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Overview of Wealth Management
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Question 1 of 30
1. Question
Which of these refers to an investment fund established by a foundation that makes consistent withdrawals from invested capital?
Correct
An endowment fund is an investment fund established by a foundation that makes consistent withdrawals from invested capital. The capital in endowment funds (often used by universities, nonprofit organizations, churches and hospitals) is generally employed for specific needs or to further a company’s operating process.
Incorrect
An endowment fund is an investment fund established by a foundation that makes consistent withdrawals from invested capital. The capital in endowment funds (often used by universities, nonprofit organizations, churches and hospitals) is generally employed for specific needs or to further a company’s operating process.
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Question 2 of 30
2. Question
Which of the following best describes the primary source of invested funds to meet funding requirements for an endowment fund?
Correct
Endowment funds are typically funded entirely by donations that are deductible for the donors. The primary source of invested funds for an endowment fund is its own assets. The endowment fund will invest its own assets to meet various funding requirements.
Incorrect
Endowment funds are typically funded entirely by donations that are deductible for the donors. The primary source of invested funds for an endowment fund is its own assets. The endowment fund will invest its own assets to meet various funding requirements.
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Question 3 of 30
3. Question
Which of the following best describes the primary source of invested funds to meet funding requirements for an investment company?
Correct
The primary source of invested funds for an investment company is assets pooled from investors. The investment company will collect funds from investors to meet the needs of the investors.
Incorrect
The primary source of invested funds for an investment company is assets pooled from investors. The investment company will collect funds from investors to meet the needs of the investors.
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Question 4 of 30
4. Question
Which of the following accurately describes the primary difference between investment companies and an endowment fund?
Correct
The primary difference between investment companies and an endowment fund is the source and use of their invested funds. The investment company will collect funds from investors to meet the needs of the investors while the endowment fund will invest its own assets to meet various funding requirements.
Incorrect
The primary difference between investment companies and an endowment fund is the source and use of their invested funds. The investment company will collect funds from investors to meet the needs of the investors while the endowment fund will invest its own assets to meet various funding requirements.
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Question 5 of 30
5. Question
Most endowments (and foundations) have spending rules. Which of the following is one of the three forms of spending rules?
I. Rolling 3-year average spending rule
II. Geometric spending rule
III. Arithmetic depression spending rule
IV. Simple spending ruleCorrect
In the United States, foundations have a minimum required spending rule but endowments can decide, change, or just fail to meet their spending rate. The three forms of spending rules are as follows:
– Simple spending rule.
– Rolling 3-year average spending rule.
– Geometric spending rule.Incorrect
In the United States, foundations have a minimum required spending rule but endowments can decide, change, or just fail to meet their spending rate. The three forms of spending rules are as follows:
– Simple spending rule.
– Rolling 3-year average spending rule.
– Geometric spending rule. -
Question 6 of 30
6. Question
Which of these is a modification to the simple spending rule, that generates a spending amount that equals the spending rate multiplied by an average of the three previous years’ market value of endowment assets?
Correct
The rolling 3-year average spending rule is a modification to the simple spending rule that generates a spending amount that equals the spending rate multiplied by an average of the three previous years’ market value of endowment assets. The idea is to reduce the volatility of what the portfolio must distribute and of what the sponsor will receive and can spend.
Incorrect
The rolling 3-year average spending rule is a modification to the simple spending rule that generates a spending amount that equals the spending rate multiplied by an average of the three previous years’ market value of endowment assets. The idea is to reduce the volatility of what the portfolio must distribute and of what the sponsor will receive and can spend.
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Question 7 of 30
7. Question
Which of the following spending rules is the most straightforward spending rule?
Correct
The most straightforward spending rule is the simple spending rule. The simple spending rule is spending to equal the specified spending rate multiplied by the beginning period market value of endowment assets.
Incorrect
The most straightforward spending rule is the simple spending rule. The simple spending rule is spending to equal the specified spending rate multiplied by the beginning period market value of endowment assets.
