CFP Investment Strategies 2 — Questions and Answers
Question 1: A fintech robo-advisor uses factor-based investing. Which factor is most associated with generating excess returns through 'value' exposure?
- Low price-to-book ratio stocks (Correct answer)
- High momentum stocks
- Small-cap growth stocks
- Low volatility dividend stocks
Correct answer: Low price-to-book ratio stocks
Value factor investing targets stocks trading at low price-to-book ratios, which historically have generated excess returns over growth stocks.
Question 2: An investor uses a fintech platform to implement a 'smart beta' ETF strategy. What distinguishes smart beta from traditional market-cap-weighted indexing?
- It weights holdings by factors like volatility, dividends, or momentum rather than market cap (Correct answer)
- It uses AI to select individual stocks for maximum alpha
- It exclusively invests in small-cap companies
- It rebalances daily to maintain equal weights
Correct answer: It weights holdings by factors like volatility, dividends, or momentum rather than market cap
Smart beta ETFs use alternative weighting schemes based on factors like low volatility, dividends, or momentum instead of traditional market-cap weighting.
Question 3: A CFP practitioner recommends dollar-cost averaging (DCA) via an automated fintech platform. What is the primary behavioral finance benefit of DCA?
- It removes emotional decision-making by automating purchases regardless of market conditions (Correct answer)
- It guarantees a lower average cost than lump-sum investing
- It maximizes returns during bull markets
- It eliminates all investment risk over time
Correct answer: It removes emotional decision-making by automating purchases regardless of market conditions
DCA's primary behavioral benefit is removing emotional bias by automating regular investments, preventing panic selling or euphoric buying.
Question 4: A fintech investment platform offers 'direct indexing.' What key advantage does direct indexing offer over ETFs for high-net-worth investors?
- Tax-loss harvesting at the individual security level (Correct answer)
- Lower expense ratios than all ETFs
- Access to private equity investments
- Guaranteed index outperformance
Correct answer: Tax-loss harvesting at the individual security level
Direct indexing allows investors to own individual securities directly, enabling tax-loss harvesting on specific positions unavailable in pooled ETFs.
Question 5: Which portfolio rebalancing trigger is most commonly used by automated fintech investment platforms?
- Threshold-based rebalancing when asset allocation drifts beyond a set percentage (Correct answer)
- Annual calendar rebalancing only
- Rebalancing only during market downturns
- Monthly rebalancing regardless of drift
Correct answer: Threshold-based rebalancing when asset allocation drifts beyond a set percentage
Threshold-based rebalancing triggers trades only when allocations drift beyond a preset band (e.g., ±5%), optimizing tax efficiency versus calendar methods.
Question 6: A fintech platform offers cryptocurrency as an asset class for portfolio diversification. What is a key risk unique to crypto that differs from traditional equities?
- Regulatory uncertainty and lack of FDIC/SIPC protection (Correct answer)
- Inability to sell 24/7
- Guaranteed correlation with equity markets
- No volatility compared to stocks
Correct answer: Regulatory uncertainty and lack of FDIC/SIPC protection
Cryptocurrency carries unique regulatory uncertainty and lacks FDIC/SIPC investor protections that govern traditional securities accounts.
Question 7: An investor's fintech portfolio uses 'lifecycle investing' (target-date approach). How does asset allocation typically shift as the target date approaches?
- Gradually reduces equity exposure and increases fixed-income and cash equivalents (Correct answer)
- Increases equity exposure to maximize final returns
- Maintains a fixed 60/40 stock-bond ratio throughout
- Shifts entirely to commodities 10 years before target
Correct answer: Gradually reduces equity exposure and increases fixed-income and cash equivalents
Target-date funds follow a 'glide path' that progressively reduces equity risk and increases bonds/cash as the investor approaches their target retirement date.
CFP Investment Strategies 2
A fintech robo-advisor uses factor-based investing.
Which factor is most associated with generating excess returns through 'value' exposure?