Investment Advisor Risk Management and Insurance in Financial Planning 1 — Questions and Answers
Question 1: Which type of life insurance provides a death benefit for a specified term and has no cash value component?
- Whole life insurance
- Universal life insurance
- Term life insurance (Correct answer)
- Variable life insurance
Correct answer: Term life insurance
Term life insurance provides pure death benefit protection for a defined period (e.g., 20 years) with no savings or cash value component, making it the most affordable option.
Question 2: An investment adviser recommending insurance products to clients should consider the client's insurance needs as part of which planning area?
- Tax planning only
- Comprehensive risk management within the financial plan (Correct answer)
- Investment selection only
- Estate planning only
Correct answer: Comprehensive risk management within the financial plan
Insurance is a key component of comprehensive risk management — protecting a client's human capital, assets, and estate — and should be integrated into the overall financial plan.
Question 3: What does 'systematic risk' refer to in portfolio management?
- Risk that can be eliminated through diversification
- Market-wide risk that cannot be diversified away (Correct answer)
- The risk of a specific company defaulting
- Risk associated with foreign currency fluctuations only
Correct answer: Market-wide risk that cannot be diversified away
Systematic risk (market risk) affects the entire market and cannot be eliminated through diversification — examples include recessions, interest rate changes, and geopolitical events.
Question 4: An investor holds a portfolio of 50 individual stocks. Further adding more stocks will primarily reduce which type of risk?
- Systematic risk
- Unsystematic (company-specific) risk (Correct answer)
- Inflation risk
- Interest rate risk
Correct answer: Unsystematic (company-specific) risk
Diversification eliminates unsystematic (idiosyncratic or company-specific) risk, while systematic risk remains regardless of how many stocks are held.
Question 5: Which risk describes the possibility that inflation will erode the purchasing power of a portfolio's returns?
- Credit risk
- Liquidity risk
- Inflation (purchasing power) risk (Correct answer)
- Reinvestment risk
Correct answer: Inflation (purchasing power) risk
Inflation risk (purchasing power risk) is the risk that investment returns will not keep pace with inflation, reducing the real value of wealth over time.
Question 6: An investment adviser recommending a client purchase disability income insurance is primarily addressing which risk?
- Market risk
- The risk of loss of earned income due to illness or injury (Correct answer)
- Longevity risk
- Interest rate risk
Correct answer: The risk of loss of earned income due to illness or injury
Disability income insurance replaces a portion of income lost when a client cannot work due to illness or injury, protecting their most important financial asset — their earning capacity.
Investment Advisor Risk Management and Insurance in Financial Planning 1
Which type of life insurance provides a death benefit for a specified term and has no cash value component?