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Question 8 of 30
8. Question
Which of the following forms of spending rule weights the prior year’s spending level adjusted for inflation by a smoothing rate, which is usually between 0.6 and 0.8, as well as the previous year’s beginning-of-period portfolio value?
Correct
The geometric spending rule weights the prior year’s spending level adjusted for inflation by a smoothing rate, which is usually between 0.6 and 0.8, as well as the previous year’s beginning-of-period portfolio value. The geometric spending rule gives some smoothing but less weight to older periods.
Incorrect
The geometric spending rule weights the prior year’s spending level adjusted for inflation by a smoothing rate, which is usually between 0.6 and 0.8, as well as the previous year’s beginning-of-period portfolio value. The geometric spending rule gives some smoothing but less weight to older periods.
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Question 9 of 30
9. Question
A cognitive bias is a systematic error in thinking that affects the decisions and judgments that people make. Which of the following is an example of cognitive bias?
I. The illusion of knowledge leading the investor to overestimate the probability the investment will produce favorable returns.
II. Availability in making decisions based on ease of recalling information.
III. Conservatism in maintaining existing beliefs.
IV. The illusion of control when the investor believes he can control what will happen to the investment.Correct
Cognitive biases are generally easier to overcome with education than are emotional biases. Typical cognitive biases include the following:
– Conservatism in maintaining existing beliefs.
– Confirmation in seeking support for what is already believed.
– Illusion of control when the investor believes he can control what will happen to the investment.
– Anchoring and adjustment in making decisions in reference to the current position held.
– Availability in making decisions based on ease of recalling information.Incorrect
Cognitive biases are generally easier to overcome with education than are emotional biases. Typical cognitive biases include the following:
– Conservatism in maintaining existing beliefs.
– Confirmation in seeking support for what is already believed.
– Illusion of control when the investor believes he can control what will happen to the investment.
– Anchoring and adjustment in making decisions in reference to the current position held.
– Availability in making decisions based on ease of recalling information. -
Question 10 of 30
10. Question
An emotional bias is a distortion in cognition and decision making due to emotional factors. Which of the following is an example of an emotional bias?
I. Naive extrapolation of past results.
II. Status quo bias and failure to consider making changes.
III. Endowment in expecting to be able to sell the asset for more than the investor would pay for it.
IV. Confirmation in seeking support for what is already believed.Correct
In an emotional bias, a person will be usually inclined to believe something that has a positive emotional effect, that gives a pleasant feeling, even if there is evidence to the contrary. Typical emotional biases include the following:
– Overconfidence, familiarity, and illusion of knowledge leading the investor to overestimate the probability the investment will produce favorable returns.
– Naive extrapolation of past results.
– Status quo bias and failure to consider making changes.
– Endowment in expecting to be able to sell the asset for more than the investor would pay for it.
– Loyalty bias in retaining employer stock or feeling an obligation to retain an inherited position.Incorrect
In an emotional bias, a person will be usually inclined to believe something that has a positive emotional effect, that gives a pleasant feeling, even if there is evidence to the contrary. Typical emotional biases include the following:
– Overconfidence, familiarity, and illusion of knowledge leading the investor to overestimate the probability the investment will produce favorable returns.
– Naive extrapolation of past results.
– Status quo bias and failure to consider making changes.
– Endowment in expecting to be able to sell the asset for more than the investor would pay for it.
– Loyalty bias in retaining employer stock or feeling an obligation to retain an inherited position. -
Question 11 of 30
11. Question
Everybody has biases as we make judgments about people, opportunities, government policies, and of course, the markets. Which of the following is a difference between the two main categories of investing biases; cognitive bias and emotional bias?
I. Cognitive biases are based on the personal feelings of an individual while emotional biases involve decisionmaking based on established concepts that may or may not be accurate.
II. Cognitive biases are generally harder to overcome with education than are emotional biases.
III. Cognitive biases involve decisionmaking based on established concepts that may or may not be accurate while emotional biases typically occur spontaneously based on the personal feelings of an individual at the time a decision is made.
