CFP Investment Planning & Portfolio Management 2

Question 1

What is asset allocation, and why is it considered the most important decision in portfolio construction?

Accepted Answer

Dividing investments among asset classes such as stocks, bonds, and cash; research shows it explains the majority of long-term portfolio return variability

Answer

Selecting individual securities; it determines specific return outcomes

Answer

Timing when to enter and exit markets; market timing drives most returns

Answer

Choosing between active and passive management; management style determines fees

Question 2

What is rebalancing a portfolio and what is its primary purpose?

Accepted Answer

Restoring a portfolio to its target asset allocation after market movements have caused drift

Answer

Replacing underperforming funds with better-performing ones

Answer

Reducing portfolio fees by switching to lower-cost index funds

Answer

Maximizing returns by overweighting the best-performing asset class

Question 3

Which bond characteristic measures the price sensitivity of a bond to changes in interest rates?

Accepted Answer

Duration

Answer

Yield to Maturity

Answer

Coupon Rate

Answer

Credit Rating

Question 4

What is the difference between systematic risk and unsystematic risk?

Accepted Answer

Systematic risk is market-wide risk that cannot be diversified away; unsystematic risk is company or industry-specific risk that can be reduced through diversification

Answer

Systematic risk can be eliminated through diversification; unsystematic risk cannot

Answer

Systematic risk applies only to bonds; unsystematic risk applies only to stocks

Answer

Both types of risk can be completely eliminated with a sufficiently large portfolio

Question 5

Which investment vehicle offers built-in diversification and allows investors to buy or sell shares throughout the trading day at market prices?

Accepted Answer

Exchange-Traded Fund (ETF)

Answer

Open-end mutual fund

Answer

Closed-end fund

Answer

Unit Investment Trust (UIT)

Question 6

According to the Capital Asset Pricing Model (CAPM), what is the expected return of an investment?

Accepted Answer

Risk-free rate plus the product of beta and the equity risk premium

Answer

Standard deviation multiplied by the market return

Answer

Dividend yield plus earnings growth rate

Answer

The geometric mean of all historical annual returns