D.31 Asset allocation and portfolio diversification Flashcards
(21 cards)
Which of the following best defines asset allocation?
A) The process of investing in a single type of asset
B) The process of investing in multiple types of assets
C) The process of selecting individual stocks to invest in
D) The process of investing in commodities only
The process of investing in multiple types of assets
Explanation: Asset allocation involves investing in a variety of asset classes, such as stocks, bonds, real estate, and commodities.
D.31 Asset allocation and portfolio diversification
Which of the following is not an asset class commonly used in asset allocation?
A) Stocks
B) Bonds
C) Cash
D) Artwork
Artwork
Explanation: While some investors may choose to invest in artwork, it is not a common asset class used in asset allocation.
D.31 Asset allocation and portfolio diversification
Which of the following is not a common investment objective for asset allocation?
A) Capital preservation
B) Income generation
C) Capital appreciation
D) Inflation avoidance
Inflation avoidance
Explanation: While inflation is a consideration when making investment decisions, it is not typically considered an investment objective for asset allocation.
D.31 Asset allocation and portfolio diversification
Which of the following is not a factor that should be considered when determining asset allocation?
A) Risk tolerance
B) Investment time horizon
C) Personal beliefs and values
D) Investment fees and expenses
Personal beliefs and values
Explanation: While personal beliefs and values may influence investment decisions, they are not typically considered when determining asset allocation.
D.31 Asset allocation and portfolio diversification
Which of the following is an example of tactical asset allocation?
A) Rebalancing a portfolio to maintain the target asset allocation
B) Investing in a target-date fund
C) Adjusting the allocation to take advantage of market trends
D) Investing in a diversified mutual fund
Adjusting the allocation to take advantage of market trends.
Explanation: Tactical asset allocation involves adjusting the allocation based on short-term market trends or changes in economic conditions.
D.31 Asset allocation and portfolio diversification
Which of the following is an example of strategic asset allocation?
A) Rebalancing a portfolio to maintain the target asset allocation
B) Investing in a target-date fund
C) Adjusting the allocation to take advantage of market trends
D) Investing in a diversified mutual fund
Rebalancing a portfolio to maintain the target asset allocation.
Explanation: Strategic asset allocation involves establishing a target asset allocation and periodically rebalancing the portfolio to maintain that allocation.
D.31 Asset allocation and portfolio diversification
Which of the following is an example of dynamic asset allocation?
A) Rebalancing a portfolio to maintain the target asset allocation
B) Investing in a target-date fund
C) Adjusting the allocation to take advantage of market trends
D) Investing in a diversified mutual fund
Investing in a target-date fund.
Explanation: Dynamic asset allocation involves adjusting the allocation based on changes in the investor’s personal situation, such as their age or investment time horizon.
D.31 Asset allocation and portfolio diversification
Which of the following is not a common method of diversification?
A) Investing in a variety of asset classes
B) Investing in multiple stocks within the same industry
C) Investing in a variety of mutual funds
D) Investing in a variety of individual bonds
Investing in multiple stocks within the same industry.
Explanation: While investing in multiple stocks can provide diversification, investing in multiple stocks within the same industry may not provide sufficient diversification.
D.31 Asset allocation and portfolio diversification
Which of the following is an example of sector rotation?
A) Investing in a target-date fund
B) Investing in a single stock
C) Adjusting the allocation to take advantage of market trends
D) Rebalancing a portfolio to maintain the target asset allocation
Adjusting the allocation to take advantage of market trends
Explanation: Sector rotation involves adjusting the allocation based on the performance of different sectors of the market.
D.31 Asset allocation and portfolio diversification
Which of the following is a potential benefit of diversification?
A) Increased risk
B) Decreased risk
C) Increased return
D) Decreased return
Decreased risk
Explanation: Diversification can help reduce the risk of a portfolio by spreading investments across different asset classes and securities.
D.31 Asset allocation and portfolio diversification
Which of the following is not a type of risk to consider when diversifying a portfolio?
A) Market risk
B) Inflation risk
C) Credit risk
D) Sector risk
Inflation risk
Explanation: While inflation can impact the value of investments, it is not typically considered a type of risk to consider when diversifying a portfolio.
D.31 Asset allocation and portfolio diversification
Which of the following is an example of passive management?
