Investment Planning Flashcards
6 cards from real CFC 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 Planning flashcards as text
Which investment metric measures the percentage of a portfolio's return attributable to the manager's active decisions rather than market movements?
Answer: Alpha
Alpha measures the excess return generated by a portfolio manager above the benchmark, reflecting active management skill.
A CFC recommends a bond with a duration of 8 years when interest rates are expected to rise 1%. Approximately how much will the bond's price change?
Answer: -8%
Duration predicts that for each 1% rise in interest rates, the bond price will fall approximately by the duration percentage.
Which asset allocation strategy automatically rebalances by selling outperforming assets and buying underperforming ones?
Answer: Constant-mix strategy
The constant-mix strategy maintains fixed target weights by selling winners and buying losers as markets move.
Under Modern Portfolio Theory, the efficient frontier represents portfolios that offer:
Answer: Minimum risk for a given expected return or maximum return for a given risk
The efficient frontier plots portfolios that are optimal — delivering the highest return for each level of risk or the lowest risk for each return target.
A client's portfolio has a Sharpe ratio of 1.2. This indicates:
Answer: The portfolio earned 1.2 units of excess return per unit of total risk
The Sharpe ratio measures risk-adjusted return as excess return over the risk-free rate divided by standard deviation.
Which type of risk cannot be eliminated through diversification in a well-constructed portfolio?
Answer: Systematic (market) risk
Systematic risk, driven by macroeconomic factors affecting all assets, cannot be diversified away unlike unsystematic, company-specific risk.