CTFA Investment Management for Trust Accounts 2

Question 1

Which investment strategy attempts to replicate the performance of a market index at low cost?

Accepted Answer

Passive (index) investing

Answer

Active management

Answer

Tactical asset allocation

Answer

Absolute return investing

Question 2

What is the primary fiduciary concern when a trustee uses affiliated investment products in a trust portfolio?

Accepted Answer

A potential conflict of interest because the trustee may benefit from higher fees on affiliated products

Answer

Diversification risk from concentrating assets in one fund family

Answer

Violation of the trust's asset allocation policy

Answer

Failure to meet the minimum investment minimums required by trust law

Question 3

In trust portfolio management, what is the significance of a trust's time horizon?

Accepted Answer

Longer time horizons allow for greater equity exposure because short-term volatility can be weathered over time

Answer

Longer time horizons require more conservative allocations to preserve principal

Answer

Time horizon is irrelevant because trust distributions must be paid regardless of market conditions

Answer

Shorter time horizons allow the trustee to take more risk because recovery is expected soon

Question 4

What is beta in the context of investment management?

Accepted Answer

A measure of a security's or portfolio's volatility relative to the overall market

Answer

The excess return earned above the risk-free rate

Answer

The standard deviation of a portfolio's monthly returns

Answer

The correlation coefficient between two asset classes

Question 5

Which risk is specific to an individual company or security and can be eliminated through diversification?

Accepted Answer

Unsystematic (idiosyncratic) risk

Answer

Systematic (market) risk

Answer

Interest rate risk

Answer

Inflation risk

Question 6

What is dollar-cost averaging and what is its primary behavioral benefit for long-term investors?

Accepted Answer

Investing fixed dollar amounts at regular intervals, which reduces the average cost per share and removes emotional market-timing decisions

Answer

Investing a lump sum immediately to maximize exposure to market gains

Answer

Shifting to cash equivalents during volatile markets to preserve principal

Answer

Buying only when the market drops by a set percentage to time the market