8. Rakesh has a portfolio with 23 different equities. The portfolio beta is 1.50. By what percentage should the Market move so that the expected return from his portfolio is 20% using the Capital Asset Pricing Model? (Assume risk free rate to be 6%). a) 14.80% b) 15.33% c) 17.00% d) 16.50% (Ans - b) 9. The CAPM is a model that: a) Determines the geometric return of a security. b) Determines time-weighted return c) Explain return in terms of risk. d) Explains systematic risk (Ans - (c) Explain return in terms of risk. 10. __________________ is an investment strategy focused on the needs of the investor rather than the constant tracking of the markets, and is thought to remove the influence of emotion from investment strategies. a) liquidity expectation timing b) portfolio optimization c) strategic asset allocation d) tactical asset allocation (Ans-(c) Strategic Asset Allocation) CFP Level 1 - Module 2 - Investment Planning and Asset Management - Workbook Page 47
11 Which of the following is/are not a method(s) to evaluate the attractiveness of investments? I. Net present value. II. Internal rate of return. III. Sum of digits. IV. Payback period. a) I b) I, II c) III d) III, IV (Ans - (c) III. Sum of digits 12. What is Modern Portfolio Theory? a) Modern Portfolio Theory (MPT) argues that it's possible to design an ideal portfolio that will provide the investor maximum returns by taking on the optimal amount of risk. b) MPT was developed by economist Harry Markowitz in the 1950s; his theories surround the importance of portfolios, risk, diversification and the connections between different kinds of securities. c) MPT advocates diversification of securities and asset classes. d) All of the above (Ans - d) 13. Which of the following is not true about assumptions of MPT? a) Investors are rational, and want to realize the best possible utility (satisfaction) of their investments. b) Investors prefer the highest level of risk, and for a given level of risk, want the maximum possible return. c) When making decisions, investors consider only risk and return. d) Expected return, risk and covariance are fixed through time, and known to investors (Ans - b) As per MPT, investors prefer lowest level of risk) CFP Level 1 - Module 2 - Investment Planning and Asset Management - Workbook Page 48
14. How do we choose between efficient portfolios? a) Most investors desire to achieve the highest satisfaction (utility) from their portfolio. b) This means there is no one perfect or best portfolio. c) Instead, each investor will find his or her optimal portfolio along the efficient frontier by determining the amount of risk to assume relative to the return the person needs or wants. d) In this context, there may be more than one optimal portfolio for a given investor, depending on the goal(s) the investor has for the portfolio. e) All the above are true (Ans - e) 15. Hoe does Arbitrage Pricing Theory explain itself? a) The key point behind APT is a logical statement that security returns are not based on one single factor of the market, rather it is influenced by multiple macro-economic factors where sensitivities to each factor is represented by a factor specific beta coefficient. b) The APT model proposes that there exists a linear relationship between the return on asset and the number of risk factors. c) APT assumes that a security’s long run return is “directly related to its sensitivities to unanticipated changes in the four macroeconomic variables – (i) inflation, (ii) industrial production, (iii) risk premium, and (iv) the scope of the term structure of interest rates. d) All the above are true (Ans - d) 16. Which of the following three forms of efficiency given by efficient market hypothesis is true? a) Weak form assumes that current stock prices reflect all available (current and historical) stock market information. b) Semi-Strong form assumes that new information available to the public is immediately factored into stock prices, and can be used by investors. The market then regains equilibrium. If true, the semi- strong form effectively discounts fundamental analysis. c) Strong form assumes current stock prices fully reflect all public and nonpublic (including insider) information (i.e., a perfect market). d) All the above are true (Ans - d) CFP Level 1 - Module 2 - Investment Planning and Asset Management - Workbook Page 49
17. Which of the following about Random walk theory is true? a) One has no reason to do Fundamental Analysis b) One has no reason to do Technical Analysis. c) The only way to get better investment returns than provided by the market is to accept greater risk (i.e., it is impossible to outperform the market). d) All the above are true 18. What is the Time-premium? a) It is the compensation or reward for waiting as the current consumption of money value is sacrificed for the present or proposed to the future. b) It is the compensation for the loss in value of the money. This compensation should be at least equal to the returns on risk free assets as this is the minimum expected return that one can have from his investment. c) The risk free assets are however, subject to interest rate risk and inflation risk. They are free from default risk. d) All the above are true (Ans - d) 19. Which of the following is not true about Risk- premium? a) It is the reward for assuming risk by the risk-averse investors. b) His desire for return increases with the increased quantum of risk assumed by him. c) The risk premium is nothing but the compensation over and above the risk involved in riskless assets. d) The risk premium decreases with the increase in risk. e) In other words, higher the risk higher the return; lower the risk lower the return. f) All are true (Ans - d) 20. The Beta of a market portfolio is: a) -1 b) 0 c) 1 d) None of the above (Ans - c) CFP Level 1 - Module 2 - Investment Planning and Asset Management - Workbook Page 50
