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 with comprehensive quizzes on finance principles, investment strategies, and risk management. Improve your knowledge and excel in your financial planning career!

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 type of risks do funds with short maturities generally avoid?

All forms of investment risk
Minimal interest rate risk
Credit risk associated only with equities
Foreign exchange risk

The correct answer is: Minimal interest rate risk

Funds with short maturities primarily focus on avoiding minimal interest rate risk due to the nature of their investment timelines. Short-maturity funds typically invest in instruments that have a brief duration until maturity, which means they are less susceptible to fluctuations in interest rates compared to long-term investments. When interest rates rise, the value of existing bonds tends to fall, but short-maturity funds are less impacted because their investments mature quickly and can reinvest at the current rates sooner. As for the other options, these do not accurately reflect the risk landscape associated with funds of short maturity. While these funds may have some level of credit risk and exposure to foreign exchange risk, especially if they invest in foreign securities, their primary strength lies in minimizing interest rate risk. Such funds can still experience other forms of investment risks to varying degrees, but the characteristic that most distinctly separates them is their limited exposure to changes in interest rates.