IV. Emotional biases are generally easier to overcome with education than are cognitive biases.Correct
The key difference between both biases is that cognitive biases involve decisionmaking based on established concepts that may or may not be accurate while emotional biases typically occur spontaneously based on the personal feelings of an individual at the time a decision is made. Cognitive biases are generally easier to overcome with education than are emotional biases.
Incorrect
The key difference between both biases is that cognitive biases involve decisionmaking based on established concepts that may or may not be accurate while emotional biases typically occur spontaneously based on the personal feelings of an individual at the time a decision is made. Cognitive biases are generally easier to overcome with education than are emotional biases.
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Question 12 of 30
12. Question
Cognitive biases are generally easier to overcome with education than are emotional biases. Which of these questions are managers likely to ask while trying to help investors with emotional biases overcome them?
I. When grandmother left this stock to you, did the shares make more sense to hold?
II. If an equivalent sum to the value of the investments inherited had been received in cash, how would you invest the cash?
III. What would you do if the position were cash rather than a single asset?
IV. What do you think your financial capability is?Correct
Reviewing past performance and current risk may help an investor with emotional bias gain perspective and think rationally. Managers may be able to help these investors with emotional biases overcome them by asking questions such as the following:
– What would you do if the position were cash rather than a single asset?
– When grandmother left this stock to you, did the shares make more sense to hold?
– If an equivalent sum to the value of the investments inherited had been received in cash, how would you invest the cash?Incorrect
Reviewing past performance and current risk may help an investor with emotional bias gain perspective and think rationally. Managers may be able to help these investors with emotional biases overcome them by asking questions such as the following:
– What would you do if the position were cash rather than a single asset?
– When grandmother left this stock to you, did the shares make more sense to hold?
– If an equivalent sum to the value of the investments inherited had been received in cash, how would you invest the cash? -
Question 13 of 30
13. Question
Which of the following is a commonly used tool for monitoring a bank’s interest rate risk?
Correct
Both assets and liabilities are sensitive to changing interest rates. Banks continually monitor their interest rate risk and Value at Risk (VAR) is one of the commonly used tools in monitoring interest rate risk.
Incorrect
Both assets and liabilities are sensitive to changing interest rates. Banks continually monitor their interest rate risk and Value at Risk (VAR) is one of the commonly used tools in monitoring interest rate risk.
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Question 14 of 30
14. Question
What statement best describes the regulatory tool “Leverage-adjusted duration gap”?
Correct
Leverage-Adjusted Duration Gap (LADG) is defined as the duration of the bank’s assets, less the leveraged duration of the bank’s liabilities. It is a duration gap measure that takes into account a bank’s overall exposure to interest rate risk.
Incorrect
Leverage-Adjusted Duration Gap (LADG) is defined as the duration of the bank’s assets, less the leveraged duration of the bank’s liabilities. It is a duration gap measure that takes into account a bank’s overall exposure to interest rate risk.
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Question 15 of 30
15. Question
Which of the following statements is true if Leverage-Adjusted Duration Gap (LADG) is negative?
I. If LADG is negative, equity value moves in the same direction as interest rates.
II. If LADG is negative, equity should be unaffected by interest rate changes.
III. If LADG is negative, equity value moves in the opposite direction as interest rates.
IV. If LADG is negative, equity change is inverse to interest rates.Correct
Leverage-Adjusted Duration Gap (LADG) is the duration of the bank’s assets, less the leveraged duration of the bank’s liabilities. If Leverage-Adjusted Duration Gap (LADG) is negative, equity value moves in the same direction as interest rates.
Incorrect
Leverage-Adjusted Duration Gap (LADG) is the duration of the bank’s assets, less the leveraged duration of the bank’s liabilities. If Leverage-Adjusted Duration Gap (LADG) is negative, equity value moves in the same direction as interest rates.
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Question 16 of 30
16. Question
Which of the following statements is true if Leverage-Adjusted Duration Gap (LADG) is positive?
