CFA CFA level 3 CFA level 3 CFA level 3 CFA level 3 CFA volume 2 finquiz item set questions, study session 5, reading 12

Annual spending needs with respect to her father amount to $30,000 and are expected to continue for five years, which corresponds to his estimated remaining life expectancy.. In light of

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FinQuiz.com CFA Level III Item-set - Question

Study Session 5 June 2018

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FinQuiz Item-set ID: 72096

Questions 1 (72097) through 6 (72102) relate to Reading 12

Lizzie & Arron Case Scenario

Lizzie and Aaron Strong, aged 35, are married and live in a two-bedroom rented apartment with

a monthly rental of $1,200 Lizzie is a middle school teacher at a government owned public school earning an annual salary of $55,000 while Aaron is a stock broker earning an annual salary of $80,000, which includes bonuses and commissions The couple has two daughters, ages

2 and 5, respectively Their salaries cover their consumption needs but they are unable to

generate savings

Lizzie is from a family whose females suffer from memory loss after they cross the age of 45 years Lizzie has a high probability of being diagnosed with this non-fatal genetic condition In spite of the high probability, Lizzie has always taken care of her health by insuring neither she nor Aaron develops a smoking habit but maintain a healthy lifestyle

Aaron has been working as a broker for three years and is gradually acquiring expertise in

trading emerging market stocks He would soon like to start his own broker-dealer firm with one

of his colleagues and has started accumulating savings for making the required investment In addition, Aaron has begun to accumulate funds to finance both his daughters’ post-secondary education

Lizzie is responsible for providing financial support to her father who is 85 years old and has depleted his pension income on living expenses and hefty medical bills Her father has suffered from two heart attacks which have significantly deteriorated his heart’s health Annual spending needs with respect to her father amount to $30,000 and are expected to continue for five years, which corresponds to his estimated remaining life expectancy Her father intends to leave his current residence, a five-bedroom home, as legacy for his daughter and her family

The Strong’s residence is situated close to a forest where the appearance of squirrels is a

common occurrence These squirrels have damaged the apartment building’s electrical wiring on numerous occasions in the past Although they do not cause extensive damage, their presence is

a nuisance for residents including the couple

In light of their significant spending requirements, Aaron decides to purchase disability

insurance to protect against the impact of a disability incident on consumption needs His

employer currently provides a disability insurance policy with an entitlement period of two months for all his employees He is evaluating three alternative policies The details of these policies are summarized in the exhibit below:

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Exhibit: Short-listed Disability Term Insurance Policies

Policy A Policy B Policy C

Insurance deductible $1,000 $1,500 $1,800

Elimination period One month 8 months 6 months Type of policy Non-cancellable

Non-cancellable and guaranteed renewable

FinQuiz Question ID: 72097

1 Considering each factor in isolation, which of the following statements most accurately

discusses the factors influencing each spouse’s human capital value? Relative to:

A Lizzie, Aaron’s human capital value is lower due to higher income volatility

B Lizzie, Aaron’s human capital value is higher because he is a non-smoking male

C Aaron, Lizzie’s human capital value is lower due to higher mortality expectations

resulting from her family’s medical history

2 Aaron’s financial life stage can most likely be classified as:

A early career

B peak accumulation

C career development

3 Which of the following risks is most likely faced by the couple with respect to funding

Lizzie’s father’s medical and living expenses?

A Earnings risk

B Longevity risk

C Premature death risk

4 The Strong’s financial advisor, Carl Whitburg, has recommended that the couple purchase an advanced life deferred annuity (ALDA) to meet Lizzie’s father’s annual expenses Which of the following reasons, in particular, negates his recommendation?

A Her father has a bequest requirement

B Premium will be high given her father’s current age

C Given her father’s health and remaining life expectancy, his investing preferences will be conservative

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5 The best risk management technique to deal with wiring damages caused by the squirrels is:

A risk transfer

B risk retention

C risk reduction

6 Which disability policy will be most appropriate for Aaron?

A A

B B

C C

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