Practice Test

Portfolio risk is not simply a weighted average of the risks of the individual securities included in the portfolio because it is necessary to recognize:

The covariances between the returns on securities

If a death benefit is being provided outside a qualified plan by a nondiscriminatory group term life insurance contract issued to the employer, the employee is not required to consider any part of the premium paid by the employer as taxable income, unless the employee's coverage exceeds:

$50,000

Diversification reduces portfolio risk most effectively when the correlation coefficient is:

-1, i.e., perfect negative correlation

Any taxable amounts received before age 59½ from a qualified retirement plan are subject to an additional penalty tax of:

10 percent penalty

If the variance of expected returns is 4%, the standard deviation is:

2%

A summary plan description (SPD) must be given to new employees after they become plan participants within a period of:

90 days

All of the following would be considered a "disqualified person" according to Title I of the Employee Retirement Income Security Act (ERISA) EXCEPT:

A 5% direct owner of the employer

All the following are reasons for a plan sponsor converting to a cash balance plan from a traditional defined benefit plan EXCEPT:

A cash balance plan will be less expensive than a career-average defined benefit plan.

For a plan sponsor to qualify for statutory relief from fiduciary liability, items that must be supplied to a plan participant include all the following EXCEPT:

A formal statement detailing how investment alternatives may be configured into an optimal portfolio

A change or modification to a plan document that alters the operation of a retirement plan is known as:

An amendment

Assuming an efficient market, a portfolio manager should devote most of his/her time to performing all of the following tasks EXCEPT:

Analyzing individual securities

Which of the following statements regarding pension plan funds is (are) correct? I. The tax aspect of an investment held in a pension fund is important. II. A pension fund manager is likely to view a tax-exempt type of investment more favorably than one that is not. III. The investment's relative liquidity is often disregarded by pension fund managers.

I only

Shareholders in an open-end investment company may sell their shares:

Back to the fund at any time but at a price not known until the close of the business day

Which of the following statements regarding variable annuities is (are) correct? I. Variable annuity payments to annuitants are guaranteed to last a lifetime. II. The amount of the annuity payments is guaranteed. III. The amount of the annuity payments is guaranteed not to decrease.

I only

Which of the following criteria could be used to establish allocation groups under a new comparability plan? I. Percentage of firm ownership II. Age III. Length of service

I, II and III

Which of the following situations could result in a fiduciary being held liable for a violation committed by a cofiduciary? I. If the fiduciary knowingly conceals the cofiduciary's violation II. If the fiduciary has knowledge of the cofiduciary's violation III. If by the fiduciary's own violation, he or she enables the cofiduciary to commit a violation

I, II and III

All the following are major factors that determine a firm's business risk (as opposed to financial risk) EXCEPT:

Changes in the desired target capital structure

The Ibbotson Associates Inc.'s nearly a century time series study of the four major classes of investments found that:

Common stocks had the highest annual return and the greatest volatility

All the following statements regarding the efficient set of portfolios made possible by the Markowitz Model are correct EXCEPT:

Conservative investors would select portfolios on the upper right end of the efficient set

Disregarding the exception of prohibited transactions, the government agency with jurisdiction over reporting and disclosure, and fiduciary responsibilities as described in Title I of the Employee Retirement Income Security Act (ERISA) is the:

Department of Labor (DOL)

All of the following are arguments used against international diversification EXCEPT:

Economic performance differs widely among countries in the European Union

Which of the following has been found to be correct regarding retirement planning of most investors?

Engaged investors tend to overreact to information about companies

All the following are typical sources of risk for common stock investments EXCEPT:

Extension risk

All of the following statements regarding rollover distributions from a qualified pension plan to an individual retirement account (IRA) or another employer's qualified plan are correct EXCEPT:

For distributions exceeding $5,000, the plan into which the distributions are being rolled over must provide a written explanation about the potential restrictions and tax consequences that apply to the incoming distributions.

Most equity funds can be divided into two categories of investment styles:

Growth and value funds

All the following describe characteristics of various types of common stocks EXCEPT:

Growth stocks are issued by major companies with a long and unbroken history of dividend payments but a record of erratic earnings.

Among the requirements for an investment to be considered a qualified default investment alternative (QDIA) is (are) which of the following? I. It must be managed either by an investment manager as specified under the Employee Retirement Income Security Act of 1974 or by an investment company registered under the Investment Company Act of 1940. II. The QDIA must be diversified so as to minimize the risk of large losses. III. The QDIA must have at least 15% of the eligible employees enrolled.

