2019 CFA level 3 qbank r 13 14 concentrated single asset risk management questions

10/11/2018 Learning Management System Question #1 of 62 A nancial asset that is speci cally designed to address the problem of outliving one's assets is called: A) a guaranteed investment contract B) life insurance .in C) a life annuity en tre Question #2 of 62 Which of the following statements regarding human capital is most accurate? bo ok c A) A person’s human capital continues after retirement B) A person’s human capital is highest when they are born and trends downward after that C) For a young investor their human capital is equivalent to a large holding of an illiquid w w o m asset Question #3 of 62 w Margin-lending rules would most likely make economic sense in a: A) risk based system B) rules based system C) returns based system Question #4 of 62 The volatility of human capital and the demand for life insurance are: https://www.kaplanlearn.com/education/dashboard/index/66a9ea0d62bb71ab495925615029a3fd/practice/qbank/24038518/quiz/83414343/print 1/20 10/11/2018 Learning Management System A) negatively correlated B) uncorrelated C) positively correlated Question #5 of 62 Which of the following statements regarding xed and/or variable annuities is most correct? in A) Although the risks underlying xed and variable annuities are di erent, the fees for them tend to be similar en tre B) For xed annuities, if interest rates are expected to decrease then it is best to purchase the xed annuity now C) Mortality credits bene t those annuitants who die earlier than annuitants who live m Question #6 of 62 bo ok c longer Regarding the asset allocation of total wealth, which of the following statements is most o correct? w w A) Asset allocation decisions should focus on nancial capital B) Generally human capital is riskier than nancial capital w C) The aggregate human capital of a couple is less risky than their individual human capital Question #7 of 62 https://www.kaplanlearn.com/education/dashboard/index/66a9ea0d62bb71ab495925615029a3fd/practice/qbank/24038518/quiz/83414343/print 2/20 10/11/2018 Learning Management System Consider the following policy: Insurance amount = $250,000 Annual premium = $4,850 Expected annual dividend = $1,190 Time to maturity = 30 years Expected surrender value = =$70,000 Base on a discount rate of 8%, the net surrender cost index per 1,000 of insurance is closest to: in A) $12.70 B) $13.80 bo ok c Question #8 of 62 en tre C) $13.10 Which of the following types of risk is most likely to impact both nancial capital and human B) Health risk w w w C) Liability risk .o A) Longevity risk m capital? Question #9 of 62 Which of the following risks is likely to be associated with the 'peak accumulation' phase of an individual's life? A) Premature death risk B) Longevity risk C) Career risk https://www.kaplanlearn.com/education/dashboard/index/66a9ea0d62bb71ab495925615029a3fd/practice/qbank/24038518/quiz/83414343/print 3/20 10/11/2018 Learning Management System Question #10 of 62 The purpose of a personal line of credit secured by company stock for the owner of a private business is generally to: A) convert the remaining ownership position to public stock B) extract cash from the business so the owner can use the funds for personal purposes C) exit any responsibility for managing the business en tre in Question #11 of 62 After attending a recent conference on wealth planning for high net worth individuals you prepare several summary points to present to your coworkers: I An estate tax freeze is a good way to shift the tax burden on future appreciation to the bo ok c next generation II A family limited partnership allows the founding member of a company to shift day to day company management of the business to the next generation while retaining the bene ts of appreciating value in the company for the founder m Which of the statements are most accurate? o A) I w w B) II w C) I and II Question #12 of 62 For which individual might a low level of life insurance and a high level of investment risk be appropriate? A) A married 31 year old systems analyst who supports his aged parents and has a large mortgage B) A single 25 year old consistently highly paid individual with no dependents C) A married 49 year old stockbroker https://www.kaplanlearn.com/education/dashboard/index/66a9ea0d62bb71ab495925615029a3fd/practice/qbank/24038518/quiz/83414343/print 4/20 10/11/2018 Learning Management System Question #13 of 62 Which of the following statements regarding human capital, nancial capital, and net wealth is most correct? A) Net wealth is the sum of nancial capital and human capital B) Human capital and nancial capital tend to move together over time Question #14 of 62 en tre in C) Financial capital tends to increase with age For which of the following individuals would a higher exposure to equities be more appropriate bo ok c as part of their overall asset allocation? A) A 27 yr old male who runs his own, risky property development business B) A 50 yr old female who works part-time in a factory .o m C) A 30 yr old female with a stable job as a nurse in an aged-care facility w w Question #15 of 62 In the following graph which of the following statements is most accurate regarding what the w vertical axis represents besides dollars? A) The point in time when the individual nishes their educational training and starts working https://www.kaplanlearn.com/education/dashboard/index/66a9ea0d62bb71ab495925615029a3fd/practice/qbank/24038518/quiz/83414343/print 5/20 10/11/2018 Learning Management System B) The combined amount of human and nancial capital called total wealth C) The point in time when the individual is born and their potential human capital is the greatest while their nancial capital is the smallest Question #16 of 62 Which of the following statements regarding the pricing of life insurance policies is most accurate? in A) For a level payment ve-year term policy, the level premium should be higher than the en tre year premium for an annual term policy B) Mortality tables are built to re ect past experiences of mortality C) Based on the assumed mortality rates, the insurance company estimates the net i m Question #17 of 62 bo ok c premiums to charge for insurance based on the assumed rate of return on investing the o Financial wealth and the demand for life insurance have: A) either a positive or a negative relationship depending upon the individual’s level of w w wealth B) a positive relationship w C) a negative relationship Question #18 of 62 The client objective motivating a monetization strategy is least likely to be: A) a tax e cient exit strategy B) provide funds to meet portfolio objectives C) increase portfolio systematic risk https://www.kaplanlearn.com/education/dashboard/index/66a9ea0d62bb71ab495925615029a3fd/practice/qbank/24038518/quiz/83414343/print 6/20 10/11/2018 Learning Management System Question #19 of 62 Which of the following is least likely a consideration when valuing an individual's human capital? A) The expected level of employment earnings B) The type of industry in which the individual is employed .in C) The value of the individual’s de ned bene t plan bene ts en tre Question #20 of 62 The purchase of a lifetime annuity at retirement would be least appropriate for which type of bo ok c individual? A) A married female with low tolerance for investment risk B) A single male with no dependents .o m C) A married male su ering from a rare congenital heart condition w w Question #21 of 62 Which of the following is not intended to increase the loan to value ratio in a monetization w strategy? A) Forward conversion with options B) Sale of the asset C) Total return equity swap Question #22 of 62 Tax considerations would likely be of greatest concern for a concentrated holding in: https://www.kaplanlearn.com/education/dashboard/index/66a9ea0d62bb71ab495925615029a3fd/practice/qbank/24038518/quiz/83414343/print 7/20 10/11/2018 Learning Management System A) a private company acquired at the bottom of a past economic cycle B) publicly traded shares of stock recently awarded to a company executive C) a real estate asset held a couple of years Question #23 of 62 In constructing a 'holistic balance sheet' for a young individual, which of the following is likely to in be the largest liability? A) Future expenses funding en tre B) Student loans Question #24 of 62 bo ok c C) Mortgage on house John Smith owns apartment buildings He employees himself as the business manager and m pays himself a market wage for this function Being recently divorced, this job has brought stability to his life Financially he does not need the "manager salary" but emotionally he needs o the job Considering the behavioral nance issues Smith would be least receptive to a: w w A) sale of the buildings B) monetization of the buildings w C) hedge of the buildings value Question #25 of 62 With no other information to go on, the lowest speci c risk in a concentrated position would most likely be for the owner of: A) publicly traded common shares B) investment real estate https://www.kaplanlearn.com/education/dashboard/index/66a9ea0d62bb71ab495925615029a3fd/practice/qbank/24038518/quiz/83414343/print 8/20 10/11/2018 Learning Management System C) a privately held business Question #26 of 62 Which of the following statements about life insurance policies is least likely accurate? A) Permanent insurance can be either whole life insurance or universal insurance B) The load of an insurance policy covers the company’s operating cost and expenses for in writing the policy including commissions C) Cash value refers to the lump sum payment that is paid to the policy owner after death bo ok c Question #27 of 62 en tre of the insured Which of the following statements regarding human capital volatility is most accurate? When human-capital is bond-like, an investor's nancial assets should be: m A) more aggressively allocated and their demand for life insurance will increase .o B) more aggressively allocated and their demand for life insurance will decrease w w w C) allocated towards low risk assets and their demand for life insurance will increase Question #28 of 62 Which of the following has a positive relationship with the demand for life insurance? A) An investor’s aversion to risk B) The volatility of the investor’s human capital C) The level of nancial wealth