Financial Advisor Investment Planning and Portfolio Management 2 — Questions and Answers
Question 1: A bond's duration measures its sensitivity to changes in:
- Credit ratings
- Interest rates (Correct answer)
- Dividend yield
- Inflation expectations
Correct answer: Interest rates
Duration measures the price sensitivity of a bond to changes in interest rates; a longer duration means greater price change for a given rate move.
Question 2: Which type of mutual fund is most suitable for an investor seeking broad exposure to the S&P 500 at the lowest possible cost?
- Actively managed large-cap growth fund
- S&P 500 index fund (Correct answer)
- Sector-specific ETF
- Balanced fund
Correct answer: S&P 500 index fund
An S&P 500 index fund provides broad market exposure with minimal expenses by passively tracking the index.
Question 3: What is the primary purpose of rebalancing a client's investment portfolio?
- To generate trading commissions
- To restore the portfolio to its target asset allocation (Correct answer)
- To shift entirely to lower-risk assets
- To maximize short-term tax losses
Correct answer: To restore the portfolio to its target asset allocation
Rebalancing restores a portfolio to its intended target allocation after market movements cause asset class weights to drift.
Question 4: The efficient market hypothesis (EMH) in its strong form states that:
- Only technical analysis can beat the market
- All public and private information is fully reflected in stock prices (Correct answer)
- Markets are efficient only in the short run
- Only insider trading can generate excess returns
Correct answer: All public and private information is fully reflected in stock prices
The strong form of EMH states that all information—public and private—is already reflected in security prices, making it impossible to consistently earn abnormal returns.
Question 5: An investor in a 32% tax bracket holds a bond yielding 5%. What is the tax-equivalent yield of a municipal bond yielding 3.5%?
- 5.15% (Correct answer)
- 3.5%
- 4.22%
- 6.25%
Correct answer: 5.15%
Tax-equivalent yield = 3.5% / (1 - 0.32) = 3.5% / 0.68 = 5.15%, making the muni bond competitive with the taxable bond.
Question 6: Which investment vehicle provides pass-through taxation, professional management, and invests primarily in real estate?
- REIT (Real Estate Investment Trust) (Correct answer)
- MLP (Master Limited Partnership)
- BDC (Business Development Company)
- Closed-end fund
Correct answer: REIT (Real Estate Investment Trust)
REITs are required to distribute at least 90% of taxable income to shareholders and provide pass-through taxation along with professional real estate management.
Financial Advisor Investment Planning and Portfolio Management 2
A bond's duration measures its sensitivity to changes in: