Accounting Fundamentals Certification (AFC) Practice Test

What type of investment would suit a client looking for active management of a $10,000 inheritance?

1. A target mutual fund based on the estimated year of retirement

2. An index-based mutual fund based on the Dow Jones index

3. An exchange-traded index fund

4. Exchange-traded funds based on a specific commodity

The correct answer is: Exchange-traded funds based on a specific commodity

When considering an investment that involves active management, options providing ongoing oversight and strategic buy/sell decisions are ideal. In this case, the choice that aligns best with the desire for active management is the option focused on exchange-traded funds based on a specific commodity. Investing in commodities through exchange-traded funds often involves active management strategies that can respond to market conditions, making adjustments based on price fluctuations and economic indicators. This allows for active engagement with the investment, contrasting with a more passive approach often associated with index funds, which typically aim to replicate market performance rather than outperform it. In comparison, target mutual funds focus on a specific retirement date and are managed based on a predetermined strategy that gradually becomes more conservative as the date approaches. This does not necessitate hands-on management after the fund's allocation is set. An index-based mutual fund and an exchange-traded index fund are designed to track the performance of a specific index, like the Dow Jones, and typically do not involve active decision-making once the investment strategy is established. These are more passive investment vehicles. By selecting exchange-traded funds based on a specific commodity, the client remains aligned with their objective of active management, engaging with market dynamics while potentially capitalizing on price movements in