Advanced Diploma of Financial Planning (ADFP) Practice Test

What investment strategy involves adjusting one's investments based on stock price movements?

1. Index investing

2. Market timing

3. Asset allocation

4. Bond laddering

The correct answer is: Market timing

The correct answer is the investment strategy that involves adjusting one's investments based on stock price movements, known as market timing. This strategy requires investors to make decisions about buying or selling stocks based on their predictions of future price movements. Market timers aim to capitalize on market volatility and trends, attempting to enter the market when prices are low and exit when they are high. In contrast, other strategies mentioned are less focused on short-term price movements. Index investing, for instance, involves investing in a market index to match its performance over time, rather than reacting to price changes. Asset allocation refers to the strategic distribution of investments across different asset categories (like stocks, bonds, and cash) to manage risk and achieve investment goals, but it does not typically change in response to price movements. Bond laddering is a fixed-income investment strategy that involves purchasing bonds with different maturity dates to manage interest rate risk and does not involve adjusting investments based on stock price changes.