RMA Research Methods & Evidence-Based Practice 2 — Questions and Answers
Question 1: In a retirement income study, the Sharpe ratio is used to evaluate a portfolio by measuring:
- Absolute return relative to benchmark
- Risk-adjusted return per unit of total volatility (Correct answer)
- Downside deviation versus upside capture
- Correlation between asset classes
Correct answer: Risk-adjusted return per unit of total volatility
The Sharpe ratio divides excess return over the risk-free rate by the portfolio's standard deviation, yielding risk-adjusted performance.
Question 2: Which research design best establishes causality when studying the impact of a new retirement savings program?
- Cross-sectional survey
- Randomized controlled trial (Correct answer)
- Case study analysis
- Correlational study
Correct answer: Randomized controlled trial
Randomized controlled trials randomly assign participants to treatment and control groups, making them the gold standard for establishing causal relationships.
Question 3: An RMA adviser reviews a Monte Carlo simulation showing a 90% probability of plan success. This means:
- The client will definitely not run out of money
- 90 out of 100 simulated scenarios maintained solvency through the planning horizon (Correct answer)
- Returns are guaranteed to meet the assumed rate in 90% of years
- The plan has a 10% chance of exceeding the target wealth
Correct answer: 90 out of 100 simulated scenarios maintained solvency through the planning horizon
Monte Carlo success probability represents the percentage of simulated scenarios in which the portfolio lasted through the specified time horizon.
Question 4: When evaluating peer-reviewed research on sequence-of-returns risk, an adviser should first assess:
- Whether the journal charges an access fee
- The study's publication year only
- The methodology, sample size, and whether findings were replicated (Correct answer)
- The author's institutional affiliation alone
Correct answer: The methodology, sample size, and whether findings were replicated
Critical appraisal requires examining methodology rigor, adequate sample size, and replication before accepting research conclusions.
Question 5: A withdrawal rate study uses a 30-year historical rolling period analysis. A key limitation of this approach is:
- It includes too many asset classes
- Rolling periods overlap, making the observations statistically dependent (Correct answer)
- It only applies to fixed-income portfolios
- Historical data cannot be stored electronically
Correct answer: Rolling periods overlap, making the observations statistically dependent
Overlapping rolling periods share data points, violating the independence assumption and overstating the number of truly independent observations.
Question 6: In evidence-based retirement planning, the term 'alpha' refers to:
- The portfolio's standard deviation
- Risk-free rate of return
- Return in excess of what is explained by market exposure (beta) (Correct answer)
- The correlation between two asset classes
Correct answer: Return in excess of what is explained by market exposure (beta)
Alpha measures a manager's value-added return above the benchmark return predicted by the portfolio's beta exposure.
Question 7: A researcher reports a p-value of 0.03 for a study on annuity pricing outcomes. This indicates:
- The effect size is large
- There is a 3% probability of observing results this extreme if the null hypothesis is true (Correct answer)
- The study has 97% statistical power
- The sample size is adequate
Correct answer: There is a 3% probability of observing results this extreme if the null hypothesis is true
A p-value of 0.03 means there is a 3% probability of obtaining the observed results (or more extreme) assuming the null hypothesis is correct.
RMA Research Methods & Evidence-Based Practice 2
In a retirement income study, the Sharpe ratio is used to evaluate a portfolio by measuring: