Investment Jobs Investment Strategy Test 2 — Questions and Answers
Question 1: A client nearing retirement wants to reduce portfolio volatility. Which asset allocation shift best fits this goal?
- Increase allocation to small-cap growth stocks
- Shift more into investment-grade bonds and cash (Correct answer)
- Concentrate holdings in a single high-dividend sector
- Add leveraged equity ETFs
Correct answer: Shift more into investment-grade bonds and cash
Investment-grade bonds and cash reduce volatility and preserve capital for investors near retirement.
Question 2: What is the primary purpose of rebalancing a portfolio?
- To maximize trading commissions
- To restore the target asset allocation after market drift (Correct answer)
- To eliminate all investment risk
- To time market tops and bottoms
Correct answer: To restore the target asset allocation after market drift
Rebalancing brings a portfolio back to its intended allocation after price changes shift the weights.
Question 3: Dollar-cost averaging primarily helps an investor by:
- Guaranteeing a profit
- Reducing the impact of market timing through regular fixed investments (Correct answer)
- Eliminating fees entirely
- Increasing leverage automatically
Correct answer: Reducing the impact of market timing through regular fixed investments
Investing a fixed amount regularly smooths out the average purchase price over time.
Question 4: Which strategy seeks to outperform a benchmark index through security selection?
- Passive indexing
- Active management (Correct answer)
- Buy-and-hold of an index fund
- Pure cash holding
Correct answer: Active management
Active management uses research and selection to try to beat a benchmark.
Question 5: A diversified portfolio reduces which type of risk most effectively?
- Systematic (market) risk
- Unsystematic (company-specific) risk (Correct answer)
- Interest rate risk on all bonds
- Inflation risk entirely
Correct answer: Unsystematic (company-specific) risk
Diversification spreads exposure so company-specific shocks have limited portfolio impact.
Question 6: What does a higher Sharpe ratio indicate about an investment?
- Higher fees
- Better risk-adjusted return (Correct answer)
- Greater leverage used
- Lower liquidity
Correct answer: Better risk-adjusted return
The Sharpe ratio measures excess return per unit of risk, so higher is better.
Question 7: A value investing strategy typically targets:
- Stocks trading below their intrinsic value (Correct answer)
- Only the fastest-growing tech firms
- Securities with the highest momentum
- Companies with no earnings history
Correct answer: Stocks trading below their intrinsic value
Value investing seeks undervalued securities priced below estimated intrinsic worth.
Investment Jobs Investment Strategy Test 2
A client nearing retirement wants to reduce portfolio volatility.
Which asset allocation shift best fits this goal?