I. If LADG is positive, equity should be unaffected by interest rate changes.
II. If LADG is positive, equity value mutiplies by 2.
III. If LADG is positive, equity moves in the opposite direction as rates.
IV. If LADG is positive, equity change is inverse to rates.Correct
Leverage-Adjusted Duration Gap (LADG) is the duration of the bank’s assets, less the leveraged duration of the bank’s liabilities. If Leverage-Adjusted Duration Gap (LADG) is positive, equity change is inverse to rates (e.g., rates up equity down).
Incorrect
Leverage-Adjusted Duration Gap (LADG) is the duration of the bank’s assets, less the leveraged duration of the bank’s liabilities. If Leverage-Adjusted Duration Gap (LADG) is positive, equity change is inverse to rates (e.g., rates up equity down).
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Question 17 of 30
17. Question
Risk tolerance for endowments (and foundations) can be quite high. Which of the following is one of the factors that affect risk tolerance?
I. Risk tolerance is reduced if the institution funded by the endowment is heavily dependent on the distributions from the endowment.
II. Poor recent performance that reduces portfolio value combined with a smoothing rule decreases short-term ability to take risk as the required distribution amount in relation to current market value will increase.
III. Higher return objectives may indicate a higher willingness to take risk as the objectives can only be met through higher risk.
IV. If there is a smoothing rule to dampen the effect of market value liquidity on distribution amounts, risk tolerance is increased.Correct
Risk tolerance for endowments (and foundations) can be quite high. Risk tolerance should be set at a level to meet long-term objectives and distribution needs. Factors that affect risk tolerance include the following:
– Risk tolerance is reduced if there is no smoothing rule to dampen the effect of market value volatility on distribution amounts.
– Risk tolerance is reduced if the institution funded by the endowment is heavily dependent on the distributions from the endowment.
– Poor recent performance that reduces portfolio value combined with a smoothing rule decreases short-term ability to take risk as the required distribution amount in relation to current market value will increase.
– Higher return objectives may indicate a higher willingness to take risk as the objectives can only be met through higher risk.Incorrect
Risk tolerance for endowments (and foundations) can be quite high. Risk tolerance should be set at a level to meet long-term objectives and distribution needs. Factors that affect risk tolerance include the following:
– Risk tolerance is reduced if there is no smoothing rule to dampen the effect of market value volatility on distribution amounts.
– Risk tolerance is reduced if the institution funded by the endowment is heavily dependent on the distributions from the endowment.
– Poor recent performance that reduces portfolio value combined with a smoothing rule decreases short-term ability to take risk as the required distribution amount in relation to current market value will increase.
– Higher return objectives may indicate a higher willingness to take risk as the objectives can only be met through higher risk. -
Question 18 of 30
18. Question
Which of the following statements concerning the time horizon constraint of endowment funds is accurate?
I. The time horizon for endowment funds is 3-6 years.
II. The time horizon for endowment funds is 2-6 years.
III. The time horizon for endowment funds is 2-6 months.
IV. The time horizon for endowment funds is typically perpetual.Correct
An investment time horizon, or just time horizon, is the period of time one expects to hold an investment until they need the money back. The time horizon for endowment funds is typically perpetual because the purpose of most endowment funds is to provide a permanent source of funding.
Incorrect
An investment time horizon, or just time horizon, is the period of time one expects to hold an investment until they need the money back. The time horizon for endowment funds is typically perpetual because the purpose of most endowment funds is to provide a permanent source of funding.
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Question 19 of 30
19. Question
Which of the following statements concerning the liquidity requirements of endowment funds is accurate?
I. The liquidity requirements of an endowment are usually ridiculously high.
II. The liquidity requirements of an endowment are usually zero.
III. The liquidity requirements of an endowment are usually low.
IV. The liquidity requirements of an endowment are usually high.Correct
The liquidity requirements of an endowment are usually low. Only emergency needs and current spending require liquidity. However, large outlays (e.g., capital improvements) may require higher levels of liquidity.
Incorrect
The liquidity requirements of an endowment are usually low. Only emergency needs and current spending require liquidity. However, large outlays (e.g., capital improvements) may require higher levels of liquidity.
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Question 20 of 30
20. Question
Which of the following statements concerning the tax consideration constraint of endowment funds is accurate?
I. Endowments are generally tax exempt.
II. Endowments are generally tax mandated.
III. Endowments are obligated to pay tax.
IV. Endownments issued tax to the government.Correct
Endowments are generally tax exempt. There are exceptions and these might occur and be described in a given situation. In the United States, some assets generate unrelated business income. In that case, Unrelated Business Income Tax (UBIT) may have to be paid. If a case does include details on taxation, note this as a tax constraint and consider the after-tax return of that asset.
Incorrect
Endowments are generally tax exempt. There are exceptions and these might occur and be described in a given situation. In the United States, some assets generate unrelated business income. In that case, Unrelated Business Income Tax (UBIT) may have to be paid. If a case does include details on taxation, note this as a tax constraint and consider the after-tax return of that asset.
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Question 21 of 30
21. Question
Which of the following statements concerning the legal and regulatory considerations of endowment funds is accurate?
I. Regulation for endowments is unlimited.
II. Regulation for endowments is limited.
III. There are infinite regulations for endowments.
IV. There are no regulations whatsoever for endowments.Correct
Regulation for endowments is limited. Foundations and endowments have broad latitude to set and pursue their objectives. In the United States, 501(c)(3) tax regulations require earnings from tax-exempt entities not be used for private individuals. Most states have adopted the Uniform Management Institutional Fund Act (UMIFA) of 1972 as the governing regulation for endowments. If no specific legal considerations are stated in the case, for U.S. entities, state UMIFA applies. Other countries may have other laws.
Incorrect
Regulation for endowments is limited. Foundations and endowments have broad latitude to set and pursue their objectives. In the United States, 501(c)(3) tax regulations require earnings from tax-exempt entities not be used for private individuals. Most states have adopted the Uniform Management Institutional Fund Act (UMIFA) of 1972 as the governing regulation for endowments. If no specific legal considerations are stated in the case, for U.S. entities, state UMIFA applies. Other countries may have other laws.
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Question 22 of 30
22. Question
With respect to the constraints of endowments, issues relating to social issues like defense policies and racial biases, the nature of endowments and many foundations, and the cost and complexity of assets are all examples of which of the following?
I. Liquidity requirements
II. Unique circumstances
III. Tax considerations
IV. Legal and regulatory considerationsCorrect
Issues relating to social issues like defense policies and racial biases, the nature of endowments and many foundations, and the cost and complexity of assets are all examples of unique circumstances. Examples of endowment unique circumstances include the following:
– Social issues (e.g., defense policies and racial biases) are typically taken into consideration when deciding upon asset allocation.
– The long-term nature of endowments and many foundations have led to significant use of alternative investments.
– The cost and complexity of these assets should be considered.
– They generally require active management expertise.Incorrect
Issues relating to social issues like defense policies and racial biases, the nature of endowments and many foundations, and the cost and complexity of assets are all examples of unique circumstances. Examples of endowment unique circumstances include the following:
– Social issues (e.g., defense policies and racial biases) are typically taken into consideration when deciding upon asset allocation.
– The long-term nature of endowments and many foundations have led to significant use of alternative investments.
– The cost and complexity of these assets should be considered.
– They generally require active management expertise. -
Question 23 of 30
23. Question
Which of the following statements concerning the unique circumstances constraint of endowment funds is accurate?
I. Endowment funds have few unique circumstances.
II. Endowment funds have absolutely no unique circumstances.
III. Endowment funds have zero unique circumstances.
IV. Endowment funds have many unique circumstances.Correct
Endowment funds have many unique circumstances due to their diversity. Social issues (e.g., defense policies and racial biases) are typically taken into consideration when deciding upon asset allocation. The cost and complexity of these assets should be considered. The long-term nature of endowments and many foundations have led to significant use of alternative investments. They generally require active management expertise.
