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CPSP 2.2 Exam Questions And Verified Answers
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CPSP 2.2 Exam Questions And Verified AnswersInvestment Policy Statement - Answer A plan sponsor is not legally required to have an
investment policy statement (IPS) for its plan in writing. However, the Employee
Retirement Income Security Act of 1974 is quite clear that plans shall "establish a
procedure for establishing and carrying out a funding policy and method consistent with
the objectives of the plan".
The IPS is typically one of the first documents requested in a DOL investigation into
suspected fiduciary misconduct.
An effective IPS generally includes the following components: - Answer Objective and
purpose of investment policy for the plan Responsibilities of the key players in plan
management (e.g. fiduciaries, TPA's, investment advisors, investment committee etc.)
Factors to be considered by the plan in selecting investments How often and by what
method the investment portfolios will be rebalanced Procedures for controlling and
accounting for investment expenses Procedures to be used to monitor on a continuing
basis the investment policy Describe how the plan will select service providers
Modern Portfolio Theory and its precepts - Answer One of the fundamental precepts of
the MPT is that various forms of investments, called asset classes, have varying
performances as related to fluctuations in market conditions. Asset classes that tend to
move in tandem with the general market-and are thus said to either positively or
negatively correlate with that market-appreciate and/or diminish in value in relationship
to
Because of that, Modern Portfolio Theory-Answer says different asset classes may
perform differently under different market conditions.
According to MPT, Investment Portfolio-Answer must be distributed across various
classes of assets that cushion losses during a bear market, rise in a bull market, and
produce consistent performance over time.
, Core Asset Classes Stocks - Answer Traditionally, equity investments-stocks-have
provided higher returns and are positively correlated, but with higher volatility, than
bonds. Debt investments, bonds have historically shown a negative correlation with a
down market. Generally speaking, the larger the equity percentage in a portfolio, the
more aggressive it is. Conversely, the larger the percentage invested in bonds,
generally speaking, is considered to be more conservative and less risky, where risk is
considered to be the loss of investment principle. A general rule in evaluating portfolio
risk is the ratio of equity to debt investments. With that said, there are types of stocks
and bonds where more leeway is allowed to try and balance the portfolio amongst
uncorrelated or low-correlated asset classes.
A Special Class of Stocks - Employer Securities - Answer Employer securities or
employer stock are not, per se, an asset class; technically they are an equity investment
and may, depending upon the size and type of company issuing that security, be small,
mid or large cap, and a value or growth investment. The employers-actually, normally
the larger publicly-traded ones-have used those securities as an investment option in
their 401(k) plans as a way of rewarding and giving incentives to employees.
Bonds - Answer As discussed earlier, fixed income investments - bonds - have
traditionally offered a negative correlation in a declining market. It therefore logically
follows that the larger the percent of a portfolio positioned in bonds would be
considered more conservative, and less risky, where risk is defined as the loss of
investment principle.
High yield bonds - Answer (riskier, sometimes called "junk" bonds issued by
corporations with weaker balance sheets that are seen as having a higher risk of
default, or non-payment). High yield bonds must generally pay higher interest rates
because of the higher risk.
Cash & Money Market Funds - Answer Cash is usually considered the least risky/most
conservative investment choice and also the lowest yielding. Money market investments
remain a popular choice in plans as a cash-like option
Non-Core Asset Classes - Solution If the plan document permits, retirement plans may
invest in real estate. Real estate investment, however presents unique challenges and
plan fiduciaries should be aware of these problems prior to investing
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