https://www.kaplanlearn.com/education/dashboard/index/66a9ea0d62bb71ab495925615029a3fd/practice/qbank/24038518/quiz/83414343/print 9/20 10/11/2018 Learning Management System Question #29 of 62 Sheryl Rubenstein is a stunt double in Hollywood whose studio took out a life insurance policy on her What risk is her studio attempting to mitigate? A) Mortality risk B) Longevity risk C) Earnings risk .in Question #30 of 62 management strategy? A) Risk of loss from a re in the home en tre In which of the following situations would transferring risk be least appropriate as a risk bo ok c B) Risk to earnings through the death of the key person in a very small business m C) Risk of loss from vandalism to factory windows .o Question #31 of 62 w w Which of the following statements is most correct? A) An individual’s net wealth is equal to the value of their nancial assets less the value of w the nancial liabilities B) An individual’s human capital will always be lower than their nancial capital C) Prior to retirement, an individual’s nancial capital is expected to increase while human capital is likely to decrease Question #32 of 62 A measure of an individual's lifetime earning capacity is best de ned as which of the following? https://www.kaplanlearn.com/education/dashboard/index/66a9ea0d62bb71ab495925615029a3fd/practice/qbank/24038518/quiz/83414343/print 10/20 10/11/2018 Learning Management System A) Total wealth B) Human capital C) Financial capital Question #33 of 62 Values that are most likely on an individual's economic (holistic) balance sheet include: B) only bequests and de ned-contribution pensions bo ok c Question #34 of 62 en tre C) bequests, human capital, and de ned-bene t pensions .in A) only human capital An advantage of a xed annuity over a variable annuity is: A) xed annuities are easier to terminate than variable annuities m B) the xed annuity’s income stream is stable throughout the life of the annuity purchaser w w o C) the xed annuity’s income o ers a hedge against in ation during periods of stag ation w Question #35 of 62 An advantage of a variable annuity over a xed annuity is the: A) variable annuity o ers stable income over the life of the purchaser of the annuity B) purchaser of the variable annuity will never out live the income stream from the annuity C) variable annuity o ers the opportunity to stay even with the rate of in ation https://www.kaplanlearn.com/education/dashboard/index/66a9ea0d62bb71ab495925615029a3fd/practice/qbank/24038518/quiz/83414343/print 11/20 10/11/2018 Learning Management System Question #36 of 62 Life insurance is most commonly used to hedge against: A) mortality risk B) longevity risk C) earnings risk .in Question #37 of 62 en tre With regard to an individual's total wealth, which statement is most accurate? If an individual's human capital is xed income-like their nancial portfolio: A) should be weighted with similar non-risky xed income assets bo ok c B) should be weighted in no speci c way that is related to their human capital C) may be weighted more heavily towards risky assets m Question #38 of 62 w w nancial capital? o Which of the following assets is generally the least marketable asset within an individual's A) Pension w B) Private equity C) Collectables Karl and Karen Arlt are both thirty- ve years old and have two children, Noah and Jamie ages and 7, respectively Karen is a tenured professor at the local state college and Karl is an engineer working at an electrical utility company Together the Arlts have a combined income of $150,000 per year The Arlts are meeting with a nancial consultant Katherine Ryals, CFA, for the rst time who was recommended to them by Karl's brother who is also training with Ryals to become a nancial consultant himself The four of them are meeting around the Arlt's dining room table where Ryals is gathering information to determine an investment policy statement https://www.kaplanlearn.com/education/dashboard/index/66a9ea0d62bb71ab495925615029a3fd/practice/qbank/24038518/quiz/83414343/print 12/20 10/11/2018 Learning Management System for the Arlts who state they want to retire when they are 60 years old One of the questions asks the Arlts about their general feelings of risk and Karen blurts out "the recent turmoil in the nancial markets due to the mortgage crisis makes me sick to my stomach!" Up to this point in their lives the Arlt's have not amassed a signi cant amount of nancial wealth nor have they given much thought about leaving a bequest It is now two weeks later and the Arlt's are meeting with Ryals and Karl's brother again Ryals suggests that they purchase a million dollar variable universal life (VUL) policy whereby their premium payments will go into mutual fund type investments resulting in equity-like returns She states "because your incomes are stable your human capital is xed income-like thus to be able to replace your steady income your demand for life insurance is high." She goes on to in state "since your incomes are stable your assets should be invested in more equity-like en tre investments like the ones found in the VUL thus it is the perfect investment vehicle for you." Ryal's analysis reveals that to maintain their current $150,000 per year