Altfest_2e_Test_Bank_Chapter_19.docx

Test Bank Questions, Chapter 19 1. Which of the following best describes integration in the context of personal financial planning? a. Evaluating costs and benefits over time to find the best path to our goals. b. Incorporating all members of the household into investment...

Test Bank Questions, Chapter 19 1. Which of the following best describes integration in the context of personal financial planning? a. Evaluating costs and benefits over time to find the best path to our goals. b. Incorporating all members of the household into investment decision making. c. Thoroughly diversifying investments geographically. d. Updating the personal financial plan on a periodic basis. e. None of the above. 2. Which of the following best describes a theory? f. A detailed mathematical model that has little usefulness when making practical decisions. g. A detailed mathematical model that has significant usefulness when making practical decisions. h. A set of concepts that unifies a body of knowledge and helps you make better decisions in practice. i. An untested idea. j. None of the above. 3. What is the goal of personal financial planning? k. To maximize the revenue of household "member-owners" over their life cycle. l. To minimize the expenses of household "member-owners" over their life cycle. m. To minimize the degree of risk faced by household "member-owners" over their life cycle. n. To provide the highest standard of living possible for household "member-owners" over their life cycle. o. All of the above. 4. At equilibrium, p. The benefits associated with one additional hour of leisure are equal to the costs in disutility of giving up more than one hour of the leisure. q. The benefits from revenues through one additional hour of work are equal to the costs in disutility of giving up one additional hour of leisure time. r. Additional revenue sources provide leisure benefits. s. Both a and b. t. Both b and c. 5. You desire to provide funds to educate your children. Is this a liability? u. No. v. Yes. w. Yes, if there is a legal obligation to do so. x. No, unless you have already accumulated the necessary funds. y. None of the above. 6. Total portfolio management's optimization model has as its payoff the asset-liability mix providing the highest return possible. This return figure is: z. The maximum amount that can be outlaid for discretionary items. a. The minimum amount that can be outlaid for discretionary items. b. The maximum amount that can be outlaid for nondiscretionary items. c. The minimum amount that can be outlaid for nondiscretionary items. d. None of the above. 7. Which of the following is not an advantage associated with a financial plan? e. It imposes overall structure on the process through specific steps that should be taken. f. It compels you to order your priorities and provide a specific financial solution using integrative techniques. g. It presents a document to refer back to so that you can compare actual with projected results and refresh your memory as thoughts of the original steps fade. h. It provides a numerical base for adjustments as goals and resources change in the future. i. All of the above are advantages. 8. Why is there a need for the financial plan to integrate all financial actions? j. Due to the possibility that the justification for some actions may be forgotten. k. Due to the limited resources households have. l. To satisfy certain regulation that financial planners must follow. m. All of the above. n. None of the above. 9. By which of the following steps in the financial planning process do we ask "Have you analyzed all areas that you intended to?" o. Establishing the scope of the activity. p. Gathering the data and identifying goals. q. Compiling and analyzing the data. r. All of the above. s. None of the above. 10. By which of the following steps in the financial planning process do we ask "Have SWOT, sensitivity and scenario analysis been considered?" t. Establishing the scope of the activity. u. Gathering the data and identifying goals. v. Compiling and analyzing the data. w. All of the above. x. None of the above. 11. For which of the following operating segments of the financial plan is the cash relationship characterized as an outflow? y. Revenues. z. Living costs. a. Retirement planning. b. Both a and b. c. Both b and c. 12. For which of the following operating segments of the financial plan is the cash relationship characterized exclusively as an inflow? d. Revenues. e. Capital expenditures (nonfinancial investments). f. Risk management g. Both a and b. h. Both b and c. 13. For which of the following operating segments of the financial plan is the function characterized as "job and investments liquidation upon retirement fund household activities"? i. Risk management. j. Financial investments. k. Retirement planning. l. Estate planning. m. None of the above. 14. What is the household resource problem? n. What the household should do to generate resources. o. What the household should do to spend resources. p. What the household should do with its current and future cash flow. q. Both a and b. r. Both b and c. 15. Which of the following segments of the financial plan is both a user and provider of cash? s. Financial investments. t. Debt. u. Capital expenditures. v. Both a and b. w. Both b and c. 16. Which of the following is not a tool that enhances the household's decision making function? x. SWOT analysis. y. Environmental analysis. z. Sensitivity analysis. a. Scenario analysis. b. All of the above are tools that enhance the household's decision making function. 17. To what do the letters in the acronym SWOT refer? c. Strategy, weaknesses, opportunity, threat. d. Strengths, wants, opportunity, threat. e. Strengths, weaknesses, opportunities, threats. f. Strengths, weaknesses, opportunities, timeline. g. None of the above. 18. SWOT analysis can: h. Uncover new information. i. Form a realistic appraisal for the planning future. j. Lead to changes in projections or practices. k. All of the above. l. None of the above. 