Chapter 26 Investment Policy and the Framework of the CFA Institute

Chapter 26 Investment Policy and the Framework of the CFA Institute

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Chapter 26 Investment Policy and the Framework of the CFA Institute Multiple Choice Questions 1. __________ refer to strategies aimed at attaining the established rate of return requirements while meeting expressed risk tolerance and applicable constraints. A) Investment constraints B) Investment objectives C) Investment policies D) All of the above E) None of the above Answer: C Difficulty: Moderate Rationale: Objectives are goals, constraints refer to actions the investor is unwilling to take; both objectives and constraints determine policies. 2. One incorrect belief that is often cited as a reason for fully-funded pension funds to invest in equities is A) stocks have higher risk. B) bonds have lower returns. C) stocks provide a hedge against inflation. D) stocks have higher returns. E) all of the above are incorrect beliefs that are often cited. Answer: C Difficulty: Moderate Rationale: Nominal returns on stocks are highly correlated with inflation, yet many pension managers cite inflation protection as a reason for investing in equities. 3. __________ in the process of asset allocation. A) Deriving the efficient portfolio frontier is a step B) Specifying asset classes to be included in the portfolio is a step C) Specifying the capital market expectations is a step D) All of the above are steps E) None of the above is a step in the asset allocation process. Answer: D Difficulty: Easy Rationale: A, B, and C determine asset allocation. 139
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Investment Policy and the Framework of the CFA Institute 4. Questionnaires and attitude surveys suggest that risk tolerance A) increases with age. B) decreases with age. C) stays constant over the life cycle for most investors. D) cannot be assessed. E) none of the above Answer: B Difficulty: Easy Rationale: The life-cycle view of investment behavior suggests that investors are more risk tolerant when they are younger, and surveys support this view. 5. __________ can be used to create a perfect inflation hedge A) Gold B) Real estate C) CPI-linked bonds D) The S&P 500 index E) None of the above Answer: C Difficulty: Moderate Rationale: The CPI is the rate of inflation, thus CPI-linked bonds can be used to create a perfect inflation hedge. 6. A fully-funded pension plan can invest surplus assets in equities provided it reduces the proportion in equities when the value of the fund drops near the accumulated benefit obligation. This strategy is referred to as A) immunization. B) hedging. C) diversification. D) contingent immunization. E) overfunding. Answer: D Difficulty: Easy Rationale: Contingent immunization allows the fund to participate in the higher returns of the equity market while protecting the benefits of plan participants. 140
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Chapter 26 Investment Policy and the Framework of the CFA Institute

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