income when they retire in 25 years at age 60 assuming a 3% increase in income per year would require an income stream of about $314,000 per year This represents a portfolio worth approximately $3.3 bo ok c million at retirement, assumes they live another 20 years during retirement, achieve a 7% rate of return on their portfolio during retirement, and there is nothing left of the portfolio at the end of 20 years Ryals goes on to further explain that to amass the equivalent of $3.3 million 25 years from now given they have no retirement savings now and assuming a 10% yearly rate of m return would require them to save roughly $2,500 per month After careful consideration of their insurance needs the Arlts decide to purchase term o insurance on both of them and invest a portion of their after tax income into a deferred w w variable annuity Upon retirement the Arlts are expecting to choose the largest cash out ow possible from the annuity utilizing the "joint and survivor" payout option The Arlts also decide to purchase disability insurance that will pay them 80% of their salary in case either of them are w unable to perform their jobs due to an illness or condition Question #39 of 62 Based on the information regarding Karl and Karen's incomes the discount rate used to determine their human capital would be: A) indeterminate since the discount rate is based on factors other than the variability in their incomes B) low representing lower risk due to their stable incomes https://www.kaplanlearn.com/education/dashboard/index/66a9ea0d62bb71ab495925615029a3fd/practice/qbank/24038518/quiz/83414343/print 13/20 10/11/2018 Learning Management System C) high because their incomes would have a low variability over time Question #40 of 62 Given the Arlt's personal information gathered from the questionnaire, which of the following statements regarding the correct asset allocation of their portfolio is most accurate? A) Their portfolio should be allocated more towards risky assets since their human capital is bond-like .in B) Since they are in the early part of the accumulation phase of their careers they can en tre tolerate more risk in their portfolio and thus should be invested more heavily in ii C) Their portfolio should be allocated more towards less risky assets because they have a Question #41 of 62 bo ok c below average willingness to accept risk thus their overall risk level is below average The statements made by the nancial consultant regarding the demand for life insurance and m the asset allocation of the policy premiums are: o A) correct for both statements w w B) incorrect for both statements w C) correct for only one of the statements Question #42 of 62 A disadvantage of the Arlt's choice of the annuity is: A) the annuity will lose real earning power in periods of high in ation B) if they both die before their predicted life expectancy the remainder of their assets will go to the insurance company instead of their heirs C) the annuity is less tax e cient than utilizing a de ned contribution plan https://www.kaplanlearn.com/education/dashboard/index/66a9ea0d62bb71ab495925615029a3fd/practice/qbank/24038518/quiz/83414343/print 14/20 10/11/2018 Learning Management System Question #43 of 62 What type of risk will the purchase of the deferred variable annuity mitigate against? A) Financial market risk B) Longevity risk .in C) Savings risk en tre Question #44 of 62 Which of the following statements regarding an economic (holistic) balance sheet is most correct? bo ok c A) Planned bequests are a liability B) Net wealth cannot be negative or else an individual would be bankrupt C) A de ned contribution plan balance is not included in a traditional balance sheet but is o m in an economic balance sheet w w Question #45 of 62 Factors that are positively related to the demand for life insurance include: w A) risk aversion and probability of death B) human capital volatility and risk aversion C) nancial wealth and probability of death Question #46 of 62 An investor with excess assets in her primary capital can increase her holdings in the portfolio's: https://www.kaplanlearn.com/education/dashboard/index/66a9ea0d62bb71ab495925615029a3fd/practice/qbank/24038518/quiz/83414343/print 15/20 10/11/2018 Learning Management System A) personal risk bucket B) aspirational risk bucket C) market risk bucket Question #47 of 62 Which of the following is NOT a drawback to a xed annuity? in A) The investor usually cannot void the contract B) The cash ows could be zero if the underlying asset return is negative for the en tre investment period Question #48 of 62 bo ok c C) The real value of the cash ows may decline over time A salesman is paid by his employer by the commission of his sales only He has noticed that in o The salesman should: m the last couple years, the amount of his sales has been closely correlated with the U.S market A) weight his nancial portfolio more so in low risk, xed income assets w w B) have no preference for how his nancial portfolio is weighted w C) weight his nancial portfolio more so in risky assets Question #49 of 62 Which of the following is NOT an example of a drawback to xed annuities? A) The real values of the cash ows fall