11:29

The concept of behavioral finance has begun to be employed in investment management. Which of the following statements is CORRECT regarding behavioral finance and its potential affect on a client’s risk objectives? Behavioral finance implies that investors are:
A)
loss averse, rather than risk averse, and this may have an impact upon the investors' willingness to take risk.
B)
risk averse, rather than loss averse, and this may have an impact upon the investors' willingness to take risk.
C)
loss averse, rather than risk averse, and this may have an impact upon the investors' ability to take risk.


Behavioral finance suggests that investors may view risk of loss differently from risk of gain (i.e., that they are more risk seeking in the domain of losses). This is known as being loss averse. The investor’s psychological profile can affect their willingness to take risk. However, the ability to take risk is a more objective measure of what is appropriate given the client’s situation.
作者: kim226    时间: 2012-3-23 11:30

Which of the following sets of assumptions is most relevant to the behavioral finance investment framework? Investors are:
A)
loss averse, investors exhibit biased expectations, investors construct portfolios via asset segregation.
B)
risk averse, investors demonstrate rational expectations with respect to investment choices, investors construct portfolios consistent with asset integration.
C)
risk averse, investors exhibit biased expectations, investors construct portfolios via asset segregation.


Behavioral finance assumes that:
作者: kim226    时间: 2012-3-23 11:30

Which of the following statements about behavioral finance is CORRECT?
A)
Investors are more concerned with portfolio construction versus individual assets' characteristics.
B)
Behavioral finance assumes investors exhibit character traits different than those stipulated by traditional finance.
C)
Investors realize their lack of experience in forecasting.


The three major characteristics exhibited by traditional finance are risk aversion, rational expectations, and portfolio diversification. Behavioral finance assumes investors exhibit three other major characteristics which are loss aversion, biased expectations, and they construct portfolios via asset segregation. Most individual investors overestimate their ability to forecast the future.
作者: kim226    时间: 2012-3-23 11:30

Investor behavior and psychology allow classification according to risk preferences. The particular technique associated with this classification exercise is termed personality:
A)
assessing.
B)
typing.
C)
testing.


The particular technique is termed personality typing. Personality typing is an attempt to help both the investor and manager get a better understanding of an investor’s risk tolerance characteristics. Although no classification can accurately describe all investors, personality typing does give an indication to risk tolerance.
作者: kim226    时间: 2012-3-23 11:31

Behavioral finance models of asset pricing take into account economic considerations and add:
A)
individual selections.
B)
security specific characteristics.
C)
personal preferences.


In a world that accounts for behavioral factors, personal preferences are added to asset pricing models. Not only do basic economic relationships impact security prices but so do personal preferences. Investors’ likes and dislikes enter the pricing function.
作者: kim226    时间: 2012-3-23 11:31

Which of the following statements about appropriate investment planning is CORRECT?
A)
Individual investment planning could include the consultation of counsel.
B)
An appropriate investment objective for a typical 23-year-old investor is a low-risk strategy, such as capital preservation.
C)
It is not a good idea to get too specific when constructing an investment policy statement.


Consultation with tax counsel could be recommended for complicated tax situations and an estate counsel for estate issues. A 23-year-old investor should be more concerned about capital appreciation, not preservation. Investment policy statements are more useful the more specific they are.
作者: kim226    时间: 2012-3-23 11:32

Investor psychology indicates investors will form portfolios via which method?
A)
Pyramiding.
B)
Triangulating.
C)
Integrating.


Pyramiding is the concept applied to investor portfolio formation in which portfolios are created by matching layers of assets to specific goals. Each layer of assets is not particularly evaluated within an overall portfolio context.
作者: kim226    时间: 2012-3-23 11:33

Most of the short questionnaires used by investment professionals to determine client risk tolerance levels consist of:
A)
comments about investment scenarios.
B)
comments about non-investment scenarios.
C)
questions that focus on how the individual would deal with the professional if he/she lost their money.


The questions tend to focus on self-evaluative statements and comments on different non-investment scenarios.
作者: kim226    时间: 2012-3-23 11:33

Which of the following statements about personality typing for individual investors is CORRECT?
A)
An ad hoc approach to personality typing is to administer a short questionnaire.
B)
It is difficult to render precise categorizations of broad groups of investors.
C)
Subjective assessments of investors are easy to standardize.


As opposed to precise categories, broad classifications are easy to derive. The more subjective the assessment, the more difficult to standardize. An ad hoc approach would be a less formal approach based on the investment professional’s interview with investors.
作者: kim226    时间: 2012-3-23 11:33

Which of the following statements about risk and decision-making styles would least likely appear in a personality typing questionnaire?
A)
I do not like contact sports, like football.
B)
I typically lose sleep when the market is down.
C)
My favorite subject in school was mathematics.


Most investor questionnaires focus on self-evaluative statements and comments on different non-investment scenarios.
作者: kim226    时间: 2012-3-23 11:34

The results of a personality typing questionnaire can be used to classify investors according to risk tolerance and how decisions are made. The classification that represents the most risk averse investor would be a(an):
A)
cautious investor.
B)
methodical investor.
C)
spontaneous investor.


Cautious investors are those investors most averse to portfolio losses. These investors are the most risk averse investor classification and prefer assets with low probability of loss.
作者: kim226    时间: 2012-3-23 11:34

The results of a personality typing questionnaire can be used to classify investors according to risk tolerance and how decisions are made. The classification that represents investors most independent in their decision making is:
A)
methodical investors.
B)
individualist investors.
C)
spontaneous investors.


Individualist investors represent the most independent investor classification. These investors are confident in their decisions and are not deterred from making risky investment decisions.
作者: kim226    时间: 2012-3-23 11:35

The results of a personality typing questionnaire can be used to classify investors according to risk tolerance and how decisions are made. The classification that represents investors suffering the highest trading costs is:
A)
spontaneous investors.
B)
methodical investors.
C)
individualist investors.


Spontaneous investors are those investors desiring to have the latest, hottest investment idea in their portfolio. Frequent portfolio adjustments and high turnover are characteristics of investment decisions made by spontaneous investors. High trading costs usually negate returns generated by the hot ideas.
作者: kim226    时间: 2012-3-23 11:35

Gary Daly is a retired schoolteacher who invests most of his money in U.S. Treasury bonds and notes. He has often stated that in times of crisis, he feels that it is better to be safe than sorry. In terms of behavioral finance, Daly is exhibiting which personality type?
A)
Spontaneous.
B)
Methodical.
C)
Cautious.


Daly’s personality type is a “cautious” investor who has a strong desire for financial security. Daly is both risk and loss averse and would prefer very safe investments. As such, investors prefer to rely on their feelings to make important investment decisions.
作者: kim226    时间: 2012-3-23 11:35

Which of the following personality types applies to investors who make investment decisions based on facts as opposed to their feelings or intuitions?
A)
Methodical and cautious.
B)
Spontaneous and methodical.
C)
Methodical and individualist.


Methodical investors research markets, industries, and firms for potential investments and are constantly on a mission to improve their analytical decision-making skills. Individualists also research their investment opportunities and exhibit independent thought when making investment decisions. Individualists are very confident, and this makes them capable of questioning inconsistencies in either recommendations or conclusions made by others. Individualist investor types tend to be less risk averse than methodical investors.
作者: kim226    时间: 2012-3-23 11:36

Which of the following statements concerning an investor’s policy statement is least accurate? The investment policy statement:
A)
should represent the long-term objectives of the investor.
B)
provides guidance to the investment advisor regarding issues of appropriateness of decisions.
C)
determines the client's ability and willingness to take risk.


The investment policy statement does not determine the client’s ability and willingness to take risk. These are a function of the client’s situation and personality type. The IPS should, however, discuss the client’s willingness and ability to take risk.
作者: kim226    时间: 2012-3-23 11:36

Clients can benefit from an investment policy statement which:
A)
provides for legal recourse due to portfolio underperformance.
B)
dictates how to spend extra liquidity.
C)
provides long-term investment discipline deterring short-term knee-jerk portfolio adjustments.


The purpose of an investment policy statement is to provide long-term discipline in investment decision making. The investment policy statement protects against short-term portfolio adjustments resulting from investor panic or overconfidence.
作者: kim226    时间: 2012-3-23 11:37

An investment policy statement does NOT provide which of the following?
A)
Guaranteed investment returns.
B)
Long-term investment decision making guidelines.
C)
Weighting ranges for asset allocation.


An investment policy statement does not provide guaranteed investment results.
作者: kim226    时间: 2012-3-23 11:37

An investment policy statement benefits investment advisors because it provides:
A)
guaranteed legal protection against errors in omission lawsuits.
B)
an understanding of the advisory relationship between manager and client.
C)
guidelines for capital market expectation formations.


The investment policy statement provides an understanding of the relationship between manager and client. The investment policy statement does not provide guaranteed legal protection or how to form capital market expectations.
作者: kim226    时间: 2012-3-23 11:38

Larry Smith, CFA, is the new equity portfolio manager for a socially responsible mutual fund. The investment policy statement stipulates which stocks do not meet the fund’s definition of socially responsible. Because Smith was new to the fund, he did not personally agree to the stocks that were forbidden. Subsequently, he included a stock into the portfolio that was on the restricted list. Which of the following statements is least accurate?
A)
Smith did not violate the investment policy statement.
B)
Smith was responsible for reading and understanding the investment policy statement prior to stock selection.
C)
Smith is to be held responsible for the investment policy statement even though it was written before he was employed at the fund.


