Module 2 Quiz Review

Max is meeting with his clients, Steve and Anne, to define their goals. Steve tells Max one of his goals is purchasing a hunting camp in two years, and Anne rolls her eyes. What is the best action for Max to take next?

Ask Anne if the camp is a mutually agreed-upon goal.

Which of the following statements regarding behavioral finance is CORRECT? I. Behavioral finance attempts to understand why people often act irrationally when making financial decisions. II. Concepts used in behavioral finance include herding and confirmation bias.

Both I and II

Which of the following statements regarding emotional biases is CORRECT? I. They are more difficult to overcome than cognitive biases. II. They are a result of feelings, intuition, or impulse and are not related to conscious thought.

Both I and II

Which of the following statements regarding the classical economics approach to financial counseling are CORRECT? I. A choice among alternatives is based on objectively defined cost-benefit and risk-returns II. It is based on the belief that increasing financial resources or reducing financial expenditures results in improved financial results.

Both I and II

Which of the following statements regarding the field of behavioral finance is CORRECT? I. Behavioral finance tries to explain why people sometimes make irrational decisions regarding their finances. II. The concepts used in behavioral finance include anchoring and overconfidence.

Both I and II

Which of the following statements regarding the forms of representativeness is CORRECT? Sample-size neglect makes the initial classification based on an overly small and potentially unrealistic sample of data. Base rate neglect occurs when a stock is classified as a growth stock even though new information asserts this may no longer be the case.

Both I and II

Which of the following statements regarding people who have a visual learning style is CORRECT? I. They express themselves through facial expressions. II. They prefer their goals and objectives to be presented as a to-do-list in bullet form.

I only

Which of the following statements regarding people who have a kinesthetic learning style is CORRECT? I. They retain information by hearing or speaking. II. They express themselves through facial expressions. III. They tend to respond to graphs, charts, pictures, and reading information. IV. They prefer their goals and objectives to be presented as a to-do-list in bullet form.

IV only

Ed has accumulated $10,000 in a savings account over the last few years and has earmarked that money as a down payment on a new boat. His air conditioner breaks and requires $5,000 in repairs. Ed is reluctant to spend the money in his savings account to make the repairs because he wants to use that money for the boat down payment. Instead, he puts the $5,000 repair bill on his credit card at an annual interest rate of 23%. This is an example of which of the following behaviors?

Mental accounting

The tendency of individuals to take a course of action based on the outcomes of prior events is known as

Outcome Bias

In determining a client's psychological ability to deal with uncertain outcomes, which of the following refers to a client's assessment of the magnitude of the risks being traded off?

Risk perception

The following statements regarding behavioral finance concepts are CORRECT except

a client's context represents what he believes to be right.

A client's assessment of the magnitude of the risks being traded off is known as

risk perception.

Under some circumstances, financial planners attempt to substitute clients' negative beliefs that lead to poor financial decisions with positive attitudes that should result in better financial results. This represents what approach to financial counseling?

Cognitive-behavioral approach

The behavioral finance concept that asserts that people are given a means of reference, a set of beliefs or values, which they use to interpret facts or conditions as they make decisions, is known as

Framing Bias

One of your clients, Phil, has a tendency to follow the actions of a larger group of people when making financial decisions, whether those actions are rational or not. Phil's behavior is an example of

Herding

Which of the following questions a financial planner might ask a client are closed-ended? I. Do you have disability insurance coverage? II. How do you feel about investing in the stock market? III. Do you have a car payment? IV. How are your job prospects for the future?

I & III

Roberta, a financial planner, is interviewing a new client. During the interview, which of the following strategies can Roberta employ to engage in active listening? I. Pay full attention to what the client says II. Paraphrase the client's comments to better understand what the client is trying to communicate III. Interrupt the client's answers whenever Roberta feels that the client might benefit from additional clarification

I and II

Which of the following statements regarding verbal mirroring is CORRECT? I. The use of verbal mirroring can improve rapport with clients. II. In verbal mirroring, the planner imitates the client's word use, tone of voice, and communication method. III. In verbal mirroring, the planner uses the client's body language. IV. Verbal mirroring includes the inflection of voice or emphasis on certain words.

I and II

Jason is meeting with Christine, who was recently referred to him by a friend. Which of the following strategies might Jason use in a meeting with Christine to foster good communication? I. Adopting the client's body language II. Imitating the client's word use, tone of voice, and communication method III. Asking as many questions as possible that require only a "yes" or "no" answer IV. Paying full attention to what the client is saying and responding by paraphrasing the client's comments

I, II, & IV

Which of the following statements regarding the economic and resource approach to financial counseling is CORRECT? I. Clients are assumed to be rational. II. The focus is on obtaining and analyzing quantitative data, such as cash flow, assets, and liabilities. III. In this approach, the client is the agent of change. IV. Individuals will change to the most favorable behavior if given the appropriate counseling.

I, II, & IV

Which of the following may be affected by a client's risk tolerance and risk perception? I. Investment decisions II. Decisions concerning insurance coverage III. Decisions concerning types and amount of mortgages IV. Decisions concerning pension payout options

I, II, III, & IV

Which of the following statements regarding interpersonal communication between financial planners and their clients are CORRECT? I. Mirroring is accomplished by imitating the client's body language or verbal style. II. Body language can impact how clients receive and interpret messages more than any other type of communication. III. Emotional intelligence includes the ability to recognize emotional expressions and select socially appropriate responses. IV. Proper use of these communication skills helps develop a relationship of honesty and trust between financial planners and their clients.

I, II, III, and IV

Which of the following statements regarding verbal mirroring is CORRECT? I. In verbal mirroring, the planner uses the client's body language. II. In verbal mirroring, the planner imitates the client's word use, tone of voice, and communication method. III. The use of verbal mirroring can improve rapport with clients. IV. Verbal mirroring includes the inflection of voice or emphasis on certain words.

II and III

Emmitt has an auditory learning style. Which of the following statements regarding Emmitt is CORRECT? I. He prefers to learn by using a hands-on approach. II. He responds well to graphs, charts, and visual presentations. III. He retains information by hearing or speaking. IV. He prefers his goals and objectives to be presented as a to-do-list in bullet form.

III only

Brittany's mother, Joan, passed away two years ago. As part of Brittany's comprehensive financial plan, her financial planner recommends that Brittany sell the ABC stock she inherited from Joan. Because Joan purchased the stocks on the day Brittany was born, they are sentimental to Brittany and she doesn't want to sell. This best describes what type of emotional bias on Brittany's part?

Status quo bias

Justin and Maddie have asked you to provide them with a comprehensive financial plan. During your initial meeting, you asked several questions to understand their feelings, goals, and objectives. Based on this discussion, you believe a consultative approach should be used that specifically identifies their strengths and weaknesses, among other factors. Which of the following techniques is most closely aligned with your financial counseling approach in this case?

Strategic management approach

A client is presented with two equal investment opportunities. The first is stated in terms of potential gains, and the second is stated in terms of potential losses. Without having any additional information, the client selects the first investment. The client's decision reflects:

loss aversion theory.

During his initial interview with a financial planner, Sam explains the tradeoffs he is willing to make between potential risks and rewards. These tradeoffs illustrate Sam's

risk tolerance.