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

Objectives Risk Tolerance Ability to take risk: Martin is a pediatrician and has a high level of income.. The high level of income, andmodest size of living expenses compared to overall

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Test ID: 7426232Managing Individual Investor Portfolios

Given the following investment policy statement, which portfolio allocation would be most appropriate for Martin and SheilaTorch?

Objectives

Risk Tolerance

Ability to take risk:

Martin is a pediatrician and has a high level of income The high level of income, andmodest size of living expenses compared to overall assets give the Torch's a high ability totolerate risk

Willingness to take risk:

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 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%

Constraints

Time Horizon

Multistage, consisting of 3 time horizons

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

LiquidityRequirements 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 The Torch's are taxable investors in the 35% tax bracket Tax aspects of investments should

be considered

UniqueConsiderations 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

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ᅞ A)

ᅞ B)

ᅚ C)

Standard deviation of Allocation 1 = (10.0 - 3.0) / 0.42 = 16.67%

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%

Allocation 3 is the only allocation that meets the Torch's goal of not losing more than 10% in a given year

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?

Objectives

Risk Tolerance

Ability to take risk:

The Anderson's have a long time horizon and meet their current expenses throughcurrent 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, 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.

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Taxes Tax aspects should be considered and the bulk of retirement savings should be held in a

tax advantaged account

UniqueConsiderations None.

Return

Portfolio 1 Portfolio 2 Portfolio 3

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 itdoes 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 acash 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 bestoption

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Question #3 of 103 Question ID: 464940

ᅚ A)

ᅞ B)

ᅞ C)

Questions #4-8 of 103

Sharpe Ratio Portfolio 1 = (8.62 - 3.0) / 12.80 = 0.439

Kent Andling is 55 years old and recently sold his high tech manufacturing company, which was started in his father's basement 35 yearsago 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?

Moderate-to-high risk tolerant

Low-to-moderate risk tolerant

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 indicatesknowledge of risk-taking activities Apparently, he has brought up his children to understand risk-taking activities, too These factorsindicate a moderate-to-high risk tolerant profile

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 fordistribution to the needy Ellen was involved in her local "Housing for the Homeless," chapter Both served their respectiveorganizations in direct service and board member capacities

The Smithsons's professional activities generated high incomes that were beyond living expenses, which could easily bedescribed as comfortably frugal Over the years, a tax deferred retirement savings account in the amount of $4,000,000 hasbeen 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 ourretirement 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 majormedical 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 involvedover 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 typeinvestment vehicles Our investment portfolio decisions have been made in congruence with our feelings of enhancing theopportunities available to our fellow man

When we have invested in equity-type securities, we have focused investing in socially responsible funds Firms that selltobacco, 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

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only able to take below average risk, but are willing to take above average risk

able to take above average risk, but are only willing to take below average risk

According to the Smithsons' risk profile created by Medley, a general asset allocation that would fit well with their objectives is:

an aggressive growth asset allocation so that the largest amount of funds will

be left to their charities

a portfolio heavily weighted toward risk-free securities to minimize possibilities of

making inappropriate investments

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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 apparentdisconnect between ability and willingness to take risk The total return approach provides an appropriate balance betweenmeeting their retirement needs and providing for the charities

Which of the following investments would NOT be appropriate in the Smithson's portfolio?

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 skinblemishes 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 ofcollege and have begun to have their own families Barbara now has two grandchildren Barbara and Tom feel that they haveachieved 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 beforetaxes 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 theirgrandchildren over the next ten years for their college education She believes that she can accomplish this through herportfolio 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 alsoproviding for their grandchildren's college needs Inflation is expected to stay at 3 percent annually for the foreseeable future

Barbara Analee can be classified into which of the following personality types?

Cautious investor

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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 theirinvestment decisions on thinking and are also more risk averse (Study Session 4, LOS 9.f)

What is the Analees return objective for this year?

6.17%

3.83%

6.67%

Explanation

The Analees' pre-tax return objective is computed as follows:

Ongoing living expenses $75,000

Total Return Objective: 6.67%

(Study Session 4, LOS 9.g)

What is their tolerance for risk?

Average

Above average

Below average

Explanation

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ᅞ A)

ᅞ B)

ᅚ C)

Their tolerance for risk is average Their liquidity needs are high because of their living expenses and other needs yet they have a largeportfolio so overall their risk tolerance is average Since they are in their retirement years, they will be living off their portfolio and notadding 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 fromthe 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)

What is Barbara's willingness and ability to assume risk?

