CPA Investment Strategies 3 — Questions and Answers
Question 1: Which fixed-income strategy seeks to minimize exposure to interest rate risk by matching asset duration to liability duration?
- Immunization (Correct answer)
- Barbell strategy
- Laddering
- Bullet strategy
Correct answer: Immunization
Immunization matches the duration of assets to liabilities so that interest rate changes affect both sides equally, protecting the funding ratio.
Question 2: In a barbell bond strategy, an investor allocates capital to:
- Medium-duration bonds only
- Short- and long-duration bonds with nothing in between (Correct answer)
- Bonds maturing in equal intervals across all maturities
- Investment-grade and junk bonds in equal measure
Correct answer: Short- and long-duration bonds with nothing in between
A barbell strategy concentrates holdings at short and long maturities, combining liquidity with higher yield while avoiding intermediate terms.
Question 3: Which of the following is a characteristic of an efficient market, according to the Efficient Market Hypothesis (EMH)?
- Prices consistently lag new information by 30 days
- Technical analysis reliably generates abnormal returns
- Current prices fully reflect all available information (Correct answer)
- Insider trading produces consistent above-market returns
Correct answer: Current prices fully reflect all available information
The EMH states that asset prices fully and instantly reflect all available information, making consistent abnormal returns impossible.
Question 4: An investor holds a long position in crude oil futures to profit from anticipated price increases. This is an example of:
- Hedging to reduce commodity price risk
- Arbitrage exploiting mispricing
- Speculation taking on price risk for potential gain (Correct answer)
- Portfolio immunization against inflation
Correct answer: Speculation taking on price risk for potential gain
Speculation involves deliberately accepting price risk in futures without an offsetting physical commodity position, aiming to profit from price movements.
Question 5: A CPA client asks about investing in REITs. Which tax feature is most relevant?
- Dividends are always tax-free at the federal level
- REITs must distribute at least 90% of taxable income as dividends (Correct answer)
- Capital gains from REIT sales are taxed at ordinary income rates
- REITs receive a 20% deduction on all rental income
Correct answer: REITs must distribute at least 90% of taxable income as dividends
To qualify as a REIT, a company must distribute at least 90% of its taxable income to shareholders annually, enabling pass-through tax treatment.
Question 6: Which investment metric indicates how much return a portfolio generates per unit of systematic risk taken?
- Sharpe ratio
- Treynor ratio (Correct answer)
- Jensen's alpha
- Information ratio
Correct answer: Treynor ratio
The Treynor ratio = (Portfolio Return − Risk-Free Rate) / Beta, measuring excess return per unit of systematic (market) risk.
Question 7: Which of the following best describes 'sector rotation' as an investment strategy?
- Rebalancing a portfolio back to target weights quarterly
- Shifting capital between economic sectors based on business cycle phases (Correct answer)
- Buying all sectors equally to achieve broad diversification
- Investing in cyclical stocks regardless of economic conditions
Correct answer: Shifting capital between economic sectors based on business cycle phases
Sector rotation moves capital into sectors expected to outperform during specific phases of the economic cycle (e.g., defensive sectors during recessions).
CPA Investment Strategies 3
Which fixed-income strategy seeks to minimize exposure to interest rate risk by matching asset duration to liability duration?