Schweser QBank 2017 portfolio management and wealth planning 02 managing individual investor portfolios

Managing Individual Investor Portfolios

Test ID: 7426232

Question #1 of 103

Question ID: 465009

Given the following investment policy statement, which portfolio allocation would be most appropriate for Martin and Sheila
Torch?
Ability to take risk:
Martin is a pediatrician and has a high level of income. The high level of income, and
modest size of living expenses compared to overall assets give the Torch's a high ability to
tolerate risk.

Willingness to take risk:
Risk Tolerance Torch states that he wants to emphasize protecting the asset base he has built

and does not want the value of his investments to decline more than 10% in a

Objectives

given year. Torch's statement implies a low willingness to take risk.
Overall:
The low willingness to take risk overshadows the Torch's high ability to take risk.
Return
Objectives

Income requirement in retirement is 2.1%.
Growth requirement including inflation and meeting gifting goals is 3.8%.
Total after tax return requirement = 5.9%.

Multistage, consisting of 3 time horizons

Time Horizon

1. Torch will retire in 5 years.
2. Retirement - at least 20 years.
3. Post retirement - desire to gift assets at death to children and charities.

Liquidity
Requirements

Constraints

Minimal liquidity requirements other than funding annual living expenses.

Legal/Regulatory Seek legal counsel to create documents to express the Torch's wishes after their death.
Taxes
Unique
Considerations

The Torch's are taxable investors in the 35% tax bracket. Tax aspects of investments should
be considered.
Desire to leave two children and charities a large estate after the death of Martin and Sheila.

Asset Class

Expected After-tax Return Expected Yield Allocation 1 Allocation 2 Allocation 3

Cash (T-bills)

3.0%

3.0%

5%

5%

10%

Domestic Bonds

5.5%

5.5%

15%

20%

35%

International Bonds

6.5%

5.0%

5%

10%

10%

Domestic Equities

8.0%

2.0%

40%

40%

30%

International Equities (Developed)

11.0%

2.5%

10%

20%

10%

Venture Capital

20.0%

0.0%

20%

0%

0%

Real Estate (REITs)

8.0%

5.0%

5%

5%

5%


Expected after-tax return

10.00%

7.70%

6.78%

Expected yield

2.53%

3.30%

3.83%

0.42

0.52

0.62

Sharpe ratio

ᅞ A) Allocation 2.
ᅞ B) Allocation 1.
ᅚ C) Allocation 3.
Explanation
The Torch's have a required return of 5.9%, so it appears that all of the portfolios will meet the return requirement. In terms of
risk, the Torch's have said that they do not want the value of their portfolio to decline more than 10% in a single year. Since we
have the Sharpe ratio, return of each portfolio, and the T-bill rate, we can calculate the standard deviation for each portfolio
and calculate the Safety-first ratio to see if any of the portfolios can be eliminated.
Standard deviation of Allocation 1 = (10.0 - 3.0) / 0.42 = 16.67%
Standard deviation of Allocation 2 = (7.7 - 3.0) / 0.52 = 9.04%
Standard deviation of Allocation 3 = (6.78 - 3.0) / 0.62 = 6.10%
The safety first ratio can be calculated as the expected portfolio return minus 2 standard deviations.
Safety first of Allocation 1 = 10.0% - 2(16.67%) = -23.34%

Safety first of Allocation 2 = 7.7% - 2(9.04%) = -10.38%
Safety first of Allocation 3 = 6.78% - 2(6.10%) = -5.42%
Allocation 3 is the only allocation that meets the Torch's goal of not losing more than 10% in a given year.

Question #2 of 103

Question ID: 465005

Carl and Terri Anderson, age 45 have a $1,500,000 investment portfolio. Given the following investment policy statement,
which of the potential portfolios would be most appropriate for the Anderson's?
Ability to take risk:
The Anderson's have a long time horizon and meet their current expenses through
current income. Their ability to take risk is high.

Willingness to take risk:
The Anderson's have stated that they do not want to gamble with their money,
Risk Tolerance

but are willing to take some risk to achieve their investment goals, if they are
adequately compensated for that risk in the form of expected return.

