CRPC FINAL EXAM NEWEST EXAM FORM A AND B
COMPLETE 100 QUESTIONS WITH DETAILED
VERIFIED ANSWERS (100% CORRECT
ANSWERS) /ALREADY GRADED A+
Richard wants to have an annual retirement income of $100,000 (payable at the beginning of each year)
protected against 3% inflation. Assuming a 7% after-tax rate of return and a retirement period of 30
years, how much money (rounded) does Richard need in order to meet his goal? - ANSWER-B)
$1,822,043
To determine how much money Richard needs, calculate the inflation-adjusted rate of return: (1.07
1.03) - 1 100 = 3.8835. Next, clear your calculator and set it to begin mode. Enter the following known
values in any order: 100,000, +/-, PMT; 3.8835 I/YR; 30, N; and request the unknown PV (PVAD).
This will give you the correct answer, $1,822,043 (rounded).
Tom has been promised a stream of $40,000 annual payments at the end of each year for 25 years. The
present value of these payments discounted at a rate of 5% equals which one of the following amounts?
A)
$563,758
B)
$666,542
C)
$610,224
D)
$591,946 - ANSWER-A)
$563,758
Tom has been promised a stream of annual payments. To determine the present value of the annual
payments to Tom, clear your calculator and set it to the end mode. Next, enter the following unknown
values in any order: 40,000, PMT; 5, I/YR; 25, N; and request the known present value of an annuity
(PVOA). This will show the correct answer, $563,758. If you got $591,946, you did everything
correctly except you were in the begin mode.
Nick wants to maintain the purchasing power of $75,000 (in today's dollars) in retirement. If inflation
continues to average 3.5%, approximately what amount will Nick need in 20 years to equal the
purchasing power of $75,000 today? (Round your answer to the nearest $5,000.)
A)
$100,000
B)
$175,000
1
,C)
$150,000
D)
$225,000 - ANSWER-C)
$150,000
If inflation continues at a 3.5% level, Nick will need approximately double his original $75,000 to
maintain purchasing power. This can be determined in two ways. If you know the Rule of 72, and you
divide 3.5 into 72, you arrive at approximately 20, which is the number of years it will take for a sum to
double. With a calculator, you can solve for the future value of $75,000 over 20 years at 3.5%.
Keystrokes: 20 N, 3.5 I/YR, 75,000, +/-, PV, FV = $149,234; rounded to the nearest $5,000 = $150,000
Which of the following are examples of the second step of the retirement planning process?
prioritize goals
disclose compensation arrangements
examine a person's tax situation
determine important time horizons - ANSWER-B)
I, III, and IV
The second step in the retirement planning process is to gather client data, including goals and
expectations. The first step is to establish and define the client-counselor relationship, which includes
disclosing the counselor's compensation arrangement.
Which of the following personal expenses are likely to decrease following an individual's retirement?
travel
education
utilities
income taxes
home repairs - ANSWER-A)
II and IV
Travel and recreation costs escalate for many retirees. Even if retirees have their mortgage paid off,
they will still be faced with the following expenses: real estate taxes, utilities, insurance, and repairs.
Retirees tend to spend less on education than do nonretirees. Total income taxes are likely to diminish
as earned income declines.
Which of the following are correct statements about the capital utilization strategy?
It produces an annual retirement income over a finite number of years.
Assuming the yield remains the same, the larger the retirement income that is paid, the shorter the
number of years over which it will be paid.
When the capital utilization approach is used, the planner must be careful in making assumptions about
the life expectancy of the client.
The effect of taxes on retirement savings and distributions should be considered when the before-tax
approach is used to calculate the future value of retirement assets. - ANSWER-A)
I, II, III, and IV
2
,All of the options are true. A capital utilization strategy would make it possible to produce a larger
annual income for a client but over a finite number of years, after which the principal is exhausted.
Therefore, a planner should make a conservative estimate of a client's life span, otherwise a client may
outlive his or her income. Assuming that the yield would remain the same, the larger the income, the
shorter the number of years. The before-tax approach for calculating the future value of retirement
assets does not take into account the shrinkage of retirement assets due to taxes. The amount of tax
shrinkage may be significant, therefore the impact of taxes will need to be taken into consideration. In
contrast, the formula for calculating an inflation-adjusted yield takes the effect of inflation into account.
The inflation-adjusted yield formula is [(1 + r) / (1 + i)] - 1 x 100 where r = Investment return, and i =
Inflation rate.
Which one of the following is not a key element of an investment policy?
A)
a provision for periodic review
B)
a target asset allocation
C)
names of specific stocks to be in the portfolio
D)
the acceptable risk tolerance level - ANSWER-C)
names of specific stocks to be in the portfolio
The key elements in an investment policy are a clear statement of the client's goal, suitable investment
vehicles and strategies, the acceptable risk tolerance level for the client, asset allocation guidelines, and
a provision for periodic review. One way to remember the essential elements of an investment policy is
the acronym "GRASP" (Goals, Risk, Asset Allocation, Strategies/Suitable Investment-meaning the
investment categories that may or may not be used-and Periodic Review). Specific investments would
be determined after the investment policy is created.