19. Which area of personal financial planning is affected by the internal environment variable "obligations in relation to assets and cash flow"? m. Cash flow. n. Debt. o. Tax planning. p. Risk management. q. None of the above. 20. Which area of personal financial planning is affected by the external environment variable "Change in projected inflation rate"? r. Cash flow. s. Debt. t. Tax planning. u. Risk management. v. None of the above. 21. Sensitivity analysis: w. Is sometimes less quantitatively based than SWOT. x. Is identical to an SWOT analysis. y. Is identifying those factors that could significantly alter anticipated planning results. z. All of the above. a. None of the above. 22. Which of the following observes the effect of changes in multiple variables or in one variable that influences many situations? b. Scenario analysis. c. Sensitivity analysis. d. SWOT analysis. e. All of the above. f. None of the above. 23. Will a solution that does not give the highest revenues or result in the lowest risk ever be the preferred course of action? g. Yes, always. h. Yes, if it costs significantly less to implement. i. Yes, if it costs significantly more to implement. j. Never. k. None of the above. 24. The financial plan should be written: l. Before the behavioral review. m. After the behavioral review. n. Both before and after the behavioral review. o. During the beginning of the behavioral review. p. None of the above. 25. An ideal financial plan should have: q. A summary at the beginning. r. A mix of written information, numbers through tables, and figures. s. A summary at the end. t. Both a and b. u. All of the above. 26. For which part of the financial plan is "sets planning focus" a key contribution? v. Statement of goals. w. Summary of plan recommendations. x. Summary. y. Integration. z. None of the above. 27. For which part of the financial plan is "special requirements of all types for household members" a key contribution? a. Employee benefits. b. Educational planning. c. Other planning. d. Integration. e. None of the above. 28. Which of the following is not a key to a successful financial plan? f. A specific statement is made indicating whether the goals are doable and the current household course is financially consistent with those goals. g. Steps have been taken to help with any human shortcomings and nonfinancial goals are given. h. Before completing the plan, a review process has been undertaken that confirms that the financial figures and recommendations make sense and are attainable, given the personalities of the individuals. i. None of the above are key to a successful financial plan. j. All of the above are key to a successful financial plan. 29. Reviews of the financial plan should identify: k. Cyclical differences. l. Implementation differences. m. Systematic differences. n. All of the above. o. None of the above. Essay questions: 30. Please list 8 distinguishing features of personal financial planning theory, and describe the benefit of each. p. Uses household framework: Places it on par with other enterprises such as a business for improved analysis. q. Highlights similarities with business: Stresses businesslike behavior - logical and efficient. Allows use of sophisticated business tools. r. Expresses personal goals in money terms: Individual goals expressed in utility terms are often thought not measurable. The equilibrium approach explained provided is consistent with classical theory. It explains why household revenue and profit maximization is established, given the individual's limited time devoted to work. s. Divides consumption into pleasurable and nonpleasurable expenditures: Aggregating these expenditures can lead to incorrect decisions. Discretionary and nondiscretionary expenditures (which are the financial expressions for pleasurable leisure outlays and non pleasurable maintenance costs) are fundamentally different. t. Places personal financial planning and capital budgeting at the center of household finance : Expresses what PFP does in a broader framework, links it more solidly to business finance, leads to better financial decisions. u. Uses an integrated portfolio approach for financial decision making: Improved decision making more closely parallels the way people do or should think. v. Incorporates risk, return, and correlation in framework: Improved decision making by providing greater dimension in inputs and conclusions. w. TPM, by using all assets and liabilities, integrates PFP and investment decisions: Better financial decisions. Use of all resources over a life cycle in arriving at conclusions. More closely resembles the way practitioners perform comprehensive financial planning. 31. For each of the following operating segments of the financial plan, please specify the cash relationship and the function. a. Revenues b. Living Costs c. Debt d. Capital Expenditures e. (Nonfinancial Investments) f. Financial Investments g. Risk Management h. Retirement Planning i. Estate Planning j. Educational Planning k. Special Circumstances Planning Answer: +-----------------------+-----------------------+-----------------------+ | **Operating Segment | **Cash | **Function** | | of the Plan** | Relationship^1^** | | +=======================+=======================+=======================+ | Revenues | Inflow | Job and investments | | | | liquidation upon | | | | retirement fund | | | | household activities. | +-----------------------+-----------------------+-----------------------+ | Living Costs | Outflow | The costs of current | | | | overhead and | | | | pleasure-related | | | | activities. | +-----------------------+-----------------------+-----------------------+ | Debt | Inflow, then outflow | Supplies funds when | | | | current cash flow | | | | inadequate, followed | | | | by repayment of those | | | | funds. | +-----------------------+-----------------------+-----------------------+ | Capital Expenditures | Outflow. To the | Outlays