Objectives

Overall:
High ability to take risk and moderate willingness to take risk leads to a
moderately high risk tolerance.
The Anderson's want to have a portfolio worth $3,500,000 in today's dollars when they
Return Objectives

retire in 20 years. They are planning to spend their current income and do not plan to

make any further contributions to their account. The break-even inflation rate implied by


TIPS is 2.5%.
Multistage, consisting of at least 2 time horizons
Time Horizon

1. Retirement in 20 years
2. Retirement - at least 20 years after retirement.

Liquidity
Requirements
Constraints

Would like to keep $50,000 in cash on hand at all times to meet emergency expenses.

Legal/Regulatory None
Taxes
Unique
Considerations

Tax aspects should be considered and the bulk of retirement savings should be held in a
tax advantaged account.
None.

Asset Class
Portfolio 1 Portfolio 2 Portfolio 3

Asset Class
Return

Large cap U.S. Stocks

8%

20%

36%

15%

Small cap U.S. stocks

12%

10%

10%

15%

International developed market equities

11%

10%

10%

0%

International emerging market equities

15%

5%

5%

0%

U.S. corporate bonds

5%

20%

35%

35%

U.S. Treasury bonds

4%

22%

0%

30%

Venture capital

20%

10%

0%

0%

Cash (T-bills)

3%

3%

4%

5%

Total expected return

8.62%

7.80%

6.10%

Standard deviation

12.80%

10.20%

7.40%

ᅞ A) Portfolio 3.
ᅞ B) Portfolio 1.
ᅚ C) Portfolio 2.
Explanation
First calculate the return requirement as N = 20, PV = -$1,500,000, PMT = 0, FV = $3,500,000 → CPT I/Y = 4.33%. Factoring
in inflation, this leads to a return requirement of (1.0433 × 1.025) - 1 = 6.90%. We can already eliminate Portfolio 3 since it
does not meet the return requirement.
The Anderson's say they want to maintain $50,000 in cash at all times. Based on their current portfolio value, this leads to a
cash percentage of ($50,000 / $1,500,000)= 3.33%. Based on this requirement, we can eliminate Portfolio 1, leaving Portfolio
2 at the best option.
Portfolio 1 looks tempting given its higher return and broad diversification, however, Portfolio 2 has a higher Sharpe ratio.
Since the Anderson's want to get paid for the risk they are taking in the form of expected return, Portfolio 2 is clearly the best
option.


Sharpe Ratio Portfolio 1 = (8.62 - 3.0) / 12.80 = 0.439
Sharpe Ratio Portfolio 2 = (7.80 - 3.0) / 10.20 = 0.471
Sharpe Ratio Portfolio 3 = (6.10 - 3.0) / 7.40 = 0.419

Question #3 of 103

Question ID: 464940

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?

ᅚ A) Moderate-to-high risk tolerant.
ᅞ B) Low-to-moderate risk tolerant.
ᅞ C) Not enough information to tell.
Explanation
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.

Questions #4-8 of 103
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:
Our living expenses are minor and are estimated to be no greater than $150,000 per year. As a result, we consider our
retirement portfolio to be large both in absolute and relative terms
We are both in good health and have at least another 20 to 25 years of life expectancy. We do not foresee any major
medical expenses, either chronic or acute, over the horizon.
We have no debts and wish not to undertake decisions that would require us to borrow.
After we die, we would like to leave the remainder of our portfolio equally to the charities with which we have been involved
over all these years. One of our objectives is to maximize those funds transferred.
Neither one of us has a high tolerance for risk and, for the most part, our retirement savings have been in low-risk type
investment vehicles. Our investment portfolio decisions have been made in congruence with our feelings of enhancing the
opportunities available to our fellow man.

When we have invested in equity-type securities, we have focused investing in socially responsible funds. Firms that sell
tobacco, firearms, alcohol, or have been cited by the EPA for environmental damage are not allowed in our portfolio.
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.


Question #4 of 103

Question ID: 464974

Medley first decides to classify the Smithsons along general investment personality typing guidelines. Which of the following
personality types best describes the Smithsons?
ᅞ A) Methodical.
ᅚ B) Cautious.
ᅞ C) Individualist.
Explanation
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.

Question #5 of 103

Question ID: 464975

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:
ᅞ A) able and willing to take above average risk.
ᅞ B) only able to take below average risk, but are willing to take above average risk.
ᅚ C) able to take above average risk, but are only willing to take below average risk.
Explanation
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").

Question #6 of 103

Question ID: 464976

One additional factor Medley believes important is the Smithsons' stage of life. Which of the following best represents the
Smithsons' stage of life?
ᅚ A) Latter.
ᅞ B) Early.
ᅞ C) Mid.
Explanation
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.

