Questions

Question 1

The relative strength index for a stock stands at 75. This reading is best
described as an indication that the stock is
A neutral.
B oversold.
C overbought.

Answer 1

C is correct. The relative strength index (RSI) is a momentum oscillator and provides
information on whether or not an asset is overbought or oversold. An RSI greater than 70
indicates that a stock is overbought; an RSI lower than 30 suggests that a stock is oversold. A is incorrect. The relative strength index is a momentum oscillator and provides
information on whether or not an asset is overbought or oversold. An RSI greater than 70
indicates that a stock is overbought; an RSI lower than 30 suggests that a stock is oversold.
B is incorrect. The relative strength index is a momentum oscillator and provides
information on whether or not an asset is overbought or oversold. An RSI greater than 70
indicates that a stock is overbought; an RSI lower than 30 suggests that a stock is oversold.

Question 2

Which of the following institutional investors is most likely to have a low tolerance
for investment risk and relatively high liquidity needs?
A Insurance company
B Defined-benefit
pension plan
C Charitable foundation

Answer 2

A is correct. Insurance companies need to be relatively conservative and liquid, given
the necessity of paying claims when due.
B is incorrect because defined-benefit
pension plans tend to have quite high risk
tolerances and quite low liquidity needs.
C is incorrect because endowments/foundations typically have high risk tolerances
and quite low liquidity needs.

Question 3

The risk-free
rate is 5%, and the market risk premium is 8%. If the beta of TRL
Corp. is 1.5, based on the capital asset pricing model (CAPM), the expected
return of TRL’s stock is closest to:
A 17.0%.
B 9.5%.
C 15.5%.

Answer 3

A is correct. Using the CAPM relationship of E(Ri ) = Rf + [E(Rm ) – Rf ]β i , we can estimate
the expected return as: E(Ri ) = 0.05 + (0.08)(1.5) = 17.0%.
B is incorrect because the expected return is computed as 0.05 + (0.08 – 0.05)(1.5)
= 9.5%.
C is incorrect because the expected return is computed as 0.08 + (0.05)(1.5) = 15.5%.

Question 4

An investment policy statement’s risk objective states that over a 12-month
period, with a probability of 95%, the client’s portfolio must not lose more than
5% of its value. This statement is most likely a(n):
A total risk objective.
B relative risk objective.
C absolute risk objective.

Answer 4

C is correct. The statement is an absolute risk objective because it expresses a maximum
loss in value with an associated probability of loss.
A is incorrect because this is an absolute (not total) risk objective because it expresses
a maximum loss in value with an associated probability of loss.
B is incorrect because this is an absolute (not relative) risk objective because it expresses
a maximum loss in value with an associated probability of loss.

Question 5

Two investors have utility functions that differ only with regard to the coefficient
of risk aversion. Relative to the investor with a higher coefficient of risk
aversion, the optimal portfolio for the investor with a lower coefficient of risk
aversion will most likely have:
A a lower level of risk and return.
B a higher level of risk and return.
C the same level of risk and return.

Answer 5

B is correct. A less risk-averse
investor’s highest utility curve, given the lower coefficient of
risk aversion, is likely to touch the capital allocation line at a point that would represent
a portfolio with higher risk and more expected return.
A is incorrect because for a high coefficient of risk aversion, the investor will seek a
lot of return for a bit of extra risk and will have an optimal portfolio that is tangential to
the capital allocation line at a lower level of risk and return relative to the investor with
a lower coefficient of risk aversion.
C is incorrect because only investors with identical coefficients of risk aversion would
select the same optimal portfolio.

Question 6

Within a risk management framework, risk tolerance:
A and risk exposure should be kept in alignment.
B includes the qualitative assessment and evaluation of risk.
C is determined as a result of establishing how and where risk is taken.

Answer 6

A is correct. The process of risk monitoring, mitigation, and management is the most
obvious facet of the risk management framework and requires recognizing when risk
exposure is not aligned with risk tolerance.
B is incorrect. Risk identification and measurement include the qualitative assessment
and evaluation of risk.
C is incorrect. Risk tolerance can provide guidance on risk budgeting, which is how
and where risk is taken. Risk budgeting is a result of determining risk tolerance.

Question 7

Which of the following statements best describes a potential concern for clients
using robo-advisers?
Robo-advisers:
A must be established as registered investment advisers.
B do not seem to incorporate the full range of investment information into
their recommendations.
C are likely to be held to a similar code of conduct as other investment professionals
in the given region.

Answer 7

B is correct. Initial research has shown that robo-advisers
do not seem to incorporate
the full range of investment information into their recommendations, meaning that
important points may be missing in investment decisions.
A is incorrect. It is an advantage to clients that robo-advisers
must be registered as
investment advisers, because they are subject to guidance from the securities regulator
of their country.
C is incorrect. It is an advantage to clients that robo-advisers
must be held to a similar
code of conduct as other investment professionals in the given region.

Question 8

When a security that was in an upward trend falls 1% below its trendline, a
technical analyst will most likely determine that:
A a downward trend is beginning.
B the upward trend is ending.
C the trendline needs an adjustment.

Answer 8

C is correct. When a security’s price drops through the trendline by a significant amount
(at least 5% to 10%), this decline signals that the uptrend has ended and further decline
may follow. Minor breakthroughs simply call for the trendline to be moderately adjusted
over time. A security falling 1% below its trendline is considered a minor breakthrough.
A is incorrect. The amount the price falls below the trendline would need to be at
least 5% before it would be considered a signal that the uptrend is ending and may
signal a further decline in price.
B is incorrect. The amount the price falls below the trendline would need to be at
least 5% before it would be considered a signal that the uptrend is ending.

Question 9

Security analysis is most likely a part of which step in the portfolio management
process?
A The feedback step
B The execution step
C The planning step

Answer 9

B is correct. The execution step of the portfolio management process has three parts:
asset allocation, security analysis, and portfolio construction.
A is incorrect because under the planning step, there are two parts: understating the
client’s needs and preparation of an investment policy statement.
C is incorrect because under the feedback step, there are two parts: portfolio monitoring
and rebalancing and performance measurement and reporting.

Question 10

Which of the following is most likely associated with an investor’s ability to take
risk rather than the investor’s willingness to take risk?
A The investor has a long investment time horizon.
B The investor believes earning excess returns on stocks is a matter of luck.
C Safety of principal is very important to the investor.

Answer 10

A is correct. Investment time horizon is an objective factor that measures the investor’s
ability to take risk.
B is incorrect because luck is a subjective factor that measures willingness to take risk.
C is incorrect because safety of principal is a subjective factor that measures willingness
to take risk.

Question 11

An investment has a 50% probability of returning 12% and a 50% probability of
returning 6%. An investor prefers this uncertain investment over a guaranteed
return of 10%. This preference most likely indicates that the investor is risk:
A seeking.
B averse.
C neutral.

