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CFC Philippines practice questions

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Question 1Financial Planning Process and Professional Standards

Under the CFC Code of Ethics, a certifying financial consultant's primary duty when providing advice is owed to which party?

  1. The client, whose interests must be placed ahead of the consultant's own Correct answer.
  2. The consultant's employer, regardless of the client's circumstances
  3. The product provider that pays the consultant's marketing support
  4. The regulator, since compliance reporting takes precedence over advice

Explanation

The professional standards of the CFC place the client's interest first in the advisory relationship. Any conflict of interest, such as provider incentives, must be disclosed and managed so that it does not override the client's interest. Loyalty to an employer or provider does not displace this fiduciary-type duty.

Question 2Financial Planning Process and Professional Standards

A couple approaches a CFC to plan for retirement and their children's education. Which action best reflects the first step of the financial planning process?

  1. Preparing the written engagement letter for signature
  2. Recommending a unit-linked investment product immediately
  3. Computing the internal rate of return of a proposed portfolio
  4. Gathering quantitative and qualitative data to establish goals and priorities Correct answer.

Explanation

The planning process begins with establishing the client-planner relationship and collecting the data needed to understand goals, resources, and constraints. Product recommendations and return computations only come after goals and data are clearly established. The engagement letter formalises the relationship but does not substitute for data gathering.

Question 3Financial Planning Process and Professional Standards

Which document primarily defines the scope of services, responsibilities of both parties, and the basis of compensation in a CFC engagement?

  1. The estate planning will
  2. The client's income tax return
  3. The engagement letter or written agreement Correct answer.
  4. The product prospectus

Explanation

The engagement letter sets out the scope, the respective responsibilities of planner and client, the fee basis, and any limitations of the engagement. It is the tool that prevents later disputes about what was agreed. Tax returns and prospectuses are client or product documents, not the planning agreement.

Question 4Financial Planning Process and Professional Standards

During data gathering, a client mentions that she is uncomfortable with any investment that can lose principal and wants to keep six months of expenses liquid. How should the planner classify these inputs?

  1. Qualitative data, because they describe attitudes and preferences Correct answer.
  2. Quantitative data only, because both statements involve amounts
  3. Assumptions to be overridden by the planner's judgement
  4. Product selection criteria to be applied at the recommendation stage

Explanation

Risk attitude and liquidity preference are qualitative data reflecting the client's psychological and behavioural profile. Qualitative data shape how quantitative facts are interpreted and constrain the eventual recommendations. They are not mere assumptions for the planner to override.

Question 5Financial Planning Process and Professional Standards

A CFC prepares a financial plan and finds that the client's goal of retiring at 55 with full income replacement is not achievable on current savings. What is the most professionally appropriate response?

  1. Adjust the goal, savings rate, or target date with the client's informed agreement Correct answer.
  2. Present the plan as achievable to keep the client motivated
  3. Decline to prepare any plan until the client lowers expectations
  4. Recommend the highest-return product available to close the gap

Explanation

When a goal is unrealistic, the planner should discuss the shortfall openly and negotiate adjustments such as a later retirement age, higher savings, or a lower target income. Presenting an unachievable plan misleads the client. Recommending speculative products to chase returns is unsuitable for a shortfall problem.

Question 6Financial Planning Process and Professional Standards

Which activity belongs to the implementation stage rather than the analysis stage of the financial planning process?

  1. Reviewing the client's risk tolerance questionnaire
  2. Identifying the gap between projected retirement funds and the target
  3. Executing the agreed investment and insurance transactions Correct answer.
  4. Calculating the client's current net worth

Explanation

Implementation is the stage where agreed recommendations are put into effect through actual transactions and referrals. Net worth calculation, gap identification, and risk tolerance review all occur during data gathering and analysis. Keeping the stages distinct helps the planner document the process properly.

Question 7Financial Planning Process and Professional Standards

A planner receives a gift from a product provider whose fund she is considering for a client. Under professional standards, what is the appropriate course of action?

  1. Return it only if the fund later underperforms
  2. Accept it and recommend the fund to show gratitude
  3. Accept it quietly since gifts do not affect professional judgement
  4. Disclose the gift to the client and manage the conflict in line with policy Correct answer.

Explanation

Gifts and incentives from providers create conflicts of interest that must be disclosed and managed transparently. Disclosure allows the client to judge whether advice is influenced by the benefit. Accepting silently or letting performance outcomes decide disclosure defeats the purpose of the rule.

