YOU ARE CREATING AN INVESTMENT POLICY STATEMENT FOR JANE DOE General: 60 years old, 3 grown children that are living on their own and supporting themselves. She is in a very low tax rate so we don't even consider anything relating to taxes for this account (we haven't studied taxes yet.) Could live 20 or 30 more years. She is in a nursing home that requires a fixed payment to the home each month, and her full health insurance and expenses are also completely covered by a separate fixed payment each month. There is no planned changes in those monthly amounts needed until the day she passes away. No other significant withdrawals should happen, just those steady living expenses. This portfolio: She and her children mainly want to be assured that it will produce a steady amount each month to continue to pay her nursing home and health insurance payments until the day she passes away. It has earned a substantial and steady return in the past, and has been able to make the payments just from its earnings, without reducing its overall balance. Question 22 6 pts You further explain that if your client fears longer maturity bonds being more sensitive to changes in value because of changes in current interest rates during their longer terms, the sub asset class that will most likely reduce that risk the most, among the following possibilities, is: (choose only the most correct one) Long-Term Tax Exempt Total US Bond Market Short Term Treasury O Intermediate Term Treasury Question 23 6 pts She then tells you some things she believes she has learned with respect to the 6 risk descriptions that you have gone over. Which of the following statements are correct (Mark all that apply.) investing only in the "US Stock Market" asset class is not generally a concentration in any of the risk premiums with respect to the stocks asset class the "Callable US Bonds" sub asset class generally earns a risk premium above other general bonds because those bonds can be terminated by the borrower, by their choice, which would end your investment in those bonds earlier than their full maturity date the "Corporate Bonds" sub asset class would include more exposure to the risk of lower credit ratings than the "Total US Bond Market" asset class the "Cash" sub asset class has a higher exposure to hyperinflation risk than the "TIPS" bonds sub asset class Question 24 8 pts You end the risk discussion by stating that standard deviation of returns is the way to measure the overall risk taken under all those categories. To show an example of its calculation, use the exam spreadsheet, tab "B" ("Lowes in 2018-2019") and compute the STANDARD DEVIATION of the monthly HPRs for all of the months listed. Round to two decimal places. The exam spreadsheet is on the opening page of the exam. 8.33% 8.15% 15.48% none of the above Question 25 6 pts You explain that you use standard deviation because you assume a certain type of model of investment returns that involves random inputs creating a range of possible outputs. Your client asks for a further explanation of this type of model, so you give the following: Assume you want to model the investment return of a single US Government 30-day "zero coupon" bond. A "zero coupon" bond is a bond that only makes one interest payment, paid along with the maturity of the bond, so there is just one fixed payment made 30 days after you buy the bond. It is considered a completely risk free investment. You tell your client that the investment model for this investment would have which of the following characteristics? (Mark all that are correct statements) each time the model is run it generally produces a different outcome O a probability distribution exists for the model a random input is included in the model it is generally NOT a stochastic model Question 26 6 pts You also show her that the standard deviation computation allows for the computation of a "range" of returns that is likely to occur with an investment portfolio. Compute the z=1 and z=-1 range of returns for MSFT stock and for the S&P 500, given the information below. Average HPR of MSFT = 10.00% Standard deviation of MSFT HPRs = 20% Beta of MSFT = 1.0 Standard deviation of S&P 500 HPRs = 15% Then choose the statement below that is most correct about these ranges for MSFT and the S&P 500. Range of returns for MSFT is -10% to 30%, and it is narrower than the S&P 500 range of returns Range of returns for MSFT is 0% to 20%, and it is wider than the S&P 500 range of returns Range of returns for MSFT is -10% to 30%, and it is wider than the S&P 500 range of returns Range of returns for MSFT is -10% to 30%, and the range of returns for the S&P 500 goes lower but not as high as the range for MSFT YOU ARE CREATING AN INVESTMENT POLICY STATEMENT FOR JANE DOE General: 60 years old, 3 grown children that are living on their own and supporting themselves. She is in a very low tax rate so we don't even consider anything relating to taxes for this account (we haven't studied taxes yet.) Could live 20 or 30 more years. She is in a nursing home that requires a fixed payment to the home each month, and her full health insurance and expenses are also completely covered by a separate fixed payment each month. There is no planned changes in those monthly amounts needed until the day she passes away. No other significant withdrawals should happen, just those steady living expenses. This portfolio: She and her children mainly want to be assured that it will produce a steady amount each month to continue to pay her nursing home and health insurance payments until the day she passes away. It has earned a substantial and steady return in the past, and has been able to make the payments just from its earnings, without reducing its overall balance. Question 22 6 pts You further explain that if your client fears longer maturity bonds being more sensitive to changes in value because of changes in current interest rates during their longer terms, the sub asset class that will most likely reduce that risk the most, among the following possibilities, is: (choose only the most correct one) Long-Term Tax Exempt Total US Bond Market Short Term Treasury O Intermediate Term Treasury Question 23 6 pts She then tells you some things she believes she has learned with respect to the 6 risk descriptions that you have gone over. Which of the following statements are correct (Mark all that apply.) investing only in the "US Stock Market" asset class is not generally a concentration in any of the risk premiums with respect to the stocks asset class the "Callable US Bonds" sub asset class generally earns a risk premium above other general bonds because those bonds can be terminated by the borrower, by their choice, which would end your investment in those bonds earlier than their full maturity date the "Corporate Bonds" sub asset class would include more exposure to the risk of lower credit ratings than the "Total US Bond Market" asset class the "Cash" sub asset class has a higher exposure to hyperinflation risk than the "TIPS" bonds sub asset class Question 24 8 pts You end the risk discussion by stating that standard deviation of returns is the way to measure the overall risk taken under all those categories. To show an example of its calculation, use the exam spreadsheet, tab "B" ("Lowes in 2018-2019") and compute the STANDARD DEVIATION of the monthly HPRs for all of the months listed. Round to two decimal places. The exam spreadsheet is on the opening page of the exam. 8.33% 8.15% 15.48% none of the above Question 25 6 pts You explain that you use standard deviation because you assume a certain type of model of investment returns that involves random inputs creating a range of possible outputs. Your client asks for a further explanation of this type of model, so you give the following: Assume you want to model the investment return of a single US Government 30-day "zero coupon" bond. A "zero coupon" bond is a bond that only makes one interest payment, paid along with the maturity of the bond, so there is just one fixed payment made 30 days after you buy the bond. It is considered a completely risk free investment. You tell your client that the investment model for this investment would have which of the following characteristics? (Mark all that are correct statements) each time the model is run it generally produces a different outcome O a probability distribution exists for the model a random input is included in the model it is generally NOT a stochastic model Question 26 6 pts You also show her that the standard deviation computation allows for the computation of a "range" of returns that is likely to occur with an investment portfolio. Compute the z=1 and z=-1 range of returns for MSFT stock and for the S&P 500, given the information below. Average HPR of MSFT = 10.00% Standard deviation of MSFT HPRs = 20% Beta of MSFT = 1.0 Standard deviation of S&P 500 HPRs = 15% Then choose the statement below that is most correct about these ranges for MSFT and the S&P 500. Range of returns for MSFT is -10% to 30%, and it is narrower than the S&P 500 range of returns Range of returns for MSFT is 0% to 20%, and it is wider than the S&P 500 range of returns Range of returns for MSFT is -10% to 30%, and it is wider than the S&P 500 range of returns Range of returns for MSFT is -10% to 30%, and the range of returns for the S&P 500 goes lower but not as high as the range for MSFT