Course 101 Unit 2 Quiz

Planners can use which of the following methods to help determine how a client will process information and make decisions? I. Formal methods, such as the Myers-Briggs evaluation II. Informal methods, such as fact-finding interviews A)Both I and II B)I only C)Neither I nor II D)II only

A. Both I and II. Planners can use both of these methods to help determine a client's psychological profile.

All of the following statements regarding a client's attitudes, beliefs, and values are correct EXCEPT A)the planner should pay little attention to a client's attitudes, beliefs, and values during the financial planning process B)values are attitudes and beliefs for which the client feels strongly C)beliefs are a type of attitude because they reveal the client's understanding of some aspect of his life D)the client's attitudes reflect the client's opinions, values, and wants

A. the planner should pay little attention to a client's attitudes, beliefs, and values during the financial planning process The planner must take into account the impact the client's attitudes, values, and beliefs may have throughout the financial planning process, especially during client-planner communication and when developing and presenting the financial plan.

Which of the following statements regarding behavioral finance is(are) CORRECT? I. Behavioral finance attempts to understand why people often act irrationally during the financial decision-making process. II. Behavioral finance tries to explain the biases people have when making financial decisions. A)I only B)Both I and II C)II only D)Neither I nor II

B. Both I and II.

Which of the following statements regarding clients who have an auditory learning style is(are) CORRECT? 1. They prefer to learn by using a hands-on approach. 2. They respond well to graphs, charts, and visual presentations. 3. They express themselves through words and often enjoy music and conversation. A)2 and 3 B)3 only C)1 and 2 D)1 only

B. Only 3. Statement 3 is correct. Statement 1 is incorrect because people who prefer to learn by using a hands-on approach have a kinesthetic learning style. Statement 2 is incorrect because people who respond well to graphs, charts, and visual presentations have a visual learning style.

Which of the following statements regarding the loss aversion theory is(are) CORRECT? I. The loss aversion theory states that people value gains and losses differently. II. The loss aversion theory states that people will make decisions based on perceived losses rather than perceived gains. A)Both I and II B)II only C)I only D)Neither I nor II

C. I only. Statement I is correct. Statement II is incorrect because the loss aversion theory states that people will make decisions based on perceived gains rather than perceived losses.

Jerry has accumulated $12,000 in a savings account over the last few years and has earmarked that money to buy a new car. His furnace breaks down and requires $8,000 in repairs. Jerry is reluctant to spend the money in his savings account to make the repairs because he feels that money is for his new car. Instead, he puts the $8,000 repair bill on his credit card at an annual interest rate of 21%. This is an example of which of the following behaviors? A)Mental accounting B)Confirmation bias C)Prospect theory D)Herd mentality

A. Mental Accounting. This is an example of mental accounting because Jerry's irrational financial decision resulted from mentally putting his money into separate "accounts" based on the function of those accounts. Prospect theory occurs when a person makes a bad decision because he fears losses more than he values gains. Herd mentality occurs when a person follows the actions of a larger group, whether rational or not. Confirmation bias means people tend to pay attention to information that supports their preconceived opinions while disregarding accurate, unsupportive information.

Which of the following may be affected by a client's risk tolerance and risk perception? 1. Investment decisions 2. Decisions concerning insurance coverage 3. Decisions concerning types and amount of mortgage loans 4. Decisions concerning pension payout options A)1, 2, and 3 B)1, 2, 3, and 4 C)2 and 3 D)1 only

B. 1, 2, 3, and 4. Although risk tolerance and risk perception are most often associated with investing, they may affect any of these financial decisions.

Terry has a kinesthetic learning style. Which of the following approaches would be most useful in working with Terry to prepare a financial plan? A)Giving Terry material to read before engaging in any discussions B)Having Terry write down his goals and objectives with bullet points as they are formulated C)Using graphs, charts, and pictures to convey information to Terry D)Relying heavily on spoken discussions before Terry's goals and recommendations are reduced to writing

B. Having Terry write down his goals and objectives with bullet points as they are formulated Clients with a kinesthetic learning style understand concepts better using a hands-on approach. Writing down goals and objectives with bullet points as they are formulated engages clients with this learning style.