Answer 11

A is correct. The expected value of the uncertain investment is 9%, which is less than
the guaranteed return of 10%. Only a risk-seeking
person would be willing to accept
this investment.
B is incorrect. A risk-averse
person would prefer the guaranteed outcome of 10%.
C is incorrect. A risk-neutral
person would prefer the guaranteed outcome of 10%.

Question 12

John Smith is given two investment options. Option A is a payment with a 50%
chance of getting $100 and a 50% chance of getting $0. Option B is a guaranteed
payment of $50. If Smith chooses Option A over Option B, his risk preference is
best described as risk:
A seeking.
B averse.
C neutral.

Answer 12

A is correct. Both options have the same expected return of $50. Option A, however, has
a higher risk (standard deviation) than Option B. Therefore, John Smith’s risk preference
is that of risk seeking.
B is incorrect because a risk-averse
person would prefer a lower risk profile given the
same expected return.
C is incorrect because a risk-neutral
person would be indifferent about the risk profile
of the outcome.

Question 13

Risk management is a process that can most likely be best described as:
A minimizing risks while attempting to maximize returns.
B forecasting the level of risk that can meet a defined required return.
C defining a level of risk to be taken with the goal of maximizing the portfolio’s
value.

Answer 13

C is correct. Risk management is the process by which an organization or individual
defines the level of risk to be taken, measures the level of risk being taken, and adjusts
the latter toward the former, with the goal of maximizing the company’s or portfolio’s
value or the individual’s overall satisfaction or utility.
A is incorrect. Risk management is actively understanding how to best balance the
achievement of goals with an acceptable chance of failure.
B is incorrect. Risk management is not about predicting risks.

Question 14

Fintech” is best described as:
A technology-driven
innovation in the financial service industry.
B the collection of large quantities of financial data from a variety of sources
in multiple formats.
C the use of technical models to describe patterns in financial markets and
make trading decisions.

Answer 14

A is correct. In its broadest sense, the term “fintech” generally refers to technology-driven
innovation occurring in the financial service industry.
B is incorrect. The collection of large quantities of data from a variety of sources in
multiple formats is the description of big data.
C is incorrect. The use of technical models to describe patterns in financial markets
and make trading decisions is the description of technical analysis.

Question 15

Which of the following is least likely to be a constraint for an investment trust that has been
established for an infant for the strict use of buying their first home?
A. Liquidity
B. Tax concerns
C. Unique circumstances

Answer 15

Answer: A
This is correct. It is unlikely that the infant will be drawing funds from the trust for a lengthy
period of time and hence the trust might not have any liquidity constraints whatsoever.

Question 16

Which of the following statements is least correct? Bond index construction can be more difficult
than equity index construction because:
A. there are more equity issues.
B. the bond price discovery process is less effective.
C. specific bonds are likely to move between different indexes.

Answer 16

Answer: A
This is incorrect as the universe and types of bonds is much broader than that of equities.
Furthermore, specific bonds mature and are replaced constantly.

Question 17

Which of the following statements is most correct? Exchange-traded funds (ETFs) differ from
index mutual funds as:
A. ETFs are more tax-effective.
B. mutual funds have lower fees.
C. mutual funds pay out all dividends received.

Answer 17

Answer: A
This is correct. ETFs are generally considered to have a tax advantage over index mutual funds,
as the latter is generally required to pass on capital gains tax as gains are realized through trading.

Question 18

Good risk governance practices in an organization should:
(i) focus on enterprise risk management.
(ii) provide for the appointment of a chief risk officer.
(iii) provide for a risk management committee.
(iv) give clear guidance to management.
A. Only (i), (ii), and (iv) are correct.
B. Only (ii), (iii), and (iv) are correct.
C. (i), (ii), (iii), and (iv) are all correct.

Answer 18

Answer: A
This is correct. Good risk governance should focus on the business as a whole (enterprise risk
management), and should provide for governance structures, such as the appointment of a CRO
and a risk forum of some kind. A good risk governance framework will also give clear guidance
to management, while at the same time leaving another flexibility in the execution of business
strategy.

Question 19

Ingrid Jolley, CFA, has put together a constrained efficient frontier (no short sales) of five risky
assets based on expected returns, volatility, and correlations of the risky assets. Asset E has the
highest expected return and standard deviation of returns of 13.5% p.a. and 16.2% p.a. However,
Jolley wishes to put together a portfolio with an expected return greater than 13.5% p.a. but with
an expected volatility of no more than 13.5% p.a. This objective might best be achieved by:
A. borrowing and investing in Asset E.
B. including a long position in the risk-free asset.
C. borrowing and investing in a portfolio of the risk assets.

Answer 19

Answer: C
This statement is correct. As Asset E is the highest returning asset, it would sit on the right-hand
extreme of a constrained efficient frontier. The only way to achieve a portfolio that is above the
efficient frontier is to combine the optimal risky portfolio with the risk-free asset; in this case,
borrowing the risk-free asset and leveraging into the optimal risky portfolio.

Question 20

Which of the following markets is most likely to exhibit semi-strong form efficiency?
A. Stock market in a country with no laws against insider trading
B. Corporate bond market where all issuers are required to have a credit rating
C. Commodity futures market where most trading is based on technical analysis

Answer 20

Answer: B
This is correct. A bond market where issuers are required to have a credit rating would likely lead
to prices based on public information. This is a semi-strong form efficient market.

Question 21

Which of the following statements is most correct? In technical analysis, the change in polarity
principle might refer to:
A. a price trend changing direction.
B. a resistance level becoming a support level.
C. a price movement between support and resistance levels.

Answer 21

Answer: B
The change in polarity principle asserts that once the price rises (falls) through the resistance
(support) level, this then becomes the new support (resistance) level.

Question 22

Growth in adoption of robo-advisory services is least likely driven by:
A. desire for lower fees.
B. demand from younger investors.
C. high barriers to entering the industry.

Answer 22

Answer: C
New entrants into the market are finding it easy to develop solutions to compete against
incumbent wealth managers.

Question 23

Which of the following would most likely be a “social issue” considered within a sustainable
investing policy?
A. Data protection
B. Energy efficiency
C. Board composition

Answer 23

Answer: A
Data protection would be considered a social issue as it relates to corporate responsibility
regarding the sensitive information of customer and stakeholder information.

Question 24

1 Investors should use a portfolio approach to:
A reduce risk.
B monitor risk.
C eliminate risk

Answer 24

1 A is correct. Combining assets into a portfolio should reduce the portfolio’s volatility. Specifically, “individuals and institutions should hold portfolios to reduce
risk.” As illustrated in the reading, however, risk reduction may not be as great
during a period of dramatic economic change.

