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Exam 16: Investors and the Investment Process

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Question 31

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Empirical evidence suggests that investors become ________ as they approach retirement.

A) greedier
B) less interested in investments
C) more risk averse
D) more risk tolerant

E) B) and C)
F) A) and C)

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Question 32

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An investor has a long time horizon and desires to earn the market rate of return. However, the investor will need to withdraw funds each year from their investment portfolio. The biggest constraint a planner would face with this client is a ________ constraint.

A) tax
B) risk tolerance
C) liquidity
D) social

E) A) and C)
F) A) and B)

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Question 33

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An institutional investor will have to pay off a maturing bond issue in 3 years. The institution has 10 000 bonds outstanding each with a $1 000 par value. The institutional money manager is re-evaluating the fund's $100 million portfolio at this time. She is bullish on shares and wants to put the most she can into the share market but she cannot risk not being able to pay off the bonds. Three year zero coupon bonds are available paying 6% interest. What percentage of the total $100 million portfolio can she put in shares and still ensure meeting the bond payments?

The term 'hedge' refers to an investment that is used ________.

A life insurance firm wants to minimise its interest rate risk and it is planning on paying out $250 000 in five years. Which one of the following investments best matches its goal?

When used in the context of investment decision making, the term 'liquidity' refers to ________.

Under the provisions of a typical defined benefit pension plan, the employer is responsible for ________.

An investor refuses to invest in any firm that produces alcohol or tobacco. This is an example of a ________ constraint.

The major asset most people have during their early working years is their ________.

An investor is looking at different retirement investment choices and he is willing to accept one with upside potential even if that means sacrificing certainty. Which of the following will he most likely select?

An investor with low risk aversion will likely require which of the following risk return combinations?

If a defined benefit pension fund's actual rate of return is ________ than the actuarial assumed rate then the ________.

My pension plan will pay me a yearly retirement amount equal to 2% of my highest annual salary for each year of service. I must have ________.

The choice of an active portfolio management strategy rather than a passive strategy assumes ________.

The term 'investment horizon' refers to ________.

A family will retire in a few years. They have a high tax bracket and are concerned about their after-tax rate of return. A meeting with their financial planner reveals they are primarily focused on safety of principal and they will need a 6% to 8% average rate of return on their portfolio. They desire a diversified portfolio and liquidity is likely to be a concern due to health reasons. If you had to choose from the list below which of the following asset allocations seems to best fit this family's situation?

For a bank, the difference between the interest rate charged to borrowers and the interest rate paid on liabilities is called the ________.

A pension fund will owe $15 million to retirees in 20 years. An actuary assumes a 6% rate of return on the funds invested in the pension plan but the fund actually earns 8%. The pension plan receives annual contributions from the company sponsor. If the 8% rate of return is expected to continue, by how much can the company reduce its pension payments per year?

Of the following, the investment time horizon is typically the shortest for ________.

To ________ means to mitigate a financial risk.