Test Q's 1-33

Question 1

Which of the following is the most commonly used measure of dispersion for investment returns over a cumulative period of years?
A. Total variability, i.e. the range in returns
B. Standard deviation
C. The variability in the coefficient of correlation
D. The cumulative probability of having a negative return
E. The cumulative wealth index

Answer 1

Standard deviation

Question 2

What are the two approaches used in transition from stocks to bonds in a targeted-maturity fund?
A. Glide path and static-allocation
B. Passive and active management
C. Packaged and customized solution
D. Tactical and glide path
E. Tactical and static-allocation

Answer 2

Tactical and glide path

Question 3

An absolute measure of the degree of association between the returns for a pair of securities is:
A. The weighted average
B. The difference between their expected rates of return
C. The variance
D. The covariance
E. The correlation coefficient

Answer 3

The covariance

Question 4

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:

A. Pension wear away
B. Conversion dilutionism
C. Cash balance effect
D. Accrual rate wear away
E. Expected benefits dilution

Answer 4

Pension wear away

Question 5

The retirement plan committee should be authorized by the corporation with the charge to:
A. Make design recommendations, but avoid policy-making, compliance, communications, and administrative decisions regarding the retirement plan
B. Make design recommendations and policy-making decisions, but avoid compliance, communications and administrative decisions regarding the retirement plan
C. Make design recommendations, policy-making and compliance decisions, but avoid communications and administrative decisions regarding the retirement plan
D. Make design recommendations, policy-making, compliance and communications decisions, but avoid administrative decisions regarding the retirement plan
E. Make all decisions necessary regarding the administration of the retirement plan

Answer 5

Correct Answer: . Make all decisions necessary regarding the administration of the retirement plan

Question 6

Shareholders in an open-end investment company may sell their shares:
A. On an exchange
B. Back to the fund at any time but at a price not known until the close of the business day
C. Back to the fund at guaranteed prices over specified periods
D. Back to the fund at any time and at the net asset value plus the premium fee
E. Back to the fund at any time and at the net asset value minus the discount fee

Answer 6

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

Question 7

A change or modification to a plan document that alters the operation of a retirement plan is known as:
A. An amendment
B. A codicil
C. An adjustment
D. An alteration
E. A referendum

Answer 7

Correct Answer: . An amendment

Question 8

Most equity funds can be divided into two categories of investment styles:
A. Load and no-load funds
B. Mutual and hedge funds
C. Stock and index funds
D. Growth and value funds
E. Midsize and growth funds

Answer 8

Growth and value funds

Question 9

Any taxable amounts received before age 59½ from a qualified retirement plan are subject to an additional penalty tax of:
A. 10 percent
B. 15 percent
C. 20 percent
D. 25 percent
E. 50 percent

Answer 9

10 percent

Question 10

What is the condition known as bounded rationality when it comes to retirement planning?
A. Individuals have limitations regarding their mental capabilities to deal with complexity inherent in retirement planning.
B. Individuals when faced with a myriad of investment choices often delay making the choice or fail to make a choice.
C. Individuals prefer a paternalistic approach when faced with making choices regarding investment assets and contribution levels.
D. Individuals are often bounded by current events and unable to make decisions impacting future events such as retirement.
E. Historically individuals have lacked the formal education to make rational decisions regarding investment planning.

Answer 10

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

Question 11

Diversifiable risk can also be referred to as:
A. Systematic risk
B. Nonsystematic risk
C. Market risk
D. Interest rate risk
E. Inflation risk

Answer 11

Nonsystematic risk

Question 12

The arithmetic mean rate of return is preferable to the geometric mean rate of return if the purpose is to:
A. Show the typical performance over a single period
B. Understand the true rate of return
C. Calculate the return with the highest degree of precision
D. Show the internal rate of return
E. Calculate current return, rather than total return

Answer 12

Show the typical performance over a single period

Question 13

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:
A. Liable because he or she is a cofiduciary of the investment manager
B. Not liable because a longer performance period is necessary to determine liability
C. Not liable since investment management services have been delegated
D. Liable since ongoing performance measurement creates fiduciary liability for a plan sponsor
E. Not liable because the courts have not yet determined fiduciary liability in connection with defined contribution investment delegation

Answer 13

Not liable since investment management services have been delegated

Question 14

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:
A. Increased by a de minimis amount
B. Increased by a significant amount
C. Decreased by a de minimis amount
D. Decreased by a significant amount
E. Held constant with no difference in amount

Answer 14

Increased by a significant amount

Question 15

Individuals who espouse to the contrarian investing approach are more likely to:
A. Invest in defensive stocks in downward business cycles
B. Prefer low price/earnings (P/E) ratio stocks rather than the often popular high P/E ratio stocks
C. Prefer high P/E ratio stocks rather than the often popular low P/E ratio stocks
D. Avoid all actively managed funds
E. Eschew the use of technical analysis for stock selection

Answer 15

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

Question 16

Dollar cost averaging:
A. Is not appropriate for pension investors.
B. Involves investing the same amount of money on a periodic basis, even when the securities appear to be overpriced.
C. Is a method of systematically liquidating a principal sum.
D. Was popular in the past, but is no longer recommended by investment managers.
E. Is appropriate for investments in bonds, but is not used for investments in common stocks.