Question 8Financial Planning Process and Professional Standards

A client refuses to provide details of an offshore account. The planner believes this omission materially affects the retirement projection. What is the best professional response?

  1. Document the limitation, explain its effect on the plan, and obtain the client's acknowledgement Correct answer.
  2. Terminate the engagement immediately without explanation
  3. Report the client to the regulator for non-disclosure
  4. Estimate the account balance and proceed without comment

Explanation

When a client withholds relevant information, the planner should document the limitation and explain how it constrains the reliability of the plan. Obtaining the client's acknowledgement protects both parties and keeps the engagement transparent. Immediate termination or regulatory reporting is disproportionate where no legal breach is evident.

Question 9Financial Planning Process and Professional Standards

In the CFC examination context, which best describes the purpose of a client risk tolerance assessment?

  1. To align recommended investments with the client's willingness and ability to bear loss Correct answer.
  2. To determine the maximum return the client can expect
  3. To replace the need for a written financial plan
  4. To satisfy a product provider's documentation requirement

Explanation

Risk tolerance assessment captures both the client's psychological willingness and financial ability to absorb losses. Its purpose is to ensure recommendations are suitable for that client. It does not predict returns or substitute for the broader plan.

Question 10Financial Planning Process and Professional Standards

A planner's client dies unexpectedly. Which professional obligation most directly arises for the planner regarding the financial plan?

  1. Assist the executor or family with information relevant to the plan and estate coordination Correct answer.
  2. Destroy the client file to protect confidentiality
  3. Continue charging fees until the estate is fully distributed
  4. Sell all client assets immediately to raise cash

Explanation

On a client's death, the planner's role shifts to supporting the estate, typically by providing relevant plan information to the executor or family. Charging fees without service or destroying records would be improper. Asset sales require proper authority from the estate.

Question 11Financial Planning Process and Professional Standards

Which statement best explains why the financial planning process is described as cyclical rather than strictly linear?

  1. Because clients are required to change advisers periodically
  2. Because regulations mandate a new plan every quarter
  3. Because planners must always revisit the engagement letter each month
  4. Because monitoring and review feed new data back into revised goals and recommendations Correct answer.

Explanation

The process is cyclical because review and monitoring generate updated information that may require revised goals and recommendations. This feedback loop distinguishes ongoing planning from a one-time product sale. There is no rule requiring monthly engagement letters or quarterly plans.

Question 12Financial Planning Process and Professional Standards

A planner is asked by a client to recommend a specific stock based on a rumour. The planner has no research to support the tip. What is the most appropriate professional action?

  1. Decline to recommend and explain the need for a suitable, researched basis Correct answer.
  2. Refer the client to a friend who trades actively
  3. Recommend a small position to satisfy the client
  4. Recommend the stock with a disclaimer that it is a rumour

Explanation

Advice must rest on a reasonable, suitable basis rather than unverified rumours. Declining and explaining the professional standard protects the client from unsuitable speculation. A disclaimer does not cure advice that lacks a proper basis.

Question 13Financial Planning Process and Professional Standards

Which of the following best describes the role of a written financial plan in the CFC planning process?

  1. It is a legally binding contract that guarantees investment returns
  2. It documents goals, assumptions, recommendations, and the basis for advice Correct answer.
  3. It replaces the need for ongoing client communication
  4. It is a marketing brochure summarising product features

Explanation

The written plan records the client's goals, the assumptions used, and the recommendations with their rationale. It serves as a reference for implementation and review. It is not a return guarantee and does not remove the need for ongoing communication.

Question 14Financial Planning Process and Professional Standards

A client's circumstances change materially after implementation: she divorces and her income falls sharply. What does professional practice require of the planner?

  1. Cancel all existing investments without discussion
  2. Reassess the plan promptly and adjust recommendations to the new circumstances Correct answer.
  3. Increase risk exposure to recover lost income
  4. Take no action until the next scheduled annual review

Explanation

Material changes in a client's circumstances trigger a prompt reassessment rather than waiting for a routine review. Recommendations should then be adjusted to reflect the new income, goals, and risk profile. Increasing risk to chase lost income is generally unsuitable.

Question 15Financial Planning Process and Professional Standards

Which practice best demonstrates the professional standard of confidentiality in financial planning?

