ACCA Advanced Financial Management (AFM) Practice Exam

Investors who favor dividends often belong to which financial group?

1. Hedge funds

2. Pension funds

3. Private equity firms

4. Venture capitalists

The correct answer is: Pension funds

Investors who favor dividends typically belong to pension funds. This is due to the nature of pension funds, which usually have long-term liabilities that require steady, predictable cash flows to meet their obligations to retirees. Dividends provide a reliable source of income, making them an attractive feature for these funds, especially when seeking stability and income generation. Pension funds actively seek investments that deliver stable returns in the form of dividends, as they can use these funds to pay out to pensioners while also managing risk through diversified portfolios. This strategic approach aligns with their commitment to fulfilling long-term obligations and providing consistent returns to their beneficiaries. In contrast, hedge funds, private equity firms, and venture capitalists generally pursue different strategies focused more on capital appreciation, high-risk investments, and growth rather than the current income provided by dividends. Hedge funds, for instance, often engage in speculative trading and complex strategies without necessarily focusing on dividend yields. Meanwhile, private equity firms invest in companies to restructure and increase their value, typically aiming for high returns upon exit rather than immediate cash flows. Venture capitalists focus on early-stage companies, investing for potential high growth that may not involve immediate dividend payouts at all.