Answer 16

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

Question 17

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

A. The least-educated employee
B. A high school graduate
C. Any interested plan participant
D. Any randomly picked third party
E. The average plan participant

Answer 17

The average plan participant

Question 18

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:
A. $2,000
B. $10,000
C. $25,000
D. $50,000
E. $100,000

Answer 18

$50,000

Question 19

The Ibbotson Associates Inc.’s nearly a century time series study of the four major classes of investments found that:
A. All four classes of investments had a negative real rate of return
B. Common stocks had the highest annual return and the greatest volatility
C. Long-term government bonds had the highest annual return and the lowest volatility
D. Long-term corporate bonds had the highest annual return and the lowest volatility
E. U.S. Treasury bonds had the highest annual return and the lowest volatility

Answer 19

Common stocks had the highest annual return and the greatest volatility

Question 20

If a defined contribution plan fails to comply with Section 404(c) requirements, then:
A. The plan’s fiduciaries are liable for the plan’s investment performance
B. The plan is automatically disqualified
C. Statutory relief from fiduciary liability is not available to the plan’s fiduciaries
D. An excise tax is imposed
E. An automatic enrollment feature is prohibited from being offered

Answer 20

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

Question 21

The penalty for failure to make a required distribution of at least the correct amount from a qualified retirement plan is a:
A. Deductible excise tax of 10 percent
B. Nondeductible excise tax of 10 percent
C. Nondeductible excise tax of 15 percent
D. Deductible excise tax of 50 percent
E. Nondeductible excise tax of 50 percent

Answer 21

Nondeductible excise tax of 50 percent

Question 22

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

A. Vanguard's Index 500 Fund Survey
B. Fidelity's S&P 500 Fund Survey
C. The Value Line Investment Survey
D. Wilshire Index
E. Securities and Exchange Commission Investment Survey

Answer 22

The Value Line Investment Survey

Question 23

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:
A. Department of Labor (DOL)
B. Internal Revenue Service (IRS)
C. Pension Benefit Guaranty Corporation (PBGC)
D. Justice Department
E. General Accounting Office (GAO)

Answer 23

Department of Labor (DOL)

Question 24

A mutual fund is an “open-end” investment company because:
A. It is not required to report capital gains
B. It does not involve redemption fees or sales charges
C. It trades on stock exchanges
D. It usually does not sell any additional shares after the initial public offering
E. It constantly issues new shares to investors and stands ready to buy back shares from shareholders

Answer 24

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

Question 25

Diversification reduces portfolio risk most effectively when the correlation coefficient is:
A. -1, i.e., perfect negative correlation
B. 0, i.e., the returns are statistically independent (in other words, there is no correlation)
C. +1, i .e., perfect positive correlation
D. +100, i.e., at least 100 securities are correlated
E. Equal to the standard deviation of the returns

Answer 25

-1, i.e., perfect negative correlation

Question 26

A summary plan description (SPD) must be given to new employees after they become plan participants within a period of:
A. 30 days
B. 60 days
C. 90 days
D. 120 days
E. 150 days

Answer 26

C. 90 days

Question 27

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?
A. They prefer liquidating assets only after the market price has fallen more than a personal target percent of the prices they originally paid.
B. They prefer not to sell any asset that is subject to capital gains taxes.
C. They prefer not to liquidate those stocks that have paid out solid dividends in recent years but are viewed now as overvalued.
D. They prefer to liquidate assets that have appreciated and retain investments where the market price has declined.
E. They rarely liquidate stocks of consumer goods companies with which they are familiar.

Answer 27

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

Question 28

Which of the following has been found to be correct regarding retirement planning of most investors?
A. Engaged investors tend to overreact to information about companies
B. Investors have a keen interest in investment issues
C. Investors have a good command of basic investment principles
D. Investors select prudently when presented with the choice of many funds
E. Investors are inclined to be actively engaged in retirement planning

Answer 28

Engaged investors tend to overreact to information about companies

Question 29

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:
A. Risk-adjusted returns
B. Market efficiency
C. Technical analysis
D. The so-called "size effect"
E. Cash flow analysis

Answer 29

Market efficiency

Question 30

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:
A. The fact that some portfolios are more efficient than others
B. The expected returns on the securities are likely to be different
C. The covariances between the returns on securities
D. The relationship between risk and return, i.e., higher risk requires a higher expected return
E. The risk that cannot be fully reflected by beta

Answer 30

The covariances between the returns on securities

Question 31

If the variance of expected returns is 4%, the standard deviation is:
A. 2%
B. 4%
C. 8%
D. 16%
E. 32%

Answer 31

2%

Question 32

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?
A. Life cycle pension plan
B. Age-weighted plan
C. Pension equity plan
D. Floor-offset plan
E. Minimum balance pension plan

Answer 32

Minimum balance pension plan

Question 33

All qualified retirement plans are required to have a fidelity bond covering what minimal percentage of plan assets?
A. One percent
B. Three percent
C. Five percent
D. Ten percent
E. Twenty-five percent

Answer 33

Ten percent

Question 34

Which of the following risks is deemed as the most important in affecting price movements of common stocks?
A. Market risk
B. Operational risk
C. Credit risk
D. Reputational risk
E. Compliance risk

Answer 34

Market risk