AAFM Professional Knowledge 3

Question 1

Which valuation method discounts a company's expected future cash flows to present value?

Accepted Answer

Discounted cash flow (DCF)

Answer

Book value method

Answer

Liquidation value

Answer

Replacement cost

Question 2

In estate planning, what is the main advantage of establishing a revocable living trust?

Accepted Answer

Avoiding probate on transferred assets

Answer

Eliminating all estate taxes

Answer

Guaranteeing higher investment returns

Answer

Removing the need for a will

Question 3

A bond's price will generally do what when market interest rates rise?

Accepted Answer

Fall

Answer

Rise

Answer

Stay unchanged

Answer

Double

Question 4

What does the Sharpe ratio measure?

Accepted Answer

Risk-adjusted return per unit of total risk

Answer

Absolute return only

Answer

A stock's dividend yield

Answer

Market capitalization

Question 5

Which retirement account allows qualified withdrawals to be tax-free in the U.S.?

Accepted Answer

Roth IRA

Answer

Traditional IRA

Answer

401(k) with pre-tax contributions

Answer

SEP IRA

Question 6

The 'efficient frontier' in portfolio theory represents portfolios that offer what?

Accepted Answer

Maximum expected return for a given level of risk

Answer

The lowest possible cost

Answer

Zero risk

Answer

The highest dividends

Question 7

What is the primary benefit of dollar-cost averaging?

Accepted Answer

Reducing the impact of market volatility over time

Answer

Guaranteeing a profit

Answer

Eliminating investment fees

Answer

Timing the market perfectly