Investment Management for Trust Accounts Flashcards
6 cards from real CTFA practice questions. Tap to flip, then mark Knew It or Still Learning — missed cards come back until you master them.
Read the first 6 Investment Management for Trust Accounts flashcards as text
Which investment strategy attempts to replicate the performance of a market index at low cost?
Answer: Passive (index) investing
Passive investing uses index funds or ETFs to replicate benchmark indices at minimal cost, based on the premise that markets are largely efficient.
What is the primary fiduciary concern when a trustee uses affiliated investment products in a trust portfolio?
Answer: A potential conflict of interest because the trustee may benefit from higher fees on affiliated products
Using affiliated products creates a conflict of interest because the corporate trustee may earn additional revenue from fund management fees, potentially at the beneficiary's expense.
In trust portfolio management, what is the significance of a trust's time horizon?
Answer: Longer time horizons allow for greater equity exposure because short-term volatility can be weathered over time
A longer investment horizon allows the trust to bear more short-term volatility and invest more heavily in equities with higher expected long-term returns.
What is beta in the context of investment management?
Answer: A measure of a security's or portfolio's volatility relative to the overall market
Beta measures how much a security or portfolio moves relative to the market; a beta of 1.5 means the asset is expected to move 1.5 times as much as the market.
Which risk is specific to an individual company or security and can be eliminated through diversification?
Answer: Unsystematic (idiosyncratic) risk
Unsystematic risk is company-specific risk (e.g., a product recall or management scandal) that can be diversified away by holding a broad portfolio of securities.
What is dollar-cost averaging and what is its primary behavioral benefit for long-term investors?
Answer: Investing fixed dollar amounts at regular intervals, which reduces the average cost per share and removes emotional market-timing decisions
Dollar-cost averaging invests fixed amounts on a schedule regardless of price, automatically buying more shares when prices fall and fewer when prices rise.