Question 25

2 Which of the following is the best reason for an investor to be concerned with
the composition of a portfolio?
A Risk reduction.
B Downside risk protection.
C Avoidance of investment disasters

Answer 25

2 A is correct. Combining assets into a portfolio should reduce the portfolio’s volatility. The portfolio approach does not necessarily provide downside protection
or guarantee that the portfolio always will avoid losses.

Question 26

3 With respect to the formation of portfolios, which of the following statements is
most accurate?
A Portfolios affect risk less than returns.
B Portfolios affect risk more than returns.
C Portfolios affect risk and returns equally

Answer 26

3 B is correct. As illustrated in the reading, portfolios reduce risk more than they
increase returns.

Question 27

4 Which of the following institutions will on average have the greatest need for
liquidity?
A Banks.
B Investment companies.
C Non- life insurance companies.

Answer 27

4 A is correct. The excess reserves invested by banks need to be relatively liquid.
Although investment companies and non- life insurance companies have high
liquidity needs, the liquidity need for banks is on average the greatest.

Question 28

5 Which of the following institutional investors will most likely have the longest
time horizon?
A Defined benefit plan.
B University endowment.
C Life insurance company.

Answer 28

5 B is correct. Most foundations and endowments are established with the intent
of having perpetual lives. Although defined benefit plans and life insurance
companies have portfolios with a long time horizon, they are not perpetual.

Question 29

6 A defined benefit plan with a large number of retirees is likely to have a high
need for
A income.
B liquidity.
C insurance

Answer 29

6 A is correct. Income is necessary to meet the cash flow obligation to retirees.
Although defined benefit plans have a need for income, the need for liquidity
typically is quite low. A retiree may need life insurance; however, a defined benefit plan does not need insurance.

Question 30

7 Which of the following institutional investors is most likely to manage investments in mutual funds?
A Insurance companies.
B Investment companies.
C University endowments

Answer 30

7 B is correct. Investment companies manage investments in mutual funds.
Although endowments and insurance companies may own mutual funds, they
do not issue or redeem shares of mutual funds

Question 31

8 With respect to the portfolio management process, the asset allocation is determined in the:
A planning step.
B feedback step.
C execution step.

Answer 31

8 C is correct. The client’s objectives and constraints are established in the investment policy statement and are used to determine the client’s target asset allocation, which occurs in the execution step of the portfolio management process.

Question 32

9 The planning step of the portfolio management process is least likely to include
an assessment of the client’s
A securities.
B constraints.
C risk tolerance

Answer 32

9 A is correct. Securities are analyzed in the execution step. In the planning step,
a client’s objectives and constraints are used to develop the investment policy
statement.

Question 33

10 With respect to the portfolio management process, the rebalancing of a portfolio’s composition is most likely to occur in the:
A planning step.
B feedback step.
C execution step.

Answer 33

10 B is correct. Portfolio monitoring and rebalancing occurs in the feedback step
of the portfolio management process.

Question 34

12 Which of the following investment products is most likely to trade at their net
asset value per share?
A Exchange traded funds.
B Open- end mutual funds.
C Closed- end mutual funds

Answer 34

12 B is correct. Open- end funds trade at their net asset value per share, whereas
closed- end funds and exchange traded funds can trade at a premium or a
discount.

Question 35

13 Which of the following financial products is least likely to have a capital gain
distribution?
A Exchange traded funds.
B Open- end mutual funds.
C Closed- end mutual funds.

Answer 35

13 A is correct. Exchange traded funds do not have capital gain distributions. If an
investor sells shares of an ETF (or open- end mutual fund or closed- end mutual
fund), the investor may have a capital gain or loss on the shares sold; however,
the gain (or loss) from the sale is not a distribution.

Question 36

14 Which of the following forms of pooled investments is subject to the least
amount of regulation?
A Hedge funds.
B Exchange traded funds.
C Closed- end mutual funds

Answer 36

14 A is correct. Hedge funds are currently exempt from the reporting requirements of a typical public investment company.

Question 37

15 Which of the following pooled investments is most likely characterized by a few
large investments?
A Hedge funds.
B Buyout funds.
C Venture capital funds.

Answer 37

15 B is correct. Buyout funds or private equity firms make only a few large investments in private companies with the intent of selling the restructured companies in three to five years. Venture capital funds also have a short time horizon;
however, these funds consist of many small investments in companies with the
expectation that only a few will have a large payoff (and that most will fail).

Question 38

1 An investor purchased 100 shares of a stock for $34.50 per share at the beginning of the quarter. If the investor sold all of the shares for $30.50 per share
after receiving a $51.55 dividend payment at the end of the quarter, the holding
period return is closest to:
A −13.0%.
B −11.6%.
C −10.1%

Answer 38

1 C is correct. −10.1% is the holding period return, which is calculated as: (3,050
− 3,450 + 51.55)/3,450, which is comprised of a dividend yield of 1.49% = 51.55/
(3,450) and a capital loss yield of −11.59% = –400/(3,450).

Question 39

4 Which of the following return calculating methods is best for evaluating the
annualized returns of a buy- and- hold strategy of an investor who has made
annual deposits to an account for each of the last five years?
A Geometric mean return.
B Arithmetic mean return.
C Money- weighted return.

Answer 39

4 A is correct. The geometric mean return compounds the returns instead of the
amount invested.

Question 40

9 With respect to capital market theory, which of the following asset characteristics is least likely to impact the variance of an investor’s equally weighted
portfolio?
A Return on the asset.
B Standard deviation of the asset.
C Covariances of the asset with the other assets in the portfolio.

Answer 40

9 A is correct. The asset’s returns are not used to calculate the portfolio’s variance
[only the assets’ weights, standard deviations (or variances), and covariances (or
correlations) are used].

Question 41

1 The line depicting the total risk and expected return of portfolio combinations
of a risk- free asset and any risky asset is the:
A security market line.
B capital allocation line.
C security characteristic line.

Answer 41

1 B is correct. A capital allocation line (CAL) plots the expected return and total
risk of combinations of the risk- free asset and a risky asset (or a portfolio of
risky assets).

Question 42

2 The portfolio of a risk- free asset and a risky asset has a better risk- return
tradeoff than investing in only one asset type because the correlation between
the risk- free asset and the risky asset is equal to:
A −1.0.
B 0.0.
C 1.0

Answer 42

2 B is correct. A portfolio of the risk- free asset and a risky asset or a portfolio of
risky assets can result in a better risk- return tradeoff than an investment in only
one type of an asset, because the risk- free asset has zero correlation with the
risky asset.

Question 43

3 With respect to capital market theory, an investor’s optimal portfolio is the
combination of a risk- free asset and a risky asset with the highest:
A expected return.
B indifference curve.
C capital allocation line slope.

Answer 43

3 B is correct. Investors will have different optimal portfolios depending on their
indifference curves. The optimal portfolio for each investor is the one with
highest utility; that is, where the CAL is tangent to the individual investor’s
highest possible indifference curve.

Question 44

4 Highly risk- averse investors will most likely invest the majority of their wealth
in:
A risky assets.
B risk- free assets.
C the optimal risky portfolio.

Answer 44

4 B is correct. Although the optimal risky portfolio is the market portfolio, highly
risk- averse investors choose to invest most of their wealth in the risk- free asset.

Question 45

5 The capital market line (CML) is the graph of the risk and return of portfolio
combinations consisting of the risk- free asset and:
A any risky portfolio.
B the market portfolio.
C the leveraged portfolio.

Answer 45

5 B is correct. Although the capital allocation line includes all possible combinations of the risk- free asset and any risky portfolio, the capital market line is a
special case of the capital allocation line, which uses the market portfolio as the
optimal risky portfolio.

Question 46

6 Which of the following statements most accurately defines the market portfolio
in capital market theory? The market portfolio consists of all:
A risky assets.
B tradable assets.
C investable assets

Answer 46

6 A is correct. The market includes all risky assets, or anything that has value;
however, not all assets are tradable, and not all tradable assets are investable.

Question 47

7 With respect to capital market theory, the optimal risky portfolio:
A is the market portfolio.
B has the highest expected return.
C has the lowest expected variance.

Answer 47

7 A is correct. The optimal risky portfolio is the market portfolio. Capital market
theory assumes that investors have homogeneous expectations, which means
that all investors analyze securities in the same way and are rational. That is,
investors use the same probability distributions, use the same inputs for future
cash flows, and arrive at the same valuations. Because their valuations of all
assets are identical, all investors will invest in the same optimal risky portfolio
(i.e., the market portfolio).

Question 48

8 Relative to portfolios on the CML, any portfolio that plots above the CML is
considered:
A inferior.
B inefficient.
C unachievable.

Answer 48

8 C is correct. Theoretically, any point above the CML is not achievable and any
point below the CML is dominated by and inferior to any point on the CML.

Question 49

9 A portfolio on the capital market line with returns greater than the returns on
the market portfolio represents a(n):
A lending portfolio.
B borrowing portfolio.
C unachievable portfolio.

Answer 49

9 B is correct. As one moves further to the right of point M on the capital market
line, an increasing amount of borrowed money is being invested in the market
portfolio. This means that there is negative investment in the risk- free asset,
which is referred to as a leveraged position in the risky portfolio.

Question 50

10 With respect to the capital market line, a portfolio on the CML with returns
less than the returns on the market portfolio represents a(n):
A lending portfolio.
B borrowing portfolio.
C unachievable portfolio.

Answer 50

10 A is correct. The combinations of the risk- free asset and the market portfolio
on the CML where returns are less than the returns on the market portfolio are
termed ‘lending’ portfolios.

Question 51

11 Which of the following types of risk is most likely avoided by forming a diversified portfolio?
A Total risk.
B Systematic risk.
C Nonsystematic risk.

Answer 51

11 C is correct. Investors are capable of avoiding nonsystematic risk by forming
a portfolio of assets that are not highly correlated with one another, thereby
reducing total risk and being exposed only to systematic risk.

Question 52

12 Which of the following events is most likely an example of nonsystematic risk?
A A decline in interest rates.
B The resignation of chief executive officer.
C An increase in the value of the US dollar.

Answer 52

12 B is correct. Nonsystematic risk is specific to a firm, whereas systematic risk
affects the entire economy.

Question 53

13 With respect to the pricing of risk in capital market theory, which of the following statements is most accurate?
A All risk is priced.
B Systematic risk is priced.
C Nonsystematic risk is priced.

Answer 53

13 B is correct. Only systematic risk is priced. Investors do not receive any return
for accepting nonsystematic or diversifiable risk.

Question 54

14 The sum of an asset’s systematic variance and its nonsystematic variance of
returns is equal to the asset’s:
A beta.
B total risk.
C total variance.

Answer 54

14 C is correct. The sum of systematic variance and nonsystematic variance equals
the total variance of the asset. References to total risk as the sum of systematic
risk and nonsystematic risk refer to variance, not to risk.

Question 55

1 Which of the following is least important as a reason for a written investment
policy statement (IPS)?
A The IPS may be required by regulation.
B Having a written IPS is part of best practice for a portfolio manager.
C Having a written IPS ensures the client’s risk and return objectives can be
achieved.

Answer 55

1 C is correct. Depending on circumstances, a written IPS or its equivalent may
be required by law or regulation and a written IPS is certainly consistent with
best practices. The mere fact that a written IPS is prepared for a client, however,
does not ensure that risk and return objectives will in fact be achieved.

Question 56

2 Which of the following best describes the underlying rationale for a written
investment policy statement (IPS)?
A A written IPS communicates a plan for trying to achieve investment success.
B A written IPS provides investment managers with a ready defense against
client lawsuits.
C A written IPS allows investment managers to instruct clients about the
proper use and purpose of investments.

Answer 56

2 A is correct. A written IPS is best seen as a communication instrument allowing
clients and portfolio managers to mutually establish investment objectives and
constraints.

Question 57

3 A written investment policy statement (IPS) is most likely to succeed if:
A it is created by a software program to assure consistent quality.
B it is a collaborative effort of the client and the portfolio manager.
C it reflects the investment philosophy of the portfolio manager.

Answer 57

3 B is correct. A written IPS, to be successful, must incorporate a full understanding of the client’s situation and requirements. As stated in the reading, “The IPS
will be developed following a fact finding discussion with the client.”

Question 58

4 The section of the investment policy statement (IPS) that provides information
about how policy may be executed, including investment constraints, is best
described as the:
A Investment Objectives.
B Investment Guidelines.
C Statement of Duties and Responsibilities.

Answer 58

4 B is correct. The major components of an IPS are listed in Section 2.2 of the
reading. Investment Guidelines are described as the section that provides information about how policy may be executed, including investment constraints.
Statement of Duties and Responsibilities “detail[s] the duties and responsibilities
of the client, the custodian of the client’s assets, the investment managers, and
so forth.” Investment Objectives is “a section explaining the client’s objectives in
investing.”

Question 59

5 Which of the following is least likely to be placed in the appendices to an
investment policy statement (IPS)?
A Rebalancing Policy.
B Strategic Asset Allocation.
C Statement of Duties and Responsibilities.

Answer 59

5 C is correct. The major components of an IPS are listed in Section 2.2 of the
reading. Strategic Asset Allocation (also known as the policy portfolio) and
Rebalancing Policy are often included as appendices to the IPS. The Statement
of Duties and Responsibilities, however, is an integral part of the IPS and is
unlikely to be placed in an appendix.