Smith is in clear violation of the fund’s investment policy statement. Just because he is new to the fund, does not exempt him from following the statement. Most investment policy statements contain a stated review process that provides direction for dispute resolution.
作者: kim226    时间: 2012-3-23 11:39

Bill Litner, CFA has been hired by Terrific Tires, Inc. (TTI) to counsel TTI’s employees concerning their investments. Jill Fisher is one of the employees and she approaches Litner to help her manage her personal finances. Fisher is 36, and earns $30,000 per year from her job at TTI. She rents an apartment, has about $5,000 in savings, and $3,000 in credit card debt. She is divorced with a 12-year old child and does not receive alimony or child support. A previous analysis performed by a financial expert from the company had predicted that Fisher’s defined benefit pension plan would be able to support her in her retirement at her current standard of living. TTI’s medical coverage is very good and will cover her in her retirement. Although Fisher has no other source of income, she recently inherited approximately $2 million in cash from a distant relative, and that is the reason she has approached Litner. After an initial consultation, Fisher asks Litner to be her investment advisor. As a first step, Litner attempts to assess Fisher’s personality type with the use of a questionnaire. The questionnaire indicates that she is conservative in that she will want to know with some certainty the lower limit of the value of her portfolio in the future. Also, she wants to be informed about every aspect of the investment process, e.g., get detailed information concerning every investment recommendation that Litner makes for her portfolio before approving it. Part of the questionnaire attempts to determine how open Fisher is to changes. The questionnaire’s results indicate that she is willing to adjust and sell positions readily, even at a loss, if new information indicates a change is needed. Litner intends to use the information from the questionnaire to compose an investment policy statement (IPS). He feels that he should compose the outline of the statement in a consultation with Fisher. When Litner asks Fisher to meet with him to compose an IPS, Fisher tells Litner that she does not see the need for such a statement. She says that she thinks that Litner’s credentials are excellent. Furthermore, since she has indicated that she intends to review in depth all of Litner‘s recommendations, having such a statement is unnecessary. Litner attempts to gather the information he needs through a series of informal conversations. During one conversation, he gleans from Fisher her returns expectations. During a later conversation, he questions her concerning her attitudes towards risk and other tastes and preferences. Fisher asks Litner to send her information on Litner’s first recommendation for her $2 million portfolio. She asks that he send to her such information one at a time for her to review so she can build her portfolio steadily one investment at a time. Fisher tells Litner at the outset that she wants to avoid frequent rebalancing and turnover because she has heard the costs and tax consequences of rebalancing and turnover can have a significant and negative impact on the returns of the portfolio. Litner’s insistence on an investment policy statement (IPS) is:
A)
justified because it is beneficial for both Fisher and Litner.
B)
not justified, and it should be considered optional.
C)
justified because it is beneficial for Litner but not necessarily for Fisher.


An IPS benefits both the client and the advisor. For example, it benefits the client because it sets guidelines for every recommendation by the advisor and it benefit’s the advisor because it protects the advisor in cases where investments do not perform exactly as expected. (Study Session 4, LOS 10.h)
Given Fisher’s age and her source of wealth, Fisher’s familiarity with risk taking is:
A)
most likely minimal, and she should be willing to accept a lower than average level of risk.
B)
most likely minimal, but she should be willing to accept a higher than average level of risk.
C)
probably high given her lifestyle, and she should be willing to accept a higher than average level of risk.


Persons who acquire their wealth through a windfall tend to have minimal familiarity with risk taking. Given that her age is less than 40, she should be able to accept a higher than average level of risk. (Study Session 4, LOS 10.a)
The use of a questionnaire to assess Litner’s personality type is:
A)
a standard approach, and Fisher appears to be a methodical investor.
B)
a standard approach, and Fisher appears to be a spontaneous investor.
C)
a standard approach, and Fisher appears to be an anchoring investor.


Such a questionnaire is widely used for just his purpose. Given that Fisher wants to learn about each investment before she invests indicates she is methodical. (Study Session 4, LOS 10.f)
Fisher’s desire to create her portfolio one asset at a time is:
A)
not unusual and is indicative of the role of investor psychology in investment choices.
B)
very unusual, but it is an acceptable method to create a portfolio for an individual investor, and Litner should follow Fisher‘s preferences.
C)
very unusual, and indicates that Litner should not take Fisher on as a client.


Fisher’s desire to compose a portfolio one position at a time is fairly typical of unsophisticated investors. Litner should try to convince Fisher of the benefits of taking a portfolio approach. (Study Session 4, LOS 10.d)
Fisher’s fear of the costs associated with rebalancing and turnover are:
A)
justified for rebalancing but not for turnover.
B)
not justified for rebalancing but are justified for turnover.
C)
justified for both rebalancing and turnover.


