Multiple choice

Investors should be advised to avoid investing in a debt fund with a

  1. lower rated portfolio and higher expense ratio

  2. higher rated portfolio and lower expense ratio

  3. lower rated portfolio and lower expense ratio

  4. higher rated portfolio and higher expense ratio
Reveal answer Fill a bubble to check yourself
A Correct answer
Explanation

Investors should avoid debt funds with lower rated portfolios (higher credit risk/default risk) and higher expense ratios (reduced net returns). This combination is doubly unfavorable. Option D (higher rated, higher expense) has credit quality but eats returns. Option C (lower rated, lower expense) and Option B (higher rated, lower expense) each have one favorable feature, making A the worst combination.

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