Question #7 of 103

Question ID: 464977

According to the Smithsons' risk profile created by Medley, a general asset allocation that would fit well with their objectives is:
ᅞ A) an aggressive growth asset allocation so that the largest amount of funds will
be left to their charities.
ᅞ B) a portfolio heavily weighted toward risk-free securities to minimize possibilities of
making inappropriate investments.


ᅚ 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.
Explanation

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.

Question #8 of 103

Question ID: 464978

Which of the following investments would NOT be appropriate in the Smithson's portfolio?
ᅚ A) Municipal bonds.
ᅞ B) Commodities.
ᅞ C) Options.
Explanation
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.

Questions #9-14 of 103
Barbara Analee, a retired registered nurse and business woman, recently retired at age 50 to pursue a life as a blues singer.
She had been running a successful cosmetics and aesthetics business using state-of-the-art lasers to treat wrinkles and skin
blemishes. She is married to Tom, a retired scientist (age 55). They have saved $3 million in their portfolio (Barbara
contributed $2.5 million to this portfolio) and now they want to travel the world. Their three children are all grown and out of
college and have begun to have their own families. Barbara now has two grandchildren. Barbara and Tom feel that they have
achieved a comfortable portfolio level to support their family's needs for the foreseeable future.
In order to meet their basic living expenses, Tom and Barbara feel that they need $75,000 per year in today's dollars before
taxes to live comfortably. As a trained professional, Barbara likes to be intensively involved in researching investment
opportunities. Barbara and Tom want to be able to provide $10,000 per year (pretax) indexed for inflation to each of their
grandchildren over the next ten years for their college education. She believes that she can accomplish this through her
portfolio. She also wants to set aside $15,000 each year (pretax) indexed for inflation for traveling for her musical

performances at various dinner clubs around the U.S. They have no debt and they own their home without a mortgage. Most
of their portfolio is currently in large cap U.S. stocks and U.S. Treasury notes and bills.
They have approached Pamela Jaycoo, CFA, for guidance on how they could best achieve their financial goals while also
providing for their grandchildren's college needs. Inflation is expected to stay at 3 percent annually for the foreseeable future.

Question #9 of 103
Barbara Analee can be classified into which of the following personality types?
ᅞ A) Cautious investor.

Question ID: 484980


ᅞ B) Methodical investor.
ᅚ C) Individualist investor.
Explanation
Barbara can be clearly classified as an Individualist Investor whereby decisions are based on thinking, rather than feeling.
Having been trained as a nurse where the methodical study of the human anatomy is required, she would not be afraid to do
her own research work on her investments and would even question recommendations and conclusions made by her
investment advisors. She is also less risk averse because she understands the results of her decisions, particularly when she
is involved in treating hospital patients and customers using a laser.
Cautious investors base their investment decisions on feeling and are more risk averse. Methodical investors base their
investment decisions on thinking and are also more risk averse. (Study Session 4, LOS 9.f)

Question #10 of 103

Question ID: 484981

What is the Analees return objective for this year?
ᅞ A) 6.17%.
ᅞ B) 3.83%.

ᅚ C) 6.67%.
Explanation
The Analees' pre-tax return objective is computed as follows:

Ongoing living expenses $75,000
Travel expenses

$15,000

College Fund

$20,000

Total

$110,000

Portfolio Principal Value
Income Objective:

$3,000,000
(110,000 / 3,000,000) 3.67%

Plus Inflation:
Total Return Objective:

+3.00%
6.67%

(Study Session 4, LOS 9.g)

Question #11 of 103
What is their tolerance for risk?

ᅚ A) Average.
ᅞ B) Above average.
ᅞ C) Below average.
Explanation

Question ID: 484982


Their tolerance for risk is average. Their liquidity needs are high because of their living expenses and other needs yet they have a large
portfolio so overall their risk tolerance is average. Since they are in their retirement years, they will be living off their portfolio and not
adding to it other than the growth in the portfolio to meet their living expenses and stay even with inflation. Always view the portfolio from
a total return basis in which the amount used for living expenses is taken from a combination of income and capital gains generated from
the portfolio. A general rule is that there should always be some cash component in the portfolio but not too much, usually around ±5% or
3 to 6 months worth of living expenses. (Study Session 4, LOS 9.a)

Question #12 of 103

Question ID: 484983

What is Barbara's willingness and ability to assume risk?
Willingness
ᅞ A) Above
average

Ability
Above

average

ᅞ B) Below average Average
ᅚ C) Above average Average

Explanation
Although Barbara's willingness to assume risk may be high (above average) given her past entrepreneurial pursuits and the
Analees' time horizon is quite long, her ability to assume risk is average given her current income needs. Thus, the need to
protect her current assets is important so her risk tolerance is lowered to average because of her high liquidity needs. (Study
Session 4, LOS 9.a)

Question #13 of 103

Question ID: 484984

Based on the information presented in the case above, which one of the following portfolios should the Analees choose:

Expected Return Portfolio A Portfolio B Portfolio C

U.S Stocks - S&P 500

9%

20%

5%

10%

U.S Stocks - Small Cap

10%

20%

15%

10%

Intl Stocks - Developing

12%

15%

15%

10%

U.S Corporate Bonds

5%

15%

0%

35%

U.S Treasury Bonds

3%

10%

0%

25%

Venture Capital

11%

5%

30%

0%

Real Estate

15%

10%

30%

0%

Cash

1%

5%

5%

10%

Total Return (before taxes)

8.8%

11.6%

5.7%

Total Return (after taxes)

5.6%

7.4%

3.6%

Yield (after taxes)

1.9%

1.9%

2.8%


ᅚ A) Portfolio A.
ᅞ B) Portfolio C.
ᅞ C) Portfolio B.
Explanation
The most appropriate portfolio for the Analees is Portfolio A. The justification and rationale for Portfolio A is that this portfolio
provides a good balance in terms of their return objectives, risk tolerance and constraints. However, the portfolio provides an
adequate return of 8.8% versus their return requirement of 6.8%. Portfolio A also provides a sufficient amount of income to
meet current income needs while minimizing the effects of inflation.
It is a well diversified portfolio that balances the risks evenly among most asset classes: 55% stocks, 25% bonds, 10% real
estate, and 5% each in venture capital and cash. Although this portfolio can meet the needs of the family, tax planning is
advised to minimize their level of total tax liability. Such planning must be done in tandem with the investment advisor, Pamela
Jaycoo, so as to coordinate construction of the appropriate asset classes.
Portfolio B is inappropriate because it concentrates a higher proportion of assets into venture capital and real estate
(combined 60%), traditionally lower liquidity classes and higher levels of volatility. Furthermore, there is a higher concentration
of assets allocated to small and international stocks, also asset classes that exhibit higher volatility levels.
Portfolio C is inappropriate because it does not meet their return objectives, and is designed for conservative investors with
low risk tolerances. There is a high concentration in bonds (60%), too much concentrated in cash (10%), and the rest evenly
distributed among the remaining asset classes. (Study Session 4, LOS 9.j)

Question #14 of 103

Question ID: 484985

For this question only, assume that Barbara has accepted an offer to work part-time as a lounge singer in Las Vegas for the
next five years but still continue with her traveling as a blues singer. This position will pay her a gross income of $45,000
annually. However, the Analees annual living expenses will increase to $85,000. After five years, Barbara plans on returning to

retirement at which point, the Analees living expenses will return to 75,000 per year in today's dollars. Also assume they will
live for 30 more years at which time the portfolio will be completely spent down.

Based on this new information, what is the Analees return objective?
ᅚ A) 2.39%.
ᅞ B) 6.48%.
ᅞ C) 6.97%.
Explanation
The Analees' pre-tax return objective is computed as follows:
Next Five Years:

Ongoing living
$85,000
expenses
Travel expenses
Barbara's Income

College Fund

$15,000
-45,000

$20,000


Total

$75,000

Return to Retirement:

Ongoing living
$75,000
expenses
Travel expenses

$15,000

College Fund

$20,000

Total

$110,000

After contributing to grandchildren's education:

Ongoing living
$75,000
expenses
Travel expenses

$15,000

Total

$90,000

Total Return Objective:

Portfolio Principal
$3,000,000
Value
CF0 = -3,000,000
C01 = 75,000 F01= 5
C02 = 110,000 F02= 5
C03 = 90,000 F03= 20
Income Objective:

CPT IRR = -0.61%

Plus Inflation:

+3.00%

Total Return
2.39%
Objective:
(Study Session 4, LOS 9.g)

Question #15 of 103

Question ID: 472637

Which of the following personality types applies to investors who make investment decisions based on facts as opposed to their feelings
or intuitions?

