Life-Cycle Fund

    graph LR
	   A[Young Investor] -->|High Stocks| B(Stocks)
	   B --> C{Approaching Retirement}
	   C -->|Shift to Bonds| D(Bonds)
	   D -->|Low Stocks| E[Retirement Age Investor]

## What is the primary purpose of a Life-Cycle Fund? - [x] To automatically adjust asset allocation as the retirement date approaches - [ ] To guarantee returns without any risk - [ ] To invest only in bonds irrespective of age - [ ] To provide instant liquidity > **Explanation:** Life-Cycle Funds automatically adjust their asset mix to become more conservative as the target retirement date gets closer. ## Which of the following best describes why a young investor might prefer a Life-Cycle Fund? - [x] They can typically afford more risk for potential growth. - [ ] They should avoid all stock investments entirely. - [ ] Their focus should be only on bonds. - [ ] They are aiming for immediate liquidity. > **Explanation:** Younger investors can handle more risk and might seek higher returns through stock investments at the early stages. ## When is the asset allocation of a Life-Cycle Fund at its most aggressive? - [ ] At retirement age - [x] When the investor is young and far from the target date - [ ] When the fund has reached maturity - [ ] At the fund's inception > **Explanation:** The fund is more aggressive with a higher percentage of stocks when the investor has many years until retirement. ## What happens to a Life-Cycle Fund as it approaches the retirement date? - [ ] Increases its stock allocation - [x] Decreases its stock allocation in favor of bonds - [ ] Stops adjusting and remains stagnant - [ ] Chooses only real estate investments > **Explanation:** As a Life-Cycle Fund nears the target retirement date, it gradually shifts towards bonds to minimize risk. ## What would you call the strategy that Life-Cycle Funds use to allocate assets based on age? - [x] Dynamic Asset Allocation - [ ] Static Risk Allocation - [ ] Conservative Positioning - [ ] Fixed Income Focus > **Explanation:** This allocation strategy is referred to as dynamic asset allocation, as it adjusts according to an investor's age and risk tolerance. ## If an investor chooses a Life-Cycle Fund with a target date of 2040 and is currently 25 years old, when is the fund likely to be most conservative? - [ ] In 2025 - [ ] In 2030 - [x] In 2040 or later - [ ] Right at inception > **Explanation:** The fund becomes conservative closer to the target date (2040), shifting its focus away from growth-oriented investments. ## Why might a Life-Cycle Fund not be suitable for all investors? - [x] Individual risk tolerance and financial goals vary - [ ] Everyone should use the same fund strategy - [ ] It's only for high-net worth investors - [ ] They guarantee returns for everyone > **Explanation:** Life-Cycle Funds may not be suitable for all as individual circumstances, such as risk and goals, can vary widely. ## What does the term "target date" mean in context of Life-Cycle Funds? - [ ] The date you open the fund - [ ] The final investment strategy for the fund - [x] The year of expected retirement or investment withdrawal - [ ] A fixed length of investment time > **Explanation:** The target date indicates when the investor plans to retire or start withdrawing money from the fund. ## How does diversification play a role in Life-Cycle Funds? - [ ] It’s unnecessary for these funds - [ ] Only affects equity funds - [x] It helps reduce risk in the portfolio by spreading investments - [ ] Simply makes it more complicated > **Explanation:** Diversification within a Life-Cycle Fund spreads investments across assets, helping lower overall portfolio risk. ## Are Life-Cycle Funds considered a “set it and forget it” investment strategy? - [ ] Yes, because they require no monitoring - [ ] No, they must be actively managed every week - [x] Yes, but regular reviews are still recommended - [ ] No, that would be too risky > **Explanation:** While Life-Cycle Funds automate adjustment, it’s wise to periodically review them to ensure they align with your financial situation.