Advanced Diploma of Financial Planning (ADFP) Practice Test

Passive investment strategies are primarily designed to minimize transaction costs. These strategies involve tracking a market index rather than attempting to outperform it through active management. By minimizing frequent buying and selling of securities, passive investors can reduce the costs associated with transactions, such as brokerage fees and bid-ask spreads. This cost efficiency is a fundamental advantage of passive investing, allowing investors to retain a larger portion of their returns over time.

In contrast, while minimizing market volatility, investment horizons, and currency fluctuations are relevant considerations in investment strategies, they do not characterize the primary objective of passive investment strategies. Passive approaches do not actively attempt to time the market or adjust based on volatility; rather, they maintain their positions in an index over the long term, which indirectly addresses volatility by promoting a more stable investment approach.