Rebalancing and turnover can both increase transactions costs and can have unfavorable tax consequences. (Study Session 4, LOS 11.f)
Litner’s attempt to gather information for the IPS through a series of conversations, as described, is:
A)
one of many appropriate ways for gathering information.
B)
recommended because it allows Litner to assess the accuracy of the information for consistency.
C)
not recommended and deemed inappropriate.


It is not appropriate because planning return expectations should take place concurrently with risk tolerance discussions. (Study Session 4, LOS 10.h)
作者: kim226    时间: 2012-3-23 11:39

Which of the following represents the process involved in creating an investment policy statement?
A)
Evaluate objectives, capital market expectations, and investment strategies.
B)
Evaluate objectives and constraints and combine them with capital market expectations.
C)
Determine constraints and formulate investment strategies.


Objectives and constraints are evaluated, and when they are combined with capital market expectations, the investment policy statement is created.
作者: kim226    时间: 2012-3-23 11:39

Which of the following statements regarding the investment policy statement is least accurate? An individual’s investment policy statement:
A)
is exactly the same as that of an institution's.
B)
differs from an institution's in that taxes play a more prominent role.
C)
differs from an institution's in that time horizon plays a more prominent role.


An individual’s investment policy statement differs from an institution’s in that time horizon, taxes, and unique circumstances play a more prominent role. The overall process is the same.
作者: kim226    时间: 2012-3-23 11:40

Sam and Ellen Smithson have both recently retired after numerous years of working as a heart surgeon and pediatrician, respectively. The Smithsons were not able to have children, so they devoted their lives to helping others through their professional and charitable activities. Sam was involved in the local “Pantry Pass,” an organization that gathered food items for distribution to the needy. Ellen was involved in her local “Housing for the Homeless,” chapter. Both served their respective organizations in direct service and board member capacities.
The Smithsons’s professional activities generated high incomes that were beyond living expenses, which could easily be described as comfortably frugal. Over the years, a tax deferred retirement savings account in the amount of $4,000,000 has been accumulated. During discussions with Marcus Medley, CFA, Sam and Ellen mentioned the following:
Medley has taken the Smithsons’ personal statements, as well as economic activity forecasts, and is attempting to formulate an investment policy statement, as well as recommend some general asset allocation guidelines.
Medley first decides to classify the Smithsons along general investment personality typing guidelines. Which of the following personality types best describes the Smithsons?
A)
Cautious.
B)
Methodical.
C)
Individualist.


The Smithsons have indicated they are somewhat risk averse. Additionally, statements referring to investment decisions being made parallel with feelings, and not necessarily those based on thinking, are congruent with a cautious personality type.
In formulating the risk objective statement, Medley must formalize the Smithsons according to their ability and willingness to take on risk. Regarding the Smithsons’ risk profile, Medley appears able to make the direct statement that the Smithsons are:
A)
able and willing to take above average risk.
B)
able to take above average risk, but are only willing to take below average risk.
C)
only able to take below average risk, but are willing to take above average risk.


Given the data regarding the Smithsons’ situation, it appears that they are able to take above average risks (large absolute and relative sized portfolio), but only willing to take below average risks (“neither of us has a high tolerance for risk”).
One additional factor Medley believes important is the Smithsons’ stage of life. Which of the following best represents the Smithsons’ stage of life?
A)
Early.
B)
Latter.
C)
Mid.


The Smithsons are obviously in the latter stage of their life cycle. Even though both appear to have a long life left, they are retired and are looking at how their legacy will be remembered after they die.
According to the Smithsons’ risk profile created by Medley, a general asset allocation that would fit well with their objectives is:
A)
an aggressive growth asset allocation so that the largest amount of funds will be left to their charities.
B)
a portfolio heavily weighted toward risk-free securities to minimize possibilities of making inappropriate investments.
C)
an asset allocation that focuses on generating a conservative total return to meet not only minimal current needs, but also the objective of maximizing the funds transfer to the charities.


An asset allocation that focuses on total return would appear to best meet the Smithsons’ objectives given the apparent disconnect between ability and willingness to take risk. The total return approach provides an appropriate balance between meeting their retirement needs and providing for the charities.
Which of the following investments would NOT be appropriate in the Smithson's portfolio?
A)
Options.
B)
Commodities.
C)
Municipal bonds.


Since their retirement savings account is tax deferred it would not be appropriate to put a tax free investment such as a municipal bond into an already tax deferred account. Municipal bonds are most effective in the taxable accounts of higher income earners. The other investment choices may be appropriate in the portfolio if added in the appropriate proportions and used to diversify the portfolio reducing the overall risk of the portfolio.
作者: kim226    时间: 2012-3-23 11:40

Desired return objectives are those return levels associated with:
A)
major goals.
B)
secondary goals.
C)
vacation home goals.


