CRPC Modules (1-3) Questions And Correct Detailed Answers Graded A+.
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What are two purposes of investment policy? - correct answer 1. To provide a foundation of goals, time horizons, and constraints on which the client portfolio is constructed
2. To provide a basis for review, performance evaluation, and adaptation to c...
CRPC Modules (1-3) Questions
What are two purposes of investment policy? - correct answer 1. To provide a
foundation of goals, time horizons, and constraints on which the client portfolio is constructed
2. To provide a basis for review, performance evaluation, and adaptation to changing conditions.
Why is a long term perspective essential as an element of investment policy? - correct answer
The returns work better in the investors favor if they are patient. There are ups and downs in the market
but over time the investor is playing a winning game.
Why is it important that investment policy be clearly defined? - correct answer
They must understand the critical importance of their investment policy, it also makes decision based on
how risky the client may be. It must be accurate and clear to them.
At a minimum, what five elements should every investment policy contain? - correct answer
Goals, Risk, Asset Allocation, Strategies, Periodic Review
How do you find the percentage change in bond price? - correct answer
Negative duration multiplied by the change in interest rate
What are the advantages and disadvantages of common stocks, and why should stocks be an important
element in most retirement portfolios? - correct answer Over time, common
stocks have almost always outperformed other financial instruments. They also offer rising dividends.
Disadvantage is their volatility, which is also higher than most asset classes. Two major risks are business
risk and market risk.
What are the advantages and disadvantages of fixed-income securities, and to what two sources of
return do their owners look? - correct answer Advantage to fixed income
securities is their cash flow stream and return of principal if held to maturity, high certainty of return.
Their disadvantages are a lower return due to guarantee as well as exposure to inflation and interest
rate risk.
What are the advantages and disadvantages of cash equivalent investments for the retirement investor?
- correct answer Advantages include a short-term maturity, they are highly
, liquid, and have a high safety of principal. The disadvantages are that they offer generally lower rates of
return and are thereby subject to purchasing power risk.
What are the advantages and disadvantages of real estate for the retirement investor? - correct answer
Advantages include an average rate of return and diversification. Disadvantages include poor liquidity,
high transaction costs, and tax-reporting responsibilities. They also can easily become overvalued.
Explain Standard Deviation - correct answer A statistical measure of total risk
that considers the dispersion of all data points around the average. With investments, higher standard
deviation means higher risk.
Explain Beta - correct answer Bet is the term referring to a security's volatility
measured to the market. The entire markets beta is 1. If security's bet is > 1 it is more volatile than the
market. If < 1 the security is less volatile than the market.
Explain Duration - correct answer Duration is a term used to describe the price
sensitivity of a bond or bond portfolio to changes in interest rates. Higher duration = higher price
volatility
XYZ Stock has SD of 14% and a mean of 10%. What is coefficient variation? - correct answer
0..10 = 1.4
Which coefficient variation has a better risk/return relationship? 0.88 or 1.5? - correct answer
0.88 offers less risk per unit of return and therefor is the better investment
How do you find the percentage change in the value of a bond? - correct answer
Multiply the duration by the interest rate change
Sharpe Ratio - correct answer Reward-to-volatility ratio; ratio of portfolio
excess return to standard deviation.
Treynor Ratio - correct answer measures investment performance as the ratio
of portfolio risk premium over portfolio beta
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