Financial Advisor Investment Planning and Portfolio Management 4

Question 1

A client's portfolio has a beta of 1.4. If the market rises 10%, what is the expected portfolio return according to the Capital Asset Pricing Model (CAPM)?

Accepted Answer

14%

Answer

Beta of 1.4 means the portfolio is expected to move 1.4x the market, so a 10% market gain yields an expected 14% portfolio return.

Question 2

Which rebalancing strategy triggers a portfolio adjustment only when an asset class drifts beyond a defined percentage threshold?

Accepted Answer

Threshold (percentage-of-portfolio) rebalancing

Answer

Threshold rebalancing triggers trades when an allocation deviates beyond a preset band (e.g., ±5%), rather than on a fixed schedule.

Question 3

An investor buys a stock at $50, sells a call option on it for $3, and sets a limit sell at $55. This strategy is best described as a:

Accepted Answer

Covered call

Answer

Selling a call against an existing stock position is a covered call, which generates premium income while capping upside.

Question 4

The Sharpe ratio of Portfolio A is 0.9 and Portfolio B is 0.6. What does this indicate?

Accepted Answer

Portfolio A provides more return per unit of total risk

Answer

The Sharpe ratio measures excess return per unit of total risk (standard deviation), so Portfolio A delivers better risk-adjusted performance.

Question 5

A 60/40 equity/bond portfolio drifts to 70/30 after a strong equity rally. Selling equities to restore the 60/40 target is an example of:

Accepted Answer

Strategic rebalancing

Answer

Selling outperforming assets to restore the original target allocation is strategic (or systematic) rebalancing.

Financial Advisor Practice Test

Financial Advisor Practice Test

Financial Advisor Investment Planning and Portfolio Management 4