Chapter - 6 Asset Allocation 1. If you maintain a flexible ratio of asset allocation, you would: a) Rebalance the Debt/Equity allocation periodically b) Rebalance the Debt/Equity allocation frequently c) Generally avoid portfolio rebalancing d) Keep fixed percentages of equity and debt investment at all times (Ans - c) - Will avoid rebalancing and allow the portfolio to be flexible) 2. Calculate the asset allocation of the given portfolio after 1 & 2 years respectively. The details of the original portfolio are as follows: Sl. No Asset Class Asset Allocation (%) 1 Cash 20 2 Debt 60 3 Equity 20 The initial investment was Rs.1,20,000. Consider there have been no changes made in the portfolio during this intermediary period. The average annual return of the different asset classes were as follows: Sl. No Asset Class Average Annual Return (%) 1 Cash 0 2 Debt 9 3 Equity 15 a) Cash: 16.99%; Debt: 60.55%; Equity: 22.47% b) Cash: 18.45%; Debt: 60.33%; Equity: 21.22% c) Cash: 33.33%; Debt: 33.33%; Equity: 33.33% d) None of the above CFP Level 1 - Module 2 - Investment Planning and Asset Management - Workbook Page 51
(Ans - a) Original Portfolio C:D:E = 0.2:0.6:0.2 i.e. Cash: 24000, Debt: 72000, Equity: 24000. Portfolio value after 2 years is: Cash: 24000, Debt: 85543.20, Equity: 31740. Total Portfolio Value after 2 years is: 24000 + 85543.20 + 31740 = 141283.20. New Asset Allocation C:D:E = 16.99% : 60.55% : 22.47% 3. What is Asset Allocation? a) Asset allocation is the process of deciding how to distribute the investor‘s wealth among the various asset classes for investment purposes. b) It is this decision which determines how much of the assets need to be distributed over the following asset classes with different characteristics. c) Asset allocation also provides for a direction to the future income, cash flows of the investor in terms of where he should invest to achieve his financial goals. d) All the above are True (Ans - d) 4. Different asset classes offer returns that are not perfectly correlated. Hence, diversification reduces the overall risk in terms of the variability of returns for a given level of expected return. Therefore, having a mixture of asset classes is more likely to meet the investor's expectations in terms of amount of risk and possible returns. a) True b) False 5. It is Long-term, generally passive once the asset mix has been chosen, rebalanced periodically to return to the original allocation percentages. Which asset allocation is this? a) Strategic Asset Allocation b) Tactical Asset Allocation c) Dynamic Asset Allocation d) Core/Satellite Asset Allocation (Ans - a) 6. It is shorter-term (than that for strategic allocation), responds to changes in the market(s), can involve market timing and sector rotation. Which Asset Allocation is this? a) Strategic Asset Allocation b) Tactical Asset Allocation c) Dynamic Asset Allocation d) Core/Satellite Asset Allocation CFP Level 1 - Module 2 - Investment Planning and Asset Management - Workbook Page 52
(Ans - b) 7. It is a combination of strategic and tactical asset allocation achieved by dividing a portfolio into a core holding of strategically allocated assets. This core typically represents 70–80% of the total portfolio, and is maintained at the prescribed allocation through periodic rebalancing. The remaining 20-30% of the portfolio is the satellite portion and is allocated to a tactical strategy (active management) to capture some excess gains (alpha). a) Strategic Asset Allocation b) Tactical Asset Allocation c) Dynamic Asset Allocation d) Core/Satellite Asset Allocation (Ans - d) 8. This type of allocation is used primarily to hedge a portfolio against big declines in value. To do this, the investment manager will shift between riskless and risky assets, making the changes in response to what is happening in the marketplace. As portfolio values change, the allocation will change with it. Which Asset allocation is this? a) Strategic Asset Allocation b) Tactical Asset Allocation c) Dynamic Asset Allocation d) Core/Satellite Asset Allocation (Ans - c) 9. Time-Based rebalancing approach requires revising the portfolio asset allocation on a predetermined schedule. This could be every six months, every year, or some other time. a) True b) False (Ans - a) 10. Using this approach will require focusing on the degree to which assets in the portfolio have increased or decreased in value and, thereby, increased or decreased as a percentage of the portfolio: This is CFP Level 1 - Module 2 - Investment Planning and Asset Management - Workbook Page 53
