Financial Advisor Investment Planning and Portfolio Management

Question 1

Which investment theory states that rational investors should hold efficient portfolios that maximize return for a given level of risk?

Accepted Answer

Modern Portfolio Theory (MPT)

Answer

Modern Portfolio Theory, developed by Harry Markowitz, holds that investors can construct efficient portfolios maximizing expected return for a given level of risk through diversification.

Question 2

In the Capital Asset Pricing Model (CAPM), what does a beta of 1.5 indicate about a security?

Accepted Answer

It moves 1.5 times the market's movements in the same direction

Answer

A beta of 1.5 means the security is expected to move 1.5 times as much as the benchmark market index, indicating higher systematic risk.

Question 3

Which asset allocation strategy automatically rebalances a portfolio to maintain a constant stock-to-bond ratio?

Accepted Answer

Strategic asset allocation

Answer

Strategic asset allocation sets long-term target weights and rebalances periodically to maintain that constant mix regardless of market conditions.

Question 4

What is the Sharpe ratio used to measure in portfolio analysis?

Accepted Answer

Risk-adjusted return per unit of total risk

Answer

The Sharpe ratio measures risk-adjusted performance by dividing excess return (above the risk-free rate) by the portfolio's standard deviation.

Question 5

Dollar-cost averaging is best described as:

Accepted Answer

Investing equal dollar amounts at regular intervals regardless of price

Answer

Dollar-cost averaging involves investing a fixed dollar amount at regular intervals, resulting in purchasing more shares when prices are low and fewer when prices are high.

Financial Advisor Practice Test

Financial Advisor Practice Test

Financial Advisor Investment Planning and Portfolio Management