The tendency of people to follow the actions of a larger group when making financial decisions, whether those actions are rational or not, is known as A)anchoring B)herd mentality C)confirmation bias D)overconfidence

B. Herd mentality. This behavior is known as herd mentality. Confirmation bias is the tendency to pay attention to information that supports one's preconceived opinions, while disregarding accurate, unsupportive information. Overconfidence occurs when an investor considers his abilities to be much better than they actually are. Anchoring occurs when a person makes an irrational decision based on information that should have no influence on the decision.

Which of the following statements regarding open-ended and closed-ended questions is(are) CORRECT? I. Open-ended questions facilitate effective communication between the client and planner because they require the client to answer in her own words. II. Planners should use as many closed-ended questions as possible when developing client goals and expectations. A)Neither I nor II B)I only C)Both I and II D)II only

B. I only. Statement I is correct. Statement II is incorrect because planners should use as few closed-ended questions as possible when developing client goals and expectations.

All of the following statements regarding interpersonal communication between financial planners and their clients are correct EXCEPT A)body language can impact how clients receive and interpret messages more than any other type of communication B)effective interpersonal communication involves the application of oral skills but not non-verbal skills C)mirroring is accomplished by imitating the client's body language or verbal style D)emotional intelligence includes the ability to recognize emotional expressions and select socially appropriate responses

B. effective interpersonal communication involves the application of oral skills but not non-verbal skills Effective interpersonal communication involves the application of both oral and non-verbal skills, such as the effective use of body language. The other statements are all correct.

Danielle is a financial planner who believes that clients' attitudes, beliefs, and values influence their behavior. In her practice, she tries to replace negative beliefs that lead to poor financial decisions with positive attitudes that should result in better financial results. Danielle's approach to financial counseling is known as the A)strategic management approach B)economic and resource approach C)cognitive-behavioral approach D)classical economics approach

C. Cognitive- behavioral approach. Danielle's approach to financial counseling is known as the cognitive-behavioral approach. In contrast, the economic and resource approach focuses on obtaining and analyzing quantitative data, such as cash flow, assets, and debt. In the classical economics approach, planners attempt to achieve better financial outcomes by increasing financial resources or reducing expenditures. In the strategic management approach, the client's goals and values drive the client-planner relationship and the planner serves as a consultant.

The degree to which a client's financial resources can cushion risk is known as A)risk tolerance B)risk perception C)risk capacity D)loss aversion.

C. Risk capacity. Risk capacity is the degree to which a client's financial resources can cushion risks. Risk tolerance refers to the trade-offs clients are willing to make between potential risks and rewards. Risk perception refers to the client's assessment of the magnitude of the risks being traded off. Loss aversion theory states that clients value gains and losses differently and make decisions based on perceived gains rather than perceived losses.

The trade-offs that clients are willing to make between potential risks and rewards are known as A)risk perception B)risk capacity C)risk tolerance D)loss aversion

C. Risk tolerance. Risk tolerance refers to the trade-offs clients are willing to make between potential risks and rewards. Risk perception refers to the client's assessment of the magnitude of the risks being traded off. Risk capacity is the degree to which a client's financial resources can cushion risks. Loss aversion theory states that clients value gains and losses differently and make decisions based on perceived gains rather than perceived losses.

During a meeting with his financial planner, Jack asks, "Should I be investing in the stock market to meet my savings goals?" The planner answers, "That depends. How do you feel about the possibility that your investment may decline in value?" The planner's answer is an example of A)emotional intelligence B)verbal mirroring C)a leading response D)physical mirroring

C. a leading response. The planner's answer is a leading response because it guides the client to provide more detail. Physical mirroring is using the client's body language, and verbal mirroring is imitating the client's word use, tone of voice, and communication method. Emotional intelligence is the ability to recognize emotional expressions in oneself and others.

All of the following statements regarding the Myers-Briggs assessment are correct EXCEPT A)the Myers-Briggs assessment evaluates whether a person is introverted or extroverted B)the Myers-Briggs assessment is a formal evaluation that is used to assess a person's psychological profile C)the Myers-Briggs assessment evaluates whether a person is driven by senses or intuition D)the Myers-Briggs assessment is used to assess a person's risk tolerance

D)the Myers-Briggs assessment is used to assess a person's risk tolerance. The Myers-Briggs assessment is a formal evaluation that is used to assess a person's psychological profile. It assesses whether a person is introverted or extroverted, driven by senses or intuition, influenced by thinking or feeling, and apt to perceive and/or judge. It is not used to assess a person's risk tolerance.

