Practice Test GeeksCFP - Certified Financial Planner Practice Test
← All CFP Flashcard Decks

Investment Planning & Portfolio Management Flashcards

6 cards from real CFP 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 & Portfolio Management flashcards as text

  1. What is asset allocation, and why is it considered the most important decision in portfolio construction?

    Answer: Dividing investments among asset classes such as stocks, bonds, and cash; research shows it explains the majority of long-term portfolio return variability

    Asset allocation is the strategic division of investments among broad asset classes, and studies (Brinson et al.) show it explains over 90% of the variability in long-term portfolio returns.

  2. What is rebalancing a portfolio and what is its primary purpose?

    Answer: Restoring a portfolio to its target asset allocation after market movements have caused drift

    Rebalancing involves selling assets that have grown above target weights and buying assets that have fallen below target weights to restore the intended risk profile.

  3. Which bond characteristic measures the price sensitivity of a bond to changes in interest rates?

    Answer: Duration

    Duration measures the sensitivity of a bond's price to changes in interest rates; a higher duration means greater price volatility for a given interest rate change.

  4. What is the difference between systematic risk and unsystematic risk?

    Answer: Systematic risk is market-wide risk that cannot be diversified away; unsystematic risk is company or industry-specific risk that can be reduced through diversification

    Systematic (market) risk affects the entire market and cannot be diversified away, while unsystematic (specific) risk relates to individual securities and can be reduced through diversification.

  5. Which investment vehicle offers built-in diversification and allows investors to buy or sell shares throughout the trading day at market prices?

    Answer: Exchange-Traded Fund (ETF)

    ETFs trade on exchanges throughout the day at market prices (like stocks) while providing exposure to a diversified basket of securities, combining features of mutual funds and individual stocks.

  6. According to the Capital Asset Pricing Model (CAPM), what is the expected return of an investment?

    Answer: Risk-free rate plus the product of beta and the equity risk premium

    CAPM: Expected Return = Risk-Free Rate + Beta × (Market Return − Risk-Free Rate), where the second term represents compensation for systematic risk.