CPC Financial Planning & Investment Strategies 3

Question 1

A pension consultant recommends rebalancing a portfolio from 65/35 equity/bond back to target weights after a strong equity rally. This practice primarily manages:

Accepted Answer

Drift risk and unintended asset allocation exposure

Answer

Rebalancing corrects drift from target allocations caused by differential asset class returns, preventing unintended concentration risk.

Question 2

The Sharpe ratio measures a portfolio's excess return per unit of:

Accepted Answer

Total risk (standard deviation)

Answer

The Sharpe ratio equals (portfolio return − risk-free rate) ÷ portfolio standard deviation, rewarding returns per unit of total volatility.

Question 3

Which type of investment manager benchmark is MOST appropriate for evaluating a passive index fund?

Accepted Answer

The exact index the fund replicates

Answer

Passive index funds should be evaluated against the specific index they track, as their goal is to replicate — not beat — that index.

Question 4

Under ERISA Section 404(c), plan fiduciaries are relieved of liability for participant investment losses when:

Accepted Answer

The plan offers at least three diversified investment options and participants exercise independent control

Answer

ERISA 404(c) relief applies when the plan offers a broad range of investment alternatives (at least three diversified options) and participants exercise control over their accounts.

Question 5

A pension plan holds alternative investments including private equity and hedge funds primarily to achieve:

Accepted Answer

Enhanced returns and diversification through low correlation with public markets

Answer

Alternatives offer return premiums (illiquidity premium) and low correlations to public equity and bonds, improving portfolio efficiency.

(CPC) Certified Pension Consultant Practice Test

(CPC) Certified Pension Consultant Practice Test

CPC Financial Planning & Investment Strategies 3