CPC Financial Planning & Investment Strategies 2

Question 1

Under the prudent investor rule, which factor is MOST critical when constructing a pension portfolio?

Accepted Answer

Diversification to reduce unsystematic risk

Answer

The prudent investor rule requires fiduciaries to diversify investments to minimize unsystematic risk unless there is good reason not to.

Question 2

A defined benefit plan's funded status deteriorates because liability growth outpaces asset returns. Which strategy BEST addresses this asset-liability mismatch?

Accepted Answer

Implement a liability-driven investment (LDI) strategy using long-duration bonds

Answer

LDI aligns asset duration with pension liability duration, reducing funded-status volatility when interest rates change.

Question 3

Which metric measures the sensitivity of a bond's price to a 1% change in interest rates?

Accepted Answer

Modified duration

Answer

Modified duration approximates the percentage price change of a bond for a 1% (100 basis point) change in yield.

Question 4

A plan sponsor wants to reduce equity volatility while maintaining upside participation. Which overlay strategy is MOST appropriate?

Accepted Answer

Buying put options on a broad equity index

Answer

Buying put options provides downside protection (a floor) while preserving all upside beyond the option premium cost.

Question 5

In a glide path design for a target-date fund, equity allocation typically:

Accepted Answer

Decreases as the target date approaches

Answer

Glide paths reduce equity exposure over time as participants near retirement to decrease the impact of sequence-of-returns risk.

(CPC) Certified Pension Consultant Practice Test

(CPC) Certified Pension Consultant Practice Test

CPC Financial Planning & Investment Strategies 2