ᅚ A) Methodical and individualist.
ᅞ B) Methodical and cautious.

ᅞ C) Spontaneous and methodical.


Explanation
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.

Question #16 of 103

Question ID: 464993

Which two constraints greatly impact an individual's investment policy statement?

ᅞ A) Legal/regulatory and unique circumstances.
ᅞ B) Legal/regulatory and liquidity concerns.
ᅚ C) Time horizon and tax considerations.
Explanation
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.

Question #17 of 103

Question ID: 464956

An investment policy statement does NOT provide which of the following?

ᅚ A) Guaranteed investment returns.
ᅞ B) Long-term investment decision making guidelines.

ᅞ C) Weighting ranges for asset allocation.
Explanation
An investment policy statement does not provide guaranteed investment results.

Questions #18-23 of 103
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 cofounded 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 risktakers."
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."

Question #18 of 103

Question ID: 484959

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?
ᅞ A) 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.
ᅚ 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.
ᅞ C) 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.
Explanation
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:
Ability to tolerate risk is above average
Willingness is average
Overall risk tolerance is average
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 9.a)

Question #19 of 103

Question ID: 484960

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?
ᅚ A) Regret and anchoring.
ᅞ B) Representativeness and loss aversion.
ᅞ C) Frame dependence and familiarity.
Explanation
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 7.b)

Question #20 of 103

Question ID: 484961

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?
ᅞ A) Liquidity requirements and tax considerations.
ᅞ B) Liquidity requirements and portfolio size.
ᅚ C) Portfolio size and time horizon.
Explanation
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 9.g)

Question #21 of 103

Question ID: 484962


Regarding the comments by Thamen and Stone about the different dynamic asset allocation strategies:
ᅞ A) Stone is correct on Buy and Hold, but incorrect on CPPI; Thamen is correct on
both Buy and Hold and CPPI.
ᅚ B) Stone is correct on both Buy and Hold and CPPI; Thamen is correct on Buy and Hold
and incorrect on CPPI.
ᅞ C) Stone is incorrect on both Buy and Hold and CPPI; Thamen is incorrect on Buy and
Hold and correct on CPPI.
Explanation
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 31.h)

Question #22 of 103

Question ID: 484963

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

Question #23 of 103

Question ID: 484964

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?
ᅞ A) Probabilistic forecasts are often better than point estimates in financial
markets.

ᅞ B) Monte Carlo techniques often better represent trade-offs between short term risks and
long-term goals.
ᅚ C) Monte Carlo forecasting techniques result in greater reliability than deterministic
techniques.
Explanation


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 9.k)

Questions #24-25 of 103
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.

Question #24 of 103

Question ID: 464999

Which of the following most accurately portrays Edgewood's overall risk tolerance? Edgewood's willingness:

ᅞ A) to accept risk is above average and her ability to accept risk is average. Thus, her
overall risk tolerance is average.

ᅚ B) and ability to accept risk is above average. Thus, her overall risk tolerance is above average.
ᅞ C) to accept risk is average and her ability to accept risk is above average. Thus, her overall risk

tolerance is average.

Explanation
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.

Question #25 of 103

Question ID: 465000

Which of the following most accurately describes Edgewood's tax, liquidity, and time horizon constraints? Edgewood's overall time horizon
is:

ᅞ A) short, her tax constraints are significant, and her liquidity needs are low.
ᅚ B) long, her tax constraints are significant, and her liquidity needs are low.
ᅞ C) long, her tax constraints are significant, and her liquidity needs are high.
Explanation
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.

Question #26 of 103

Question ID: 464997

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?

ᅚ A) Income beneficiary and remaindermen.
ᅞ B) Income beneficiary and the trust officer.
ᅞ C) Grantor and remaindermen.
Explanation
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.

Question #27 of 103

Question ID: 464936

Anthony Scarillo, a mortgage broker, is considering investing all his savings into a mutual fund. He will take above-average risk
in exchange for the possibility of outperforming the market. Scarillo is 60 years old. Based on this information, which of the
following two funds is most appropriate for him?

