RFC Investment Analysis & Selection 3

Question 1

A mutual fund that consistently underperforms its benchmark by 0.5% annually, but closely tracks it, MOST likely has a:

Accepted Answer

High expense ratio and low tracking error

Answer

Consistent underperformance by a fixed amount with tight tracking suggests costs (expense ratio) are dragging returns rather than poor security selection.

Question 2

Which portfolio construction technique seeks to minimize variance for a given level of expected return?

Accepted Answer

Modern Portfolio Theory (MPT)

Answer

MPT, developed by Harry Markowitz, identifies portfolios on the efficient frontier that minimize variance for each level of expected return.

Question 3

An investor holds a diversified portfolio with a beta of 1.4. If the market rises 10%, the portfolio is expected to return approximately:

Accepted Answer

14%

Answer

A beta of 1.4 means the portfolio is expected to move 1.4 times the market; 1.4 × 10% = 14% expected return.

Question 4

Which of the following BEST describes a 'closed-end' fund?

Accepted Answer

A fund with a fixed number of shares trading on an exchange

Answer

Closed-end funds issue a fixed number of shares through an IPO, then trade on exchanges at prices that may differ from their NAV.

Question 5

An RFC client wants income with modest capital appreciation. Which asset allocation is MOST appropriate?

Accepted Answer

40% equities / 60% bonds

Answer

A 40/60 equity-to-bond split provides fixed-income income while the equity allocation offers some growth potential, balancing the stated objectives.

(RFC) Registered Financial Consultant Practice Test

(RFC) Registered Financial Consultant Practice Test

RFC Investment Analysis & Selection 3