CRPC exam 2023/2024 with 100% correct answers

2-1 What are the two purposes of investment policy? Investment policy serves two purposes: - correct answer It provides a foundation of goals, time horizons, and constraints on which the client portfolio is constructed. For example, the policy may establish the goal of preserving the purchasing power of the portfolio while providing periodic distributions, and it may limit the acceptable securities to large-company stocks and U.S. Treasury securities. The goals, time horizons, and constraints provide a basis for periodic review by the client and money manager. 2-1 Why is a long-term perspective essential as an element of investment policy? - correct answer U.S. financial markets and many markets overseas have a positive bias in favor of the investor. But this positive bias generally plays out over time. In the short term, the investments that produce sizable returns generally go hand-in-hand with price fluctuations. By taking a long-term view, however, these short-term fluctuations can be ignored. 2-1 Why is it important that investment policy be clearly defined? - correct answer A clear definition of the investment policy helps the planner avoid errors and reduces the chance of disputes between planner and client. An example of a clear definition would be any of the following: No securities or mutual funds with betas greater than 1.15 will be permitted in the portfolio. Only listed stocks may be purchased. The portfolio will not use options or futures except to hedge risk. 2-1 At a minimum, what five elements should every investment policy contain? Briefly explain or provide examples. GRASP - correct answer G-R-A-S-P Goals: A clear statement of the client's investment goals. Goals can be stated in relative terms (e.g., stock returns equal to the market as a whole, as measured against the S&P 500 index). Risk: A statement of the risk level acceptable to the client, as well as how risk will be managed or controlled (through diversification, rotation from long-term to short-term bonds under specified conditions, etc.). For example, "The portfolio will reduce risk by investing only in highly diversified stock and bond funds; further, interest rate risk will be limited by investing only in fixed-income securities with durations of five or less." Allocation: A statement of how the client's assets should be roughly allocated among the suitable classes of investments and a statement of the philosophy under which they should be managed. Guidelines should be given to the planner as to how the funds should be invested and monitored. Strategies: A statement identifying the investment vehicles and investment strategies deemed suitable (and unsuitable) for the portfolio. Examples would include "all corporate fixed-income securities will be A-rated or better," and "no short selling will be allowed." Periodic Review: The policy should stipulate that planner and client should meet periodically, such as semiannually, to review investment performance and discuss any changes in the client's situation that would call for a change in the portfolio or the investment policy itself; this may include general allocation guidelines. 2-2 What are the advantages and disadvantages of common stocks, and why should stocks be an important element in most retirement portfolios? - correct answer Common stocks have earned higher returns over time than other asset classes. Common stocks have outperformed nearly every asset class by a wide margin. In addition, they offer the prospect of rising dividends over time. Their disadvantage to the investor is their volatility, which is also higher than most other asset classes. This volatility makes many clients reluctant to make large allocations to stocks; but the fact is that many of these same clients will be unable to accumulate sufficient retirement savings without the greater returns enjoyed by stocks over time. The two major risks for common stock are business risk and market risk.