CRPC PRACTICE EXAM 2 VERSION A 2026-2027 ACTUAL EXAM
180 QUESTIONS AND CORRECT DETAILED ANSWERS WITH
RATIONALES (VERIFIED ANSWERS) |ALREADY GRADED A+
QUESTION
Which of the following is NOT a key element of an investment policy statement (IPS)?
A) A provision for periodic review and updating of the policy.
B) The client's acceptable risk tolerance level.
C) A target asset allocation that aligns with the client's objectives.
D) The names of specific stocks or securities to be included in the portfolio.
CORRECT ANS: D
Expert Rationale
The essential elements of an investment policy statement (IPS) are designed to provide a
strategic framework for managing a client's portfolio. Key elements include a clear
statement of the client's goals, the acceptable risk tolerance level, asset allocation
guidelines, suitable investment vehicles and strategies, and a provision for periodic
review. One useful mnemonic to recall these elements is "GRASP": Goals, Risk, Asset
Allocation, Strategies/Suitable Investments, and Periodic Review. The specific selection
of individual securities is a tactical decision that occurs after the IPS is established and is
not a component of the policy itself. Therefore, the names of specific stocks are not a
key element.
QUESTION
Which of the following is a characteristic of Treasury Inflation-Protected Securities
(TIPS)?
A) They are sold at a discount to their par value.
B) The increase in the principal amount is taxable each year for federal income tax
purposes.
C) Their returns are tied to the Producer Price Index (PPI).
D) They are issued with maturities of up to 40 years.
,CORRECT ANS: B
Expert Rationale
Treasury Inflation-Protected Securities (TIPS) are designed to protect investors from
inflation. The principal amount of TIPS is adjusted semiannually based on changes in the
Consumer Price Index (CPI), not the Producer Price Index (PPI). While the increase in
principal is not received in cash until maturity, it is considered taxable income for federal
income tax purposes in the year it occurs, unless held in a tax-advantaged account. TIPS
are issued at par value, not at a discount, and are available with maturities of 5, 10, and
30 years. Therefore, the taxable increase in principal is the correct characteristic.
QUESTION
Your client owns a bond fund with a duration of 6.5. If interest rates increase by 1.5%,
what is the expected percentage change in the price of this fund?
A) 6.5% decrease.
B) 9.75% increase.
C) 9.75% decrease.
D) 6.5% increase.
CORRECT ANS: C
Expert Rationale
Duration measures the sensitivity of a bond's price to changes in interest rates. The
approximate percentage change in price is calculated as the negative of the duration
multiplied by the change in interest rates. In this case, the expected change is -6.5 ×
1.5% = -9.75%. The negative sign indicates an inverse relationship: as interest rates rise,
bond prices decline. Therefore, the bond fund is expected to decrease in price by
approximately 9.75%.
QUESTION
,The process of rebalancing a portfolio back to its target asset allocation is a key factor in
which of the following investment approaches?
A) Institutional asset allocation.
B) Dynamic asset allocation.
C) Tactical asset allocation.
D) Strategic asset allocation.
CORRECT ANS: D
Expert Rationale
Strategic asset allocation involves establishing a long-term target asset mix for a client
based on their goals, risk tolerance, and time horizon. Over time, market movements can
cause the actual portfolio weights to drift from their targets. The process of rebalancing
involves periodically buying or selling assets to restore the portfolio to its original target
allocation. This discipline helps maintain the desired risk-return profile over the long
term. Therefore, rebalancing is a key factor in strategic asset allocation.
QUESTION
What does Jensen's alpha measure?
A) The percentage of return that can be attributed to unsystematic risk.
B) The percentage by which a manager outperformed or underperformed the market.
C) The percentage by which a manager over- or underperformed based on the amount
of risk taken.
D) The percentage of return that can be attributed to systematic risk.
CORRECT ANS: C
Expert Rationale
Jensen's alpha is a risk-adjusted performance metric that measures the excess return of
a portfolio or manager relative to the expected return predicted by the Capital Asset
Pricing Model (CAPM), given the portfolio's level of systematic risk (beta). A positive
alpha indicates that the manager generated a return in excess of what would be
expected for the level of risk taken, while a negative alpha indicates underperformance.
The coefficient of determination (R²) measures the percentage of return that can be
, attributed to systematic risk. Therefore, Jensen's alpha measures over- or
underperformance based on the amount of risk taken.
QUESTION
Which of the following tools is NOT used in technical analysis?
A) Graphs and chart patterns.
B) Financial statement ratios.
C) Moving averages.
D) Supply and demand statistics for stocks.
CORRECT ANS: B
Expert Rationale
Technical analysis involves the study of market action, primarily through the use of
charts, graphs, moving averages, and supply/demand statistics, to forecast future price
movements. Financial statement ratios, such as the price-to-earnings ratio or debt-to-
equity ratio, are tools of fundamental analysis, which focuses on evaluating a company's
intrinsic value by examining its financial statements, management, and industry
conditions. Therefore, financial statement ratios are not used in technical analysis.
QUESTION
When performing bond calculations, which of the following general assumptions should
be made unless stated otherwise?
A) The coupon rate is annualized but paid semiannually for U.S. bonds.
B) On a financial calculator, bonds are calculated in the "Begin" mode.
C) The coupon payment used in bond calculations is the annual amount.
D) The face value of the bond is assumed to be $10,000.