Question 60

6 Which of the following typical topics in an investment policy statement (IPS) is
most closely linked to the client’s “distinctive needs”?
A Procedures.
B Investment Guidelines.
C Statement of Duties and Responsibilities

Answer 60

6 B is correct. According to the reading, “The sections of an IPS that are most
closely linked to the client’s distinctive needs are those dealing with investment objectives and constraints.” Investment Guidelines “[provide] information about how policy may be executed, including investment constraints.”
Procedures “[detail] the steps to be taken to keep the IPS current and the
procedures to follow to respond to various contingencies.” Statement of Duties
and Responsibilities “detail[s] the duties and responsibilities of the client, the
custodian of the client’s assets, the investment managers, and so forth.

Question 61

7 An investment policy statement that includes a return objective of outperforming the FTSE 100 by 120 basis points is best characterized as having a(n):
A relative return objective.
B absolute return objective.
C arbitrage- based return objective

Answer 61

7 A is correct. Because the return objective specifies a target return relative to the
FTSE 100 Index, the objective is best described as a relative return objective.

Question 62

8 Risk assessment questionnaires for investment management clients are most
useful in measuring:
A value at risk.
B ability to take risk.
C willingness to take risk

Answer 62

8 C is correct. Risk attitude is a subjective factor and measuring risk attitude is
difficult. Oftentimes, investment managers use psychometric questionnaires,
such as those developed by Grable and Joo (2004), to assess a client’s willingness
to take risk.

Question 63

9 Which of the following is best characterized as a relative risk objective?
A Value at risk for the fund will not exceed US$3 million.
B The fund will not underperform the DAX by more than 250 basis points.
C The fund will not lose more than €2.5 million in the coming 12- month
period.

Answer 63

9 B is correct. The reference to the DAX marks this response as a relative risk
objective. Value at risk establishes a minimum value of loss expected during a
specified time period at a given level of probability. A statement of maximum
allowed absolute loss (€2.5 million) is an absolute risk objective.

Question 64

10 In preparing an investment policy statement, which of the following is most
difficult to quantify?
A Time horizon.
B Ability to accept risk.
C Willingness to accept risk.

Answer 64

10 C is correct. Measuring willingness to take risk (risk tolerance, risk aversion)
is an exercise in applied psychology. Instruments attempting to measure risk
attitudes exist, but they are clearly less objective than measurements of ability
to take risk. Ability to take risk is based on relatively objective traits such as
expected income, time horizon, and existing wealth relative to liabilities.

Question 65

11 After interviewing a client in order to prepare a written investment policy statement (IPS), you have established the following:
● The client has earnings that vary dramatically between £30,000 and £70,000
(pre- tax) depending on weather patterns in Britain.
● In three of the previous five years, the after- tax income of the client has
been less than £20,000.
● The client’s mother is dependent on her son (the client) for approximately
£9,000 per year support.
● The client’s own subsistence needs are approximately £12,000 per year.
● The client has more than 10 years’ experience trading investments including
commodity futures, stock options, and selling stock short.
● The client’s responses to a standard risk assessment questionnaire suggest
he has above average risk tolerance.
The client is best described as having a:
A low ability to take risk, but a high willingness to take risk.
B high ability to take risk, but a low willingness to take risk.
C high ability to take risk and a high willingness to take risk.

Answer 65

11 A is correct. The volatility of the client’s income and the significant support
needs for his mother and himself suggest that the client has a low ability to take
risk. The client’s trading experience and his responses to the risk assessment
questionnaire indicate that the client has an above average willingness to take
risk.

Question 66

12 After interviewing a client in order to prepare a written investment policy statement (IPS), you have established the following:
● The client has earnings that have exceeded €120,000 (pre- tax) each year for
the past five years.
● She has no dependents.
● The client’s subsistence needs are approximately €45,000 per year.
● The client states that she feels uncomfortable with her lack of understanding
of securities markets.
● All of the client’s current savings are invested in short- term securities guaranteed by an agency of her national government.
● The client’s responses to a standard risk assessment questionnaire suggest
she has low risk tolerance.
The client is best described as having a:
A low ability to take risk, but a high willingness to take risk.
B high ability to take risk, but a low willingness to take risk.
C high ability to take risk and a high willingness to take risk.

Answer 66

12 B is correct. On the one hand, the client has a stable, high income and no
dependents. On the other hand, she exhibits above average risk aversion. Her
ability to take risk is high, but her willingness to take risk is low.

Question 67

13 A client who is a 34- year old widow with two healthy young children (aged
5 and 7) has asked you to help her form an investment policy statement. She
has been employed as an administrative assistant in a bureau of her national
government for the previous 12 years. She has two primary financial goals—her
retirement and providing for the college education of her children. This client’s
time horizon is best described as being:
A long term.
B short term.
C medium term.

Answer 67

13 A is correct. The client’s financial objectives are long term. Her stable employment indicates that her immediate liquidity needs are modest. The children will
not go to college until 10 or more years later. Her time horizon is best described
as being long term.

Question 68

14 The timing of payouts for property and casualty insurers is unpredictable
(“lumpy”) in comparison with the timing of payouts for life insurance companies. Therefore, in general, property and casualty insurers have:
A lower liquidity needs than life insurance companies.
B greater liquidity needs than life insurance companies.
C a higher return objective than life insurance companies.

Answer 68

14 B is correct. The unpredictable nature of property and casualty (P&C) claims
forces P&C insurers to allocate a substantial proportion of their investments
into liquid, short maturity assets. This need for liquidity also forces P&C companies to accept investments with relatively low expected returns. Liquidity is of
less concern to life insurance companies given the greater predictability of life
insurance payouts

Question 69

15 A client who is a director of a publicly listed corporation is required by law to
refrain from trading that company’s stock at certain points of the year when
disclosure of financial results are pending. In preparing a written investment
policy statement (IPS) for this client, this restriction on trading:
A is irrelevant to the IPS.
B should be included in the IPS.
C makes it illegal for the portfolio manager to work with this client.

Answer 69

15 B is correct. When a client has a restriction in trading, such as this obligation to
refrain from trading, the IPS “should note this constraint so that the portfolio
manager does not inadvertently trade the stock on the client’s behalf.

Question 70

17 Returns on asset classes are best described as being a function of:
A the failure of arbitrage.
B exposure to the idiosyncratic risks of those asset classes.
C exposure to sets of systematic factors relevant to those asset classes.

Answer 70

17 C is correct. Strategic asset allocation depends on several principles. As stated
in the reading, “One principle is that a portfolio’s systematic risk accounts for
most of its change in value over the long run.” A second principle is that, “the
returns to groups of like assets… predictably reflect exposures to certain sets of
systematic factors.” This latter principle establishes that returns on asset classes
primarily reflect the systematic risks of the classes.

