Certified Plan Sponsor Professional (CPSP) Practice Exam

Which asset class generally provides the least amount of investment risk but also the lowest return?

1. Stocks

2. Bonds

3. Money market funds

4. Real estate investment trusts (REITs)

The correct answer is: Money market funds

Money market funds are designed to provide a safe and stable investment option, which is why they generally exhibit the least amount of investment risk among the asset classes listed. These funds primarily invest in short-term, high-quality debt instruments, such as Treasury bills, commercial paper, and certificates of deposit, which are considered very low risk due to their short maturities and the high credit quality of the underlying securities. Investors typically choose money market funds when they prioritize capital preservation and liquidity over higher returns. Consequently, while they offer the safety of principal, the returns from money market funds are usually the lowest compared to stocks, bonds, and real estate investment trusts (REITs), which have higher potential returns but also come with greater risk. In contrast, stocks often provide higher potential returns due to their exposure to the performance of companies and the overall market, but they also carry higher volatility and risk. Bonds, while generally safer than stocks, can still experience fluctuations in value and interest rate risk. REITs tend to yield higher returns as they invest in real estate and may provide both capital appreciation and income through dividends, yet they also involve market and sector-specific risks. Therefore, the inherent characteristics of money market funds make them uniquely positioned to provide the lowest