8. Discuss Investment Basics with a Client (10%)

Question 1

What does the term “asset allocation” mean?

A. Buying stocks only
B. Dividing investments among different asset classes
C. Timing the market
D. Avoiding risk entirely

Answer 1

B. Dividing investments among different asset classes

Asset allocation balances risk and return by diversifying across various asset categories.

Question 2

What is dollar-cost averaging?

A. Investing a lump sum all at once
B. Investing fixed amounts regularly regardless of price
C. Selling investments during market dips
D. Timing the market for better returns

Answer 2

B. Investing fixed amounts regularly regardless of price

Dollar-cost averaging helps mitigate the impact of market volatility.

Question 3

What is the Rule of 72 used for?

A. Calculating retirement contributions
B. Estimating the time to double an investment at a fixed rate of return
C. Determining tax liabilities
D. Calculating compounding intervals

Answer 3

B. Estimating the time to double an investment at a fixed rate of return

Divide 72 by the annual interest rate to approximate doubling time.

Question 4

Which of the following is a passive investment approach?

A. Day trading
B. Index fund investing
C. Stock picking
D. Short selling

Answer 4

B. Index fund investing

Passive investing typically involves replicating an index.

Question 5

What does a bond’s “coupon rate” indicate?

A. Its market price
B. Its maturity date
C. The annual interest paid to the bondholder
D. Its tax benefits

Answer 5

C. The annual interest paid to the bondholder

The coupon rate specifies the interest income from a bond.

Question 6

Which investment is generally considered the least risky?

A. Stocks
B. Real estate
C. U.S. Treasury bonds
D. Cryptocurrency

Answer 6

C. U.S. Treasury bonds

Treasury bonds are backed by the U.S. government and are considered very safe.

Question 7

What is a fiduciary duty?

A. A legal obligation to act in the client’s best interest
B. A financial planning strategy
C. A type of investment account
D. An expense associated with investments

Answer 7

A. A legal obligation to act in the client’s best interest

Fiduciaries must prioritize their clients’ needs over their own.

Question 8

What is an ETF?

A. Exchange-Traded Fund
B. Equity-Transfer Fund
C. Emerging Tax-Free Fund
D. Estate Transfer Foundation

Answer 8

A. Exchange-Traded Fund

ETFs are investment funds traded on stock exchanges, similar to stocks.

Question 9

What is diversification?

A. Focusing on a single asset type
B. Reducing risk by spreading investments across different assets
C. Investing only in high-risk securities
D. Avoiding international investments

Answer 9

B. Reducing risk by spreading investments across different assets

Diversification minimizes the impact of poor performance in a single asset.

Question 10

What is the primary benefit of rebalancing a portfolio?

A. Maximizing short-term gains
B. Adjusting the portfolio to align with the investor’s goals and risk tolerance
C. Increasing portfolio fees
D. Timing the market for better returns

Answer 10

B. Adjusting the portfolio to align with the investor’s goals and risk tolerance

Rebalancing ensures the portfolio reflects the desired asset allocation.

Question 11

A client is considering investing $10,000 in stocks. They are concerned about market volatility. What strategy could reduce their risk?

A. Invest all $10,000 in a single stock
B. Use dollar-cost averaging
C. Focus only on small-cap stocks
D. Ignore risk and invest fully

Answer 11

B. Use dollar-cost averaging

This approach reduces the impact of price fluctuations over time.

Question 12

A client wants to invest in a mix of stocks and bonds for retirement. What type of investment vehicle should they consider?

A. Checking account
B. Balanced mutual fund
C. Certificate of deposit
D. Savings bond

Answer 12

B. Balanced mutual fund

Balanced funds include both stocks and bonds for diversification.

Question 13

If a client’s risk tolerance is low, which investment option is most suitable?

A. High-growth technology stocks
B. Government bonds
C. Venture capital
D. Cryptocurrency

Answer 13

B. Government bonds

Government bonds are safer and offer more stable returns.

Question 14

A client’s portfolio consists of 90% stocks and 10% bonds. If they wish to reduce risk, what action should they take?

A. Increase bond allocation
B. Move fully into stocks
C. Maintain the current allocation
D. Invest in more stocks

Answer 14

A. Increase bond allocation

Bonds are less volatile, reducing portfolio risk.

Question 15

A client is interested in ethical investing. What type of funds should they consider?

A. Index funds
B. ESG funds
C. Hedge funds
D. Real estate funds

Answer 15

b. ESG funds

ESG funds focus on environmental, social, and governance factors.

Question 16

Which tool can help a client determine if an advisor is qualified?

A. SEC’s Investment Advisor Public Disclosure website
B. A financial blog
C. Social media reviews
D. Personal testimonials

Answer 16

A. SEC’s Investment Advisor Public Disclosure website

This tool verifies credentials and records.

Question 17

A client wants to allocate their investments evenly between domestic and international stocks. Which type of fund could simplify this process?