Desired return objectives are associated with secondary goals. Desired returns may be lowered if there is a disconnect between risk tolerance and return objectives.
作者: kim226    时间: 2012-3-23 11:41

Risk objectives should be evaluated during which stage of the investment policy statement process? Concurrently with the:
A)
capital market expectations formations.
B)
investment strategy decision.
C)
return objectives.


Discussions of risk objectives should occur simultaneously with those of return objectives.
作者: kim226    时间: 2012-3-23 12:47

Return requirements are those return levels associated with returns needed to meet:
A)
secondary goals.
B)
educational goals.
C)
major goals.


Return requirements are returns needed to attain major goals.
作者: kim226    时间: 2012-3-23 12:48

Which of the following statements distinguishes the ability to take risk from the willingness to take risk? The:
A)
ability to take risk is more qualitative in nature whereas the willingness to take risk can be measured in a quantitative nature.
B)
ability to take risk is more amenable to quantitative measures whereas the willingness to take risk is more qualitative in nature.
C)
willingness to take risk is connected with primary goals and objectives.


The ability to take risk is usually associated with specific goals and time horizons and is more quantitative than willingness to take risk. Willingness to take risk is more subjective from the investor’s perspective and is therefore more qualitative in nature.
作者: kim226    时间: 2012-3-23 12:49

Jessica Paskiet, a portfolio manager for Porthouse Investment Management is drafting an investment policy statement for her new client, Kenneth Moon. Which of the following procedures should Paskiet follow when drafting the risk and return objectives for her client?
Procedure 1:Consider the client’s risk tolerance and return objective separately from one another.
Procedure 2:Focus on the investor’s required returns only, as desired returns are not important when drafting the IPS.

With regard to the procedures Paskiet has proposed:
Procedure 1Procedure 2
A)
IncorrectCorrect
B)
CorrectIncorrect
C)
IncorrectIncorrect


Procedure 1 is incorrect – the process of identifying desired and required returns should take place concurrently – ultimately, the investment policy statement must present a return objective that is attainable within the risk constraints of the portfolio. Procedure 2 is also incorrect – the investment manager should address both required and desired returns in the IPS, although when balancing the return objective with risk tolerance, the investor may have to dismiss less important objectives and focus on required return, putting less emphasis on desired returns.
作者: kim226    时间: 2012-3-23 12:49

Dan Kreuz, age 35, is a supervisor with BHS Consumer Finance and earns an annual salary of $95,000 per year before taxes. His spouse, Szeren Kreuz, age 36, is a marketing manager for a firm specializing in rental property, and earns $55,000 per year. Dan and Szeren recently inherited $800,000 from Szaren’s father’s estate. In addition to their income and their inheritance, the Kreuz’s have accumulated the following assets:
The Kreuz’s annual living expenses are $90,000 per year and their tax rate is 40 percent. After-tax salary increases will offset any future increases in living expenses.

In a discussion with their financial advisor, Joel Douglas, the Kreuz’s express concern about having enough assets for a comfortable retirement. The Kreuz’s make the following comments to Douglas:
After the discussion with Douglas, he goes back to his office to prepare an investment policy statement for the Kreuz’s. He determines that to meet their goals, they will need $2,500,000 in 20 years. Which of the following is the most appropriate description of the risk objective for the Kreuz’s?
Willingness to Take RiskAbility to Take RiskOverall Conclusion
A)
Below AverageBelow AverageBelow Average
B)
Below AverageAbove AverageBelow Average
C)
Below AverageAbove AverageAbove Average


The Kreuz’s indicate a below average willingness to take risk based on their unhappiness with the 2000-2002 bear market in stocks and an unwillingness to accept a decline in the value of their portfolio of more than 10%.
The ability to take risk is best classified as above average. They have a substantial asset base, a long time horizon, and do not depend on their portfolio to meet their living expenses. Their after-tax income is $150,000(1 - 0.4) = $90,000, which exactly covers their living expenses. Also, their required return is equal to N = 20; PV = $1,200,000; FV = $2,500,000; PMT = 0; CPT I/Y → 3.74% on an after-tax basis, which is equal to 3.74 / (1 - 0.4) = 6.23% on a pretax basis, which is a reasonable return for a balanced portfolio.
Overall, with an above average ability and below average willingness, their risk objective is below average as their willingness to take risk dominates their ability to take risk in determining overall risk tolerance. On the exam, if a conflict arises between willingness and ability to take risk, honor willingness to take risk unless doing so would jeopardize the portfolio’s ability to meet investor goals.
作者: kim226    时间: 2012-3-23 12:50

