Qualified Financial Adviser (QFA) Pensions Exam 2 Practice Test

Which statement best describes a Lifestyle fund?

It changes its asset allocation to more secure assets as retirement approaches It changes its asset allocation to higher risk/return assets as retirement approaches It invests only in shares of luxury clothing companies It is open to wealthy investors only

Correct Answer:

It changes its asset allocation to more secure assets as retirement approaches

Explanation:

Lifestyle funds use a glide path approach: as retirement gets closer, the fund systematically shifts from higher-risk assets toward lower-risk assets. This automatic rebalancing aims to reduce volatility and protect capital as the investor’s time horizon shortens. So, the description that it changes its asset allocation to more secure assets as retirement approaches is the best fit. Early on, the fund tends to hold more equities to seek growth, then gradually increases exposure to bonds and cash equivalents. The other statements don’t match SAMPLEhow lifestyle funds are designed: they don’t increase risk as retirement nears, they don’t invest only in luxury stock shares, and they aren’t restricted to wealthy investors.

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