Advanced Diploma of Financial Planning (ADFP) Practice Test

Which order of asset classes ranked by historical returns (highest to lowest) is correct?

1. Small capitalization stocks, large capitalization stocks, fixed-income securities

2. Large capitalization stocks, fixed-income securities, small capitalization stocks

3. Fixed-income securities, small capitalization stocks, large capitalization stocks

4. Large capitalization stocks, small capitalization stocks, fixed-income securities

The correct answer is: Small capitalization stocks, large capitalization stocks, fixed-income securities

The order of asset classes ranked by historical returns from highest to lowest is accurately represented by the option that mentions small capitalization stocks, large capitalization stocks, and fixed-income securities. Historically, small capitalization stocks have provided higher returns compared to large capitalization stocks, primarily due to their growth potential and the fact that they are often less established and more volatile, which appeals to long-term investors seeking higher growth rates. This asset class tends to outperform during bull markets, contributing to its precedence in return ranking. Large capitalization stocks also yield significant returns, but they typically fall behind small caps in the long run. These stocks are generally associated with more stable, established companies and they tend to exhibit slower growth rates compared to smaller firms, which can lead to lower average historical returns over extended periods. Fixed-income securities, such as bonds, have historically provided the lowest returns among these asset classes, as they are designed to offer regular income with lower risk. Investors often accept this lower return in exchange for the stability and predictability that bonds provide, especially during economic downturns when stocks may underperform. The other options mischaracterize the ranking of these asset classes, placing fixed-income securities higher than stocks or failing to acknowledge the consistent trend of small-cap stocks yielding higher returns than large