2019 CFA level 3 qbank r 13 14 concentrated single asset risk management questions

Question #2 of 62 Which of the following statements regarding human capital is most accurate?. Question #4 of 62 The volatility of human capital and the demand for life insurance are: ww

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Question #1 of 62

A nancial asset that is speci cally designed to address the problem of outliving one's assets is

called:

A) a guaranteed investment contract.

B) life insurance.

C) a life annuity.

Which of the following statements regarding human capital is most accurate?

A) A person’s human capital continues after retirement.

B) A person’s human capital is highest when they are born and trends downward after

that

C) For a young investor their human capital is equivalent to a large holding of an illiquid

asset

Margin-lending rules would most likely make economic sense in a:

A) risk based system.

B) rules based system.

C) returns based system.

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

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A) negatively correlated.

B) uncorrelated.

C) positively correlated.

Which of the following statements regarding xed and/or variable annuities is most correct?

A) Although the risks underlying xed and variable annuities are di erent, the fees for

them tend to be similar

B) For xed annuities, if interest rates are expected to decrease then it is best to purchase

the xed annuity now

C) Mortality credits bene t those annuitants who die earlier than annuitants who live

longer

Regarding the asset allocation of total wealth, which of the following statements is most

correct?

A) Asset allocation decisions should focus on nancial capital.

B) Generally human capital is riskier than nancial capital.

C) The aggregate human capital of a couple is less risky than their individual human

capital

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Consider the following policy:

Expected annual dividend = $1,190

Expected surrender value = =$70,000

Base on a discount rate of 8%, the net surrender cost index per 1,000 of insurance is closest to:

A) $12.70.

B) $13.80.

C) $13.10

Which of the following types of risk is most likely to impact both nancial capital and human

capital?

A) Longevity risk.

B) Health risk.

C) Liability risk.

Which of the following risks is likely to be associated with the 'peak accumulation' phase of an

individual's life?

A) Premature death risk.

B) Longevity risk.

C) Career risk.

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The purpose of a personal line of credit secured by company stock for the owner of a private

business is generally to:

A) convert the remaining ownership position to public stock.

B) extract cash from the business so the owner can use the funds for personal purposes.

C) exit any responsibility for managing the business.

After attending a recent conference on wealth planning for high net worth individuals you

prepare several summary points to present to your coworkers:

I An estate tax freeze is a good way to shift the tax burden on future appreciation to the next generation

II A family limited partnership allows the founding member of a company to shift day to day company management of the business to the next generation while retaining the bene ts of appreciating value in the company for the founder

Which of the statements are most accurate?

A) I.

B) II.

C) I and II.

For which individual might a low level of life insurance and a high level of investment risk be

appropriate?

A) A married 31 year old systems analyst who supports his aged parents and has a large

mortgage

B) A single 25 year old consistently highly paid individual with no dependents.

C) A married 49 year old stockbroker.

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Which of the following statements regarding human capital, nancial capital, and net wealth is

most correct?

A) Net wealth is the sum of nancial capital and human capital.

B) Human capital and nancial capital tend to move together over time.

C) Financial capital tends to increase with age.

For which of the following individuals would a higher exposure to equities be more appropriate

as part of their overall asset allocation?

A) A 27 yr old male who runs his own, risky property development business.

B) A 50 yr old female who works part-time in a factory.

C) A 30 yr old female with a stable job as a nurse in an aged-care facility.

In the following graph which of the following statements is most accurate regarding what the

vertical axis represents besides dollars?

A) The point in time when the individual nishes their educational training and starts

working

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B) The combined amount of human and nancial capital called total wealth.

C) The point in time when the individual is born and their potential human capital is the

greatest while their nancial capital is the smallest

Which of the following statements regarding the pricing of life insurance policies is most

accurate?

A) For a level payment ve-year term policy, the level premium should be higher than the

year 5 premium for an annual term policy

B) Mortality tables are built to re ect past experiences of mortality.

C) Based on the assumed mortality rates, the insurance company estimates the net

premiums to charge for insurance based on the assumed rate of return on investing the i

Financial wealth and the demand for life insurance have:

A) either a positive or a negative relationship depending upon the individual’s level of

wealth

B) a positive relationship.

