CFP Investment Planning & Portfolio Management 3

Question 1

What is the purpose of an Investment Policy Statement (IPS) in financial planning?

Accepted Answer

To document the client's goals, risk tolerance, time horizon, constraints, and guidelines to govern portfolio management decisions

Answer

To legally bind the client to a specific investment strategy for at least 10 years

Answer

To satisfy IRS requirements for qualified retirement plan management

Answer

To disclose all advisor fees and conflicts of interest to the client

Question 2

Which of the following best describes the risk tolerance assessment process for a new CFP client?

Accepted Answer

Evaluating both the client's ability to take risk (financial capacity) and willingness to take risk (psychological tolerance)

Answer

Assigning an investment portfolio based solely on the client's age

Answer

Using the client's income level as the sole determinant of portfolio risk

Answer

Defaulting to a 60/40 stock/bond portfolio unless the client specifically objects

Question 3

What is a 'liability-matching' investment strategy often used in retirement income planning?

Accepted Answer

Structuring a portfolio so that asset cash flows match the timing and amount of anticipated future liabilities or spending needs

Answer

Investing in assets whose returns correlate with stock market performance

Answer

Balancing the equity and fixed income portions of a portfolio equally

Answer

Selecting bonds issued by the same company as the client's employer

Question 4

What is sequence-of-returns risk, and when is it most dangerous for investors?

Accepted Answer

The risk that poor investment returns early in retirement, combined with withdrawals, can permanently deplete a portfolio; most dangerous in early retirement years

Answer

The risk that inflation will erode purchasing power; most dangerous in the accumulation phase

Answer

The risk of picking the wrong sequence of investments; most dangerous during market corrections

Answer

The risk of poor returns in any single year; equally dangerous throughout retirement

Question 5

What does the term 'alpha' represent in investment management?

Accepted Answer

The excess return of an investment above what would be predicted by its level of systematic risk (beta)

Answer

The expected return of a portfolio based on its beta

Answer

The percentage of a portfolio allocated to alternative investments

Answer

The first-year return of a newly launched investment fund

Question 6

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?

Accepted Answer

Fiduciary standard

Answer

Suitability standard

Answer

Prudent investor rule

Answer

Best execution standard