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

DCF estimates intrinsic value by discounting projected cash flows at an appropriate rate.

Question 2

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

Accepted Answer

Avoiding probate on transferred assets

Answer

Assets held in a revocable trust pass to beneficiaries without going through probate.

Question 3

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

Accepted Answer

Fall

Answer

Bond prices move inversely to interest rates, so rising rates push existing bond prices down.

Question 4

What does the Sharpe ratio measure?

Accepted Answer

Risk-adjusted return per unit of total risk

Answer

The Sharpe ratio divides excess return by standard deviation to gauge return earned per unit of risk.

Question 5

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

Accepted Answer

Roth IRA

Answer

Roth IRA contributions are made after tax, so qualified withdrawals of contributions and earnings are tax-free.

American Academy of Financial Management (AAFM) Practice Test