C) a negative relationship.

The client objective motivating a monetization strategy is least likely to be:

A) a tax e cient exit strategy.

B) provide funds to meet portfolio objectives.

C) increase portfolio systematic risk.

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Which of the following is least likely a consideration when valuing an individual's human

capital?

A) The expected level of employment earnings.

B) The type of industry in which the individual is employed.

C) The value of the individual’s de ned bene t plan bene ts.

The purchase of a lifetime annuity at retirement would be least appropriate for which type of

individual?

A) A married female with low tolerance for investment risk.

B) A single male with no dependents.

C) A married male su ering from a rare congenital heart condition.

Which of the following is not intended to increase the loan to value ratio in a monetization

strategy?

A) Forward conversion with options.

B) Sale of the asset.

C) Total return equity swap.

Tax considerations would likely be of greatest concern for a concentrated holding in:

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A) a private company acquired at the bottom of a past economic cycle.

B) publicly traded shares of stock recently awarded to a company executive.

C) a real estate asset held a couple of years.

In constructing a 'holistic balance sheet' for a young individual, which of the following is likely to

be the largest liability?

A) Future expenses funding.

B) Student loans.

C) Mortgage on house.

John Smith owns 3 apartment buildings He employees himself as the business manager and

pays himself a market wage for this function Being recently divorced, this job has brought

stability to his life Financially he does not need the "manager salary" but emotionally he needs

the job Considering the behavioral nance issues Smith would be least receptive to a:

A) sale of the buildings.

B) monetization of the buildings.

C) hedge of the buildings value.

With no other information to go on, the lowest speci c risk in a concentrated position would

most likely be for the owner of:

A) publicly traded common shares.

B) investment real estate.

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C) a privately held business.

Which of the following statements about life insurance policies is least likely accurate?

A) Permanent insurance can be either whole life insurance or universal insurance.

B) The load of an insurance policy covers the company’s operating cost and expenses for

writing the policy including commissions

C) Cash value refers to the lump sum payment that is paid to the policy owner after death

of the insured

Which of the following statements regarding human capital volatility is most accurate? When

human-capital is bond-like, an investor's nancial assets should be:

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

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

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

Which of the following has a positive relationship with the demand for life insurance?

A) An investor’s aversion to risk.

B) The volatility of the investor’s human capital.

C) The level of nancial wealth.

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Sheryl Rubenstein is a stunt double in Hollywood whose studio took out a life insurance policy

on her What risk is her studio attempting to mitigate?

A) Mortality risk.

B) Longevity risk.

C) Earnings risk.

In which of the following situations would transferring risk be least appropriate as a risk

management strategy?

A) Risk of loss from a re in the home.

B) Risk to earnings through the death of the key person in a very small business.

C) Risk of loss from vandalism to factory windows.

Which of the following statements is most correct?

A) An individual’s net wealth is equal to the value of their nancial assets less the value of

the nancial liabilities

B) An individual’s human capital will always be lower than their nancial capital.

C) Prior to retirement, an individual’s nancial capital is expected to increase while human

capital is likely to decrease

A measure of an individual's lifetime earning capacity is best de ned as which of the following?

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A) Total wealth.

B) Human capital.

C) Financial capital.

Values that are most likely on an individual's economic (holistic) balance sheet include:

A) only human capital.

B) only bequests and de ned-contribution pensions.

C) bequests, human capital, and de ned-bene t pensions.

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

A) xed annuities are easier to terminate than variable annuities.

B) the xed annuity’s income stream is stable throughout the life of the annuity purchaser.

C) the xed annuity’s income o ers a hedge against in ation during periods of stag ation.

An advantage of a variable annuity over a xed annuity is the:

A) variable annuity o ers stable income over the life of the purchaser of the annuity.

B) purchaser of the variable annuity will never out live the income stream from the

annuity

C) variable annuity o ers the opportunity to stay even with the rate of in ation.

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Life insurance is most commonly used to hedge against:

A) mortality risk.