Question 71

18 In defining asset classes as part of the strategic asset allocation decision, pairwise correlations within asset classes should generally be:
A equal to correlations among asset classes.
B lower than correlations among asset classes.
C higher than correlations among asset classes.

Answer 71

18 C is correct. As the reading states, “an asset class should contain homogeneous
assets… paired correlations of securities would be high within an asset class,
but should be lower versus securities in other asset classes.”

Question 72

19 Tactical asset allocation is best described as:
A attempts to exploit arbitrage possibilities among asset classes.
B the decision to deliberately deviate from the policy portfolio.
C selecting asset classes with the desired exposures to sources of systematic
risk in an investment portfolio.

Answer 72

19 B is correct. Tactical asset allocation allows actual asset allocation to deviate
from that of the strategic asset allocation (policy portfolio) of the IPS. Tactical
asset allocation attempts to take advantage of temporary dislocations from the
market conditions and assumptions that drove the policy portfolio decision.

Question 73

1 Risk management in the case of individuals is best described as concerned with:
A hedging risk exposures.
B maximizing utility while bearing a tolerable level of risk.
C maximizing utility while avoiding exposure to undesirable risks.

Answer 73

1 B is correct. For individuals, risk management concerns maximizing utility
while taking risk consistent with individual’s level of risk tolerance.

Question 74

2 Which of the following may be controlled by an investor?
A Risk
B Raw returns
C Risk- adjusted returns

Answer 74

2 A is correct. Many decision makers focus on return, which is not something
that is easily controlled, as opposed to risk, or exposure to risk, which may
actually be managed or controlled

Question 75

3 The process of risk management includes:
A minimizing risk.
B maximizing returns.
C defining and measuring risks being taken.

Answer 75

3 C is correct. Risks need to be defined and measured so as to be consistent with
the organization’s chosen level of risk tolerance and target for returns or other
outcomes.

Question 76

4 Risk governance:
A aligns risk management activities with the goals of the overall enterprise.
B defines the qualitative assessment and evaluation of potential sources of risk
in an organization.
C delegates responsibility for risk management to all levels of the organization’s hierarchy.

Answer 76

4 A is correct. Risk governance is the top- down process that defines risk tolerance, provides risk oversight and guidance to align risk with enterprise goals.

Question 77

5 The factors a risk management framework should address include all of the
following except:
A communications.
B policies and processes.
C names of responsible individuals.

Answer 77

5 C is correct. While risk infrastructure, which a risk management framework
must address, refers to the people and systems required to track risk exposures,
there is no requirement to actually name the responsible individuals.

Question 78

6 Which of the following is the correct sequence of events for risk governance
and management that focuses on the entire enterprise? Establishing:
A risk tolerance, then risk budgeting, and then risk exposures.
B risk exposures, then risk tolerance, and then risk budgeting.
C risk budgeting, then risk exposures, and then risk tolerance.

Answer 78

6 A is correct. In establishing a risk management system, determining risk tolerance must happen before specific risks can be accepted or reduced. Risk tolerance defines the appetite for risk. Risk budgeting determine how or where the
risk is taken and quantifies the tolerable risk by specific metrics. Risk exposures
can then be measured and compared against the acceptable risk.

Question 79

7 Which of the following best describes activities that are supported by a risk
management infrastructure?
A Risk tolerance, budgeting, and reporting
B Risk tolerance, measurement, and monitoring
C Risk identification, measurement, and monitoring

Answer 79

7 C is correct. Risk infrastructure refers to the people and systems required to
track risk exposures and perform most of the quantitative risk analysis to allow
an assessment of the organization’s risk profile. The risk management infrastructure identifies, measures, and monitors risks (among other things).

Question 80

8 Effective risk governance in an enterprise provides guidance on all of the following except:
A unacceptable risks.
B worst losses that may be tolerated.
C specific methods to mitigate risk for each subsidiary in the enterprise.

Answer 80

8 C is correct. Risk governance is not about specifying methods to mitigate risk
at the business line level. Rather, it is about establishing an appropriate level of
risk for the entire enterprise. Specifics of dealing with risk fall under risk management and the risk infrastructure framework.

Question 81

9 A firm’s risk management committee would be expected to do all of the following except:
A approving the governing body’s proposed risk policies.
B deliberating the governing body’s risk policies at the operational level.
C providing top decision- makers with a forum for considering risk management issues.

Answer 81

9 A is correct. The risk management committee is a part of the risk governance
structure at the operational level—as such, it does not approve the governing
body’s policies.

Question 82

10 Once an enterprise’s risk tolerance is determined, the role of risk management
is to:
A analyze risk drivers.
B align risk exposures with risk appetite.
C identify the extent to which the enterprise is willing to fail in meeting its
objectives.

Answer 82

10 B is correct. When risk tolerance has been determined, the risk framework
should be geared toward measuring, managing, and complying with the risk tolerance, or aligning risk exposure with risk tolerance. The risk tolerance decision
begins by looking at what shortfalls within an organization would cause it to fail
to achieve some critical goals and what are the organization’s risk drivers.

Question 83

11 Which factor should most affect a company’s ability to tolerate risk?
A A stable market environment
B The beliefs of the individual board members
C The ability to dynamically respond to adverse events

Answer 83

11 C is correct. If a company has the ability to adapt quickly to adverse events
may allow for a higher risk tolerance. There are other factors, such as beliefs of
board members and a stable market environment, which may but should not
affect risk tolerance

Question 84

12 Risk budgeting includes all of the following except:
A determining the target return.
B quantifying tolerable risk by specific metrics.
C allocating a portfolio by some risk characteristics of the investments.

Answer 84

12 A is correct. Risk budgeting does not include determining the target return.
Risk budgeting quantifies and allocates the tolerable risk by specific metrics.

Question 85

13 A benefit of risk budgeting is that it:
A considers risk tradeoffs.
B establishes a firm’s risk tolerance.
C reduces uncertainty facing the firm

Answer 85

13 A is correct. The process of risk budgeting forces the firm to consider risk
tradeoffs. As a result, the firm should choose to invest where the return per unit
of risk is the highest.

Question 86

14 Which of the following risks is best described as a financial risk?
A Credit
B Solvency
C Operational

Answer 86

14 A is correct. A financial risk originates from the financial markets. Credit risk is
one of three financial risks identified in the reading: Credit risk is the chance of
loss due to an outside party defaulting on an obligation. Solvency risk depends
at least in part on factors internal to the organization and operational risk is an
internal risk arising from the people and processes within the organization.

Question 87

15 Liquidity risk is most associated with:
A the probability of default.
B a widening bid–ask spread.
C a poorly functioning market

Answer 87

15 B is correct. Liquidity risk is also called transaction cost risk. When the bid–ask
spread widens, purchase and sale transactions become increasingly costly. The
risk arises from the uncertainty of the spread.

