CFC Investment Planning 3

Question 1

Which option strategy provides income while capping upside potential on a stock already owned?

Accepted Answer

Covered call

Answer

A covered call involves selling a call option on stock the investor already owns, generating premium income in exchange for capping upside gains.

Question 2

A CFC is evaluating a mutual fund's performance using the Treynor ratio. The denominator used is:

Accepted Answer

Beta

Answer

The Treynor ratio measures excess return per unit of systematic risk (beta), unlike the Sharpe ratio which uses standard deviation.

Question 3

Which portfolio construction approach assigns weights to asset classes based on their market capitalizations?

Accepted Answer

Market-cap-weighted (passive) allocation

Answer

Market-cap weighting, the basis of most index funds, allocates proportionally to each security's share of total market value.

Question 4

In a rising interest rate environment, which bond characteristic minimizes price decline?

Accepted Answer

Short duration and high coupon

Answer

Short duration reduces price sensitivity to rate changes, and high coupons return principal faster, further limiting duration and price risk.

Question 5

The Capital Asset Pricing Model (CAPM) calculates expected return using which inputs?

Accepted Answer

Risk-free rate, market risk premium, and beta

Answer

CAPM states that expected return equals the risk-free rate plus beta multiplied by the market risk premium.

CFC - Certified Financial Consultant Practice Test