B) longevity risk.

C) earnings risk.

With regard to an individual's total wealth, which statement is most accurate? If an individual's

human capital is xed income-like their nancial portfolio:

A) should be weighted with similar non-risky xed income assets.

B) should be weighted in no speci c way that is related to their human capital.

C) may be weighted more heavily towards risky assets.

Which of the following assets is generally the least marketable asset within an individual's

nancial capital?

A) Pension.

B) Private equity.

C) Collectables.

Karl and Karen Arlt are both thirty- ve years old and have two children, Noah and Jamie ages 5

and 7, respectively Karen is a tenured professor at the local state college and Karl is an

engineer working at an electrical utility company Together the Arlts have a combined income

of $150,000 per year The Arlts are meeting with a nancial consultant Katherine Ryals, CFA, for

the rst time who was recommended to them by Karl's brother who is also training with Ryals

to become a nancial consultant himself The four of them are meeting around the Arlt's dining

room table where Ryals is gathering information to determine an investment policy statement

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for the Arlts who state they want to retire when they are 60 years old One of the questions

asks the Arlts about their general feelings of risk and Karen blurts out "the recent turmoil in the

nancial markets due to the mortgage crisis makes me sick to my stomach!" Up to this point in

their lives the Arlt's have not amassed a signi cant amount of nancial wealth nor have they

given much thought about leaving a bequest

It is now two weeks later and the Arlt's are meeting with Ryals and Karl's brother again Ryals

suggests that they purchase a million dollar variable universal life (VUL) policy whereby their

premium payments will go into mutual fund type investments resulting in equity-like returns

She states "because your incomes are stable your human capital is xed income-like thus to be

able to replace your steady income your demand for life insurance is high." She goes on to

state "since your incomes are stable your assets should be invested in more equity-like

investments like the ones found in the VUL thus it is the perfect investment vehicle for you."

Ryal's analysis reveals that to maintain their current $150,000 per year income when they retire

in 25 years at age 60 assuming a 3% increase in income per year would require an income

stream of about $314,000 per year This represents a portfolio worth approximately $3.3

million at retirement, assumes they live another 20 years during retirement, achieve a 7% rate

of return on their portfolio during retirement, and there is nothing left of the portfolio at the

end of 20 years Ryals goes on to further explain that to amass the equivalent of $3.3 million 25

years from now given they have no retirement savings now and assuming a 10% yearly rate of

return would require them to save roughly $2,500 per month

After careful consideration of their insurance needs the Arlts decide to purchase term

insurance on both of them and invest a portion of their after tax income into a deferred

variable annuity Upon retirement the Arlts are expecting to choose the largest cash out ow

possible from the annuity utilizing the "joint and survivor" payout option The Arlts also decide

to purchase disability insurance that will pay them 80% of their salary in case either of them are

unable to perform their jobs due to an illness or condition

Based on the information regarding Karl and Karen's incomes the discount rate used to

determine their human capital would be:

A) indeterminate since the discount rate is based on factors other than the variability in

their incomes

B) low representing lower risk due to their stable incomes.

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C) high because their incomes would have a low variability over time.

Given the Arlt's personal information gathered from the questionnaire, which of the following

statements regarding the correct asset allocation of their portfolio is most accurate?

A) Their portfolio should be allocated more towards risky assets since their human capital

is bond-like

B) Since they are in the early part of the accumulation phase of their careers they can

tolerate more risk in their portfolio and thus should be invested more heavily in

i i

C) Their portfolio should be allocated more towards less risky assets because they have a

below average willingness to accept risk thus their overall risk level is below average

The statements made by the nancial consultant regarding the demand for life insurance and

the asset allocation of the policy premiums are:

A) correct for both statements.

B) incorrect for both statements.

C) correct for only one of the statements.

A disadvantage of the Arlt's choice of the annuity is:

A) the annuity will lose real earning power in periods of high in ation.

B) if they both die before their predicted life expectancy the remainder of their assets will

go to the insurance company instead of their heirs

C) the annuity is less tax e cient than utilizing a de ned contribution plan.

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