for household | | | extent outlays | work-related | | (Nonfinancial | provide cash | efficiencies and | | Investments) | benefits, those | pleasure-related | | | benefits will be | activities. | | | shown in revenues as | | | | an inflow and living | | | | costs as a deduction | | | | from outflows. | | +-----------------------+-----------------------+-----------------------+ | Financial Investments | Outflow, then inflow | To initially invest | | | | savings held for | | | | future utilization. | | | | This segment along | | | | with job revenues | | | | then funds the rest | | | | of household | | | | activities. | +-----------------------+-----------------------+-----------------------+ | Risk Management | Outflow. Will also | To protect the | | | provide inflow if | household and bring | | | actual loss occurs. | about desired | | | | tolerance for risk. | +-----------------------+-----------------------+-----------------------+ | Retirement Planning | Outflow | To appropriate so as | | | | to generate | | | | investment resources | | | | to be employed when | | | | working stops. | +-----------------------+-----------------------+-----------------------+ | Estate Planning | Outflow | To be used for people | | | | we care for to the | | | | extent we desire. | +-----------------------+-----------------------+-----------------------+ | Educational Planning | Outflow. If used for | To provide for | | | spouse or other | household member | | | permanent member, may | education. | | | be covered under | | | | nonfinancial | | | | investments and | | | | provide an inflow as | | | | an outcome. | | +-----------------------+-----------------------+-----------------------+ | Special Circumstances | Outflow | To outlay money for | | Planning | | special uses. | +-----------------------+-----------------------+-----------------------+ 32. For each of the following personal financial planning areas, provide a representative sampling of internal and external environmental variables that affect the given area of financial planning. x. Balance Sheet y. Goals z. Cash Flow a. Debt b. Tax Planning c. Investments, Nonfinancial d. Investments, Financial e. Risk Management f. Retirement Planning g. Educational Planning h. Employee Benefits i. Other Planning j. Estate Planning Answer: +-----------------------+-----------------------+-----------------------+ | **PFP Area** | **Internal | **External | | | Environment** | Environment** | | | | | | | **=** | **=** | | | | | | | **Strengths or | **Opportunities or | | | Weaknesses** | Threats** | +=======================+=======================+=======================+ | Balance Sheet | Amount of assets | Ability to fund | | | | needed outlays | | Goals | Degree of liquidity | arising from change | | | | in environment | | | Ability to ascertain | | | | deep seated goals | Skill in matching | | | | goals with externally | | | | derived resources | +-----------------------+-----------------------+-----------------------+ | Cash Flow | Size of free cash | Ability to fund | | | flow | needed outlays | | | | arising from change | | | | in environment | +-----------------------+-----------------------+-----------------------+ | Debt | Obligations in | Change in projected | | | relation to assets | inflation rate | | | and cash flow | | +-----------------------+-----------------------+-----------------------+ | Tax Planning | Availability of | Shift in tax rates | | | viable tax reduction | | | | strategies | | +-----------------------+-----------------------+-----------------------+ | Investments, | Prospects for | Economic outlook | | Nonfinancial | existing job | | | | | Industry-related job | | | Ability to invest in | opportunities | | | job-related education | | | | | Changes in technology | | | Productivity and | | | | enjoyment-related | | | | durable goods | | +-----------------------+-----------------------+-----------------------+ | Investments, | Degree of asset | Economic outlook | | Financial | diversification | | | | | Projected inflation | | | Understanding of | rate | | | investment dynamics | | | | | Degree of speculation | | | Ability to fund | in markets | | | needed investments | | +-----------------------+-----------------------+-----------------------+ | Risk Management | State of personal | Government attitude | | | health | toward assistance for | | Retirement Planning | | risk-related needs | | | Safety practices | | | | | External risk-related | | | Proper insurance | exposures | | | coverage | | | | | Changes in insurance | | | Accumulated assets | policy coverage | | | | | | | Annual savings | Change in Social | | | | Security benefits | | | | | | | | Opportunity for part | | | | time consulting | +-----------------------+-----------------------+-----------------------+ | Educational Planning | Money accumulated for | Government and | | | higher education | college changes in | | | | assistance policy | | | Ability to qualify | | | | for assistance | | +-----------------------+-----------------------+-----------------------+ | Employee Benefits | Quality of | Changes in government | | | employer-funded | mandated assistance | | | programs | and tax policy | | | | | | | Medical reimbursement | Trends in overall | | | policy | corporate benefits | +-----------------------+-----------------------+-----------------------+ | Other Planning | State of physical and | Government policies | | | mental health | toward aiding special | | | Structure and | needs | | | closeness of current | | | | household | Changes in society's | | | relationships | opinion of nonmarital | | | | relationships | +-----------------------+-----------------------+-----------------------+ | Estate Planning | Resources accumulated | Change in allowable | | | relative to goals | estate tax planning | | | | strategies | | | Employment of well | | | | thought out legal | Society's opinion | | | documents | changes and estates | | | | are taxed | +-----------------------+-----------------------+-----------------------+