a) Time Based Approach of Rebalancing b) Threshold Based Approach of Rebalancing c) None of the above d) Both the above (Ans - b) 11. What is Active management policy? a) Active management is the use of human capital to manage a portfolio of funds. b) Active managers rely on analytical research, personal judgment, and forecasts to make decisions on what securities to buy, hold, or sell. c) a is false but b is true d) Both are true (Ans - d) 12. This type of investing’s goal is to build wealth gradually. Also known as a buy-and-hold strategy, it means buying a security to own it long-term. Unlike active traders, these investors do not seek to profit from short-term price fluctuations or market timing. The underlying assumption of this investment strategy is that the market posts positive returns over time. What is this strategy of investing? a) Active strategy b) Core strategy c) Satellite strategy d) Passive strategy (Ans- d) CFP Level 1 - Module 2 - Investment Planning and Asset Management - Workbook Page 54
Chapter - 7 Wealth Management 1. While preparing a Financial Plan for Mr. X you have made a forecast of his present revenues and expenditures i.e. constructed a model of how his finances might perform in the near future. You have prepared a __________. a) Investment Plan b) Fund Flow statement c) Cash Flow statement d) Budget (Ans - d) 2. Prior to providing any wealth management/ financial planning services, you as Financial Planning practitioner and Mr. X, as your client shall mutually define the scope of the engagement. The letter of engagement would define the scope of engagement by discussing i) Identification of the service(s) to be provided ii) Financial Planning practitioner’s compensation arrangement(s) iii) Analysis and evaluation of client’s current situation iv) Determining the clients and the Financial Planning practitioner’s responsibilities; v) Establishing the duration of the engagement; vi) Determine the strategies to achieve financial goals (3) a) i), ii), iv) and v) b) ii), iii), iv) and vi) c) ) ii), iii), IV) and v) d) i), ii), v) and VI) (Ans - a) 3. Mr. X wants to know how you will ensure that information and relevant documents given to or gathered by you are securely stored? This would be is accordance to FPSB India's Rules that relate to the Code of Ethics of _____________. a) Integrity b) Diligence c) Confidentiality d) Professionalism CFP Level 1 - Module 2 - Investment Planning and Asset Management - Workbook Page 55
(Ans - c) 4. While preparing Financial Plan for Mr. X you have ensured that all the significant recommendations are made in writing. If any significant recommendations are given orally, then confirmations have been given in writing. You have complied with Rule that relates to the Code of Ethics of ________. a) Fairness b) Diligence c) Professionalism d) Compliance (Ans - b) 5. You as a CERTIFIED FINANCIAL PLANNERCM Professional are required to exercise objectivity in providing services to Mr. X, your client. This means you shall be _____________. a) Impartial b) Honest c) Competent d) Diligent (Ans - a) 6. You receive a phone call from a person with whom you have never spoken. .The caller is excited, just having heard that a new mutual fund is positioned to deliver larger gains in the coming year. The caller wishes to purchase shares of the fund through you. Keeping in mind stages of the overall personal planning process, which of the following questions that address the first two stages of the financial planning process should you ask the caller? (1) What are your goals for this investment? (2) What other investments do you have? (3) What is your date of birth? (4) Do you want your dividends reinvested? a) 1 and 2 only b) 2 and 4 only c) 1, 2, and 3 only d) 1, 2, and 4 only (Ans - c) CFP Level 1 - Module 2 - Investment Planning and Asset Management - Workbook Page 56
7. Which one of the following statements regarding the second step of the financial planning process, Gathering client data and determining goals and expectations, is correct? a) General goals, such as “adequate retirement income” provide appropriate guidance in developing the plan. b) Quantitative information and qualitative information are equally important. c) This step provides the greatest time-saving potential since most of the information required can be estimated and reasonable accuracy is not affected. d) Most clients will be able to completely implement their financial plans in a relatively short period of time, so prioritization is merely a formality and not particularly important (Ans - b) 8. What is the third step in the financial planning process? a) Recommending a plan b) Establishing the client planner relationship c) Analyzing information d) Gathering data (Ans - c) 9. An appropriate Financial Plan is influenced by one’s________ a) Income b) Age c) Liquidity d) All of the above (Ans - d) 10. A comprehensive financial plan includes: a) Wealth Accumulation b) Wealth Distribution c) Risk Management d) All of the above (Ans - d) 11. Which of the following are most commonly-cited reasons that people give for why they sought out a financial planner? 1) To assist with the time and effort of managing their finances, 2) To get timely advice on markets and investment opportunities, CFP Level 1 - Module 2 - Investment Planning and Asset Management - Workbook Page 57
