CEBS RPA 2 LATEST EXAMS SCRIPT QUESTIONS
AND ANSWERS RATED A+
✔✔Defensive Stock - ✔✔Recession-resistant stock
✔✔Interest-Sensitive Stock - ✔✔Stock affected strongly by interest-rate changes
✔✔Mutual Fund Advantage - ✔✔Diversification and liquidity for smaller plans
✔✔Portfolio Expected Return - ✔✔Weighted average of expected asset returns
✔✔Portfolio Risk Trap - ✔✔Portfolio risk is NOT weighted average of individual risks
✔✔Law of Large Numbers - ✔✔More independent securities reduce firm-specific risk
✔✔Correlation of +1 - ✔✔No diversification benefit
✔✔Correlation of 0 - ✔✔Some diversification benefit
✔✔Correlation of -1 - ✔✔Maximum diversification benefit
✔✔Lower Correlation Means - ✔✔Lower portfolio risk
✔✔Normal Distribution ±1 SD - ✔✔68.3% of outcomes
✔✔Normal Distribution ±2 SD - ✔✔95% of outcomes
✔✔Normal Distribution ±3 SD - ✔✔99% of outcomes
✔✔Large Stocks vs Small Stocks - ✔✔Small stocks historically higher return and higher
risk
, ✔✔T-Bills - ✔✔Lowest risk and lowest return major asset class
✔✔Market Risk Example - ✔✔Interest rate increases negatively affect most companies
✔✔Liquidity Importance - ✔✔Prevents forced sale of investments during depressed
markets
✔✔Time-Weighted Return Advantage - ✔✔Removes effect of external cash flow timing
✔✔Arithmetic vs Geometric Trap - ✔✔Arithmetic mean overstates long-term growth
when volatility exists
✔✔Geometric Mean Usage - ✔✔Used for actual long-term compounded growth
✔✔Arithmetic Mean Usage - ✔✔Used for average single-period return
✔✔Beta of 1.0 - ✔✔Security moves with market
✔✔Beta Greater Than 1 - ✔✔More volatile than market
✔✔Beta Less Than 1 - ✔✔Less volatile than market
✔✔Security Market Line - ✔✔Slope equals market return minus risk-free rate
✔✔Standard Deviation Usage - ✔✔Most common measure of investment risk
✔✔Variance vs Standard Deviation - ✔✔Standard deviation easier to interpret because
same units as returns
✔✔Investment Manager Selection Criteria - ✔✔Performance history strategy references
and decision process
✔✔DC Plan Communication Requirement - ✔✔Participants must receive enough
information to make informed choices
✔✔Lifecycle Fund - ✔✔Portfolio adjusted automatically as retirement nears
✔✔Target-Date Fund - ✔✔Investment mix becomes more conservative over time
✔✔GIC - ✔✔Insurance contract guaranteeing principal and interest
✔✔Exclusive Benefit Rule - ✔✔Plan assets must benefit employees and beneficiaries
only
AND ANSWERS RATED A+
✔✔Defensive Stock - ✔✔Recession-resistant stock
✔✔Interest-Sensitive Stock - ✔✔Stock affected strongly by interest-rate changes
✔✔Mutual Fund Advantage - ✔✔Diversification and liquidity for smaller plans
✔✔Portfolio Expected Return - ✔✔Weighted average of expected asset returns
✔✔Portfolio Risk Trap - ✔✔Portfolio risk is NOT weighted average of individual risks
✔✔Law of Large Numbers - ✔✔More independent securities reduce firm-specific risk
✔✔Correlation of +1 - ✔✔No diversification benefit
✔✔Correlation of 0 - ✔✔Some diversification benefit
✔✔Correlation of -1 - ✔✔Maximum diversification benefit
✔✔Lower Correlation Means - ✔✔Lower portfolio risk
✔✔Normal Distribution ±1 SD - ✔✔68.3% of outcomes
✔✔Normal Distribution ±2 SD - ✔✔95% of outcomes
✔✔Normal Distribution ±3 SD - ✔✔99% of outcomes
✔✔Large Stocks vs Small Stocks - ✔✔Small stocks historically higher return and higher
risk
, ✔✔T-Bills - ✔✔Lowest risk and lowest return major asset class
✔✔Market Risk Example - ✔✔Interest rate increases negatively affect most companies
✔✔Liquidity Importance - ✔✔Prevents forced sale of investments during depressed
markets
✔✔Time-Weighted Return Advantage - ✔✔Removes effect of external cash flow timing
✔✔Arithmetic vs Geometric Trap - ✔✔Arithmetic mean overstates long-term growth
when volatility exists
✔✔Geometric Mean Usage - ✔✔Used for actual long-term compounded growth
✔✔Arithmetic Mean Usage - ✔✔Used for average single-period return
✔✔Beta of 1.0 - ✔✔Security moves with market
✔✔Beta Greater Than 1 - ✔✔More volatile than market
✔✔Beta Less Than 1 - ✔✔Less volatile than market
✔✔Security Market Line - ✔✔Slope equals market return minus risk-free rate
✔✔Standard Deviation Usage - ✔✔Most common measure of investment risk
✔✔Variance vs Standard Deviation - ✔✔Standard deviation easier to interpret because
same units as returns
✔✔Investment Manager Selection Criteria - ✔✔Performance history strategy references
and decision process
✔✔DC Plan Communication Requirement - ✔✔Participants must receive enough
information to make informed choices
✔✔Lifecycle Fund - ✔✔Portfolio adjusted automatically as retirement nears
✔✔Target-Date Fund - ✔✔Investment mix becomes more conservative over time
✔✔GIC - ✔✔Insurance contract guaranteeing principal and interest
✔✔Exclusive Benefit Rule - ✔✔Plan assets must benefit employees and beneficiaries
only