Willingness Ability

Above

average

AboveaverageBelow average Average

Above average Average

Explanation

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

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

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It is a well diversified portfolio that balances the risks evenly among most asset classes: 55% stocks, 25% bonds, 10% realestate, and 5% each in venture capital and cash Although this portfolio can meet the needs of the family, tax planning isadvised to minimize their level of total tax liability Such planning must be done in tandem with the investment advisor, PamelaJaycoo, 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 withlow risk tolerances There is a high concentration in bonds (60%), too much concentrated in cash (10%), and the rest evenlydistributed among the remaining asset classes (Study Session 4, LOS 9.j)

For this question only, assume that Barbara has accepted an offer to work part-time as a lounge singer in Las Vegas for thenext five years but still continue with her traveling as a blues singer This position will pay her a gross income of $45,000annually However, the Analees annual living expenses will increase to $85,000 After five years, Barbara plans on returning toretirement at which point, the Analees living expenses will return to 75,000 per year in today's dollars Also assume they willlive 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?

2.39%

6.48%

6.97%

Explanation

The Analees' pre-tax return objective is computed as follows:

Next Five Years:

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Total Return

(Study Session 4, LOS 9.g)

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

or intuitions?

Methodical and individualist

Methodical and cautious

Spontaneous and methodical

0

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recommendations or conclusions made by others Individualist investor types tend to be less risk averse than methodical investors

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

Legal/regulatory and unique circumstances

Legal/regulatory and liquidity concerns

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, individualinvestors can invest in almost any manner they please

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

Guaranteed investment returns

Long-term investment decision making guidelines

Weighting ranges for asset allocation

Explanation

An investment policy statement does not provide guaranteed investment results

Jim Thamen, CFA, recently received an assignment from his supervisor Andy Stone, CFA, to prepare a proposal for managingEllen and Joe Swathman's investment portfolio Ellen, 62, and Joe, 65, recently inherited $2,500,000 from Ellen's eccentricuncle, Daniel, and wish to invest their money wisely The Swathmans have two grown children, Marcus, 30, and Sue, 27, whoare financially independent from their parents Although both Marcus and Sue are married, the Swathmans do not have anygrandchildren

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 founded with a high school classmate almost 40 years ago Although the rock quarry has not provided the Swathmans with alarge amount of excess discretionary income, they have been able to provide themselves and their children a comfortableliving Joe and his partner Ed Small have executed a buy-sell agreement and maintain life insurance to fund a buy-out in theevent of the untimely death of either Although Ellen is planning to retire within 9 to 12 months, Ed wants to continue working at

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co-Question #18 of 103 Question ID: 484959

ᅞ A)

ᅚ B)

ᅞ C)

the quarry for a few more years

The Swathmans are in relatively good health, have adequate health insurance, property and casualty, disability, liability, andlife insurance All consumer debts have been paid They plan to spend approximately $200,000 over the next year renovatingtheir 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 giventhe 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 alsooutperforms 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 hisclients Which of the following best represents the situational risk profile for the Swathmans?

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

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

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

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savings during retirement Thus, their financial situation indicates an above-average ability to incur risk In contrast, Joe'sentrepreneurial background (increased risk tolerance), statement about them being of average risk tolerance, his statementabout Ellen saying they should be careful (below average risk tolerance), adequate insurance, and no debt indicates theymanage their finances in a responsible manner Hence their statements and background reflect an average to some whatbelow-average willingness to take risk leaning more towards average Overall their risk tolerance would be average based ontheir average willingness to take risk On the exam you would not want to give a range of risk tolerances but instead state asingle 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 andwillingness 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)

Thamen understands that behavioral finance topics are becoming more important when attempting to better understand therelationship between portfolio manager and client Which of the following behavioral investor traits were exhibited in

Swathman's statements 1-4?

Regret and anchoring

Representativeness and loss aversion

Frame dependence and familiarity

Explanation

Only statements 3 and 4 describe behavior investor traits Statement 3 is describing regret where the feeling in hindsight isassociated 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)

Thamen starts formulating the risk tolerance portion of the investment policy statement He knows it is important to considerboth the willingness and ability to take risk Which of the following generally has the most impact on an individual's ability totake risk?

Liquidity requirements and tax considerations

Liquidity requirements and portfolio size

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 generallyconsidered to be as important as time horizon and portfolio size (Study Session 4, LOS 9.g)

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Regarding the comments by Thamen and Stone about the different dynamic asset allocation strategies:

Stone is correct on Buy and Hold, but incorrect on CPPI; Thamen is correct on

both Buy and Hold and CPPI

Stone is correct on both Buy and Hold and CPPI; Thamen is correct on Buy and Hold

and incorrect on CPPI

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 andoutperforms 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 aflat but oscillating market

The CPPI strategy outperforms a comparable Buy and Hold strategy, which, in turn, outperforms a Constant Mix strategy intrending markets (Study Session 16, LOS 31.h)

Thamen wants to incorporate the information ratio in the portfolio management process Which of the following statementsbest describes the information ratio?

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 uses tracking error in the numerator of the equation which

represents the standard deviation of monthly alphas

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 therelationship between the manager's alpha and the standard deviation of alpha (tracking error): information ratio = alpha /tracking error (Study Session 17, LOS 32.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?