  1. Disclosing client information only with consent or where legally required Correct answer.
  2. Discussing client cases in public forums without names
  3. Sharing client details freely with product providers for marketing
  4. Retaining client files indefinitely on a personal device

Explanation

Confidentiality requires that client information be disclosed only with the client's consent or when legally compelled. Sharing for marketing or in public forums breaches this duty even without names. Secure, policy-compliant retention is also part of protecting client data.

Question 16Financial Planning Process and Professional Standards

A planner prepares a retirement projection using a 12% annual return assumption for a conservative client. What is the main professional concern with this approach?

  1. The client should choose the assumption without advice
  2. The assumption is too low to be realistic
  3. Projections should never include return assumptions
  4. The assumption is inconsistent with the client's risk profile and may overstate outcomes Correct answer.

Explanation

Return assumptions must be reasonable and consistent with the client's risk tolerance and the underlying asset mix. A 12% assumption for a conservative client is likely optimistic and could overstate projected outcomes. Projections routinely use assumptions, but they must be justified and disclosed.

Question 17Financial Planning Process and Professional Standards

Which sequence correctly orders the core stages of the financial planning process from start to finish?

  1. Recommendations, implementation, data gathering, review
  2. Analysis, data gathering, implementation, review
  3. Implementation, data gathering, review, analysis
  4. Data gathering, analysis and recommendations, implementation, monitoring and review Correct answer.

Explanation

The standard sequence begins with establishing the relationship and gathering data, proceeds to analysis and recommendations, then implementation, and finally monitoring and review. This order ensures advice is grounded in client data before action is taken. The cyclical nature allows review to feed back into earlier stages.

Question 18Financial Planning Process and Professional Standards

A planner discovers an error in a previous recommendation that has disadvantaged a client. What does professional conduct require?

  1. Disclose the error to the client promptly and take reasonable corrective action Correct answer.
  2. Conceal the error to protect the firm's reputation
  3. Blame the product provider publicly without informing the client
  4. Wait until the client notices and then respond

Explanation

Professional standards require candour when an error affects a client, including prompt disclosure and reasonable steps to correct the situation. Concealment or waiting for discovery compounds the harm and breaches trust. Public blame without client notification does not remedy the error.

Question 19Financial Planning Process and Professional Standards

A client insists on a highly concentrated position in a single stock that represents most of his retirement savings. What is the most appropriate professional response?

  1. Execute the instruction without comment since the client is entitled to decide
  2. Explain the concentration risk, document the discussion, and recommend diversification Correct answer.
  3. Refuse to act and close the engagement without explanation
  4. Recommend leveraging the position to increase returns

Explanation

The planner should clearly explain the risks of concentration and recommend diversification, while documenting the client's informed decision if he proceeds. Silence leaves the client unaware of a material risk. Closing the engagement without explanation or recommending leverage worsens the situation.

Question 20Financial Planning Process and Professional Standards

Which of the following is the best example of a qualitative constraint that a planner must record during data gathering?

  1. The client's current bank balance
  2. The client's desire for socially responsible investments Correct answer.
  3. The client's annual salary
  4. The client's monthly mortgage payment

Explanation

A preference for socially responsible investing reflects values and attitudes, which are qualitative constraints on recommendations. Mortgage payments, bank balances, and salaries are quantitative facts. Recording both types gives a complete client profile.

Question 21Risk Management and Insurance Planning

Under the Insurance Code, which party bears the burden of proving that a loss falls within an exclusion clause in a property insurance policy?

  1. The agent who sold the policy, because the agent warrants the scope of cover
  2. The Insurance Commission, because exclusions are approved regulations
  3. The insurer, because exclusions are affirmative defenses that must be established by the party relying on them Correct answer.
  4. The insured, because the insured must prove the entire claim including every exclusion

Explanation

The insured generally has the burden of showing that the loss is covered by the insuring agreement, while the insurer bears the burden of proving that an exclusion applies. Because an exclusion limits the promise to indemnify, the party invoking it must establish its applicability by competent evidence.

Question 22Risk Management and Insurance Planning

A life insurance applicant conceals a diagnosed heart condition on the application and dies of an unrelated accident within two years. Which statement best describes the insurer's position under the doctrine of concealment?

  1. The insurer may reduce the benefit proportionally to the unpaid premium
  2. The insurer may rescind the contract because the concealed fact was material to the risk assessment Correct answer.
  3. The insurer must pay because the contestability period has already lapsed
  4. The insurer must pay because the death cause was unrelated to the concealed condition

Explanation

Concealment of a material fact entitles the insurer to rescind the contract, and materiality is judged by whether the fact would influence a prudent insurer in accepting or rating the risk, not by whether the concealed condition caused the death. Rescission restores the parties to their original position.

Question 23Risk Management and Insurance Planning

Which element is essential for a contract of insurance to be valid and enforceable?

  1. Approval of the policy by the insured's employer
  2. Registration of the policy with the Securities and Exchange Commission
  3. An insurable interest in the subject matter of the insurance Correct answer.
  4. A medical examination of the insured before issuance

Explanation

Insurable interest is a statutory requirement for a valid insurance contract; without it the contract is void. Medical examinations and employer approval are underwriting or administrative steps that may be waived, and insurance policies are not registered with the SEC.

Question 24Risk Management and Insurance Planning

A policyholder owns a warehouse worth PHP 10 million and insures it for PHP 6 million under a valued policy with an agreed value of PHP 6 million. A total loss occurs. How much is payable, absent fraud?

  1. PHP 6 million reduced by the ratio of sum insured to value
  2. PHP 4 million, representing the uninsured portion
  3. PHP 6 million, the agreed value stated in the policy Correct answer.
  4. PHP 10 million, the actual cash value of the property

Explanation

In a valued policy the parties agree in advance on the value of the subject matter, and that agreed value is conclusive in the event of a total loss absent fraud or misrepresentation. The insured therefore recovers the stated amount rather than the actual value.

Question 25Risk Management and Insurance Planning

Which of the following best describes the principle of indemnity in property insurance?

  1. The insured may recover from both the insurer and the negligent third party without limitation
  2. The insured is restored to the same financial position held before the loss, no better and no worse Correct answer.
  3. The insured receives a fixed sum agreed at inception regardless of the actual loss
  4. The insurer pays a benefit based on the insured's future earning capacity

Explanation

Indemnity aims to place the insured financially where he stood immediately before the loss, preventing profit from insurance. It is the reason for actual cash value, depreciation, and subrogation rules in property cover.

Question 26Risk Management and Insurance Planning

An insurer pays a fire loss of PHP 2 million to its insured, who was injured by the negligence of a third party. Which doctrine allows the insurer to step into the insured's shoes and pursue the third party?

  1. Coinsurance
  2. Subrogation Correct answer.
  3. Reinstatement
  4. Contribution

Explanation

Subrogation transfers to the paying insurer the insured's rights of recovery against the party responsible for the loss, to the extent of the payment made. It supports the indemnity principle by preventing the insured from recovering twice.

Question 27Risk Management and Insurance Planning

A building is insured for PHP 8 million with Insurer A and PHP 4 million with Insurer B, both policies covering the same risk on the same interest. A PHP 3 million loss occurs. Under the contribution principle, how much does Insurer A pay?

  1. PHP 3 million
  2. PHP 2 million Correct answer.
  3. PHP 1 million
  4. PHP 1.5 million

Explanation

Contribution apportions the loss among insurers in proportion to the sums they respectively insured. Insurer A carries 8 of the 12 million total, so it pays two-thirds of the PHP 3 million loss, or PHP 2 million.

Question 28Risk Management and Insurance Planning

Which statement correctly describes the operation of a coinsurance clause in a Philippine fire policy?

  1. The insured forfeits the entire claim whenever the sum insured is below the required percentage
  2. The insured who insures below the required percentage shares the loss with the insurer in proportion to the deficiency Correct answer.
  3. The coinsurance percentage sets the maximum number of policies the insured may hold
  4. The insurer automatically increases the sum insured to meet the coinsurance requirement at renewal

Explanation

A coinsurance clause requires the insured to carry insurance equal to a stated percentage of the property's value; if the insured fails, recovery is reduced in the proportion that the actual sum insured bears to the required amount. The clause penalizes underinsurance rather than voiding the claim.

Question 29Risk Management and Insurance Planning

An insured deliberately sets fire to his own insured stock to collect the proceeds. What is the effect on the claim?

