CRPC ACTUAL FINALS EXAMS QUESTIONS AND
ANSWERS SURE A+
✔✔Susan has reached full retirement age (FRA). She is trying to decide between
starting Social Security benefits of $1,000 per month now, or delaying receipt for three
years and using her savings to provide current income. By delaying three years her
benefit would increase to $1,240 per month. Ignoring the time value of money and cost-
of-living adjustments, use the break-even calculation to determine how much longer
Susan will need to live in order for delaying to "pay off."
A)
She should delay beyond FRA regardless of her life expectancy in order to maximize
her lifetime benefit.
B)
She should delay only if she expects to live beyond the next 15½ years or so.
C)
She should begin at FRA if she expects to live beyond the next three years.
D)
She should begin her benefits at FRA regardless of her life expectancy in order to
maximize her lifetime benefit. - ✔✔By delaying three years, Susan is forfeiting $1,000 X
36 payments or $36,000 of benefits. She would then gain $240 per month going
forward: $36,000/$240 = 150 months, or 12.5 years, from three years from now. If she
thinks she is going to live beyond 15.5 years from now, it would pay to delay benefits by
three years.
B
LO 3-3
✔✔Sam, age 62, begins receiving his Social Security income. His PIA is $1,500 per
month. Because he has filed at age 62, his payment will be reduced by 25% to $1,125.
His wife Linda, age 67, would like to begin spousal benefits. Her monthly income would
be
,A)
$562.50.
B)
$1,125.00.
C)
$1,500.00.
D)
$750.00. - ✔✔Because Linda has attained FRA, she would be eligible for 50% of Sam's
full PIA, or $750.00.
D
LO 3-4
✔✔Unsystematic risk
A)
increases during periods of volatile interest rates.
B)
is reduced when markets fluctuate less.
C)
is increased through diversification.
D)
can be effectively eliminated. - ✔✔D
Diversification decreases unsystematic risk.
Market fluctuations affect market risk, a type of systematic risk. Volatile interest rates
affect interest rate risk, which is a type of systematic risk.
One of the main points of the CAPM (Capital Asset Pricing Model) is that investors are
not rewarded in the long-term for taking unsystematic risk. This does not mean an
investor cannot get lucky and purchase the next Amazon or Facebook early. It means
on average, over time, unsystematic risk does not benefit the average investor.
LO 2-3
✔✔Sources of risk include which of the following?
fluctuating exchange rates
a firm's financing decisions
higher interest rates
a loss of purchasing power - ✔✔All of the options are types of systematic or
unsystematic risk.
LO 2-3
fluctuating exchange rates
a firm's financing decisions
higher interest rates
,a loss of purchasing power
✔✔Investors who want to bear the least amount of risk from equity investments should
acquire stocks with beta coefficients
A)
less than 0.5.
B)
less than 1.0.
C)
greater than 1.0.
D)
greater than 1.5. - ✔✔When seeking investments that have the least amount of risk, the
lowest beta should be selected.
A
LO 2-3
✔✔If a security has an average return of 14.2% and a standard deviation of 8.4, what
can be said about the security?
A)
The security's returns can be expected to never be negative.
B)
The security's returns can be expected to be between 8.4% and 14.2% approximately
95% of the time.
C)
The security's annual volatility can be expected to be within a range approximately 8.4%
above and 8.4% below the current fair market value.
D)
The security's returns can be expected to be between 5.8% and 22.6% approximately
68% of the time. - ✔✔This security can be expected to have a return that does not
range beyond one standard deviation on either side of its average return approximately
68% of the time. The standard deviation is subtracted from and added to the average
return and there is no guarantee that an investor will never have a negative return.
Volatility is measured by beta.
D
LO 2-3
✔✔Which one of the following individuals would be best served by a $5,000 Roth
conversion?
A)
, George, a 28-year-old father of two whose wife is completing school; their income is
$24,000
B)
Mandy, a 30-year-old highly paid executive
C)
Tom, a 51-year-old mid-level manager making $90,000
D)
Rachel, a 63-year-old widowed grandmother whose income is $70,000 and has $55,000
in her IRA - ✔✔A
George is young, so converting now would give him the longest time for the Roth
account to grow and thus produce tax-free income in retirement. Second, George's
gross income is below the standard deduction for a couple married filing jointly. Also,
they will receive two child tax credits and an earned income credit. Thus, the conversion
will not be income taxed. The others are older and subject to income tax now. Rachel
does not need to convert because she does not seem to be on a path that will make her
pay income taxes in retirement when she claims her monthly benefit.
LO 4-4
✔✔Your client has established a balanced portfolio with various amounts allocated to
different asset classes, and periodically she rebalances the portfolio to keep the same
approximate percentages in the different asset classes. Her approach is
A)
strategic.
B)
dynamic.
C)
core/satellite.
D)
tactical - ✔✔A
This is a correct example of a strategic approach. Tactical means choosing various
sectors that you believe will do best, and changing as you believe is necessary. The
dynamic approach is to change asset allocation amounts as the market changes,
typically used by institutional investors. Core/satellite is a combination of strategic and
tactical.
LO 2-5
✔✔Harry, who is 34 years old, contributed $2,000 to a Roth IRA six years ago. By this
year, the investments in his account had grown to $3,785. Finding himself in a financial
bind, Harry is now compelled to withdraw $2,000 from this Roth IRA. What is the tax
and penalty status of this withdrawal?
