1. Compared to investing in a single security, diversification provides investors a way to:
A. increase the expected rate of return.
B. decrease the volatility of returns.
C. increase the probability of high returns.
2. Which of the following is least likely to be considered an appropriate schedule for reviewing and
updating an investment policy statement?
A. At regular intervals (e.g., every year).
B. When there is a major change in the client’s constraints.
C. Frequently, based on the recent performance of the portfolio.
3. A top-down security analysis begins by:
A. analyzing a firm’s business prospects and quality of management.
B. identifying the most attractive companies within each industry.
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C. examining economic conditions.
4. Portfolio diversification is least likely to protect against losses:
A. during severe market turmoil.
B. when markets are operating normally.
C. when the portfolio securities have low return correlation.
5. Low risk tolerance and high liquidity requirements best describe the typical investment needs of:
A. a defined-benefit pension plan.
B. a foundation.
C. an insurance company.
6. A long time horizon and low liquidity requirements best describe the investment needs of:
A. an endowment.
B. an insurance company.
C. a bank.
7. In a defined contribution pension plan:
A. the employee accepts the investment risk.
B. the plan sponsor promises a predetermined retirement income to participants.
C. the plan manager attempts to match the fund’s assets to its liabilities.
8. In a defined benefit pension plan:
A. the employee assumes the investment risk.
B. the employer contributes to the employee’s retirement account each period.
C. the plan sponsor promises a predetermined retirement income to participants.
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