Which one of the following is a characteristic of Treasury inflation-protected securities (TIPS)?
A)
They are sold at a discount.
B)
They are issued with maturities up to 40 years.
C)
Their returns are tied to the producer price index.
D)
The increase in principal is taxable each year. - ANSWER-D)
The increase in principal is taxable each year.
Any annual increase in principal is subject to federal taxation (unless in a tax-deferred account).
Returns are tied to the consumer price index. TIPS are sold at par value and have maturities up to 30
years.
Assume your client has the following portfolio:
StockWeightBetaBCD40%1.15EFG25%.90HIJ35%1.05
What is the overall weighted beta for this portfolio? - ANSWER-A)
3
, 1.05
.4 × 1.15 = .4600; .25 × .90 = .2250; .35 × 1.05 = .37. Then, .4600 + .2250 + .3675 = 1.0525.
Your client owns a bond fund with a duration of 6.5. If interest rates increase 1.5%, what is the
expected change in price for this fund?
A)
6.5% increase
B)
9.75% decrease
C)
6.5% decrease
D)
9.75% increase - ANSWER-B)
9.75% decrease
1.5% x -6.5 = -9.75%. Recall that duration needs to have a negative sign in order to represent the
inverse relationship between bond prices and interest rates. In this case, an increase in rates means the
bonds or bond funds will fall in price. Therefore, this fund will decrease in price about 9.75%. Also,
you can remember that bond prices move opposite to interest rates. An increase in interest rates means
the price of bonds will go down.
The process of rebalancing is a key factor in
A)
strategic asset allocation.
B)
dynamic asset allocation.
C)
tactical asset allocation.
D)
institutional asset allocation. - ANSWER-A)
strategic asset allocation.
Strategic asset allocation involves obtaining the best asset mix for a client over a long period. For
example, this might be 60% stocks and 40% bonds. When these percentages change due to market
movements, this strategic asset allocation requires the portfolio to be rebalanced back to the target mix,
in this case 60/40 stocks/bonds.
What does Jensen's alpha tell you?
A)
the percentage by which a manager beat the market
B)
the percentage a manager over- or underperformed based on the amount of risk taken
C)
the percentage of return that can be attributed to unsystematic risk
D)
the percentage of return that can be attributed to systematic risk - ANSWER-B)
4
COMPLETE 100 QUESTIONS WITH DETAILED
VERIFIED ANSWERS (100% CORRECT
ANSWERS) /ALREADY GRADED A+
Richard wants to have an annual retirement income of $100,000 (payable at the beginning of each year)
protected against 3% inflation. Assuming a 7% after-tax rate of return and a retirement period of 30
years, how much money (rounded) does Richard need in order to meet his goal? - ANSWER-B)
$1,822,043
To determine how much money Richard needs, calculate the inflation-adjusted rate of return: (1.07
1.03) - 1 100 = 3.8835. Next, clear your calculator and set it to begin mode. Enter the following known
values in any order: 100,000, +/-, PMT; 3.8835 I/YR; 30, N; and request the unknown PV (PVAD).
This will give you the correct answer, $1,822,043 (rounded).
Tom has been promised a stream of $40,000 annual payments at the end of each year for 25 years. The
present value of these payments discounted at a rate of 5% equals which one of the following amounts?
A)
$563,758
B)
$666,542
C)
$610,224
D)
$591,946 - ANSWER-A)
$563,758
Tom has been promised a stream of annual payments. To determine the present value of the annual
payments to Tom, clear your calculator and set it to the end mode. Next, enter the following unknown
values in any order: 40,000, PMT; 5, I/YR; 25, N; and request the known present value of an annuity
(PVOA). This will show the correct answer, $563,758. If you got $591,946, you did everything
correctly except you were in the begin mode.
Nick wants to maintain the purchasing power of $75,000 (in today's dollars) in retirement. If inflation
continues to average 3.5%, approximately what amount will Nick need in 20 years to equal the
purchasing power of $75,000 today? (Round your answer to the nearest $5,000.)
A)
$100,000
B)
$175,000
1
,C)
$150,000
D)
$225,000 - ANSWER-C)
$150,000
If inflation continues at a 3.5% level, Nick will need approximately double his original $75,000 to
maintain purchasing power. This can be determined in two ways. If you know the Rule of 72, and you
divide 3.5 into 72, you arrive at approximately 20, which is the number of years it will take for a sum to
double. With a calculator, you can solve for the future value of $75,000 over 20 years at 3.5%.
