PFS Investment Planning 3

Question 1

Which of the following best describes the efficient frontier in modern portfolio theory?

Accepted Answer

Portfolios with the highest return for any given level of risk

Answer

The efficient frontier represents the set of optimal portfolios that offer the highest expected return for a defined level of risk.

Question 2

A client's IPS specifies a maximum portfolio standard deviation of 12%. A proposed portfolio has an expected return of 9% and standard deviation of 14%. What should the advisor do?

Accepted Answer

Reject it because it violates the IPS risk constraint

Answer

The proposed portfolio violates the client's stated maximum risk tolerance of 12% standard deviation and must be rejected as written.

Question 3

What is the primary advantage of using exchange-traded funds (ETFs) over mutual funds for taxable accounts?

Accepted Answer

ETFs are generally more tax-efficient due to in-kind redemption mechanism

Answer

ETF in-kind redemptions allow the fund to avoid realizing capital gains that would otherwise be distributed to shareholders.

Question 4

A retiree relies on portfolio income. Which sequence of returns scenario is MOST damaging?

Accepted Answer

Weak early returns followed by strong later returns

Answer

Poor returns early in retirement, combined with ongoing withdrawals, permanently deplete capital before markets recover—this is sequence-of-returns risk.

Question 5

When comparing two portfolios with the same Sharpe ratio, the Treynor ratio will differ if:

Accepted Answer

They have different betas

Answer

The Treynor ratio uses beta (systematic risk) in the denominator instead of standard deviation, so portfolios with the same Sharpe but different betas will have different Treynor ratios.

(PFS) Personal Financial Specialist Practice Test

(PFS) Personal Financial Specialist Practice Test

PFS Investment Planning 3