Brad Piasecki is a successful 35 year old executive in the technology industry with a company that is growing rapidly. Piasecki has a pre-tax income of $150,000 per year, and manages to live well below his means. Piasecki is currently saving for both his retirement, which will take place in 30 years, as well as funding his daughter’s college education, which will begin in 15 years. Piasecki’s investment manager has determined that based on contributions to his portfolio, Piasecki requires at a minimum, an 8 percent annualized return on his investments in order to meet his goals. He also states that Piasecki should invest in a diversified stock and corporate bond portfolio that provides total return with an emphasis on capital gains. When his investment manager gives Piasecki his recommendations, Piasecki replies “I have seen too many of my colleagues buy risky stocks and have their portfolios wiped out. I only want to buy Treasury bonds for my portfolio.” Piasecki checks the yields on Treasury bonds, and sees that best yield he can obtain is 4.5 percent. Which of the following would be the best course of action for Piasecki’s investment manager?
A)
Recommend investor education and a reassessment of portfolio objectives since the investor’s view is inconsistent with his goals and ability to take risk.
B)
Invest 50 percent in Treasury bonds and 50 percent in the diversified stock/corporate bond portfolio to provide a balance between Piasecki’s risk tolerances and required return.
C)
Invest in the Treasury bonds since willingness to take risk always supersedes ability to take risk.


Given his age, income, and lifestyle, Piasecki would seem to have a high ability to take risk, which conflicts with his willingness to take risk. Also, his required return cannot be achieved given his willingness to take risk. On the exam, a general rule is to go with client’s willingness to take risk unless doing so would jeopardize the portfolio’s ability to meet the investor’s goals (going ahead and investing in the Treasury bonds would not be an option). In this case, investor education and a reassessment of portfolio objectives is the best option. The client obviously cannot meet both his return requirement and risk tolerance goals at the same time, so something has to change – either the client changes his views on risk through education, or he changes the goals of his portfolio. Taking any of the other two actions would either not meet the required return, or would violate the risk tolerance, so investor education is the key. If you see a conflict like this on the exam, make sure the inconsistency is noted and that you recommend investor education.
作者: kim226    时间: 2012-3-23 12:50

The willingness to take risk is best judged by the:
A)
subjective nature of the perspective investments.
B)
psychological profile of the investor.
C)
financial profile of the investor.


The willingness to take risk is related to the psychological characteristics of investors and is best measured in subjective terms.
作者: kim226    时间: 2012-3-23 12:50

Which of the following statements regarding institutional and individual investors is CORRECT?
A)
Institutions and not individual investors should focus on total return.
B)
Time horizon factors are typically more crucial to individuals than institutions.
C)
Portfolio growth is not important when an individual client is faced with substantial income requirements.


Institutions as well as individuals should consider a total return perspective. Spending objectives usually represent an income component while growth objectives represent a capital gains component. Even though a client may have a significant current income requirement, attention to portfolio growth is also required. The same is true with respect to inflation. One of the distinguishing factors between individual and institutional investors is time horizon. Institutional investors may have infinite lives, but individuals do not.
作者: kim226    时间: 2012-3-23 12:52

The ability to take risk is best judged by:
A)
the time horizon of only short term objectives.
B)
the time horizon of both short- and long-term objectives.
C)
the time horizon of long term objectives.


The time horizon of both short- and long-term objectives will have direct consequences on an investor’s ability to take risk.
作者: kim226    时间: 2012-3-23 12:52

Although legal and regulatory constraints do not usually impact an individual investor’s policy statement, attention must often be paid between two parties of personal trusts. Which parties exhibit the greatest tension in setting investment policy for a personal trust?
A)
Grantor and remaindermen.
B)
Income beneficiary and remaindermen.
C)
Income beneficiary and the trust officer.


A creative tension exists between the income beneficiary and remaindermen listed in a personal trust. Income beneficiaries would like to have as much current income from the trust as possible. Remaindermen wish to have as large of a portfolio passed to them after the income beneficiary dies. The conflict between current income and longer-term portfolio growth is a situation that must be addressed in formulating investment policy for a personal trust.
作者: kim226    时间: 2012-3-23 12:53

Which class of liquidity constraints is usually NOT considered a factor when formulating an individual’s investment policy statement?
A)
Negative liquidity events.
B)
Cash carried on the person.
C)
Ongoing expenses.


The amount of cash an investor carries with them should not impact the investment policy statement. The primary liquidity constraints impacting the long-term policy statement are those cash outflows required in meeting ongoing expenses and negative liquidity events.
作者: kim226    时间: 2012-3-23 12:53

Vivian Collins is a client of ESP Financial Advisors. She presents her situation as follows: Collins is currently a divorced mother to a 5-year-old daughter, Daija. She is 35 years old. She has worked at her current job with the government for the last 13 years, and assumes that she will remain there until retirement and collect her pension. Collins wants to be able to send Daija to the college of her choice. Collins expects her daughter to eventually marry and have children. She would love to be able to leave something to these future grandchildren. How many time horizons does Collins have?
A)
3.
B)
4.
C)
5.


