Testbank to accompany Financial Planning2nd edition

Testbank to accompany Financial Planning 2 nd

edition By Warren Mckeown, Mike Kerry, Marc Olynyk Prepared by Peter Lennox

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Testbank to accompany Financial Planning2nd edition © John Wiley and Sons Australia, Ltd 2014 1.2 Chapter 1 Personal Financial Planning

Multiple-choice questions

• A close reading of chapter 1 provides which of the following lessons for investors:

*a. be aware of market cycles

• do not diversify unless there are no other options available
• both a and b
• none of the above

Correct answer: a

Feedback: Being aware of market cycles is one of the lessons from chapter 1. The chapter also advocates the benefits arising from diversification as a sound investment principle. Learning objective 1.1 ~ describe the concept of personal financial planning.

• Generally accepted finance principles would support which of the following statements?

*a. ‘high return generally equals high risk’

• ‘high return generally equals low risk’
• ‘high risk is generally inversely related to high return’
• none of the above

Correct answer: a

Feedback: The risk-return trade-off is positive with a higher investment return generally only being possible when the investor is (financially) exposed to relatively higher risk levels.Learning objective 1.1 ~ describe the concept of personal financial planning.

3. The term personal financial planning generally implies:

*a. the achievement of a financial outcome within a specified time period

• successfully gaining a job promotion
• winning the lottery within a specified time period
• both a and b

Correct answer: a

Feedback: Personal financial planning generally implies the achievement of a financial outcome within a specified time period. The other factors listed, although personal in nature, would not be expected to form part of the personal financial planning process. Learning objective 1.1 ~ describe the concept of personal financial planning.

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Chapter 1: Personal Financial Planning

© John Wiley and Sons Australia, Ltd 2014 1.3

• The value of the expected shortfall the working population will have in building an

adequate retirement benefit is termed the:

• Retirement Standard (RS)

*b. Retirement Savings Gap (RSG)

• Target Retirement Benefit (TRB)
• none of the above

Correct answer: b

Feedback: The Retirement Savings Gap is the term given to the expected shortfall in total retirement benefits as compared to expected accumulated retirement benefits. Learning objective 1.2 ~ explain why personal financial planning has gained in importance over the past few years.

5. In Australia, it is expected that by about 2050 there will be approximately:

*a. 2.7 people in working age groups for each retired person

• 3.5 people in working age groups for each retired person
• 5.0 people in working age groups for each retired person
• 4 males in working age groups and 2.5 females in working age groups for each

retired person

Correct answer: a

Feedback: Statistical research in Australia provides evidence that by about 2050 there will be approximately 2.7 people in working age groups for each retired person. Learning objective 1.2 ~ explain why personal financial planning has gained in importance over the past few years.

6. Superannuation guarantee contributions in Australia are levied on:

• employers and the self-employed

*b. employers

• employees
• both b and c

Correct answer: b

Feedback: Superannuation guarantee contributions in Australia are only levied on employers with payment amounts based on the remuneration of eligible employees. Learning objective 1.2 ~ explain why personal financial planning has gained in importance over the past few years.

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Testbank to accompany Financial Planning2nd edition © John Wiley and Sons Australia, Ltd 2014 1.4

• To adequately meet required income needs in retirement it is generally accepted that

people will need approximately what percentage of their pre-retirement income?

• more than 90 per cent

*b. 60 to 70 per cent

• 40 to 50 per cent
• less than 40 per cent

Correct answer: b

Feedback: Although people are unique and have different income needs it is generally expected that approximately 60 to 70 per cent of pre-retirement income will be needed in retirement.Learning objective 1.2 ~ explain why personal financial planning has gained in importance over the past few years.

8. Market volatility as a component of interest-rate risk:

• affects the amount of interest payments received on a fixed-interest investment
• affects the value of a fixed-interest investment at its maturity date

*c. affects the value of a fixed-interest investment sold before its maturity date

• both a and b

Correct answer: c

Feedback: Market volatility affects the value of a fixed-interest investment sold before its maturity date. Any increase in market interest rates will have an inverse relationship on the value of the fixed-interest investment resulting in a decrease in its relative value. Learning objective 1.5 ~ define various types of risk.

• The currency risk effects from holding an investment valued in an overseas currency will

result in:

• a rise in the Australian dollar value of the investment if the Australian dollar falls

relative to the overseas currency

• a rise in the Australian dollar value of the investment if the Australian dollar rises

relative to the overseas currency

• a fall in the Australian dollar value of the investment if the Australian dollar rises

relative to the overseas currency *d. both a and c

Correct answer: d

Feedback: A rise / fall in the Australian dollar value of the investment will result if the Australian dollar falls / rises relative to the overseas currency – this is the basis of currency risk Learning objective 1.5 ~ define various types of risk.

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