Keystrokes: 20 N, 3.5 I/YR, 75,000, +/-, PV, FV = $149,234; rounded to the nearest $5,000 = $150,000
Which of the following are examples of the second step of the retirement planning process?
prioritize goals
disclose compensation arrangements
examine a person's tax situation
determine important time horizons - ANSWER-B)
I, III, and IV
The second step in the retirement planning process is to gather client data, including goals and
expectations. The first step is to establish and define the client-counselor relationship, which includes
disclosing the counselor's compensation arrangement.
Which of the following personal expenses are likely to decrease following an individual's retirement?
travel
education
utilities
income taxes
home repairs - ANSWER-A)
II and IV
Travel and recreation costs escalate for many retirees. Even if retirees have their mortgage paid off,
they will still be faced with the following expenses: real estate taxes, utilities, insurance, and repairs.
Retirees tend to spend less on education than do nonretirees. Total income taxes are likely to diminish
as earned income declines.
Which of the following are correct statements about the capital utilization strategy?
It produces an annual retirement income over a finite number of years.
Assuming the yield remains the same, the larger the retirement income that is paid, the shorter the
number of years over which it will be paid.
When the capital utilization approach is used, the planner must be careful in making assumptions about
the life expectancy of the client.
The effect of taxes on retirement savings and distributions should be considered when the before-tax
approach is used to calculate the future value of retirement assets. - ANSWER-A)
I, II, III, and IV
2
,All of the options are true. A capital utilization strategy would make it possible to produce a larger
annual income for a client but over a finite number of years, after which the principal is exhausted.
Therefore, a planner should make a conservative estimate of a client's life span, otherwise a client may
outlive his or her income. Assuming that the yield would remain the same, the larger the income, the
shorter the number of years. The before-tax approach for calculating the future value of retirement
assets does not take into account the shrinkage of retirement assets due to taxes. The amount of tax
shrinkage may be significant, therefore the impact of taxes will need to be taken into consideration. In
contrast, the formula for calculating an inflation-adjusted yield takes the effect of inflation into account.
The inflation-adjusted yield formula is [(1 + r) / (1 + i)] - 1 x 100 where r = Investment return, and i =
Inflation rate.
Which one of the following is not a key element of an investment policy?
A)
a provision for periodic review
B)
a target asset allocation
C)
names of specific stocks to be in the portfolio
D)
the acceptable risk tolerance level - ANSWER-C)
names of specific stocks to be in the portfolio
The key elements in an investment policy are a clear statement of the client's goal, suitable investment
vehicles and strategies, the acceptable risk tolerance level for the client, asset allocation guidelines, and
a provision for periodic review. One way to remember the essential elements of an investment policy is
the acronym "GRASP" (Goals, Risk, Asset Allocation, Strategies/Suitable Investment-meaning the
investment categories that may or may not be used-and Periodic Review). Specific investments would
be determined after the investment policy is created.
Which one of the following is a characteristic of Treasury inflation-protected securities (TIPS)?
A)
They are sold at a discount.
B)
They are issued with maturities up to 40 years.
C)
Their returns are tied to the producer price index.
D)
The increase in principal is taxable each year. - ANSWER-D)
The increase in principal is taxable each year.
Any annual increase in principal is subject to federal taxation (unless in a tax-deferred account).
Returns are tied to the consumer price index. TIPS are sold at par value and have maturities up to 30
years.
Assume your client has the following portfolio:
StockWeightBetaBCD40%1.15EFG25%.90HIJ35%1.05
What is the overall weighted beta for this portfolio? - ANSWER-A)
3
, 1.05
.4 × 1.15 = .4600; .25 × .90 = .2250; .35 × 1.05 = .37. Then, .4600 + .2250 + .3675 = 1.0525.
Your client owns a bond fund with a duration of 6.5. If interest rates increase 1.5%, what is the
expected change in price for this fund?
A)
6.5% increase
B)
9.75% decrease
C)
6.5% decrease
D)
9.75% increase - ANSWER-B)
9.75% decrease
1.5% x -6.5 = -9.75%. Recall that duration needs to have a negative sign in order to represent the
inverse relationship between bond prices and interest rates. In this case, an increase in rates means the
bonds or bond funds will fall in price. Therefore, this fund will decrease in price about 9.75%. Also,
you can remember that bond prices move opposite to interest rates. An increase in interest rates means
the price of bonds will go down.
The process of rebalancing is a key factor in
A)
strategic asset allocation.
B)
dynamic asset allocation.
C)
tactical asset allocation.
D)
institutional asset allocation. - ANSWER-A)
strategic asset allocation.
Strategic asset allocation involves obtaining the best asset mix for a client over a long period. For
example, this might be 60% stocks and 40% bonds. When these percentages change due to market
movements, this strategic asset allocation requires the portfolio to be rebalanced back to the target mix,
in this case 60/40 stocks/bonds.
What does Jensen's alpha tell you?
A)
the percentage by which a manager beat the market
B)
the percentage a manager over- or underperformed based on the amount of risk taken
C)
the percentage of return that can be attributed to unsystematic risk
D)
the percentage of return that can be attributed to systematic risk - ANSWER-B)
4