Probabilistic forecasts are often better than point estimates in financial

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The results of Monte Carlo techniques are only as good as the inputs used A weakness of Monte Carlo simulations is theneed to pre-specify the distribution of the variables used or rely on historical distributions (Study Session 4, LOS 9.k)

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 smallcapitalization stocks with a bias toward high-tech companies She has expressed a desire to earn a return equal to the return of 12percent 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 Thispurchase will be mortgaged and require her to make an $80,000 down payment Edgewood plans to retire at the age of 63 and is currentlypaying 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:

to accept risk is above average and her ability to accept risk is average Thus, her

overall risk tolerance is average

and ability to accept risk is above average Thus, her overall risk tolerance is above average

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 annualliving expenses by a substantial amount Also, being invested in small, high tech firms is an indication of Edgewood's above averagewillingness to accept risk

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

short, her tax constraints are significant, and her liquidity needs are low

long, her tax constraints are significant, and her liquidity needs are low

long, her tax constraints are significant, and her liquidity needs are high

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Income beneficiary and the trust officer.

Grantor and remaindermen

Explanation

A creative tension exists between the income beneficiary and remaindermen listed in a personal trust Income beneficiaries would like tohave as much current income from the trust as possible Remaindermen wish to have as large of a portfolio passed to them after theincome beneficiary dies The conflict between current income and longer-term portfolio growth is a situation that must be addressed informulating investment policy for a personal trust

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 thefollowing two funds is most appropriate for him?

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

A, because of its higher income

B, because of its higher five year return

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 wasspecified, we can only assume that it is imminent A 60-year-old should not be 100% invested in growth stocks Past returns are not anindication of future performance

Which of the following represents the process involved in creating an investment policy statement?

Determine constraints and formulate investment strategies

Evaluate objectives and constraints and combine them with capital market expectations

Evaluate objectives, capital market expectations, and investment strategies

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Once the return objective has been met, eliminating allocations via the risk objective can be accomplished

Clients can benefit from an investment policy statement which:

dictates how to spend extra liquidity

provides for legal recourse due to portfolio underperformance

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 policystatement protects against short-term portfolio adjustments resulting from investor panic or overconfidence

Desired return objectives are those return levels associated with:

vacation home goals

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capital market expectations formations

investment strategy decision

Explanation

Discussions of risk objectives should occur simultaneously with those of return objectives

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

Negative liquidity events

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 constraintsimpacting the long-term policy statement are those cash outflows required in meeting ongoing expenses and negative liquidity events

Which of the following statements about appropriate investment planning is CORRECT?

It is not a good idea to get too specific when constructing an investment policy

statement

An appropriate investment objective for a typical 23-year-old investor is a low-risk

strategy, such as capital preservation

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 A23-year-old investor should be more concerned about capital appreciation, not preservation Investment policy statements aremore useful the more specific they are

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

comments about non-investment scenarios

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

Vivian Collins is a client of ESP Financial Advisors She presents her situation as follows: Collins is currently a divorced mother to a 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 assumesthat 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

5-grandchildren How many time horizons does Collins have?

Jennifer Moore has worked in a governmental position (administrative assistant) since graduating from high school She lovesher job because she is very good at following her bosses' orders At office functions, many of her colleagues ranted and ravedabout the quality of her baked goods Some even suggested that they tasted so good that she should quit her job and sellbaked goods Moore is 50 years old and never paid attention to the suggestions of her colleagues She plans on retiring fromthe government in three years

Based on her personality type, what type of investor is Moore?

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Jennifer Moore recently came into a seven-figure inheritance from a long-lost uncle Which of the following statements aboutMoore is most accurate?

Moore has little to no familiarity with risk taking and will tend to be more

cautious in her investment approach

Since she didn't count on the inheritance, she will be willing to take on substantial

knowledge She enjoys taking orders

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

Higher probabilities of meeting high return expectations

Better incorporation of tax implications

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 taximplications

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 peryear 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:

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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 ourinvestments 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 Hedetermines that to meet their goals, they will need $2,500,000 in 20 years Which of the following is the most appropriatedescription of the risk objective for the Kreuz's?

Willingness to

Take Risk

Ability to TakeRisk

OverallConclusion

Below

Average

AboveAverage

AboveAverageBelow Average Above Average Below Average

Below Average Below Average Below Average

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 betweenwillingness and ability generally go with the lower of either willingness or ability and recommend counseling to reconcile thedifference between the two

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 Spartatravels extensively She likes to consider herself someone who lives in the fast lane and possesses refined tastes in both the arts andentertainment Sparta's annual expenses, including travel and entertainment, average $375,000 Sparta has no foreseeable liquidityneeds, legal, regulatory, or tax concerns, and has no unique circumstances Which of the following most appropriately describes Sparta'sability and willingness to bear risk? Sparta is:

both willing and able to accept risk

willing, but unable to accept risk

neither able or willing to accept risk

Explanation

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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:

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