Advanced Diploma of Financial Planning (ADFP) Practice Test

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Which of the following statements about investment companies is correct?

All investment companies are actively managed.
Unit investment trusts allow for unlimited share issuance.
ETFs are always managed passively.
Investment companies can provide diversification benefits.

The correct answer is: Investment companies can provide diversification benefits.

The statement regarding investment companies providing diversification benefits is accurate because one of the primary purposes of investment companies is to pool funds from multiple investors to create a diversified portfolio of assets. This diversification helps to spread risk across different investments, which can mitigate the impact of any single investment's poor performance on the overall portfolio. By investing in a variety of asset classes, sectors, or geographical regions, investment companies can enhance the likelihood of more stable returns over time. In contrast, the other statements lack accuracy. The assertion that all investment companies are actively managed is incorrect because there are a variety of investment companies, including those that passively track indices. The claim that unit investment trusts allow for unlimited share issuance is misleading, as these trusts have a fixed number of shares that are issued when the trust is created. Lastly, while many exchange-traded funds (ETFs) are indeed passively managed, there are actively managed ETFs as well, which means the statement doesn't hold universally true.