I and II only

For a retirement plan asset allocation model to qualify under the Department of Labor's (DOL's) safe harbor provisions as investment education, rather than as investment advice, which of the following conditions must be met? I. The model must be based on generally accepted investment theories. II. The model's underlying assumptions must be disclosed. III. The model must be accompanied by a statement explaining that participants should apply the model to retirement assets and exclude other income, assets and investments from consideration.

I and II only

Markowitz diversification analysis generates efficient portfolios based on a set of inputs which include which of the following? I. The expected return for every security being considered II. The standard deviation for every security being considered III. The excess return on the market portfolio

I and II only

Which of the following are considered insiders by the Securities and Exchange Commission (SEC) and required to report their monthly stock purchases and sales to the SEC? I. Officers II. Directors III. Owners of more than 5% of a company's stock

I and II only

Which of the following is (are) among the conditions for an efficient market? I. Information is costless and widely available II. Investors react quickly and fully to new information III. Investors eliminate nonsystematic risk by holding well- diversified portfolios

I and II only

Which of the following is (are) investment techniques using bond portfolios to meet emerging pension obligations? I. Contingent immunization II. Dedication III. Portfolio insurance

I and II only

Which of the following items should be included in an investment policy statement for a qualified retirement plan when investments are participant-directed? I. The number of fund options permitted II. The range of investment options allowed III. The frequency of rebalancing

I and II only

Which of the following plans allow plan sponsors to make contributions on a discretionary basis? I. Age-weighted profit sharing plans II. New comparability plans III. Target benefit plans

I and II only

Which of the following statements regarding exchange-traded funds (ETFs) is (are) correct? I. They are very inefficient from an income tax point of view. II. They are obligated to redeem their shares at the net asset value. III. They can be index funds.

III only

As the number of securities in a portfolio increases, which of the following occurs? I. The importance of each individual security's risk decreases II. The expected return increases III. The importance of the covariance relationships increases

I and III only

Which of the following statements regarding the weak form of market efficiency is (are) correct? I. The weak form of efficiency is concerned with the predictive value of past stock price movements II. The study of public information such as earnings and dividends is important to the weak form of efficiency III. If the market is efficient in the weak form, technical analysis has little or no value

I and III only

Which of the following types of fees is (are) associated with a collective investment fund offered under a 401(k) plan? I. Front-end load II. Back-end load III. Investment management fees

III only

According to some studies which of the following groups has (have) consistently earned above-average investment profits when they make large trades? I. Corporate insiders II. Mutual fund investors III. Investors who use technical analysis

I only

Which of the following is (are) correct regarding a cumulative wealth index? I. Return relatives are used to compute the index II. A cumulative wealth index is the same as an arithmetic mean rate of return III. A cumulative wealth index can be computed only if all of the returns during the period for the calculation are positive

I only

Which of the following statements accurately describe(s) equity index funds? I. They are based on the efficient market hypothesis II. They are expected to perform well when the stock market drops and vice versa III. Plan sponsors generally prefer the fund with the largest beta value

I only

Which of the following statements concerning pension equity plans is (are) correct? I. Pension equity plans are based on final average pay and the percentage credits that a worker receives each year while he or she is a plan participant II. Pension equity plans are less suited to fast-track employees than are traditional defined benefit plans III. Pension equity plans typically provide a relatively equal level of earnings for employees in specific job classes regardless of longevity

I only

Which of the following statements describe(s) information that must be provided to retirement plan participants who can direct plan investments? I. An explanation on the importance of diversifying investments II. Information explaining plan restrictions on fixed investment versus equity investment allocation rates III. A statement cautioning participants on the risk of holding more than 20% of a portfolio in the securities of any single entity, excluding any employer securities

I only

Which of the following statements is (are) correct when analyzing rates of return and comparing the arithmetic and geometric means? I. The geometric mean normally will be less than the arithmetic mean II. The arithmetic mean is preferable for showing the true rate of growth III. The geometric mean should not be used unless there is a minimum of 20 different rates

I only

Which of the following statements regarding the concept of savings anchors is (are) correct? I. Savings anchors involve an initial starting point or level from which the decision maker adjusts and that point or level is subject to certain biases. II. Researchers have found that savings anchors vary with age and income. III. In retirement planning, savings anchors affect more the level of savings than a computation of the necessary funds to sustain a certain level of income.

I, II and III

The financial measurement known as the internal rate of return is: I. Highly effective as a means of evaluating investment managers II. The rate of return that accumulates all of the cash flows of a portfolio to exactly the market value of the ending balance III. Valuable in that it allows the sponsor to determine whether the investment portfolio is achieving the rate of return assumed for actuarial calculations

II and III only

Which of the following is (are) disadvantages of a defined benefit hybrid retirement plan? I. It may make it more difficult to replace midcareer employees with younger, mobile employees. II. It may erode the plan sponsor's fundamental objective of providing retirement benefits. III. If the plan's benefits do not accrue quickly enough, younger participants may not perceive sufficient value in the plan.

