CTFA Investment Management for Trust Accounts 1

Question 1

Which asset allocation concept involves periodically restoring a portfolio to its target allocation after market movements have caused drift?

Accepted Answer

Rebalancing

Answer

Rebalancing restores a portfolio to its intended asset allocation by selling overweighted assets and buying underweighted ones after market changes cause drift.

Question 2

What does the Sharpe ratio measure in portfolio analysis?

Accepted Answer

Risk-adjusted return expressed as excess return per unit of total risk (standard deviation)

Answer

The Sharpe ratio measures how much excess return (above the risk-free rate) an investor earns per unit of total portfolio risk, expressed as standard deviation.

Question 3

Under modern portfolio theory, which concept describes the set of optimal portfolios offering the highest expected return for each level of risk?

Accepted Answer

The efficient frontier

Answer

The efficient frontier represents all portfolios that maximize expected return for a given level of risk or minimize risk for a given expected return.

Question 4

What is the primary purpose of including alternative investments such as real estate or commodities in a trust portfolio?

Accepted Answer

To reduce overall portfolio volatility through diversification and low correlation with stocks and bonds

Answer

Alternatives often have low or negative correlations with traditional assets, reducing overall portfolio volatility through diversification benefits.

Question 5

Which fixed-income measure describes the sensitivity of a bond's price to changes in interest rates?

Accepted Answer

Duration

Answer

Duration measures the approximate percentage change in a bond's price for a 1% change in interest rates—longer duration means greater interest rate sensitivity.

CTFA - Certified Trust and Fiduciary Advisor Practice Test

CTFA - Certified Trust and Fiduciary Advisor Practice Test

CTFA Investment Management for Trust Accounts 1