Advanced Diploma of Financial Planning (ADFP) Practice Test

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Prepare for the Advanced Diploma of Financial Planning Test. Study with interactive quizzes and comprehensive questions, each offering detailed explanations and insights. Gear up for success!

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How is a unit investment trust (UIT) managed?

Actively managed
Passively managed
Managed by individual investors
Managed by multiple firms

The correct answer is: Passively managed

A unit investment trust (UIT) is characterized by its passive management style. Unlike actively managed funds, which involve frequent buying and selling of securities with the goal of outperforming a benchmark index, UITs are designed to be more stable and predictable in their investment strategy. UITs typically hold a fixed portfolio of securities for a specific time period. Once the UIT is established, the selection of the securities does not change, meaning that the management of the trust does not engage in active trading. This passive approach allows investors to benefit from the performance of the underlying assets without the complexities and costs associated with active management. The other options suggest different management styles that do not align with the nature of UITs. Individual investors managing UITs or multiple firms managing the same UIT would introduce active management principles, which is not how UITs operate. Therefore, the preference for passive management in a UIT structure is what fundamentally distinguishes it from other investment vehicles.