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

The average return of a portfolio over time

Answer

The correlation between two asset classes

Answer

The downside risk only, ignoring positive returns

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

It guarantees positive returns in all market conditions

Answer

It eliminates all investment risk

Answer

It maximizes portfolio returns by concentrating in the best-performing asset class

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 total return of a portfolio over a benchmark

Answer

The correlation between a portfolio and a market index

Answer

The maximum drawdown a portfolio has experienced

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

A measure of a stock's total risk relative to its own historical returns

Answer

The expected return of a portfolio as calculated by the CAPM

Answer

The ratio of fixed income to equity in a portfolio

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

Investing a lump sum all at once to maximize time in market

Answer

Rebalancing a portfolio to target allocations annually

Answer

Selecting investments based on their current price-to-earnings ratio

Question 6

What is the efficient market hypothesis (EMH) and which form suggests that technical analysis cannot consistently produce excess returns?

Accepted Answer

Weak form, which holds that past price and volume data cannot predict future prices

Answer

Strong form, which holds that all public and private information is reflected in prices

Answer

Semi-strong form, which holds that all publicly available information is already priced in

Answer

All three forms equally support this conclusion