Advanced Diploma of Financial Planning (ADFP) Practice Test

Disable ads (and more) with a membership for a one time $2.99 payment

Prepare for the Advanced Diploma of Financial Planning Exam. Study with flashcards and multiple-choice questions, each question has hints and explanations. Get ready for your exam!

Each practice test/flash card set has 50 randomly selected questions from a bank of over 500. You'll get a new set of questions each time!

Practice this question and more.

What does passive investment management primarily focus on?

Finding undervalued securities for higher returns
Minimizing transaction costs
Actively trading based on market trends
Maximizing interest on bonds

The correct answer is: Finding undervalued securities for higher returns

Passive investment management primarily focuses on minimizing transaction costs. This approach aims to match the performance of a specific market index rather than attempting to outperform it through active trading strategies. By investing in a diversified portfolio that reflects the index, passive management reduces the need for frequent buying and selling of securities, which in turn lowers trading costs and tax implications. Additionally, passive management is grounded in the belief that markets are generally efficient, meaning that all known information is already reflected in stock prices. Therefore, trying to find undervalued securities (as suggested in the first choice) is more characteristic of active management, which seeks to capitalize on perceived market inefficiencies. Since the emphasis is on long-term growth aligned with market indices rather than making frequent trades or speculative moves, passive strategies aim for steady gains while incurring minimal costs. Thus, efficient allocation and maintenance of a low-cost investment strategy are hallmark characteristics of passive investment management.