II and III only

Which of the following penalties can result when a fiduciary of a retirement plan breaches or violates his or her responsibilities? I. The plan is disqualified. II. An excise tax is levied. III. The fiduciary is held personally liable.

II and III only

Which of the following describe the capital gain (loss) component of return on a typical investment? I. The periodic cash flows on the investment II. The difference between the purchase price and the price at which an asset can be, or is, sold. III. Dividend payments (from stocks)

II only

Which of the following statements is (are) correct regarding the concept of "mean reversion"? I. It is interpreted to mean that if stock returns have been unusually good in the recent past, they are likely to perform at the historical average in the future. II. It implies in part that equity risk is generally lower for those with longer investment horizons. III. Historically investors who have successfully moved in and out of mean-reverting assets have improved their overall returns.

II only

Which of the following statements regarding 12b-1 fees of mutual funds is (are) correct? I. They range as high as 5% of the trade transaction II. They are annual fees III. They are allowed only in small mutual funds because the objective is to increase sales and achieve economies of scale

II only

Which of the following statements regarding the use of electronic media in disclosing plan information is (are) correct? I. Use of electronic media has been severely limited because of the media's difficulties associated with ensuring actual receipt of information. II. Provided certain conditions are met, summary plan descriptions, summaries of material modifications, and summary annual reports may be conveyed in electronic form. III. Pension plan investment information, material on pension plan loans, and responses to written requests from plan participants and beneficiaries may not be conveyed in electronic form.

II only

Which of the following administrative requirements apply to target benefit plans? I. Payment of termination insurance premiums to the Pension Benefit Guaranty Corporation (PBGC) II. Calculation of periodic actuarial valuations required under the Employee Retirement Income Security Act (ERISA) III. Use of an actuarial cost method in determining an initial contribution rate for each employee

III only

When a qualified retirement plan holds employer securities, the maximum amount for a fidelity bond, relative to the required amount if the plan did not hold employer securities, is:

Increased by a significant amount

What is the condition known as bounded rationality when it comes to retirement planning?

Individuals have limitations regarding their mental capabilities to deal with complexity inherent in retirement planning.

All of the following is (are) assumptions made in behavioral finance EXCEPT:

Investors make most decisions based on rational beliefs

Dollar cost averaging:

Involves investing the same amount of money on a periodic basis, even when the securities appear to be overpriced.

All of the following describe advantages and disadvantages of using a packaged product for target-date funds EXCEPT:

It allows plan sponsors to engage the same manager who oversees the company's defined contribution plan

A mutual fund is an "open-end" investment company because:

It constantly issues new shares to investors and stands ready to buy back shares from shareholders

All of the following statements regarding the human-capital based argument in the context of equity exposure are correct EXCEPT:

It is based on the premise that for younger workers the value of their Social Security benefits is an asset with stock-like characteristics.

The retirement plan committee should be authorized by the corporation with the charge to:

Make all decisions necessary regarding the administration of the retirement plan

A number of studies have concluded that common stocks with low price/earnings (P/E) ratios tend to outperform those with higher P/E ratios. This conclusion is in direct conflict with the concept of:

Market efficiency

Which of the following risks is deemed as the most important in affecting price movements of common stocks?

Market risk

All the following statements regarding money market funds are correct EXCEPT:

They do not have a management fee.

Which of the following plans offers participants the greater benefit of either a traditional defined benefit plan or the benefit accumulated by a cash balance plan?

Minimum balance pension plan

All the following forces have supported a paradigm shift where individuals are more likely now to use a wealth management approach in managing their retirement assets than in the past EXCEPT:

Much of the complexity of wealth management in the past has been simplified.

All of the following external service providers may be delegated certain plan functions by a retirement plan committee EXCEPT:

Named fiduciary

The penalty for failure to make a required distribution of at least the correct amount from a qualified retirement plan is a:

Nondeductible excise tax of 50 percent

Which of the following statements is (are) correct concerning investment advice provided to plan participants by a plan fiduciary? I. If requested to do so by a plan participant, a plan sponsor must supply investment advice. II. If investment advice involves fiduciary advisor selection, a plan sponsor must allow for multiple fiduciary advisors. III. Once fiduciary advisors are selected by a plan sponsor, their performance of this service need only undergo scrutiny upon re-bid at a future date.