3) To seek advice on tax-reduction, Page 58 4) Budget planning in order to optimize their investable income a) (1), (3) and (2) b) (1), (2), (3) and (4) c) (1), (3) and (4) d) (1) and (2) (Ans - b) 12. Which of the following is not qualitative information? a) Liquidity Preference. b) Assets and Liabilities. c) Personal Details. d). All of the above. (Ans - b) 13. Which of the following is the basic characteristic of a client’s goal? a) It must be defined in terms of money b) It must be quantified c) It must not be vague d) All of the above (Ans - d) 14. Which of the following data cannot be collected through a single direct Question? a) Income of a person b) Family members c). Risk tolerance d) Term for the goal to be achieved (Ans - c) 15. Which of the following are steps used in preparing a financial plan? I goal setting II identification of financial problems III preparation of alternatives/recommendations IV implementation of the agreed recommendations a) I, II, III and IV b) I, II and IV c) III and IV CFP Level 1 - Module 2 - Investment Planning and Asset Management - Workbook
d) II, III and IV (Ans - a) 16. A statement of advice is not needed in providing limited financial planning advice) a) There is no such thing known as a statement of advice b) The above statement is true c) The above statement is false d) There is no such thing as limited financial planning advice, by definition financial planning is comprehensive) (Ans - c) 17. A wealth management advisor or wealth manager is a type of financial advisor who a) utilizes the range of financial disciplines available, such as financial and investment advice, legal or estate planning, accounting, and tax services, and retirement planning, to manage an affluent client's wealth. b) He charges fees for managing the wealth of affluent people. Wealth management practices differ depending on the nation. c) Both the above are true (Ans - c) 18. The sentence “Exit Strategies for Business Owners” refers to what as per your understanding? a) Succession planning for individuals b) Succession planning for self employed c) Succession planning for business owners d) Any of the above is true (Ans - c) 19. Understanding of which ratios of their client’s business are important to be understood by financial advisors? a) Liquidity ratios, such as the current ratio and quick ratio, determine whether a company can meet its obligations as they come due. b) Activity ratios, such as accounts receivable turnover and inventory turnover, determine how rapidly assets move through the company, including how quickly inventory is moving out the door, and how quickly payments are received. CFP Level 1 - Module 2 - Investment Planning and Asset Management - Workbook Page 59
c) Profitability ratios, such as EBITDA (earnings before income taxes, depreciation and amortization), return on capital and return on equity (ROE) measure performance and how profitable the company is, and what sort of return the company is getting on capital and equity. d) Leverage ratios, such as debt-to-equity and debt-to-capital, measure the extent to which a company uses debt financing. e) All of the above (Ans - e) 20. What is EBIT and EBITDA refer to? a) EBIT (Earnings before interest and taxes) b) EBITDA (earnings before interest, taxes, depreciation and amortization) c) a is true, b is false d) b is true, a is false e) Both are true (Ans - e) cc CFP Level 1 - Module 2 - Investment Planning and Asset Management - Workbook Page 60
Chapter – 8 Behavioral finance 1. \"Behavioral finance denotes the study of finance based on credible assumptions about how people behave, often confirmed by-------------- experiments such as those by the 2002 Nobel prize winners Vernon Smith and Daniel Kahneman a) Financial b) Theoretical c) Economic d) Psychology (Ans - d) 2. The only difference between behavioral and traditional approaches to finance lies in the explicit recognition of the need to ground theoretical ----------- of financial decision making in an understanding of how decisions are actually made. a) Explanations b) Underpinnings c) Deliberations d) Innovations (Ans - d) 3. Behavioral finance by emphasizing what finance theory does rather than says cover the vast ground of behavioural finance research. a) True b) False (Ans - a) true) CFP Level 1 - Module 2 - Investment Planning and Asset Management - Workbook Page 61
4. The workhorse model of standard finance evaluates utility by asking how much would an agent/investor ------- to enter a certain lottery. a) Earn b) Pay c) Demand d) None of these (Ans - b) Pay) 5. A principal insight of standard finance is the injunction to hold a diversified portfolio of shares knowing some will succeed and others fail. By doing so the investor avoids bearing unnecessary risk associated with any particular security. Sufficient diversification ensures the investor bears only some base level of 'market' risk. a) True b) False (Ans – a) true) 6. For these pioneering authors expected utility theory constituted a normative model of how a rational person should make decision about alternative courses of action and not a positive/descriptive rationalization about how decisions are--------- made. a) Really b) Normatively c) Formally d) None of these (Ans - a) 7. Nicolas' s paradox was simply that further increments in expected wealth don't increase utility in------- ---- proportion beyond some point. a) Equal b) Differential c) Marginal d) Unequal (Ans - a) CFP Level 1 - Module 2 - Investment Planning and Asset Management - Workbook Page 62