Collins has 4 distinct time horizons. The first is now until the time that Daija enrolls in college. The second is supporting Daija's college education. The third is her remaining years before retirement and after supporting Daija through college. The fourth is retirement. In retirement if a goal is to leave some assets to her grandchildren then the portfolio would need to be managed with that in mind.
作者: kim226    时间: 2012-3-23 12:53

With respect to the constraints portion of an investor’s investment policy statement, issues relating to on-going expenses, emergency reserves, alterations in on-going expenses, and transactions costs are all examples of:
A)
time horizon issues.
B)
unique circumstances.
C)
liquidity issues.


The issues listed in the stem of the question are concerned with the investor’s liquidity requirement.
作者: kim226    时间: 2012-3-23 12:54

Which two constraints greatly impact an individual’s investment policy statement?
A)
Legal/regulatory and unique circumstances.
B)
Time horizon and tax considerations.
C)
Legal/regulatory and liquidity concerns.


Individual investors have finite lives and are taxable entities. Legal/regulatory factors may have an impact, but for the most part, individual investors can invest in almost any manner they please.
作者: kim226    时间: 2012-3-23 12:54

An analyst is developing an investment policy statement for Sally Edgewood, a 48-year old orthodontist with an annual income in excess of $400,000. Edgewood has accumulated an investment portfolio with a current value of $4 million. Her portfolio is concentrated in small capitalization stocks with a bias toward high-tech companies. She has expressed a desire to earn a return equal to the return of 12 percent above the return of the Russell 2000 small capitalization stock index. Edgewood lives well on 50 percent of her annual income. She has always been a ski enthusiast and this year she plans to purchase a second home in the mountains in western Wyoming. This purchase will be mortgaged and require her to make an $80,000 down payment. Edgewood plans to retire at the age of 63 and is currently paying taxes at a rate of 30 percent on both income and capital gains.Which of the following most accurately portrays Edgewood’s overall risk tolerance? Edgewood’s willingness:
A)
to accept risk is average and her ability to accept risk is above average. Thus, her overall risk tolerance is average.
B)
and ability to accept risk is above average. Thus, her overall risk tolerance is above average.
C)
to accept risk is above average and her ability to accept risk is average. Thus, her overall risk tolerance is average.


Edgewood’s ability to assume risk is above average as indicated by the fact that her income is relatively large and exceeds her annual living expenses by a substantial amount. Also, being invested in small, high tech firms is an indication of Edgewood’s above average willingness to accept risk.
Which of the following most accurately describes Edgewood’s tax, liquidity, and time horizon constraints? Edgewood’s overall time horizon is:
A)
long, her tax constraints are significant, and her liquidity needs are high.
B)
long, her tax constraints are significant, and her liquidity needs are low.
C)
short, her tax constraints are significant, and her liquidity needs are low.


Edgewood’s overall time horizon is long—25 years or more—and it consists of two states: pre-retirement and post-retirement. A 30 percent income and capital gains tax is significant. Her liquidity needs are low and can easily be paid out of income.
作者: kim226    时间: 2012-3-23 12:55

When developing an investment policy statement (IPS), which of the following items should be one of the first considerations?
A)
Unique circumstances.
B)
Liquidity.
C)
Return objectives.


When constructing an IPS, the first two considerations deal with objectives: return objectives and risk tolerance. The constraints are dealt with after the objectives have been stated.
作者: kim226    时间: 2012-3-23 12:56

Which of the following parts of an investment policy statement (IPS) is NOT considered a constraint?
A)
Taxes.
B)
Time horizon.
C)
Risk tolerance.


Risk tolerance levels are part of the objectives part of the IPS, not a constraint.
作者: kim226    时间: 2012-3-23 12:56

When constructing an investment policy statement (IPS), which of the following statements would be considered least accurate?
A)
If there are liquidity requirements, the applicable after-tax return will need to be calculated.
B)
One of the distinguishing factors between individual and institutional investors is time horizon.
C)
The use of total return analysis is almost always the wrong way to approach an IPS.


Use of a total return statement is almost never incorrect. Institutional investors may have infinite life but individuals do not. The other statements are true statements with respect to liquidity and time horizon.
作者: kim226    时间: 2012-3-23 12:57

Joanne Sparta is a 48-year old, successful physician who earns in excess of $500,000 per year. She has also been successful speculating on small business startups, which has added an average of $200,000 to her annual income over the last 10 years. Sparta travels extensively. She likes to consider herself someone who lives in the fast lane and possesses refined tastes in both the arts and entertainment. Sparta’s annual expenses, including travel and entertainment, average $375,000. Sparta has no foreseeable liquidity needs, legal, regulatory, or tax concerns, and has no unique circumstances. Which of the following most appropriately describes Sparta’s ability and willingness to bear risk? Sparta is:
A)
willing, but unable to accept risk.
B)
neither able or willing to accept risk.
C)
both willing and able to accept risk.


