Financial Advisor Investment Planning and Portfolio Management 5

Question 1

A client in the 37% marginal tax bracket earns 6% on a taxable bond. What after-tax yield must a municipal bond offer to be equivalent?

Accepted Answer

3.78%

Answer

Tax-equivalent yield = taxable yield × (1 − tax rate) = 6% × (1 − 0.37) = 3.78%.

Question 2

Which portfolio construction concept holds that adding an asset with low correlation to an existing portfolio can reduce overall portfolio risk without sacrificing expected return?

Accepted Answer

Diversification benefit

Answer

The diversification benefit arises when assets with low or negative correlations are combined, reducing total portfolio variance.

Question 3

An advisor recommends shifting a client's equity allocation from 70% to 50% because of near-term recession concerns. This is an example of:

Accepted Answer

Tactical asset allocation

Answer

Tactical asset allocation involves short-term, active deviations from the long-term strategic target based on market outlook.

Question 4

What does a portfolio's R-squared (R²) statistic tell a financial advisor?

Accepted Answer

The percentage of portfolio variance explained by movements in its benchmark

Answer

R² measures how closely a portfolio's performance tracks its benchmark, ranging from 0 (no correlation) to 100 (perfect correlation).

Question 5

A 35-year-old client with a high risk tolerance and 30-year time horizon asks for a portfolio. Which allocation is MOST suitable?

Accepted Answer

80% equities / 20% bonds

Answer

A long time horizon and high risk tolerance support a growth-oriented allocation heavily weighted toward equities.

Financial Advisor Practice Test

Financial Advisor Practice Test

Financial Advisor Investment Planning and Portfolio Management 5