CRPC Modules (1-3) Questions And Correct Detailed Answers Graded A+.

What are two purposes of investment policy? - correct answer 1. To provide a foundation of goals, time horizons, and constraints on which the client portfolio is constructed 2. To provide a basis for review, performance evaluation, and adaptation to changing conditions. Why is a long term perspective essential as an element of investment policy? - correct answer The returns work better in the investors favor if they are patient. There are ups and downs in the market but over time the investor is playing a winning game. Why is it important that investment policy be clearly defined? - correct answer They must understand the critical importance of their investment policy, it also makes decision based on how risky the client may be. It must be accurate and clear to them. At a minimum, what five elements should every investment policy contain? - correct answer Goals, Risk, Asset Allocation, Strategies, Periodic Review How do you find the percentage change in bond price? - correct answer Negative duration multiplied by the change in interest rate What are the advantages and disadvantages of common stocks, and why should stocks be an important element in most retirement portfolios? - correct answer Over time, common stocks have almost always outperformed other financial instruments. They also offer rising dividends. Disadvantage is their volatility, which is also higher than most asset classes. Two major risks are business risk and market risk. What are the advantages and disadvantages of fixed-income securities, and to what two sources of return do their owners look? - correct answer Advantage to fixed income securities is their cash flow stream and return of principal if held to maturity, high certainty of return. Their disadvantages are a lower return due to guarantee as well as exposure to inflation and interest rate risk. What are the advantages and disadvantages of cash equivalent investments for the retirement investor? - correct answer Advantages include a short-term maturity, they are highly liquid, and have a high safety of principal. The disadvantages are that they offer generally lower rates of return and are thereby subject to purchasing power risk. What are the advantages and disadvantages of real estate for the retirement investor? - correct answer Advantages include an average rate of return and diversification. Disadvantages include poor liquidity, high transaction costs, and tax-reporting responsibilities. They also can easily become overvalued. Explain Standard Deviation - correct answer A statistical measure of total risk that considers the dispersion of all data points around the average. With investments, higher standard deviation means higher risk. Explain Beta - correct answer Bet is the term referring to a security's volatility measured to the market. The entire markets beta is 1. If security's bet is > 1 it is more volatile than the market. If < 1 the security is less volatile than the market. Explain Duration - correct answer Duration is a term used to describe the price sensitivity of a bond or bond portfolio to changes in interest rates. Higher duration = higher price volatility XYZ Stock has SD of 14% and a mean of 10%. What is coefficient variation? - correct answer 0.14 / 0.10 = 1.4 Which coefficient variation has a better risk/return relationship? 0.88 or 1.5? - correct answer 0.88 offers less risk per unit of return and therefor is the better investment How do you find the percentage change in the value of a bond? - correct answer Multiply the duration by the interest rate change Sharpe Ratio - correct answer Reward-to-volatility ratio; ratio of portfolio excess return to standard deviation. Treynor Ratio - correct answer measures investment performance as the ratio of portfolio risk premium over portfolio beta Jensen's Alpha - correct answer measures investment performance as the raw portfolio returns less the return predicted by the capital asset pricing model Describe the purpose of asset allocation - correct answer to appoint funds in a way that meets the client's investment goals and dampens the effects of periodic market fluctuations Explain the effect of volatility of security prices and factors that can alleviate these concerns - correct answer Two factors that can alleviate these concerns are time and asset allocation. Longer investment horizons can manage greater volatility than short investment horizons. Asset allocation can select certain assets that are aligned with the investor's goals. What is longevity risk? - correct answer risk that a retiree will outlive their financial resources Explain the concept of correlation and how it relates to portfolio management - correct answer Correlation pertaining to a portfolio is referring to the degree in which two securities move relative to each other. Perfect correlation is +1 which means they move in synch together. -1 is the opposite where these two securities move opposite and balance each other out. Diversification is the key component What is meant by the concept of Strategic Asset Allocation? - correct answer Identify the asset mix that will provide the optimal balance between expected risk and return for a long investment horizon. Portfolio manager tries to maintain this balance Tactical Asset Allocation - correct answer When a manager varies from the strategic allocation weights when attractive opportunities are present. May be seen as the opposite of momentum investing where one would move money away from the asset category that has been the most successful Core Satellite asset allocation - correct answer 70-80% invested in broad index fund or etfs - remaining satellite consists of actively managed MFs in niches such as sector funds or alt investments like hedge funds Target Retirement Funds - correct answer Mutual funds that are usually a fund of funds that allocate assets among stock, bond, and money market funds within the same fund family. Uses a specific year in mind. (Think of having this fund be very aggressive and then get more conservative as retirement date approaches.) Balanced Funds - correct answer invest in both stocks and bonds, with the primary objectives of conserving principal, providing income, and long-term growth Managed Accounts - correct answer An investment account that is managed by a broker or other professional; designed for investors lacking the time or expertise to make their own decisions. How can you address the issue of security selection within the asset allocation process? - correct answer Through the use of broad-based index mutual funds that offer diversified representation in their respective asset class What are the four steps in the asset allocation process? - correct answer 1. Determine which asset classes should be represented in portfolio 2. Determine the percentage that each asset class should represent in the total portfolio 3. Select the securities 4. Review the performance and investment climate What are some of the advantages of target funds? - correct answer Target Date funds are easy to use. They are simple and straightforward where rebalancing is automatically done by the manager. What are some of the disadvantages of target date retirement funds? - correct answer "One size fits all" approach may not be the optimum choice for the investor, the fund may not be in sync with the risk tolerance of the investor. What Key 3 elements does strategy depend on? - correct answer 1. Identifiable goal 2. Method to attain that goal 3. Competencies and resources to sustain the strategy Explain the benefits of the buy and hold strategy - correct answer