8. In a lifetime of work in experimental economic Kahneman and Tversky have constructed the building blocks of a new descriptive/positive theory of how decisions are made. The theory they advance is entitled ------------ a) Prospect theory'. b) Descriptive theory c) Rational theory d) Normative theory (Ans - a) 9. The extrapolation bias is particularly marked in judging the performance of experts or those with a special talent. a) True b) False (Ans – a) true) 10. To secure maximum benefit in life, all ------------ pleasures or pains should act upon us with the same force as if they were present, allowance being made for their uncertainty. The factor expressing the normal effect of remoteness should, in short, always be unity, so that time should have no influence. But no human mind is constituted in this perfect way: a future feeling is always less influential than a present one. a) Future b) Past c) Present d) Worldly (Ans - a) 11. Standard finance theory values assets by --------- the future payoffs that arise from holding those assets. a) Compounding b) Discounting c) Predicting Page 63 CFP Level 1 - Module 2 - Investment Planning and Asset Management - Workbook
d) Assessing (Ans - b) discounting) 12. What is Cognitive Dissonance in Behavioral Finance? a) When people get new information that is not matching /conflicts with a pre-existing understanding, people may experience mental discomfort, also known as cognitive dissonance. b) When in a state of cognitive dissonance, people will often perform significant rationalizations to maintain psychological stability. c) Unfortunately, attempts to achieve this cognitive harmony are not always in the individual’s self- interest. d) All the above are true (Ans - d) 13. What is Confirmation bias? a) This bias refers to a type of selective perception that emphasizes ideas that confirm our beliefs, while devaluing whatever might contradict them. b) Another way to look at this is that we tend to convince ourselves that our beliefs are correct, and we discount or dismiss any information to the contrary. c) Investors frequently fall prey to this bias by failing to acknowledge negative information about a security, even when that information is substantial and credible. d) b and c are true e) All are true (Ans - e) 14. What is Anchoring in Behavioral Finance? a) Anchoring is one of the root psychological flaws that pushes otherwise brilliant people to make financial mistakes. b) It’s critical to admit this heuristic is hardwired in your brain or you will continue to succumb to it. c) To avoid making serious financial mistakes, you must become a vigilant contrarian. d) All are true (Ans - d) CFP Level 1 - Module 2 - Investment Planning and Asset Management - Workbook Page 64
15. What is Ambiguity Aversion? a) People tend to dislike uncertainty (i.e., ambiguity) more than they dislike risk. b) People do not like situations where they are uncertain about the probability distribution of an unknown (i.e., a gamble). c) The more competent an individual, the more likely they will be comfortable with ambiguity (assuming that individual believes they can make an accurate prediction based on personal judgment). d) a and b are correct e) All are correct (Ans - e) 16. What is Loss aversion bias? a) Built from prospect theory, loss aversion suggests that people generally prefer to avoid losses rather than to achieve gains. b) Loss aversion can cause people to hang onto poor investments with little or no potential for a turnaround (i.e., waiting until they are able to “break even”) c) A is true, b is false d) Both are true (Ans - d) 17. What is Regret eversion? a) This is the fear that any decisive action may prove to be less than optimal. b) The individual attempts to reduce or eliminate the pain of regret associated with poor decision- making. c) Regret aversion may also keep an investor from entering the market after it has generated a series of losses, perhaps leading to a tendency to buy high and sell low. d) Another potential result is the tendency to do nothing, because any action has the potential to create pain, and thereby, regret. e) All are true (Ans - e) CFP Level 1 - Module 2 - Investment Planning and Asset Management - Workbook Page 65