None

Diversifiable risk can also be referred to as:

Nonsystematic risk

Assume that a fiduciary has acted prudently in selecting and monitoring a duly appointed investment manager for a retirement plan. If the performance of the plan is materially below its benchmark, then the fiduciary is:

Not liable since investment management services have been delegated

The term used to describe a condition that occurs because of different accrual patterns when a traditional defined benefit plan is converted to a cash balance plan is:

Pension wear away

All the following statements describe characteristics of a targeted-maturity lifecycle fund EXCEPT:

Periodic monitoring is needed by its investors to determine if the fund's asset allocation continues to match the investor's risk profile through the stages of accumulation, transition and retirement

Individuals who espouse to the contrarian investing approach are more likely to:

Prefer low price/earnings (P/E) ratio stocks rather than the often popular high P/E ratio stocks

The Employee Retirement Income Security Act (ERISA) requires all of the following provisions in connection with reporting and disclosure and fiduciary duty EXCEPT:

Records related to plan filings are required to be kept for a period of two years after the documents are due for filing

Rule 12b-1 fees assessed against a mutual fund offered as a qualified retirement plan investment option may be used to pay all of the following items EXCEPT:

Remuneration to a plan sponsor in connection with property leased to the plan

The arithmetic mean rate of return is preferable to the geometric mean rate of return if the purpose is to:

Show the typical performance over a single period

Which of the following is the most commonly used measure of dispersion for investment returns over a cumulative period of years?

Standard deviation

If a defined contribution plan fails to comply with Section 404(c) requirements, then:

Statutory relief from fiduciary liability is not available to the plan's fiduciaries

All the following statements regarding the use of statistical models in personal financial planning are correct EXCEPT:

Stochastic models have a large number of fixed assumptions. These models vary one variable at a time to see how it changes the results.

What are the two approaches used in transition from stocks to bonds in a targeted-maturity fund?

Tactical and glide path

All qualified retirement plans are required to have a fidelity bond covering what minimal percentage of plan assets?

Ten percent coverage

All the following are changes made by the Pension Protection Act (PPA) of 2006 EXCEPT:

The PPA required rollovers from various types of retirement savings plans to be first moved into a traditional IRA before the funds can be placed into a Roth IRA.

Which of the following is an important source of information for investors and one of the most used investment advisory services available?

The Value Line Investment Survey

All the information contained in a summary plan description (SPD) must be written in a manner calculated to be understood by:

The average plan participant

All the following are elements in the Capital Asset Pricing Model Yes (CAPM) EXCEPT:

The beta for Treasury bills

An absolute measure of the degree of association between the returns for a pair of securities is:

The covariance

Factors to consider when evaluating an indexed management strategy include all the following EXCEPT:

The difficulty in communicating performance results to participants

All of the following transactions between a retirement plan and a "disqualified person" are prohibited EXCEPT:

The disclosure of plan information

All of the following are conditions for a plan sponsor to qualify for fiduciary relief when investing participant assets in default investment alternatives EXCEPT:

The participant or beneficiary on whose behalf an investment in a QDIA may be made must be afforded the opportunity to make future plan contributions to any other investment alternative under the plan at any time without financial penalty; transfers of current plan accumulations may be subject to financial penalties.

All of the following statements regarding the Capital Asset Pricing Model (CAPM) are correct EXCEPT:

The portfolio's alpha value can be thought of as the amount of return which is dependent on the return of the market

Which of the following statements best describes a bias that hinders investors from making effective decisions when it comes to the selling or disposing of assets?

They prefer to liquidate assets that have appreciated and retain investments where the market price has declined.

The investment manager for a pension plan is analyzing the risk of a particular investment and has developed the following simplified figures: Possible Return Probability 5% .30 10% .50 20% .20 Using the above figures, all the following statements are correct EXCEPT:

The standard deviation is calculated by taking the square root of a number that is approximately 49%

All of the following statements regarding non-traditional asset classes for target-date funds (TDFs) are correct EXCEPT:

The value of these asset classes is less likely to be subject to demand and supply conditions.

Closed-end investment companies are described by all the following EXCEPT:

Their portfolios must include some liquid assets to meet redemptions of shareholders.

All of the following are reasons for the growth of target-date funds EXCEPT:

They are ideal for the automatic re-allocation of assets when a participant's time horizon and spending needs change.

All the following statements regarding investment companies are correct EXCEPT:

They are insured/guaranteed by the Securities and Exchange Commission (SEC)

All of the following are reasons for pension plans, especially those with small assets under management, choosing mutual funds as investment vehicles EXCEPT:

Timing of investment earnings derived from mutual funds match the disbursement schedule of benefit payments.

All of the following statements regarding disclosure requirements for benefit statements are correct EXCEPT:

To a participant in a defined contribution plan who is not entitled to direct plan investments, a plan sponsor must provide a statement once every two years.

All the following factors are included in determining an employee's cost basis in a qualified plan for tax purposes EXCEPT:

Various contributions made by the employer that have yet to be taxed to the employee