Mutual Fund A

Mutual Fund B

Balanced

Growth

Five year return 12%

Five year return 14%

Standard deviation = 7

Standard Deviation = 12

Consists of 40% growth stocks, 60% preferred stocks Consists of 100% growth stocks

ᅚ A) A, because of its higher income.
ᅞ B) B, because of its higher five year return.
ᅞ C) A, because of its ability to beat inflation at a lower standard deviation.
Explanation
Fund A is more appropriate because it has a better mix of growth and income, tilted towards income. Although no retirement age was
specified, we can only assume that it is imminent. A 60-year-old should not be 100% invested in growth stocks. Past returns are not an
indication of future performance.

Question #28 of 103
Which of the following represents the process involved in creating an investment policy statement?

ᅞ A) Determine constraints and formulate investment strategies.
ᅚ B) Evaluate objectives and constraints and combine them with capital market expectations.
ᅞ C) Evaluate objectives, capital market expectations, and investment strategies.

Question ID: 464961


Explanation
Objectives and constraints are evaluated, and when they are combined with capital market expectations, the investment policy statement
is created.

Question #29 of 103

Question ID: 465008

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?

ᅚ A) Risk objective.
ᅞ B) Unique considerations.
ᅞ C) Liquidity constraint.
Explanation
Once the return objective has been met, eliminating allocations via the risk objective can be accomplished.

Question #30 of 103

Question ID: 464957

Clients can benefit from an investment policy statement which:

ᅞ A) dictates how to spend extra liquidity.
ᅞ B) provides for legal recourse due to portfolio underperformance.
ᅚ C) provides long-term investment discipline deterring short-term knee-jerk portfolio adjustments.
Explanation
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.

Question #31 of 103

Question ID: 464972

Desired return objectives are those return levels associated with:

ᅞ A) vacation home goals.

ᅚ B) secondary goals.
ᅞ C) major goals.
Explanation
Desired return objectives are associated with secondary goals. Desired returns may be lowered if there is a disconnect between risk
tolerance and return objectives.


Question #32 of 103

Question ID: 464971

Risk objectives should be evaluated during which stage of the investment policy statement process? Concurrently with the:

ᅚ A) return objectives.
ᅞ B) capital market expectations formations.
ᅞ C) investment strategy decision.
Explanation
Discussions of risk objectives should occur simultaneously with those of return objectives.

Question #33 of 103

Question ID: 464996

Which class of liquidity constraints is usually NOT considered a factor when formulating an individual's investment policy statement?

ᅞ A) Ongoing expenses.
ᅞ B) Negative liquidity events.
ᅚ C) Cash carried on the person.
Explanation
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.

Question #34 of 103

Question ID: 464954

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

Question #35 of 103
Most of the short questionnaires used by investment professionals to determine client risk tolerance levels consist of:

ᅚ A) comments about non-investment scenarios.

Question ID: 472636


ᅞ B) questions that focus on how the individual would deal with the professional if he/she lost their
money.

ᅞ C) comments about investment scenarios.
Explanation

The questions tend to focus on self-evaluative statements and comments on different non-investment scenarios.

Question #36 of 103

Question ID: 464995

Vivian Collins is a client of ESP Financial Advisors. She presents her situation as follows: Collins is currently a divorced mother to a 5year-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?

ᅞ A) 3.
ᅚ B) 4.
ᅞ C) 5.
Explanation
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.

Questions #37-38 of 103
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.

Question #37 of 103

Question ID: 464932

Based on her personality type, what type of investor is Moore?
ᅞ A) Individualist.
ᅚ B) Cautious.
ᅞ C) Methodical.
Explanation
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.


Question #38 of 103

Question ID: 464933

Jennifer Moore recently came into a seven-figure inheritance from a long-lost uncle. Which of the following statements about
Moore is most accurate?
ᅚ A) Moore has little to no familiarity with risk taking and will tend to be more
cautious in her investment approach.
ᅞ B) Since she didn't count on the inheritance, she will be willing to take on substantial
investment risks.
ᅞ C) She will be willing to take an active role in the investment process.
Explanation
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.

Question #39 of 103

Question ID: 465011

Probabilistic outcomes generated by a Monte Carlo approach to retirement planning do NOT generate which of the following?

ᅚ A) Higher probabilities of meeting high return expectations.
ᅞ B) Better incorporation of tax implications.
ᅞ C) Potential risk/return tradeoffs.
Explanation
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.

Question #40 of 103

Question ID: 464983

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:
$10,000 in cash
$150,000 in stock and bond mutual funds
$240,000 in BHS common stock.
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:


We want to retire in 20 years.
We were very uncomfortable with the decline in the stock market from 2000-2002, and cannot tolerate a drop in our
investments of more than 10% in any given year.

