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

Passive investing uses index funds or ETFs to replicate benchmark indices at minimal cost, based on the premise that markets are largely efficient.

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

Using affiliated products creates a conflict of interest because the corporate trustee may earn additional revenue from fund management fees, potentially at the beneficiary's expense.

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

A longer investment horizon allows the trust to bear more short-term volatility and invest more heavily in equities with higher expected long-term returns.

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

Beta measures how much a security or portfolio moves relative to the market; a beta of 1.5 means the asset is expected to move 1.5 times as much as the market.

Question 5

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

Accepted Answer

Unsystematic (idiosyncratic) risk

Answer

Unsystematic risk is company-specific risk (e.g., a product recall or management scandal) that can be diversified away by holding a broad portfolio of securities.

CTFA - Certified Trust and Fiduciary Advisor Practice Test

CTFA - Certified Trust and Fiduciary Advisor Practice Test

CTFA Investment Management for Trust Accounts 2