FASEA Data Analysis and Interpretation 3

Question 1

An adviser compares two managed funds: Fund A has an annualised return of 11% with a standard deviation of 18%, and Fund B returns 9% with a standard deviation of 10%. The risk-free rate is 3%. Which fund has the superior Sharpe ratio?

Accepted Answer

Fund B, with a Sharpe ratio of 0.60

Answer

Fund A's Sharpe ratio = (11-3)/18 ≈ 0.44; Fund B's = (9-3)/10 = 0.60, so Fund B delivers more return per unit of risk.

Question 2

A client aged 58 has a 20-year retirement projection showing a 90% probability of not running out of funds. The adviser revises assumptions to use actual historical sequence-of-returns data instead of average returns. The probability falls to 74%. What does this reveal?

Accepted Answer

Sequence-of-returns risk is not captured by average return assumptions

Answer

Sequence-of-returns risk—the danger of poor early returns depleting the portfolio—is systematically underestimated by models that use average rather than sequential historical returns.

Question 3

In reviewing a client's insurance needs data, an adviser calculates the human life value (HLV) method yields $1.8M coverage need, while the income replacement method yields $1.2M. Which approach best satisfies FASEA's appropriate advice standard?

Accepted Answer

Explain both methodologies and recommend coverage appropriate to the client's specific circumstances

Answer

FASEA's appropriate advice obligation requires the adviser to explain the basis for recommendations; using both methods as inputs and tailoring to client circumstances demonstrates this duty.

Question 4

A regression analysis of a client's investment portfolio shows an R-squared of 0.85 against the ASX 200 benchmark. What does this most accurately tell the adviser?

Accepted Answer

85% of the portfolio's return variance is explained by movements in the ASX 200

Answer

R-squared measures the proportion of a portfolio's variance explained by the benchmark index, indicating how closely the portfolio tracks the index.

Question 5

When reviewing five years of a client's annual income data ($62k, $68k, $71k, $74k, $210k), which measure of central tendency should an adviser use to best represent the client's typical annual income for budgeting purposes?

Accepted Answer

Median ($71k), as it is resistant to the outlier year

Answer

The median is more representative of typical income when data contains outliers, as the $210k year (possibly from a one-off event) disproportionately inflates the mean.

(FASEA) Financial Adviser Standards and Ethics Authority Practice Test

(FASEA) Financial Adviser Standards and Ethics Authority Practice Test

FASEA Data Analysis and Interpretation 3