  1. The claim is paid only if the insured had no prior losses
  2. The claim is denied and the insurer may recover amounts already paid Correct answer.
  3. The claim is paid at half the sum insured as a compromise
  4. The claim is paid because fire is a covered peril regardless of cause

Explanation

Intentional destruction of insured property by the insured is a willful act that voids coverage and constitutes fraud. The insurer may deny the claim and, having paid, may recover the amount from the insured.

Question 30Risk Management and Insurance Planning

A marine cargo policy covers goods from Manila to Cebu. The shipment is lost because the vessel was unseaworthy at the time of departure, a fact known to the carrier. Which principle most directly affects the insured's recovery?

  1. The incontestability clause in the policy
  2. The doctrine of proximate cause in life insurance
  3. The free-look period granted to the policyholder
  4. The implied warranty of seaworthiness in marine insurance Correct answer.

Explanation

Marine insurance carries an implied warranty that the vessel is seaworthy at the commencement of the voyage, and a breach of this warranty can discharge the insurer. This is distinct from life insurance doctrines such as incontestability.

Question 31Risk Management and Insurance Planning

Which of the following is a characteristic of a mutual insurance company compared with a stock insurance company?

  1. It may not issue participating policies to its policyholders
  2. It is exempt from regulation by the Insurance Commission
  3. It is owned by shareholders who elect a board of directors
  4. Policyholders are members who may receive dividends from surplus rather than shareholders owning the company Correct answer.

Explanation

A mutual insurer is owned by its policyholders rather than by outside shareholders, and surplus may be returned to members as dividends. A stock insurer is owned by shareholders and may also issue participating policies.

Question 32Risk Management and Insurance Planning

A financial adviser recommends that a client hold a life insurance policy designed to provide pure death protection with no cash value. Which product matches this need?

  1. Term life insurance Correct answer.
  2. Endowment insurance
  3. Whole life insurance
  4. Universal life insurance

Explanation

Term insurance provides protection for a specified period and builds no cash value, so it delivers the most death benefit per peso of premium. Whole life, endowment, and universal life all accumulate cash values.

Question 33Risk Management and Insurance Planning

An insured holds a whole life policy with a cash value of PHP 500,000 and an outstanding policy loan of PHP 150,000. He surrenders the policy. What amount is payable?

  1. PHP 500,000
  2. PHP 650,000
  3. PHP 350,000 Correct answer.
  4. PHP 150,000

Explanation

On surrender the insurer pays the net cash surrender value, which is the cash value less any outstanding policy loan and accrued interest. The loan is deducted because it was an advance against the policy's value.

Question 34Risk Management and Insurance Planning

Which provision prevents an insurer from denying a life insurance claim based on a misrepresentation in the application after the policy has been in force for a specified period?

  1. The automatic premium loan provision
  2. The grace period provision
  3. The incontestability clause Correct answer.
  4. The reinstatement provision

Explanation

The incontestability clause bars the insurer from contesting the policy for misrepresentation after it has been in force for the period stated in the law, typically two years. It protects beneficiaries from late rescission.

Question 35Risk Management and Insurance Planning

A policyowner dies 45 days after the premium due date without having paid the premium, and the policy contained a 31-day grace period. The insurer had not sent a lapse notice. What is the likely status of the claim?

  1. The policy remained in force because the insurer failed to give a lapse notice
  2. The policy remained in force because grace periods run for one year under the Code
  3. The insurer must pay the cash value only, regardless of the death
  4. The policy had lapsed, so the insurer may deny the claim unless reinstatement occurred Correct answer.

Explanation

The grace period gives the policyowner a limited time after the due date to pay without lapse, and once it expires without payment the policy lapses. A lapse notice is not a statutory condition of lapse for ordinary life policies.

Question 36Risk Management and Insurance Planning

Which of the following best explains why an insurer uses a reinstatement provision in a life policy?

  1. It converts the policy automatically into a term policy
  2. It transfers ownership of the policy to the beneficiary
  3. It allows a lapsed policy to be revived upon evidence of insurability and payment of overdue premiums Correct answer.
  4. It allows the insurer to cancel the policy at any time without notice

Explanation

Reinstatement lets a policyowner restore a lapsed policy by providing proof of insurability and paying arrears, often with interest. It protects the policyowner's original age and rate while protecting the insurer against adverse selection.

Question 37Risk Management and Insurance Planning

A beneficiary under a life insurance policy murders the insured and is convicted. What is the effect on the beneficiary's right to the proceeds?

  1. The proceeds are paid to the beneficiary but reduced by the cost of the criminal case
  2. The beneficiary is disqualified, and the proceeds pass to the contingent beneficiary or the insured's estate Correct answer.
  3. The beneficiary still receives the proceeds because the policy named him irrevocably
  4. The insurer keeps the proceeds because the contract is void

Explanation

A beneficiary who willfully causes the death of the insured is disqualified from taking the proceeds, because no one may profit from his own wrongdoing. The proceeds then go to the contingent beneficiary or, absent one, to the insured's estate.

Question 38Risk Management and Insurance Planning

Which statement correctly distinguishes a revocable from an irrevocable beneficiary designation?

  1. A revocable beneficiary's interest may be changed by the policyowner without the beneficiary's consent Correct answer.
  2. A revocable beneficiary must consent before a policy loan is taken
  3. An irrevocable beneficiary may be changed by the policyowner at any time without consent
  4. An irrevocable beneficiary has no vested right to the proceeds

Explanation

A revocable beneficiary holds a mere expectancy that the policyowner may alter or remove without consent. An irrevocable beneficiary has a vested interest, so the policyowner generally needs that beneficiary's consent to change the designation or take certain policy actions.

Question 39Risk Management and Insurance Planning

An applicant for a life policy answers all questions truthfully but the agent alters an answer before submitting the application. The insurer issues the policy and later discovers the alteration. What is the insurer's likely position?

  1. The insurer is generally bound because the agent's knowledge and acts are imputed to the insurer Correct answer.
  2. The insurer may rescind because the agent is not the insurer's representative
  3. The insurer may rescind only if the insured signed the altered application after delivery
  4. The insurer may rescind because the insured warranted the altered answer

Explanation

An agent acting within the scope of authority is the insurer's representative, and knowledge acquired by the agent is imputed to the insurer. An insurer that issues a policy with knowledge of the true facts generally cannot later rescind on that ground.

Question 40Risk Management and Insurance Planning

Which of the following correctly describes the purpose of a pre-need plan regulated under Philippine law?

  1. It provides for the future delivery of goods or services, such as education or memorial services, funded by periodic payments Correct answer.
  2. It indemnifies the policyholder for fire damage to a commercial building
  3. It guarantees a fixed return on an investment in government securities
  4. It provides marine cargo cover for imported goods

Explanation

Pre-need plans are contracts under which a buyer pays in advance, often in installments, for the future delivery of services such as education, pension, or memorial services. They are regulated separately from ordinary insurance but share trust and reserve requirements.

Question 41Risk Management and Insurance Planning

An insurer is assessing its exposure to a large concentration of earthquake risk in one city. Which risk management technique involves transferring part of that exposure to another insurer?

  1. Reinsurance Correct answer.
  2. Retention
  3. Loss prevention
  4. Avoidance

Explanation

Reinsurance is the transfer by an insurer of part of its risk to another insurer, reducing the ceding insurer's net exposure to a single event. Retention keeps the risk, avoidance eliminates the activity, and loss prevention reduces frequency or severity.

Question 42Risk Management and Insurance Planning

A family wants to protect against the risk of a long hospital stay for a breadwinner. Which product type is most directly suited to this need?

  1. A health insurance policy with hospital income and medical expense benefits Correct answer.
  2. A whole life policy with a small cash value
  3. A fire insurance policy on the family home
  4. A marine hull policy on a fishing boat

Explanation

Health insurance addresses the cost and income loss associated with hospitalization and medical treatment. The other products cover different perils and do not respond to medical expenses.

Question 43Risk Management and Insurance Planning

An insurer discovers that a fire claim is inflated by PHP 300,000 through falsified receipts. What is the insurer's best legal position?

  1. The insurer must pay the full claim and then report the matter to the Insurance Commission
  2. The insurer may deny the entire claim because the insured presented a fraudulent claim Correct answer.
  3. The insurer may pay only the fraudulent amount
  4. The insurer must pay the undisputed portion and ignore the falsification

Explanation

A fraudulent claim, including inflation of a loss through falsified documents, entitles the insurer to deny the claim entirely. The fraud vitiates the insured's right to indemnity for the whole claim, not merely the exaggerated part.

Question 44Risk Management and Insurance Planning

Which of the following best describes the role of the Insurance Commission in the Philippine insurance market?

