CFC Investment Planning 2 — Questions and Answers
Question 1: A CFC client wants income with low credit risk. Which bond type is most appropriate?
- High-yield corporate bonds
- U.S. Treasury bonds (Correct answer)
- Convertible bonds
- Revenue municipal bonds
Correct answer: U.S. Treasury bonds
U.S. Treasury bonds carry the full faith and credit of the federal government, making them the lowest credit-risk fixed-income option.
Question 2: The price-to-earnings (P/E) ratio is most useful for comparing companies within the same:
- Country
- Industry (Correct answer)
- Asset class
- Time period
Correct answer: Industry
P/E ratios are most meaningful when comparing companies in the same industry because growth rates and capital structures differ across sectors.
Question 3: Which investment vehicle allows a CFC client to gain diversified exposure to real estate without directly owning property?
- Real Estate Investment Trust (REIT) (Correct answer)
- Exchange-traded fund tracking gold
- Variable annuity
- Covered call strategy
Correct answer: Real Estate Investment Trust (REIT)
REITs are publicly traded companies that own income-producing real estate and must distribute at least 90% of taxable income to shareholders.
Question 4: Dollar-cost averaging benefits investors primarily by:
- Guaranteeing positive returns over time
- Reducing the average cost per share when prices fluctuate (Correct answer)
- Eliminating all market risk
- Maximizing returns in bull markets
Correct answer: Reducing the average cost per share when prices fluctuate
By investing fixed amounts regularly, investors automatically buy more shares when prices are low and fewer when high, lowering the average cost per share.
Question 5: Which measure best captures the total variability of returns around the mean for a portfolio?
- Beta
- Standard deviation (Correct answer)
- Alpha
- Treynor ratio
Correct answer: Standard deviation
Standard deviation quantifies total risk by measuring how widely returns are dispersed around their average, capturing both systematic and unsystematic risk.
Question 6: An investor who sells a security and immediately repurchases a substantially identical one to claim a tax loss may trigger:
- Capital gain
- Wash-sale rule (Correct answer)
- Alternative minimum tax
- Step-up in basis
Correct answer: Wash-sale rule
The IRS wash-sale rule disallows a capital loss deduction if a substantially identical security is purchased within 30 days before or after the sale.
CFC Investment Planning 2
A CFC client wants income with low credit risk.
Which bond type is most appropriate?