AAFM AAFM Financial Planning Principles

Question 1

What is the time value of money (TVM) concept?

Accepted Answer

A dollar today is worth more than a dollar in the future due to its earning potential

Answer

Money increases in value automatically over time

Answer

Future money is always worth more than present money

Answer

Time has no effect on money's value

Question 2

What is Modern Portfolio Theory (MPT)?

Accepted Answer

A framework for constructing diversified portfolios that maximize expected return for a given level of risk

Answer

Only investing in modern companies

Answer

A theory about digital currencies

Answer

A method for timing the stock market

Question 3

What is the Capital Asset Pricing Model (CAPM)?

Accepted Answer

A model relating expected return to systematic risk (beta), expressed as E(R) = Rf + β(Rm - Rf)

Answer

A model for pricing commercial real estate

Answer

A system for calculating insurance premiums

Answer

A method for valuing antique assets

Question 4

What is asset allocation and why is it considered the most important investment decision?

Accepted Answer

Dividing investments among asset classes (stocks, bonds, cash, alternatives) — research shows it determines about 90% of return variability

Answer

Buying only one type of investment

Answer

Allocating assets equally regardless of goals

Answer

Only investing in the best-performing asset class

Question 5

What is the efficient market hypothesis (EMH)?

Accepted Answer

A theory stating that asset prices fully reflect all available information, making it impossible to consistently beat the market

Answer

Markets are always inefficient

Answer

Only insiders can profit from markets

Answer

All stocks are equally good investments

Question 6

What is the Sharpe Ratio and how is it used?

Accepted Answer

A measure of risk-adjusted return calculated as (portfolio return - risk-free rate) / portfolio standard deviation

Answer

The ratio of shares to bonds in a portfolio

Answer

A tax calculation method

Answer

A measure of market volatility only