Question 88

16 An example of a non- financial risk is:
A market risk.
B liquidity risk.
C settlement risk.

Answer 88

16 C is correct. Settlement risk is related to default risk, but deals with the timing
of payments rather than the risk of default

Question 89

17 If a company has a one- day 5% Value at Risk of $1 million, this means:
A 5% of the time the firm is expected to lose at least $1 million in one day.
B 95% of the time the firm is expected to lose at least $1 million in one day.
C 5% of the time the firm is expected to lose no more than $1 million in one
day.

Answer 89

17 A is correct. The VaR measure indicates the probability of a loss of at least a
certain level in a time period.

Question 90

18 An organization choosing to accept a risk exposure may:
A buy insurance.
B enter into a derivative contract.
C establish a reserve fund to cover losses.

Answer 90

18 C is correct. Risk acceptance is similar to self- insurance. An organization
choosing to self- insure may set up a reserve fund to cover losses. Buying insurance is a form of risk transfer and using derivatives is a form of risk- shifting,
not risk acceptance.

Question 91

19 The choice of risk- modification method is based on:
A minimizing risk at the lowest cost.
B maximizing returns at the lowest cost.
C weighing costs versus benefits in light of the organization’s risk tolerance.

Answer 91

19 C is correct. Among the risk- modification methods of risk avoidance, risk
acceptance, risk transfer, and risk shifting none has a clear advantage. One must
weigh benefits and costs in light of the firm’s risk tolerance when choosing the
method to use.

Question 92

1 Technical analysis relies most importantly on:
A price and volume data.
B accurate financial statements.
C fundamental analysis to confirm conclusions.

Answer 92

1 A is correct. Almost all technical analysis relies on these data inputs.

Question 93

2 Which of the following is not an assumption of technical analysis?
A Security markets are efficient.
B The security under analysis is freely traded.
C Market trends and patterns tend to repeat themselves.

Answer 93

2 A is correct. Technical analysis works because markets are not efficient and
rational and because human beings tend to behave similarly in similar circumstances. The result is market trends and patterns that repeat themselves and are
somewhat predictable

Question 94

3 Drawbacks of technical analysis include which of the following?
A It identifies changes in trends only after the fact.
B Deviations from intrinsic value can persist for long periods.
C It usually requires detailed knowledge of the financial instrument under
analysis.

Answer 94

3 A is correct. Trends generally must be in place for some time before they are
recognizable. Thus, some time may be needed for a change in trend to be
identified.

Question 95

4 Why is technical analysis especially useful in the analysis of commodities and
currencies?
A Valuation models cannot be used to determine fundamental intrinsic value
for these securities.
B Government regulators are more likely to intervene in these markets.
C These types of securities display clearer trends than equities and bonds do.

Answer 95

4 A is correct. Commodities and currencies do not have underlying financial
statements or an income stream; thus, fundamental analysis is useless in determining theoretical values for them or whether they are over- or undervalued.

Question 96

5 A daily bar chart provides:
A a logarithmically scaled horizontal axis.
B a horizontal axis that represents changes in price.
C high and low prices during the day and the day’s opening and closing prices

Answer 96

5 C is correct. The top and bottom of the bars indicate the highs and lows for the
day; the line on the left indicates the opening price and the line on the right
indicates the closing price.

Question 97

6 A candlestick chart is similar to a bar chart except that the candlestick chart:
A represents upward movements in price with X’s.
B also graphically shows the range of the period’s highs and lows.
C has a body that is light or dark depending on whether the security closed
higher or lower than its open.

Answer 97

6 C is correct. Dark and light shading is a unique feature of candlestick charts.

Question 98

7 In analyzing a price chart, high or increasing volume most likely indicates which
of the following?
A Predicts a reversal in the price trend.
B Predicts that a trendless period will follow.
C Confirms a rising or declining trend in prices.

Answer 98

7 C is correct. Rising volume shows conviction by many market participants,
which is likely to lead to a continuation of the trend.

Question 99

8 In constructing a chart, using a logarithmic scale on the vertical axis is likely to
be most useful for which of the following applications?
A The price of gold for the past 100 years.
B The share price of a company over the past month.
C Yields on 10- year US Treasuries for the past 5 years.

Answer 99

8 A is correct. The price of gold in nominal dollars was several orders of magnitude cheaper 100 years ago than it is today (roughly US$20 then versus
US$1,100 today). Such a wide range of prices lends itself well to being graphically displayed on a logarithmic scale.

Question 100

9 A downtrend line is constructed by drawing a line connecting:
A the lows of the price chart.
B the highs of the price chart.
C the highest high to the lowest low of the price chart.

Answer 100

9 B is correct. A downtrend line is constructed by drawing a line connecting the
highs of the price chart

Question 101

11 The “change in polarity” principle states which of the following?
A Once an uptrend is broken, it becomes a downtrend.
B Once a resistance level is breached, it becomes a support level.
C The short- term moving average has crossed over the longer- term moving
average.

Answer 101

11 B is correct

Question 102

14 In an inverted head and shoulders pattern, if the neckline is at €100, the
shoulders at €90, and the head at €75, the price target is closest to which of the
following?
A €50.
B €110.
C €125

Answer 102

14 C is correct. Target = Neckline + (Neckline − Head): €100 + (€100 − €75) = €125

Question 103

15 Which flow- of- funds indicator is considered bearish for equities?
A A large increase in the number of IPOs.
B Higher- than- average cash balances in mutual funds.
C An upturn in margin debt but one that is still below the long- term average

Answer 103

15 A is correct. A large increase in the number of IPOs increases the supply of
equity and if overall demand remains the same, puts downward pressure on
equities. Also, companies tend to issue shares of equity when the managers
believe they will receive a premium price, which is also an indicator of a market
top.

Question 104

16 A TRIN with a value of less than 1.0 indicates:
A the market is in balance.
B there is more volume in rising shares.
C there is more volume in declining shares.

Answer 104

16 B is correct. A value below 1.0 is a bullish sign; it means more volume is in rising shares than in declining ones. The TRIN is calculated as: (Advancing issues/
Declining issues)/(Volume of advancing issues/Volume of declining issues).

Question 105

17 Bollinger Bands are constructed by plotting:
A a MACD line and a signal line.
B a moving- average line with an uptrend line above and downtrend line below.
C a moving- average line with upper and lower lines that are at a set number of
standard deviations apart.

Answer 105

17 C is correct. Bollinger Bands consist of a moving average and a higher line
representing the moving average plus a set number of standard deviations from
average price (for the same number of periods as used to calculate the moving
average) and a lower line that is a moving average minus the same number of
standard deviations

Question 106

18 Which of the following is not a momentum oscillator?
A MACD.
B Stochastic oscillator.
C Bollinger Bands

Answer 106

18 C is correct. Bollinger Bands are price- based indicators, not momentum oscillators, which are constructed so that they oscillate between a high and a low or
around 0 or 100

Question 107

19 Which of the following is a continuation pattern?
A Triangle.
B Triple top.
C Head and shoulders.

Answer 107

19 A is correct. Triangles are one of several continuation patterns

Question 108

20 Which of the following is a reversal pattern?
A Pennant.
B Rectangle.
C Double bottom

Answer 108

20 C is correct. It is one of several reversal patterns.

Question 109

21 Which of the following is generally true of the head and shoulders pattern?
A Volume is important in interpreting the data.
B The neckline, once breached, becomes a support level.
C Head and shoulders patterns are generally followed by an uptrend in the
security’s price

Answer 109

21 A is correct. Volume is necessary to confirm the various market rallies and
reversals during the formation of the head and shoulders pattern.

Question 110

22 Nikolai Kondratieff concluded in the 1920s that since the 1780s, Western economies have generally followed a cycle of how many years?
A 18.
B 54.
C 76

Answer 110

22 B is correct.

Question 111

23 Based on the decennial pattern of cycles, how would the return of the Dow
Jones Industrial Average (DJIA) in the year 2015 compare with the return in
2020?
A The return would be better.
B The return would be worse.
C The answer cannot be determined because the theory does not apply to
both of those years.

Answer 111

23 A is correct. The decennial pattern theory states that years ending with a 5 will
have the best performance of any of the 10 years in a decade and that those
ending with a zero will have the worst.

Question 112

24 According to the US presidential cycle theory, the DJIA has the best performance during which year?
A The presidential election year itself.
B The first year following a presidential election.
C The third year following a presidential election.

Answer 112

24 C is correct. A possible reason for the superior performance in the third year
is that the US presidential election occurs, together with a number of other
elections, in a four- year cycle, so the politicians desiring to be reelected inject
money into the economy in the third year to improve their chances of winning
the following year.

Question 113

25 What is a major problem with long- term cycle theories?
A The sample size is small.
B The data are usually hard to observe.
C They occur over such a long period that they are difficult to discern.

Answer 113

25 A is correct. Long- term cycles require many years to complete; thus, not many
cycles are available to observe.

Question 114

26 In 1938, R. N. Elliott proposed a theory that equity markets move:
A in stochastic waves.
B in cycles following Fibonacci ratios.
C in waves dependent on other securities.

Answer 114

26 B is correct.

Question 115

27 All of the following are names of Elliott cycles except:
A presidential.
B supercycle.
C grand supercycle.

Answer 115

27 A is correct. This is the term for a separate cycle theory.

Question 116

28 To identify intermarket relationships, technicians commonly use:
A stochastic oscillators.
B Fibonacci ratios.
C relative strength analysis.

Answer 116

28 C is correct. Relative strength analysis is often used to compare two asset classes or two securities

Question 117

1 A correct description of fintech is that it:
A is driven by rapid growth in data and related technological advances.
B increases the need for intermediaries.
C is at its most advanced state using systems that follow specified rules and
instructions.

Answer 117

1 A is correct. Drivers of fintech include extremely rapid growth in data (including their quantity, types, sources, and quality) and technological advances
enabling the capture and extraction of information from it.

Question 118

2 A characteristic of Big Data is that:
A one of its traditional sources is business processes.
B it involves formats with diverse types of structures.
C real- time communication of it is uncommon due to vast content.

Answer 118

2 B is correct. Big Data is collected from many different sources and is in a
variety of formats, including structured data (e.g., SQL tables or CSV files),
semi- structured data (e.g., HTML code), and unstructured data (e.g., video
messages).

Question 119

3 In the use of machine learning (ML):
A some techniques are termed “black box” due to data biases.
B human judgment is not needed because algorithms continuously learn from
data.
C training data can be learned too precisely, resulting in inaccurate predictions
when used with different datasets.

Answer 119

3 C is correct. Overfitting occurs when the ML model learns the input and target
dataset too precisely. In this case, the model has been “over trained” on the data
and is treating noise in the data as true parameters. An ML model that has been
overfitted is not able to accurately predict outcomes using a different dataset
and may be too complex.

Question 120

4 Text Analytics is appropriate for application to:
A economic trend analysis.
B large, structured datasets.
C public but not private information

Answer 120

4 A is correct. Through the Text Analytics application of natural language processing (NLP), models using NLP analysis may incorporate non- traditional
information to evaluate what people are saying—via their preferences, opinions,
likes, or dislikes—in the attempt to identify trends and short- term indicators
about a company, a stock, or an economic event that might have a bearing on
future performance.

Question 121

5 In providing investment services, robo- advisers are most likely to:
A rely on their cost effectiveness to pursue active strategies.
B offer fairly conservative advice as easily accessible guidance.
C be free from regulation when acting as fully- automated wealth managers.

Answer 121

5 B is correct. Research suggests that robo- advisers tend to offer fairly conservative advice, providing a cost- effective and easily accessible form of financial
guidance to underserved populations, such as the mass affluent and mass market segments.

Question 122

6 Which of the following statements on fintech’s use of data as part of risk analysis is correct?
A Stress testing requires precise inputs and excludes qualitative data.
B Machine learning ensures that traditional and alternative data are fully
segregated.
C For real- time risk monitoring, data may be aggregated for reporting and
used as model inputs.

Answer 122

6 C is correct. There is increasing interest in monitoring risk in real- time. To do
so, relevant data must be taken by a firm, mapped to known risks, and identified while moving within the firm. Data may be aggregated for reporting purposes or used as inputs to risk models.

Question 123

7 A factor associated with the widespread adoption of algorithmic trading is
increased:
A market efficiency.
B average trade sizes.
C trading destinations

Answer 123

7 C is correct. Global financial markets have undergone substantial change as
markets have fragmented into multiple trading destinations consisting of electronic exchanges, alternative trading systems, and so- called dark pools. In such
an environment, when markets are continuously reflecting real- time information and continuously changing conditions, algorithmic trading has been
viewed as an important tool.

Question 124

8 A benefit of distributed ledger technology (DLT) favoring its use by the investment industry is its:
A scalability of underlying systems.
B ease of integration with existing systems.
C streamlining of current post- trade processes.

Answer 124

8 C is correct. DLT has the potential to streamline the existing, often complex
and labor intensive post- trade processes in securities markets by providing
close to real- time trade verification, reconciliation, and settlement, thereby
reducing related complexity, time, and costs.

Question 125

9 What is a distributed ledger technology (DLT) application suited for physical
assets?
A Tokenization
B Cryptocurrencies
C Permissioned networks

Answer 125

9 A is correct. Through tokenization—the process of representing ownership
rights to physical assets on a blockchain or distributed ledger—DLT has the
potential to streamline this rights process by creating a single, digital record of
ownership with which to verify ownership title and authenticity, including all
historical activity.