We do not plan to have children.
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

Ability to Take Overall

Take Risk

Risk

Conclusion

Above

Above

Average

Average

ᅞ A) Below
Average

ᅚ B) Below Average Above Average Below Average
ᅞ C) Below Average Below Average Below Average

Explanation
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 generally go with the lower of either willingness or ability and recommend counseling to reconcile the
difference between the two.

Question #41 of 103

Question ID: 465001

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:

ᅚ A) both willing and able to accept risk.
ᅞ B) willing, but unable to accept risk.
ᅞ C) neither able or willing to accept risk.
Explanation


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.

Question #42 of 103

Question ID: 464951

Investor psychology indicates investors will form portfolios via which method?

ᅚ A) Pyramiding.
ᅞ B) Triangulating.
ᅞ C) Integrating.
Explanation
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.

Question #43 of 103

Question ID: 464937

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 1

Statement 2

ᅚ A) Incorrect

Correct

ᅞ B) Correct

Incorrect

ᅞ C) Correct

Correct

Explanation
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.


Questions #44-49 of 103
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:
1. "I use the "basket" theory of investing - I don't want to put all my assets in one place so I'll give you a try with about 20% of
my investment portfolio - that way I can see how you do relative to my other advisors."
2. "I have been following Pharmitrol, a local company listed on NASDAQ. Several of my neighbors have production jobs there
and are really optimistic about the firm's prospects. Of course they're not in management, but I think they should be able
to sense what's going on. I have a significant position now at $3.50 per share and expect to triple my investment soon."
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.

Question #44 of 103

Question ID: 484966

The analysis of Wang's personality questionnaire indicates that she most likely is a:
ᅞ A) cautious investor.
ᅞ B) individualistic investor.
ᅚ C) methodical investor.
Explanation
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 9.b)

Question #45 of 103

Question ID: 484967

Statement 1 by Wang is reflective of which of the following basic principles of the behavioral finance investment framework?
ᅚ A) Asset segregation.
ᅞ B) Asset integration.
ᅞ C) Loss aversion.
Explanation
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 9.b)


Question #46 of 103

Question ID: 484968

The statement by Wang about Pharmitrol is most reflective of which of the following behavioral tendencies?
ᅞ A) Anchoring.
ᅚ B) Overconfidence.
ᅞ C) Familiarity.
Explanation
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 8.b)

Question #47 of 103

Question ID: 484969

Which of the following is NOT one of the behavioral finance traits that leads to market inefficiency? Investors:

ᅞ A) are overconfident in their ability to interpret information and predict
performance.
ᅞ B) think a well run company will be a good investment.
ᅚ C) all have the same information and interpret it the same way.
Explanation
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 9.c)

Question #48 of 103

Question ID: 484970

For understanding an individual's preferences, goals and desires, situational profiling:
ᅞ A) is superior to psychological profiling.
ᅚ B) places individuals into categories according to stage of life and economic
circumstances.
ᅞ C) places individuals into categories according to sources of wealth and level of risk
aversion.
Explanation
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 9.b)

Question #49 of 103

Question ID: 484971

Which of the following statements about Wang's ability and willingess to take on risk is most accurate? Wang's
ᅚ A) ability to take risk is determined by her time horizon and portfolio size.
ᅞ B) willingness to take risk is more important than her ability to take risk.
ᅞ C) willingness and ability to take risk are incongruent therefore Rineholt should defer to
Wang's desire for a moderately aggressive portfolio.
Explanation
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 9.g)

Question #50 of 103

Question ID: 465002

When constructing an investment policy statement (IPS), which of the following statements would be considered least accurate?

ᅞ A) One of the distinguishing factors between individual and institutional investors is time
horizon.

ᅞ B) If there are liquidity requirements, the applicable after-tax return will need to be calculated.
ᅚ C) The use of total return analysis is almost always the wrong way to approach an IPS.
Explanation
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.

Question #51 of 103

Question ID: 472630

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:

ᅚ A) loss averse, rather than risk averse, and this may have an impact upon the investors'
willingness to take risk.

ᅞ B) loss averse, rather than risk averse, and this may have an impact upon the investors' ability
to take risk.

ᅞ C) risk averse, rather than loss averse, and this may have an impact upon the investors'
willingness to take risk.

Explanation
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