EFPA European Financial Advisor (EQF 5) Practice Exam
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The EFPA European Financial Advisor (EQF 5) Practice Exam prepares financial advisors for certification under the European Financial Planning Association (EFPA). Topics include financial planning, investment strategies, risk management, and ethics. Candidates are tested on their ability to provide ...
1. What is the primary goal of diversification in an investment portfolio?
A. To increase the total return
B. To reduce the overall risk
C. To maximize dividends
D. To improve liquidity
Answer: B. To reduce the overall risk
Explanation: Diversification aims to spread investments across different assets or asset
classes to reduce the overall risk of the portfolio. By doing so, the negative performance of
one investment may be offset by the positive performance of others.
2. Which of the following is a type of risk associated with investing in equities?
A. Inflation risk
B. Liquidity risk
C. Business risk
D. Reinvestment risk
Answer: C. Business risk
Explanation: Business risk refers to the risk associated with the operations and profitability
of a company. For equities, this risk is related to the company's performance and market
conditions affecting its stock price.
3. What does the term "beta" measure in investment analysis?
A. The correlation between a stock and the market
B. The standard deviation of returns
C. The average return of an asset
D. The risk-free rate of return
Answer: A. The correlation between a stock and the market
Explanation: Beta measures the volatility or risk of a stock relative to the market as a whole.
A beta of 1 indicates that the stock’s price will move with the market, while a beta greater
than 1 means higher volatility compared to the market.
4. What is meant by "systematic risk"?
A. Risk that can be eliminated through diversification
B. Risk related to a specific company or industry
C. Risk associated with the overall market movements
D. Risk that affects only short-term investments
Answer: C. Risk associated with the overall market movements
Explanation: Systematic risk, also known as market risk, refers to the risk that affects the
entire market or economy, such as economic recessions or interest rate changes. It cannot be
eliminated through diversification.
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, EFPA European Financial Advisor (EQF 5)
5. Which investment typically offers the lowest risk?
A. Stocks
B. Bonds
C. Certificates of Deposit (CDs)
D. Real Estate
Answer: C. Certificates of Deposit (CDs)
Explanation: CDs generally offer lower risk compared to stocks, bonds, or real estate
because they are insured by deposit insurance and offer a fixed interest rate.
6. What is "market risk"?
A. The risk that a company will default on its bonds
B. The risk of loss due to changes in market conditions
C. The risk associated with a company's financial health
D. The risk of a decline in real estate values
Answer: B. The risk of loss due to changes in market conditions
Explanation: Market risk is the risk of losses due to changes in market conditions, such as
fluctuations in stock prices, interest rates, or currency values.
7. What does "liquidity risk" refer to?
A. The risk of an investment's value declining
B. The risk of not being able to sell an investment quickly
C. The risk of a company defaulting on its debt
D. The risk associated with interest rate changes
Answer: B. The risk of not being able to sell an investment quickly
Explanation: Liquidity risk is the risk that an investor may not be able to buy or sell an
investment quickly at a price that reflects its true value.
8. Which of the following is considered a fixed-income security?
A. Common stock
B. Preferred stock
C. Corporate bond
D. Real estate investment trust (REIT)
Answer: C. Corporate bond
Explanation: A corporate bond is a fixed-income security where the investor receives
periodic interest payments and returns the principal at maturity. Common stock and preferred
stock are equity securities, and REITs are investment vehicles for real estate.
9. What does "alpha" measure in investment performance?
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, EFPA European Financial Advisor (EQF 5)
A. The risk-adjusted return relative to the market
B. The average return of a stock
C. The volatility of a stock
D. The correlation between different asset classes
Answer: A. The risk-adjusted return relative to the market
Explanation: Alpha measures the excess return of an investment compared to the expected
return based on its beta and the market's performance. A positive alpha indicates the
investment has outperformed its benchmark.
10. Which of the following is NOT a method of managing investment risk?
A. Hedging
B. Diversification
C. Speculation
D. Asset allocation
Answer: C. Speculation
Explanation: Speculation involves taking on high risks in hopes of achieving high returns
and is not a method of managing risk. Hedging, diversification, and asset allocation are
strategies used to manage and reduce investment risk.
11. What is "credit risk"?
A. The risk that an investment's price will fluctuate
B. The risk that a borrower will default on a loan
C. The risk of loss due to market volatility
D. The risk associated with currency exchange rates
Answer: B. The risk that a borrower will default on a loan
Explanation: Credit risk is the risk that a borrower or issuer of a bond will fail to make the
required payments, leading to a potential loss for the investor.
12. How is "standard deviation" used in investment analysis?
A. To measure the average return of an investment
B. To assess the total market risk
C. To evaluate the variability of an investment’s returns
D. To calculate the beta of an investment
Answer: C. To evaluate the variability of an investment’s returns
Explanation: Standard deviation measures the dispersion of an investment's returns around
its mean, indicating the level of volatility and risk.
13. What type of investment risk can be mitigated through diversification?
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, EFPA European Financial Advisor (EQF 5)
A. Systematic risk
B. Unsystematic risk
C. Market risk
D. Interest rate risk
Answer: B. Unsystematic risk
Explanation: Unsystematic risk, also known as specific risk, is related to individual
companies or sectors and can be mitigated through diversification. Systematic risk affects the
entire market and cannot be eliminated through diversification.
14. What does "duration" measure in bond investing?
A. The time until the bond matures
B. The bond's yield to maturity
C. The bond's price volatility with respect to interest rate changes
D. The amount of coupon payments received
Answer: C. The bond's price volatility with respect to interest rate changes
Explanation: Duration measures the sensitivity of a bond's price to changes in interest rates.
A longer duration indicates greater sensitivity to interest rate movements.
15. What is the primary advantage of investing in index funds?
A. High returns compared to actively managed funds
B. Lower management fees and broad market exposure
C. Ability to pick individual stocks with high potential
D. Guaranteed returns
Answer: B. Lower management fees and broad market exposure
Explanation: Index funds typically have lower management fees compared to actively
managed funds and provide broad exposure to a market index, offering diversification at a
lower cost.
16. What is the purpose of a "stop-loss" order?
A. To limit potential losses on an investment
B. To guarantee a minimum profit
C. To ensure dividends are paid on time
D. To automatically reinvest dividends
Answer: A. To limit potential losses on an investment
Explanation: A stop-loss order is designed to sell a security when its price falls to a specified
level, helping to limit potential losses and protect the investor's capital.
17. Which investment type is typically characterized by the highest level of
risk?
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