CFP Investment Planning & Portfolio Management

Question 1

What does 'standard deviation' measure in portfolio analysis?

Accepted Answer

The total risk of a portfolio, measuring the dispersion of returns around the mean

Answer

Standard deviation measures total risk by quantifying how widely a portfolio's returns are dispersed around its average return.

Question 2

According to Modern Portfolio Theory (MPT), what is the primary benefit of diversification?

Accepted Answer

It reduces portfolio risk without necessarily sacrificing expected return by combining assets with low correlations

Answer

MPT demonstrates that combining assets with low or negative correlations can reduce portfolio risk (standard deviation) while maintaining expected return levels.

Question 3

What does the Sharpe Ratio measure?

Accepted Answer

The risk-adjusted return of a portfolio, calculated as excess return per unit of total risk

Answer

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

Question 4

What is 'beta' in the context of portfolio management?

Accepted Answer

A measure of systematic risk that indicates how sensitive an investment is to market movements

Answer

Beta measures an investment's sensitivity to market movements; a beta of 1.0 means the investment moves in line with the market, while >1.0 indicates higher volatility.

Question 5

Which of the following best describes dollar-cost averaging (DCA)?

Accepted Answer

Investing a fixed dollar amount at regular intervals regardless of market price

Answer

Dollar-cost averaging involves investing a consistent dollar amount at regular intervals, automatically buying more shares when prices are low and fewer when prices are high.

CFP - Certified Financial Planner Practice Test

CFP - Certified Financial Planner Practice Test

CFP Investment Planning & Portfolio Management