18. Which of the following is not common mistakes people make while taking decisions about investments? a) Overconfidence b) Projecting the immediate past into the distant future c) Herd Like behaviour (Social proof), driven by a desire to be part of the crowd or an assumption that the crowd is omniscient d) Understanding randomness, seeing patterns that does not exist e) Commitment and consistency bias (Ans - d) 19. Helping Clients to “Behave” Their way to success, what does it mean? a) A review of the behavioral biases should lead to the conclusion that the way to help clients behave their way to success is to help them recognize and revise at least some of their core disabling biases. b) It is possible by financial advisors giving persistent advice c) Both are correct (Ans - c) 20. What is optimism? a) This may be somewhat related to overconfidence, which is not necessarily a negative trait, in and of itself. b) However, believing that bad events (or investments) will not happen to “me,” only to other people, is delusional. c) It may lead individuals to have an unrealistically positive view of themselves and their futures. d) Optimism can become negative when it produces the tendency to rate oneself higher than the general population. This is not an uncommon situation. e) All the above (Ans - e) CFP Level 1 - Module 2 - Investment Planning and Asset Management - Workbook Page 66
Chapter-9 Investment Objectives, Constraints and Suitability 1. Why engaging with investment client is important? a) For financial planners, more important than acquiring clients or selling them financial products is to taking the time to develop a thorough understanding of a client’s current financial position, positive future position, timeline, concerns, behavioral inclinations, risk tolerance, and current level of planning. b) Prospective clients may not have the same level of knowledge and comfort or familiarity with concepts of finance and investments as financial professionals do, which is why most will seek out and engage the services of an investment advisor c) Helping them reach their financial destination is very important d) All the above are true e) Only a and c are true (Ans - d) 2. Defining the Scope of Engagement is crucial before initiating the process of wealth management/Financial planning, why? a) The process of ‘mutually-defining’ is essential in determining what activities may be necessary to proceed with the client engagement. b) Engaging the clients in some games is important c) Regular gossip with the client is required (Ans - a) 3. He is confident but acts with intent and caution, makes decisions based on information perceived to be factual, trusts his analysis, sticks to decisions once they are made, is independent (do-it-yourselves) and be entrepreneurial. What type of client is he? a) Individualist investor b) Adventurer investor c) Guardian investor d) Celebrity investor (Ans - a) CFP Level 1 - Module 2 - Investment Planning and Asset Management - Workbook Page 67
4. He is confident, but acts with impulsivity or spontaneity (rashly), is strong-willed and is highly risk tolerant/more likely to take risks. What type of client is he? a) Individualist investor b) Adventurer investor c) Guardian investor d) Celebrity investor (Ans - b) 5. What is Risk Profiling? a) In financial markets, the risk profile of an individual indicates his ability to take risk while investing. b) It is one of the important variables that a financial planner will focus on before recommending a product to an investor. c) Risk profile categorizes the individuals in various segments such as conservative, moderate or aggressive. d) All of the above (Ans - d) 6. Which of the following statements would best describe your level of knowledge as an investor? a) I don’t understand investment terminology at all. b) I am a proficient investor who’s able to explain concepts such as EVA, beta and hedging. c) I know how to identify and invest in mutual funds and secondary market debentures. d) I understand all the avenues of investment; their risk return attributes and takes decision accordingly. e) I am not very familiar with investment options and financial planning. (Ans - d) 7. For which types of clients capital preservation is most important? a) Very conservative investor b) Moderate risk taker c) Aggressive investor (Ans - a) CFP Level 1 - Module 2 - Investment Planning and Asset Management - Workbook Page 68
7. Which of the following is false? a) The risk-return trade-off is the principle that links high risk with high reward. b) The right risk-return trade-off depends on a variety of factors including an investor’s risk tolerance, the investor’s remaining years to retirement and the likelihood to replace lost funds. c) Time also plays an essential role in determining a portfolio with the appropriate levels of risk and reward. d) None of this is false (Ans - d) 8. What is the difference between “realised” and “unrealised” gain/loss on capital asset? a) Realised gain/loss occurs when asset is not sold and unrealised gain/loss happens when capital is sold b) Realised gain/loss and unrealised gain/loss are same c) Realised gain/loss occurs when asset is sold and unrealised gain/loss happens when capital is not sold d) All are false (Ans - c) 9. Which of the following is false? a) Establishing financial goals and the time horizon of the goal is very important. b) Time horizon is the period when you will be requiring money to meet your goal. c) A financial goal with a high degree of certainty and a short time horizon requires a focus on safety (capital preservation), and therefore a selection of assets that remain stable in value (most likely interest-bearing instruments). d) Long term financial goal requires investment in Fixed income (Ans - d) CFP Level 1 - Module 2 - Investment Planning and Asset Management - Workbook Page 69
10. What is true about SMART Goals? a) Short term, monetary value, achievable, real and time-bound b) Specific, money value, artistic, realistic and time-bound c) Specific, measurable, achievable, realistic and time-bound d) None of the above is true (Ans - c) 11. The assumptions to be made to create portfolios of the client need to be: a) Client-specified, b) Mutually agreed upon, c) Both personal and economic assumptions must be considered in this step of the process. d) All the above are true (Ans - d) 12. What is Investment Policy Statement? a) An investment policy statement lays out the roadmap for a client’s situation, their goals/objectives, and the investment strategy or approach that is being used to achieve those goals. b) While the IPS describes the investment strategy/strategies to be used, it does not specify individual investment holdings. c) A well-written investment policy statement would allow another financial advisor to step in and quickly understand the client’s situation and goals, and be able to advise and guide the client. d) The IPS also helps financial advisors to keep their clients focused on their progress relative to their goals, rather than focusing on investment performance alone. e) All the above are true (Ans - e) CFP Level 1 - Module 2 - Investment Planning and Asset Management - Workbook Page 70
13. Cash flow management is one of the core steps toward financial well-being. a) True b) False (Ans - a) 14. Why is there a Need to Review Financial Plans? a) Micro changes happen at client level b) Macro changes happen at economy level c) Introduction of new products calling for review d) All the above are true (Ans - d) 15. Who should take the help of financial professionals? a) People who earn money b) People with less or no knowledge about personal finance c) People with various goals to achieve d) All the above need to take advice (Ans - d) CFP Level 1 - Module 2 - Investment Planning and Asset Management - Workbook Page 71
CFP Level 1 - Module 2 - Investment Planning and Asset Management - Workbook Page 72
Chapter - 1 and 2 (India Specific) 1. When was first Monetary Policy Committee formed in India? a) 1934 b) 2010 c) 2015 d) 2009 (Ans - c) 2. The Monetary Policy Committee is responsible for fixing the benchmark ------------in India. a) Open Market Operations b) Tax rates on Bank investments c) Interest rates d) None of the above (Ans - c) 3. RBI formulates, implements and monitors the ----------------. a) Fiscal Policy b) Debt issue c) Monetary policy (Ans - c) 4. -------------Securities are issued by RBI (in the role of merchant banker) Page 73 a) Certificates of Deposit b) Commercial papers c) Govt. of India securities CFP Level 1 - Module 2 - Investment Planning and Asset Management - Workbook
(Ans - c) 5. ----------- Performs following functions. 1. To regulate the business in stock exchanges and any other securities markets 2. To register and regulate the working of Stockbrokers, Registrars, Depositories, Credit Rating Agencies, Foreign Institutional Investors, Mutual Funds, Underwriters, Advisers etc. and intermediaries who may be associated with securities markets in any manner 3. Regulating substantial acquisition of shares and takeover of companies a) RBI b) AMFI c) SRO d) SEBI (Ans - d) 6. Zero coupon bonds (Discounted securities) are issued at ---------and redeemed at ------- a) Par value, discount b) Discount, discount c) Discount, Par d) None of the above (Ans - c) 7. ------------and ----------are collaterised borrowings and lending by banks vis a vis RBI a) Repo and Reverse Repo b) Reverse Repo and Repo c) T-Bills and GOI Securities d) None of the above (Ans - a) Repo rate is paid by banks to RBI when it borrow) CFP Level 1 - Module 2 - Investment Planning and Asset Management - Workbook Page 74
8. What is underwriting? a) Companies which as a bankers to the issue (IPO) b) Guaranteeing corporations that the securities on offer will be fully subscribed to. c) Distributors (Ans - b) 9. Who are market makers? a) A market maker is an intermediary who is willing and ready to buy and sell securities. b) The market maker provides a two way quote in the market, thus creating a market for the securities. c) Both the statements are correct d) a is correct, b is false (Ans - c) 10. Depository holds securities in dematerialized form for the investors in their beneficiary accounts. a) True b) False (Ans - a) 11. S&P BSE SENSEX is calculated using the \"Free-float Market Capitalization\". What do you mean by Free Float Capitalization? a) Where available float shares are defined as total shares outstanding less shares held by strategic holders b) Promoters holdings are part of this capitalization c) Free Float shares are less than total number of shares which forms part of capital d) a and c are correct CFP Level 1 - Module 2 - Investment Planning and Asset Management - Workbook Page 75