Dana has a visual learning style. Which of the following statements regarding Dana is(are) CORRECT? 1. Dana is likely to express herself through facial expressions. 2. Graphs, charts, and pictures are useful in presenting information to Dana. 3. Dana's preferred method of learning is by hearing or speaking. A)2 only B)3 only C)1, 2, and 3 D)1 and 2

D. 1 and 2. Statements 1 and 2 are correct. Because Dana has a visual learning style she is likely to express herself through facial expressions, and she responds well to graphs, charts, and pictures. Statement 3 is incorrect; people whose preferred method of learning is by hearing or speaking have an auditory learning style.

A financial planner asked a client the following questions. Which of them is(are) open-ended? 1. Do you have an IRA? 2. What are your financial goals in terms of retirement? 3. What are your feelings about investing in the stock market? A)1 only B)2 only C)1, 2, and 3 D)2 and 3

D. 2 and 3. Statement 1 is incorrect; this is a closed-ended question because it requires only a "yes" or "no" answer. Statements 2 and 3 are correct; these are open-ended questions because they require the client to answer in her own words.

Which of the following is the best example of physical mirroring? A)A planner asks the client a question that requires only a "yes" or "no" answer. B)A planner answers a client question in a way that guides the client to give more detail. C)A planner imitates the client's word use and tone of voice when talking to the client. D)A planner adopts the client's body language when talking to the client.

D. A planner adopts the client's body language when talking to the client. Adopting the client's body language is an example of physical mirroring. Imitating the client's word use and tone of voice is verbal mirroring. Answering a client question in a way that guides the client to give more detail is using a leading response. A question that requires only a "yes" or "no" answer is a closed-ended question.

During the financial planning process, a financial planner should be sensitive to which of the following? I. The client's attitudes, values, biases, and behaviors II. The planner's own attitudes, values, biases, and behaviors A)II only B)I only C)Neither I nor II D)Both I and II

D. Both I and II. Both of these statements are correct. The planner should take into account the client's attitudes, values, biases, and behaviors, but the planner's recognition of his own attitudes, values, biases, and behaviors is equally important.

Which of the following scenarios is the best example of anchoring? A)Carol, age 27, deposits her $200,000 retirement fund in a savings account instead of investing it in stocks; she understands that stocks will probably provide a higher return over the long run but she wants to avoid any possible loss of principal. B)Ted invests a large sum of money in a risky stock without doing any investigation because several of his friends at work have invested in the same stock. C)Harvey plans to continue picking his own stock investments without professional advice, despite having poor results over the last several years when the market in general was booming. D)Don buys a house that is out of his price range simply because the house is in the same subdivision as his girlfriend's.

D. Don buys a house that is out of his price range simply because the house is in the same subdivision as his girlfriend's. Don's scenario best illustrates anchoring because Don has made an irrational financial decision based on information that should have had no bearing on the decision. Carol's scenario illustrates the prospect theory because she fears losses much more than she values gains. Harvey's scenario illustrates overconfidence because he considers his stock-picking abilities to be much better than they actually are. Ted's scenario illustrates herd mentality because he is following the actions of a larger group, whether they are rational or not.

Phil is a financial planner who believes that a client's goals and values should drive the client-planner relationship. He conducts a SWOT analysis (identifying strengths, weaknesses, obstacles, and threats) early in the financial planning process with each client. Phil's approach to financial counseling is an example of which of the following approaches? A)Cognitive-behavioral approach B)Classical economics approach C)Psychoanalytic approach D)Strategic management approach

D. Strategic Management approach. Phil's approach is an example of the strategic management approach to financial counseling. In the classical economics approach, clients choose among alternatives based on objectively-defined cost-benefit and risk-return tradeoffs. In the cognitive-behavioral approach, planners attempt to substitute negative beliefs with positive attitudes that should result in better financial results. The psychoanalytic approach is based on the use of psychoanalytic theory such as Freudian or Gestalt theory.