Based on the information provided, Sparta’s fast life style, speculative activities, and relatively large income in excess of expenses, indicates both a willingness and ability to accept risk.
作者: kim226    时间: 2012-3-23 12:57

The process of elimination can be used to arrive at an individual’s asset allocation. Which step is often considered the first hurdle in the elimination process?
A)
Risk objective.
B)
Return objective.
C)
Liquidity constraint.


The first step in the elimination process is to select those allocations that at least meet the real after-tax total return objective of the investor. Once that step is completed, then other considerations are addressed.
作者: kim226    时间: 2012-3-23 12:58

After selecting allocations based on a return objective criterion, the process of elimination for selecting the appropriate individual investor allocation can next use which of the following factors?
A)
Risk objective.
B)
Unique considerations.
C)
Liquidity constraint.


Once the return objective has been met, eliminating allocations via the risk objective can be accomplished.
作者: kim226    时间: 2012-3-23 12:59

If more than one allocation exists after elimination via return and risk criteria, the advisor then can eliminate those that do NOT meet an individual’s:
A)
familial heritage.
B)
unique considerations.
C)
acquaintance recommendations.


Unique preferences and other considerations should be used to eliminate those allocations that are inappropriate beyond risk and return objectives. These unique preferences may be related to statements made about what type of securities an individual does not desire holding or some desired liquidity level not already considered explicitly in the liquidity constraint. Any indication as to inappropriateness can be used to eliminate all but the most appropriate allocation.
作者: kim226    时间: 2012-3-23 12:59

Which of the following inputs is NOT used in both deterministic and probabilistic analyses in individual retirement planning?
A)
Current income.
B)
Assets owned.
C)
Input variable probabilities.


In both approaches, the individual supplies a similar set of personal information, including the above as well as age, savings, etc. The difference between deterministic and probabilistic analyses is that deterministic planning techniques use single values for economic and financial variables. Monte Carlo (MC) simulations generate a probabilistic forecast of multiple retirement period values. Only Monte Carlo simulation would require the input of variable probabilities.
作者: kim226    时间: 2012-3-23 13:00

Which of the following statements about approaches in retirement planning is least accurate?
A)
Monte Carlo techniques can be used by most individual investors.
B)
Monte Carlo techniques take into account probabilities for input variables.
C)
Deterministic planning techniques use multiple values for economic and financial variables.


Deterministic planning techniques use single values for economic and financial variables. Monte Carlo (MC) simulations generate a probabilistic forecast of retirement period values. Although MC analyses require computing powers, the advent of computers available at low cost provides the individual investor a means for incorporating probabilities into retirement planning process.
作者: kim226    时间: 2012-3-23 13:00

Which of the following statements about Monte Carlo simulation is CORRECT? Monte Carlo simulation:
A)
typically produces approximately 100 trials.
B)
is best when it uses only historical data.
C)
forecasts a more accurate risk/return tradeoff than a deterministic approach.


History provides a view of only one possible path among the many that might occur in the future. It is difficult to estimate expected returns using historical figures because of the volatility factor. Monte Carlo analysis produces probability distribution by tabulating the outcomes of a large number (often 10,000) of simulated trials.
作者: kim226    时间: 2012-3-23 13:00

When planning for retirement, an individual investor may wish to use a Monte Carlo approach over a deterministic approach because:
A)
Monte Carlo approaches are simpler and quicker to implement.
B)
deterministic approaches use inappropriate inputs.
C)
Monte Carlo approaches provide a better analysis of outcome ranges than the single wealth figure estimate generated by deterministic approaches.


Monte Carlo approaches generate ranges of outcomes that can be associated with probabilities of their occurrences. Although slightly more involved in implementation, and sometimes taking longer to generate, Monte Carlo generated ranges and or probabilities may better indicate to the client realistic retirement opportunities.
作者: kim226    时间: 2012-3-23 13:00

Deterministic approaches differ from Monte Carlo approaches in that deterministic approaches:
A)
use probability forecasts whereas Monte Carlo approaches use best estimates.
B)
generate single numbers whereas Monte Carlo approaches generate a range of outcomes.
C)
generate ranges of outcomes whereas Monte Carlo approaches generate single numbers.


Monte Carlo approaches rely on probabilistic inputs to generate a range of outcomes that may provide better information than any method that generates a single number, like deterministic approaches.
作者: kim226    时间: 2012-3-23 13:05

Probabilistic outcomes generated by a Monte Carlo approach to retirement planning do NOT generate which of the following?
A)
Potential risk/return tradeoffs.
B)
Higher probabilities of meeting high return expectations.
C)
Better incorporation of tax implications.


No forecasting method can affect probabilities of meeting high return expectations. Forecasting methods can only indicate future outcomes, and in the case of Monte Carlo approaches, potential risk/return tradeoffs can be generated, as well as better incorporating tax implications.



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