(Ans - d) 12 . A stock market index is created by selecting a group of stocks that are -------------- of the whole market or a specified sector or segment of the market. a) Included b) Excluded c) Representative d) Issued (Ans - c) 13. The NIFTY 50 is owned and managed by NSE Indices Limited (formerly known as India Index Services & Products Limited-IISL) a) True b) False (Ans - a) 14. Which of the following is true? a) In reality, common shareholders are at the bottom of the chain when a company liquidates. b) During insolvency proceedings, the creditors are the first to have their outstanding debts paid from the company’s assets. c) The bondholders are the next priority followed by preferred shareholders and, finally, the common shareholders. d) All are true (Ans - d) 15. Which of the following is incorrect? a) A company in which promoter stake is high is generally considered positive. b) But is has negative aspects as well. CFP Level 1 - Module 2 - Investment Planning and Asset Management - Workbook Page 76
c) On the other hand a well-diversified shareholding across different types of investors means that the promoters have little scope to take unwarranted decisions that can hurt the business. d) An increase in promoter shareholding is an indication of the increased confidence of the promoter in the business growth. e) A decrease in promoter holding must be studied carefully but not immediately looked upon as a negative for the business or the company. f) None is incorrect (Ans - f) 16. Futures price of a security shall be logically more than the spot price of a security because of concept of “cost of carry” a) True b) False (Ans - a) 17. Which of the following is false about GOI (Government of India) securities? a) Issued at face value b) No default risk as the securities carry sovereign guarantee. c) Ample liquidity as the investor can sell the security in the secondary market d) No Interest payment (Ans - d) 18. Which of the following is true about Tax Free bonds? a) Tax-free bonds are an attractive long-term investment. b) There is no deduction of tax at source from the interest that accrues to bondholders, irrespective of the interest amount or status of the investor. c) These bonds score over bank fixed deposits on account of tax exemption on the interest earned. d) However, bank fixed deposits are more liquid than tax-free bonds as the latter have a longer maturity period and are not easy to sell in the secondary market e) All are true CFP Level 1 - Module 2 - Investment Planning and Asset Management - Workbook Page 77
(Ans - e) 19. Which of the following is true about Foreign exchange markets? a) The foreign exchange market is the market to determine the price of different currencies in terms of one another in order to enable trade between countries and to provide a way to transfer currency associated risks arising from economic transactions. b) The legal framework for the conduct of foreign exchange transactions in India is provided by the Foreign Exchange Management Act, 1999. c) Foreign exchange transactions in India happens both on an OTC market and an exchange traded market. d) All are true (Ans - d) 20. The foreign exchange rates constantly respond to a number of economic variables, both domestic and global, which have an impact on the demand and supply of foreign currency in the short-term and long term. a) True b) False (Ans - True) 21. 1. Daily settlement price for futures contracts is the closing price of such contracts on the trading day. 2. The closing price for a futures contract shall be calculated on the basis of the last half an hour weighted average price across exchanges of such contract or such other price as may be decided by the relevant authority from time to time a) 1 is true, 2 is false b) Both are false c) Both are true (Ans - c) CFP Level 1 - Module 2 - Investment Planning and Asset Management - Workbook Page 78
22. If the difference between the interest rates of two countries equals the difference between their forward and spot exchange rates, it is called ----------- a) Currency parity b) Income parity c) Interest rate parity (Ans - c) 23. Why Indians invest in Gold? a) High liquidity b) Inflation-beating capacity c) Love for Gold by Indians d) All the above (Ans - d) 24. Which of the following is false? a) The principal participants in the foreign exchange market are the authorized dealers (AD), foreign exchange brokers and customers. b) The authorized dealers are the market makers who give buy and sell quotes for different currency pairs. c) The brokers act as intermediaries who find the best quotes for their clients who may be the end users of the currency. d) For dealing in foreign exchange market, the intermediaries need to be registered with RBI. Authorized dealers are banks and others who are licensed to deal in the foreign exchange market by the RBI. e) All are true (Ans - e) 25. The SEBI regulates commodity market trading in India. The Commodity Derivatives Market Regulation Department (CDMRD) looks after day to day operations. a) True b) False (Ans - a) True CFP Level 1 - Module 2 - Investment Planning and Asset Management - Workbook Page 79
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