CORRECT ANS: A
Expert Rationale
180 QUESTIONS AND CORRECT DETAILED ANSWERS WITH
RATIONALES (VERIFIED ANSWERS) |ALREADY GRADED A+
QUESTION
Which of the following is NOT a key element of an investment policy statement (IPS)?
A) A provision for periodic review and updating of the policy.
B) The client's acceptable risk tolerance level.
C) A target asset allocation that aligns with the client's objectives.
D) The names of specific stocks or securities to be included in the portfolio.
CORRECT ANS: D
Expert Rationale
The essential elements of an investment policy statement (IPS) are designed to provide a
strategic framework for managing a client's portfolio. Key elements include a clear
statement of the client's goals, the acceptable risk tolerance level, asset allocation
guidelines, suitable investment vehicles and strategies, and a provision for periodic
review. One useful mnemonic to recall these elements is "GRASP": Goals, Risk, Asset
Allocation, Strategies/Suitable Investments, and Periodic Review. The specific selection
of individual securities is a tactical decision that occurs after the IPS is established and is
not a component of the policy itself. Therefore, the names of specific stocks are not a
key element.
QUESTION
Which of the following is a characteristic of Treasury Inflation-Protected Securities
(TIPS)?
A) They are sold at a discount to their par value.
B) The increase in the principal amount is taxable each year for federal income tax
purposes.
C) Their returns are tied to the Producer Price Index (PPI).
D) They are issued with maturities of up to 40 years.
,CORRECT ANS: B
Expert Rationale
Treasury Inflation-Protected Securities (TIPS) are designed to protect investors from
inflation. The principal amount of TIPS is adjusted semiannually based on changes in the
Consumer Price Index (CPI), not the Producer Price Index (PPI). While the increase in
principal is not received in cash until maturity, it is considered taxable income for federal
income tax purposes in the year it occurs, unless held in a tax-advantaged account. TIPS
are issued at par value, not at a discount, and are available with maturities of 5, 10, and
30 years. Therefore, the taxable increase in principal is the correct characteristic.
QUESTION
Your client owns a bond fund with a duration of 6.5. If interest rates increase by 1.5%,
what is the expected percentage change in the price of this fund?
A) 6.5% decrease.
B) 9.75% increase.
C) 9.75% decrease.
D) 6.5% increase.
CORRECT ANS: C
Expert Rationale
Duration measures the sensitivity of a bond's price to changes in interest rates. The
approximate percentage change in price is calculated as the negative of the duration
multiplied by the change in interest rates. In this case, the expected change is -6.5 ×
1.5% = -9.75%. The negative sign indicates an inverse relationship: as interest rates rise,
bond prices decline. Therefore, the bond fund is expected to decrease in price by
approximately 9.75%.
QUESTION
,The process of rebalancing a portfolio back to its target asset allocation is a key factor in
which of the following investment approaches?
A) Institutional asset allocation.
B) Dynamic asset allocation.
C) Tactical asset allocation.
D) Strategic asset allocation.
CORRECT ANS: D
Expert Rationale
Strategic asset allocation involves establishing a long-term target asset mix for a client
based on their goals, risk tolerance, and time horizon. Over time, market movements can
cause the actual portfolio weights to drift from their targets. The process of rebalancing
involves periodically buying or selling assets to restore the portfolio to its original target
allocation. This discipline helps maintain the desired risk-return profile over the long
term. Therefore, rebalancing is a key factor in strategic asset allocation.
QUESTION
What does Jensen's alpha measure?
A) The percentage of return that can be attributed to unsystematic risk.
B) The percentage by which a manager outperformed or underperformed the market.
C) The percentage by which a manager over- or underperformed based on the amount
of risk taken.
D) The percentage of return that can be attributed to systematic risk.
CORRECT ANS: C
Expert Rationale
Jensen's alpha is a risk-adjusted performance metric that measures the excess return of
a portfolio or manager relative to the expected return predicted by the Capital Asset
Pricing Model (CAPM), given the portfolio's level of systematic risk (beta). A positive
alpha indicates that the manager generated a return in excess of what would be
expected for the level of risk taken, while a negative alpha indicates underperformance.
The coefficient of determination (R²) measures the percentage of return that can be
, attributed to systematic risk. Therefore, Jensen's alpha measures over- or
underperformance based on the amount of risk taken.
QUESTION
Which of the following tools is NOT used in technical analysis?
A) Graphs and chart patterns.
B) Financial statement ratios.
C) Moving averages.
D) Supply and demand statistics for stocks.
CORRECT ANS: B
Expert Rationale
Technical analysis involves the study of market action, primarily through the use of
charts, graphs, moving averages, and supply/demand statistics, to forecast future price
movements. Financial statement ratios, such as the price-to-earnings ratio or debt-to-
equity ratio, are tools of fundamental analysis, which focuses on evaluating a company's
intrinsic value by examining its financial statements, management, and industry
conditions. Therefore, financial statement ratios are not used in technical analysis.
QUESTION
When performing bond calculations, which of the following general assumptions should
be made unless stated otherwise?
A) The coupon rate is annualized but paid semiannually for U.S. bonds.
B) On a financial calculator, bonds are calculated in the "Begin" mode.
C) The coupon payment used in bond calculations is the annual amount.
D) The face value of the bond is assumed to be $10,000.
CORRECT ANS: A
Expert Rationale