A. Sector-specific ETF
B. Global mutual fund
C. Money market fund
D. Target-date fund

Answer 17

B. Global mutual fund

Global funds include both domestic and international stocks.

Question 18

A client asks how to minimize taxes on investment gains. Which option is most appropriate?

A. Invest in taxable accounts only
B. Use tax-advantaged accounts like IRAs or 401(k)s
C. Focus on high-dividend stocks
D. Ignore tax implications

Answer 18

B. Use tax-advantaged accounts like IRAs or 401(k)s

Tax-advantaged accounts help defer or eliminate taxes on investment gains.

Question 19

A client’s portfolio is 60% stocks, 30% bonds, and 10% cash. Due to market changes, it has shifted to 70% stocks, 20% bonds, and 10% cash. What should they do to restore their original allocation?

A. Rebalance by selling stocks and buying bonds
B. Add more cash to the portfolio
C. Focus on increasing stock allocation
D. Keep the allocation as-is

Answer 19

A. Rebalance by selling stocks and buying bonds

Rebalancing restores the desired allocation.

Question 20

A client wants to save for their child’s college education. Which investment vehicle is most suitable?

A. Roth IRA
B. 529 plan
C. High-yield savings account
D. Corporate bonds

Answer 20

B. 529 plan

529 plans offer tax advantages specifically for education savings.

Question 21

A client’s risk tolerance questionnaire indicates a moderate risk level. How should their portfolio be structured?

A. 90% stocks, 10% bonds
B. 50% stocks, 40% bonds, 10% cash
C. 20% stocks, 70% bonds, 10% cash
D. 100% cash

Answer 21

B. 50% stocks, 40% bonds, 10% cash

A moderate risk portfolio balances growth and stability.

Question 22

A client is comparing two mutual funds. Fund A charges a 1.5% annual expense ratio and Fund B charges 0.5%. If both funds return 8% annually, which is more cost-effective over the long term?

A. Fund A
B. Fund B
C. Both are equal
D. Depends on the initial investment

Answer 22

B. Fund B

Lower expense ratios result in higher net returns over time.

Question 23

A client has $500,000 in retirement savings and wants to withdraw $20,000 annually. Assuming a 4% annual return, will this strategy sustain their savings for 30 years?

A. Yes, the return covers the withdrawals
B. No, withdrawals will deplete the savings
C. Uncertain without additional data
D. Yes, but only if inflation is zero

Answer 23

A. Yes, the return covers the withdrawals

A 4% return typically supports a 4% withdrawal rate.

Question 24

A client is interested in an ETF that tracks the S&P 500 but also emphasizes ESG criteria. What should they evaluate to determine if it fits their values?

A. The ETF’s expense ratio
B. The ETF’s ESG screening criteria
C. The ETF’s historical performance only
D. The ETF’s issuer reputation only

Answer 24

B. The ETF’s ESG screening criteria

The screening process ensures alignment with the client’s ethical values.

Question 25

A client has $100,000 in a taxable investment account. They are considering selling a stock with a $10,000 gain. What tax strategies could minimize their capital gains tax liability?

A. Offset the gain with capital losses
B. Hold the stock for less than a year
C. Invest the proceeds in a money market fund
D. Avoid reporting the gain

Answer 25

A. Offset the gain with capital losses

Tax-loss harvesting reduces taxable gains.

Question 26

A client is 30 years old and wants to retire at 65. They estimate needing $1 million for retirement. Assuming an 8% annual return, how much should they invest monthly?

A. $300
B. $500
C. $700
D. $1,000

Answer 26

B. $500

Using a financial calculator or future value formula estimates the required investment.

Question 27

A client wants to diversify by adding alternative investments like real estate. What should they consider before proceeding?

A. The liquidity of alternative investments
B. The current interest rate on bonds
C. The performance of technology stocks
D. Their tax bracket

Answer 27

A. The liquidity of alternative investments

Alternative investments like real estate may have limited liquidity.

Question 28

A client nearing retirement has a portfolio heavily weighted in stocks. What adjustment might you recommend?

A. Shift a portion of the portfolio into bonds
B. Add more international stocks
C. Keep the allocation as-is
D. Increase exposure to small-cap stocks

Answer 28

A. Shift a portion of the portfolio into bonds

Bonds reduce volatility and provide income for retirees.

Question 29

A client asks whether they should choose an actively managed mutual fund or a passive index fund. What factors should influence their decision?

A. Expense ratios and historical performance
B. The fund manager’s reputation alone
C. Current market conditions only
D. None of the above

Answer 29

A. Expense ratios and historical performance

Lower costs and consistent performance favor passive funds for many investors.

Question 30

A client wants to invest $50,000 in a mix of stocks and bonds but is unsure about their risk tolerance. What tool should they use first?

A. A budgeting app
B. A risk tolerance questionnaire
C. A market forecast report
D. A credit score analysis

Answer 30

B. A risk tolerance questionnaire

This helps determine the appropriate asset allocation.