A)
Harry must pay tax and a $200 penalty.
ANSWERS SURE A+
✔✔Susan has reached full retirement age (FRA). She is trying to decide between
starting Social Security benefits of $1,000 per month now, or delaying receipt for three
years and using her savings to provide current income. By delaying three years her
benefit would increase to $1,240 per month. Ignoring the time value of money and cost-
of-living adjustments, use the break-even calculation to determine how much longer
Susan will need to live in order for delaying to "pay off."
A)
She should delay beyond FRA regardless of her life expectancy in order to maximize
her lifetime benefit.
B)
She should delay only if she expects to live beyond the next 15½ years or so.
C)
She should begin at FRA if she expects to live beyond the next three years.
D)
She should begin her benefits at FRA regardless of her life expectancy in order to
maximize her lifetime benefit. - ✔✔By delaying three years, Susan is forfeiting $1,000 X
36 payments or $36,000 of benefits. She would then gain $240 per month going
forward: $36,000/$240 = 150 months, or 12.5 years, from three years from now. If she
thinks she is going to live beyond 15.5 years from now, it would pay to delay benefits by
three years.
B
LO 3-3
✔✔Sam, age 62, begins receiving his Social Security income. His PIA is $1,500 per
month. Because he has filed at age 62, his payment will be reduced by 25% to $1,125.
His wife Linda, age 67, would like to begin spousal benefits. Her monthly income would
be
,A)
$562.50.
B)
$1,125.00.
C)
$1,500.00.
D)
$750.00. - ✔✔Because Linda has attained FRA, she would be eligible for 50% of Sam's
full PIA, or $750.00.
D
LO 3-4
✔✔Unsystematic risk
A)
increases during periods of volatile interest rates.
B)
is reduced when markets fluctuate less.
C)
is increased through diversification.
D)
can be effectively eliminated. - ✔✔D
Diversification decreases unsystematic risk.
Market fluctuations affect market risk, a type of systematic risk. Volatile interest rates
affect interest rate risk, which is a type of systematic risk.
One of the main points of the CAPM (Capital Asset Pricing Model) is that investors are
not rewarded in the long-term for taking unsystematic risk. This does not mean an
investor cannot get lucky and purchase the next Amazon or Facebook early. It means
on average, over time, unsystematic risk does not benefit the average investor.
LO 2-3
✔✔Sources of risk include which of the following?
fluctuating exchange rates
a firm's financing decisions
higher interest rates
a loss of purchasing power - ✔✔All of the options are types of systematic or
unsystematic risk.
LO 2-3
fluctuating exchange rates
a firm's financing decisions
higher interest rates
,a loss of purchasing power
✔✔Investors who want to bear the least amount of risk from equity investments should
acquire stocks with beta coefficients
A)
less than 0.5.
B)
less than 1.0.
C)
greater than 1.0.
D)
greater than 1.5. - ✔✔When seeking investments that have the least amount of risk, the
lowest beta should be selected.
A
LO 2-3
✔✔If a security has an average return of 14.2% and a standard deviation of 8.4, what
can be said about the security?
A)
The security's returns can be expected to never be negative.
B)
The security's returns can be expected to be between 8.4% and 14.2% approximately
95% of the time.
C)
The security's annual volatility can be expected to be within a range approximately 8.4%
above and 8.4% below the current fair market value.
D)
The security's returns can be expected to be between 5.8% and 22.6% approximately
68% of the time. - ✔✔This security can be expected to have a return that does not
range beyond one standard deviation on either side of its average return approximately
68% of the time. The standard deviation is subtracted from and added to the average
return and there is no guarantee that an investor will never have a negative return.
Volatility is measured by beta.
D
LO 2-3
✔✔Which one of the following individuals would be best served by a $5,000 Roth
conversion?
A)
, George, a 28-year-old father of two whose wife is completing school; their income is
$24,000
B)
Mandy, a 30-year-old highly paid executive
C)
Tom, a 51-year-old mid-level manager making $90,000
D)
Rachel, a 63-year-old widowed grandmother whose income is $70,000 and has $55,000
in her IRA - ✔✔A
George is young, so converting now would give him the longest time for the Roth
account to grow and thus produce tax-free income in retirement. Second, George's
gross income is below the standard deduction for a couple married filing jointly. Also,
they will receive two child tax credits and an earned income credit. Thus, the conversion
will not be income taxed. The others are older and subject to income tax now. Rachel
does not need to convert because she does not seem to be on a path that will make her
pay income taxes in retirement when she claims her monthly benefit.
LO 4-4
✔✔Your client has established a balanced portfolio with various amounts allocated to
different asset classes, and periodically she rebalances the portfolio to keep the same
approximate percentages in the different asset classes. Her approach is
A)
strategic.
B)
dynamic.
C)
core/satellite.
D)
tactical - ✔✔A
This is a correct example of a strategic approach. Tactical means choosing various
sectors that you believe will do best, and changing as you believe is necessary. The
dynamic approach is to change asset allocation amounts as the market changes,
typically used by institutional investors. Core/satellite is a combination of strategic and
tactical.
LO 2-5
✔✔Harry, who is 34 years old, contributed $2,000 to a Roth IRA six years ago. By this
year, the investments in his account had grown to $3,785. Finding himself in a financial
bind, Harry is now compelled to withdraw $2,000 from this Roth IRA. What is the tax
and penalty status of this withdrawal?
A)
Harry must pay tax and a $200 penalty.
