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
What is the purpose of an Investment Policy Statement (IPS) in financial planning?
Answer: To document the client's goals, risk tolerance, time horizon, constraints, and guidelines to govern portfolio management decisions
An IPS provides a written framework that guides investment decisions by documenting the client's objectives, risk tolerance, liquidity needs, and investment constraints.
Which of the following best describes the risk tolerance assessment process for a new CFP client?
Answer: Evaluating both the client's ability to take risk (financial capacity) and willingness to take risk (psychological tolerance)
Proper risk assessment requires evaluating both risk capacity (financial ability to absorb losses) and risk tolerance (psychological comfort with volatility), which may differ significantly.
What is a 'liability-matching' investment strategy often used in retirement income planning?
Answer: Structuring a portfolio so that asset cash flows match the timing and amount of anticipated future liabilities or spending needs
Liability-matching (or asset-liability management) aligns investment maturities and cash flows with future spending needs, ensuring funds are available when required.
What is sequence-of-returns risk, and when is it most dangerous for investors?
Answer: The risk that poor investment returns early in retirement, combined with withdrawals, can permanently deplete a portfolio; most dangerous in early retirement years
Sequence-of-returns risk is greatest in early retirement because large withdrawals during a market downturn lock in losses, leaving less capital to benefit from subsequent recoveries.
What does the term 'alpha' represent in investment management?
Answer: The excess return of an investment above what would be predicted by its level of systematic risk (beta)
Alpha represents the value an active manager adds (or subtracts) above the return that would be expected given the portfolio's systematic risk exposure.
Which fiduciary standard requires a financial advisor to act in the best interest of the client at all times, putting the client's interests ahead of their own?
Answer: Fiduciary standard
The fiduciary standard requires advisors to always act in the client's best interest, disclose conflicts of interest, and avoid placing personal gain above client welfare.