over time B) The payments in some periods may fail to meet the investor’s needs or may be zero if the funds lose money C) The investor could become locked into a low interest rate https://www.kaplanlearn.com/education/dashboard/index/66a9ea0d62bb71ab495925615029a3fd/practice/qbank/24038518/quiz/83414343/print 16/20 10/11/2018 Learning Management System Question #50 of 62 To structure a limited partnership that would transfer tax burdens from the current owner of a real estate investment while allowing the owner to control the property the current owner should assume the role of: A) general partner B) angel investor en tre in C) limited partner Question #51 of 62 bo ok c By using an exchange fund it is most accurate to expect an investor can: A) pay a smaller tax now to minimize future taxes B) defer and then escape future taxes .o m C) monetize the asset at a better LTV w w Question #52 of 62 What type of insurance or risk management strategy is most appropriate in protecting against w loss of earnings due to long-term unemployment as a result of a job layo ? A) Self-insurance B) Disability insurance C) Annuities Question #53 of 62 Which of the following statements is least accurate regarding human capital? https://www.kaplanlearn.com/education/dashboard/index/66a9ea0d62bb71ab495925615029a3fd/practice/qbank/24038518/quiz/83414343/print 17/20 10/11/2018 Learning Management System A) The demand for life insurance will increase if human capital is bond-like B) When possible, one should maximize the correlation of human and nancial capital C) If an investor’s human capital is equity-like they should allocate a greater amount of their nancial capital to xed income investments Question #54 of 62 The owner of a real estate property who obtains a mortgage with recourse has done all of the en tre A) retained control of the property .in following EXCEPT: B) e ectively bought a protective put on the property Question #55 of 62 bo ok c C) monetized the asset .o particular point in time? m Which type of life insurance imposes premiums that best re ect the pure risk of death at any A) Term insurance w w B) Whole life insurance w C) Universal life insurance Question #56 of 62 Regarding asset allocation and risk reduction, which of the following statements is most accurate? A) An a uent couple nearing retirement should focus on investing in low risk investments to provide stable retirement income B) Insurance can be used to reduce non-market risk https://www.kaplanlearn.com/education/dashboard/index/66a9ea0d62bb71ab495925615029a3fd/practice/qbank/24038518/quiz/83414343/print 18/20 10/11/2018 Learning Management System C) A young couple with large debts and high expenses needs permanent life insurance Question #57 of 62 In general, an individual facing retirement has a greater amount of: A) human capital than nancial capital B) both human and nancial capital than when they rst started working en tre in C) nancial capital than human capital Question #58 of 62 reduce the upfront cost? bo ok c Which of the following types of annuities is most suitable for an individual who is seeking to A) Advanced life deferred annuity B) Immediate variable annuity w w o m C) Deferred xed annuity Question #59 of 62 w In which nancial stage of life would an individual's investment risk tolerance most likely be increasing? A) Preretirement B) Peak accumulation C) Career development Question #60 of 62 https://www.kaplanlearn.com/education/dashboard/index/66a9ea0d62bb71ab495925615029a3fd/practice/qbank/24038518/quiz/83414343/print 19/20 10/11/2018 Learning Management System Which of the following types of life insurance generally has a xed premium payment? A) Whole life B) Universal C) Term Question #61 of 62 in Which risk management decision is most appropriate if a loss is not severe but occurs regularly? en tre A) Risk retention B) Risk reduction Question #62 of 62 bo ok c C) Risk transfer m Which of the following statements regarding annuities is least correct? o A) The premium for an advanced life deferred annuity would be lower than the premium w w for an immediate life annuity (all else being equal) B) The payout for a joint annuity will be lower than the payout for single-life annuity (all w else being equal) C) The annual payout on a life annuity would be greater for a 60 year old female than for a 60 year old male (all else being equal) https://www.kaplanlearn.com/education/dashboard/index/66a9ea0d62bb71ab495925615029a3fd/practice/qbank/24038518/quiz/83414343/print 20/20 ... A) Premature death risk B) Longevity risk C) Career risk https://www.kaplanlearn.com/education/dashboard/index/66a9ea0d62bb71ab495925615029a3fd/practice /qbank/ 24 038 518/quiz/ 834 1 434 3/print 3/ 20... they retire in 25 years at age 60 assuming a 3% increase in income per year would require an income stream of about $31 4,000 per year This represents a portfolio worth approximately $3. 3 bo ok... https://www.kaplanlearn.com/education/dashboard/index/66a9ea0d62bb71ab495925615029a3fd/practice /qbank/ 24 038 518/quiz/ 834 1 434 3/print 16/20 10/11/2018 Learning Management System Question #50 of 62 To structure a limited partnership that would transfer tax burdens from the current