Incorrect
Endowment funds have many unique circumstances due to their diversity. Social issues (e.g., defense policies and racial biases) are typically taken into consideration when deciding upon asset allocation. The cost and complexity of these assets should be considered. The long-term nature of endowments and many foundations have led to significant use of alternative investments. They generally require active management expertise.
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Question 24 of 30
24. Question
Insurance companies sell policies that promise payment to the policyholder if a covered event occurs during the life of the policy. What would be the covered event in the case of life insurance?
Correct
Insurance companies sell policies that promise payment to the policyholder if a covered event occurs during the life (term or period of coverage) of the policy. With life insurance, that event would be the death of the beneficiary.
Incorrect
Insurance companies sell policies that promise payment to the policyholder if a covered event occurs during the life (term or period of coverage) of the policy. With life insurance, that event would be the death of the beneficiary.
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Question 25 of 30
25. Question
Insurance companies sell policies that promise payment to the policyholder if a covered event occurs during the life of the policy. What would be the covered event in the case of automobile insurance?
Correct
Insurance companies sell policies that promise payment to the policyholder if a covered event occurs during the life (term or period of coverage) of the policy. With automobile insurance, the event might be an accident to the automobile.
Incorrect
Insurance companies sell policies that promise payment to the policyholder if a covered event occurs during the life (term or period of coverage) of the policy. With automobile insurance, the event might be an accident to the automobile.
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Question 26 of 30
26. Question
Which of the following statements concerning the time horizon constraint for banks is incorrect?
I. The time horizon is short and linked to the duration of the liabilities.
II. The time horizon is long and linked to the duration of the liabilities.
III. The time horizon is short and not linked to the duration of the liabilities.
IV. The time horizon is long and independent of the duration of the liabilities.Correct
The objectives and constraints of a bank’s securities portfolio derive from its place in the overall asset-liability structure of the bank. The time horizon of banks is short and linked to the duration of the liabilities.
Incorrect
The objectives and constraints of a bank’s securities portfolio derive from its place in the overall asset-liability structure of the bank. The time horizon of banks is short and linked to the duration of the liabilities.
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Question 27 of 30
27. Question
What term most accurately refers to fluctuations in the insurance business over a period of time?
Correct
The underwriting cycle, also known as the insurance cycle refers to fluctuations in the insurance business over a period of time. A typical underwriting cycle spans a number of years.
Incorrect
The underwriting cycle, also known as the insurance cycle refers to fluctuations in the insurance business over a period of time. A typical underwriting cycle spans a number of years.
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Question 28 of 30
28. Question
A will (also known as a testament) is used to transfer estate assets at death. Which of the following best refers to a legal process used to validate and implement the will after death?
Correct
A probate is a legal process to validate and implement the will after death. Probate also refers to the general administering of a deceased person’s will or the estate of a deceased person without a will. Probate can be costly and makes details of the will public.
Incorrect
A probate is a legal process to validate and implement the will after death. Probate also refers to the general administering of a deceased person’s will or the estate of a deceased person without a will. Probate can be costly and makes details of the will public.
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Question 29 of 30
29. Question
Which of the following is the amount necessary to meet all of an individual’s liabilities plus a reserve for unexpected needs?
Correct
The amount necessary to meet all of an individual’s liabilities plus a reserve for unexpected needs is referred to as core capital. Core capital is the sum of the products of expected spending for each year and the probability of living that long.
Incorrect
The amount necessary to meet all of an individual’s liabilities plus a reserve for unexpected needs is referred to as core capital. Core capital is the sum of the products of expected spending for each year and the probability of living that long.
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Question 30 of 30
30. Question
Concentrated positions can have consequences for return and risk. Which of the following is the risk that cannot be diversified away by holding a portfolio of risky assets?
Correct
Systematic risk is the risk that cannot be diversified away through holding a portfolio of risky assets. Systematic risk refers to the risk inherent to the entire market or market segment. Systematic risk is also known as undiversifiable risk.
Incorrect
Systematic risk is the risk that cannot be diversified away through holding a portfolio of risky assets. Systematic risk refers to the risk inherent to the entire market or market segment. Systematic risk is also known as undiversifiable risk.