A) Investing in an actively managed mutual fund
B) Investing in a passively managed mutual fund
C) Selecting individual stocks to invest in
D) Trading securities frequently
Investing in a passively managed mutual fund
Explanation:Passive management involves investing in a fund that tracks a market index, such as the S&P 500, rather than trying to beat the market through active management.
D.31 Asset allocation and portfolio diversification
Which of the following is an example of active management?
A) Investing in an actively managed mutual fund
B) Investing in a passively managed mutual fund
C) Selecting individual stocks to invest in
D) Trading securities frequently
Investing in an actively managed mutual fund
Explanation: Active management involves actively selecting individual securities in an attempt to outperform the market.
D.31 Asset allocation and portfolio diversification
Which of the following is not a factor to consider when selecting an investment manager?
A) Investment philosophy
B) Fees and expenses
C) Performance history
D) Geographic location
Geographic location
Explanation: While the location of an investment manager may impact their ability to manage certain types of investments, it is not typically a factor to consider when selecting an investment manager.
Which of the following is not a potential limitation of diversification?
A) Limited investment options
B) Overlapping investments
C) Higher fees and expenses
D) Lower returns
Lower returns
Explanation: Diversification is intended to reduce risk, but may not necessarily result in lower returns.
D.31 Asset allocation and portfolio diversification
Sarah is a 30-year-old investor who is willing to take on moderate risk. Which of the following asset allocations would be most appropriate for her?
A) 70% stocks, 20% bonds, 10% cash
B) 40% stocks, 40% bonds, 20% cash
C) 20% stocks, 60% bonds, 20% cash
D) 90% stocks, 5% bonds, 5% cash
70% stocks, 20% bonds, 10% cash
Explanation: A younger investor with a moderate risk tolerance may benefit from a more aggressive allocation that includes a larger percentage of stocks.
D.31 Asset allocation and portfolio diversification
Tom is a 65-year-old investor who is looking to generate income from his portfolio while minimizing risk. Which of the following asset allocations would be most appropriate for him?
A) 60% stocks, 30% bonds, 10% cash
B) 30% stocks, 60% bonds, 10% cash
C) 10% stocks, 80% bonds, 10% cash
D) 5% stocks, 90% bonds, 5% cash
30% stocks, 60% bonds, 10% cash
Explanation: An older investor who is looking to generate income and minimize risk may benefit from a more conservative allocation that includes a larger percentage of bonds.
D.31 Asset allocation and portfolio diversification
James is a 40-year-old investor who is interested in investing in sustainable and socially responsible companies. Which of the following investment strategies would be most appropriate for him?
A) Active management
B) Passive management
C) Growth investing
D) Value investing
Passive management
Explanation: Passive management through investing in index funds or exchange-traded funds (ETFs) that track sustainable or socially responsible indices may be the most appropriate investment strategy for James.
D.31 Asset allocation and portfolio diversification
Lisa is an investor who wants to diversify her portfolio with international investments. Which of the following investment options would provide her with exposure to foreign markets?
A) U.S. large-cap mutual fund
B) U.S. bond fund
C) International stock fund
D) Money market fund
International stock fund
Explanation: Investing in an international stock fund provides exposure to foreign markets and can help diversify a portfolio.
D.31 Asset allocation and portfolio diversification
John is a 50-year-old investor who is interested in investing in real estate but does not want to purchase physical property. Which of the following investment options would provide him with exposure to real estate?
A) Index funds
B) Mutual funds
C) Real estate investment trusts (REITs)
D) Exchange-traded funds (ETFs)
Real estate investment trusts (REITs)
Explanation: Investing in REITs provides exposure to real estate without the need to purchase physical property. REITs are companies that own, operate, or finance income-generating real estate properties and are traded like stocks on major stock exchanges.
D.31 Asset allocation and portfolio diversification
Which of the following financial vehicles have many older members of Gen Z been proactive about?
A) Stocks, real estate, and cryptocurrency.
B) Bonds and mutual funds.
C) Precious metals.
D) Only traditional savings accounts.
Stocks, real estate, and cryptocurrency.
Explanation: The article states that many older members of Gen Z have been proactive about investing in stocks, real estate, and cryptocurrency.
D.31 Asset allocation and portfolio diversification