  1. It regulates and supervises insurers and intermediaries to protect policyholders and the public interest Correct answer.
  2. It sets the premium rates for every life insurance product without exception
  3. It adjudicates criminal cases involving insurance fraud
  4. It underwrites policies on behalf of private insurers

Explanation

The Insurance Commission supervises the insurance industry, issues licenses, approves forms and rates where required, and protects the insuring public. It does not underwrite policies, fix every rate, or exercise criminal jurisdiction.

Question 45Investment Planning and Asset Allocation

Under the risk-return framework used in portfolio planning, what is the primary reason an investor expects a higher expected return from a portfolio of Philippine equities compared with a portfolio of short-term government treasury bills?

  1. Equity returns are fixed by the Philippine Stock Exchange at the start of each year
  2. Treasury bills are subject to higher transaction taxes than equities
  3. Equity investors accept greater uncertainty of returns and therefore demand a risk premium Correct answer.
  4. Equities are guaranteed by the Bureau of the Treasury against capital loss

Explanation

The risk-return tradeoff holds that investors require additional expected compensation, a risk premium, for bearing greater uncertainty. Equities have volatile and uncertain returns, while short-term government securities are treated as low-risk instruments. The higher expected equity return is compensation for that added risk, not a guarantee or a fixed rate.

Question 46Investment Planning and Asset Allocation

A client has a 6-month investment horizon and needs the principal intact at the end of that period to pay a tuition bill. Which asset allocation is most appropriate for those specific funds?

  1. An offshore emerging-market equity feeder fund
  2. A peso-denominated money market fund or short-term time deposit Correct answer.
  3. A long-duration peso government bond fund
  4. A diversified portfolio of small-cap Philippine equities

Explanation

When the horizon is short and the principal must be preserved, capital preservation instruments such as money market funds or short-term deposits match the need. Volatile assets can suffer losses that cannot be recovered in six months. Matching asset maturity to the liability date is the core principle here.

Question 47Investment Planning and Asset Allocation

Which statement best describes the role of asset allocation in a long-term investment plan?

  1. It determines the mix among asset classes and explains most of the variability of portfolio returns Correct answer.
  2. It replaces the need for an investment policy statement
  3. It selects individual securities expected to outperform the index
  4. It sets the exact timing of purchases and sales in the market

Explanation

Asset allocation sets the strategic weights across asset classes such as cash, fixed income, equities, and property. Research tradition holds that this policy mix drives the majority of return variability over time. Security selection and market timing are separate, secondary decisions.

Question 48Investment Planning and Asset Allocation

An investor's portfolio is 70% Philippine equities and 30% peso bonds. After a strong equity rally the equity weight rises to 78%. Under a rebalancing policy with a 5% band, what action does the policy require?

  1. Buy more equities to reach 80% and lock in the momentum
  2. Sell enough equities to return to the 70% target and add the proceeds to bonds Correct answer.
  3. Take no action because the target is only a suggestion
  4. Liquidate the entire portfolio and hold cash

Explanation

A 5% band around a 70% target permits equity weights between 65% and 75%. At 78% the upper band is breached, so the policy requires trimming equities back toward target and adding to bonds. This enforces discipline by selling what has become overweight.

Question 49Investment Planning and Asset Allocation

A 28-year-old professional with stable income, no dependents, and a 30-year horizon wants to maximize long-term growth. Which allocation is most consistent with a growth-oriented strategic policy?

  1. 80% money market, 20% equities
  2. 85% diversified equities, 15% bonds Correct answer.
  3. 60% equities, 40% short-term deposits
  4. 100% single Philippine small-cap stock

Explanation

A long horizon and high risk tolerance support a heavy equity weight diversified across many issuers. A modest bond sleeve provides some stability without abandoning the growth objective. Diversification keeps the equity exposure from depending on one company.

Question 50Investment Planning and Asset Allocation

Which of the following best illustrates systematic risk in a Philippine equity portfolio?

  1. A labor strike halting production at one listed manufacturer
  2. An accounting fraud discovered at a single bank
  3. A nationwide interest rate increase by the central bank affecting all listed shares Correct answer.
  4. A fire destroying one company's warehouse

Explanation

Systematic risk affects the whole market and cannot be diversified away, such as a broad monetary policy move. Company-specific events are unsystematic risk that diversification can reduce. A rate change ripples across valuations of all equities.