Certified Plan Sponsor Professional (CPSP) Practice Exam

What are the three core asset classes for maintaining a diversified investment portfolio?

1. Real estate, commodities, and bonds

2. Stocks, cash, and bonds

3. Stocks, options, and cash

4. Equities, fixed income, and derivatives

The correct answer is: Stocks, cash, and bonds

The correct answer identifies the three core asset classes for a diversified investment portfolio as stocks, cash, and bonds. Stocks, or equities, represent ownership in a company and have the potential for capital appreciation and dividends. They typically carry higher risk but can offer substantial returns. Bonds, or fixed income, are loans made to corporations or governments, providing more stable returns and lower risk compared to stocks. They help to balance the volatility typically associated with equities. Cash, which includes money market instruments and savings accounts, serves as a safe haven and provides liquidity to the portfolio, allowing for quick access to funds when needed. Together, these three asset classes form a foundational structure for diversification. By spreading investments across stocks for growth, bonds for stability, and cash for liquidity, an investor can achieve a more risk-adjusted return, as the different asset classes respond differently to market conditions. This diversification helps to mitigate risks and smooth out the overall performance of the portfolio. In contrast to the other options, which mix asset classes in a less conventional way, the combination of stocks, cash, and bonds aligns with established investment principles focusing on risk management and return potential.