FREE Certified Portfolio Specialist Core Competencies Covered Questions and Answers
Which of the following is an essential principle of portfolio construction?
Portfolio construction requires balancing risk and return in a way that aligns with the investor's financial goals and risk tolerance. This is fundamental for ensuring that the portfolio meets the client’s long-term needs while managing potential risks. Concentrating investments in a single asset class (A) and avoiding diversification (D) increase risk, while focusing solely on historical performance (C) can lead to choices that don’t align with current goals and market conditions.
Which asset allocation approach adjusts the mix of assets based on the investor's age, gradually becoming more conservative over time?
Age-based or life-cycle asset allocation gradually shifts the asset mix to be more conservative as the investor ages. This approach is designed to reduce exposure to risky assets as an investor approaches retirement, preserving capital. Tactical (A) and strategic asset allocation (B) involve adjusting allocations based on market conditions or fixed asset proportions but do not necessarily adjust by age, while opportunistic allocation (D) seeks to take advantage of short-term market conditions without a focus on age.
Which of the following investment strategies focuses on stocks believed to be undervalued relative to their intrinsic value?
Value investing is the strategy of buying stocks that are believed to be undervalued compared to their intrinsic or fundamental value. Investors practicing this strategy expect that the market will eventually recognize the stock’s true worth, leading to potential appreciation. Growth investing (A) focuses on companies with high earnings potential, while momentum investing (C) buys stocks that are trending upwards. Income investing (D) prioritizes assets that generate steady income, such as dividends, over capital gains.
Which of the following risk management strategies is primarily focused on reducing unsystematic risk in a portfolio?
Diversification is a risk management strategy that reduces unsystematic risk (the risk specific to individual companies or industries) by spreading investments across different asset classes, sectors, or geographies. Hedging (A) can mitigate specific risks but is not as broad a strategy as diversification. Investing solely in government bonds (C) may reduce risk but also limits growth potential, while market timing (D) is a speculative strategy rather than a core risk management principle.
Which metric is commonly used to assess a portfolio’s risk-adjusted return?
The Sharpe Ratio measures a portfolio’s risk-adjusted return by comparing excess return (above a risk-free rate) to the portfolio’s volatility (standard deviation). This helps assess whether the portfolio’s returns are due to smart investment choices or a high level of risk. Dividend yield (B) and the P/E ratio (C) are individual stock metrics, while total return (D) measures overall returns but does not account for risk.