Investment Advisor Client Suitability and Portfolio Management 2

Question 1

Which asset allocation approach involves periodically resetting a portfolio to its original target weights?

Accepted Answer

Rebalancing

Answer

Rebalancing involves periodically buying and selling assets to restore the portfolio to its target allocation after market movements have shifted the weights.

Question 2

A client with a high risk tolerance and a 30-year time horizon is generally most appropriate for a portfolio weighted toward:

Accepted Answer

Equities with a small fixed income allocation

Answer

Long time horizons and high risk tolerance support heavier equity allocations, as equity markets tend to outperform fixed income over long periods despite short-term volatility.

Question 3

The Sharpe Ratio measures:

Accepted Answer

Excess return per unit of total risk

Answer

The Sharpe Ratio calculates a portfolio's excess return above the risk-free rate per unit of standard deviation, measuring risk-adjusted performance.

Question 4

A client who panics and sells investments during market downturns is exhibiting which behavioral bias?

Accepted Answer

Loss aversion

Answer

Loss aversion, a core concept in behavioral finance, describes the tendency for people to feel the pain of losses more intensely than equivalent gains, driving panic selling.

Question 5

In a client needs analysis, 'liquidity needs' refer to:

Accepted Answer

The need for readily accessible funds to cover short-term obligations

Answer

Liquidity needs represent how much of the client's portfolio must be readily accessible for near-term spending, emergencies, or obligations.

Investment Advisor Practice Test

Investment Advisor Practice Test

Investment Advisor Client Suitability and Portfolio Management 2