Risk Assessment & Management Flashcards
7 cards from real CFP practice questions. Tap to flip, then mark Knew It or Still Learning — missed cards come back until you master them.
Read the first 7 Risk Assessment & Management flashcards as text
The Sharpe ratio is used to measure which of the following?
Answer: Risk-adjusted return per unit of total risk
The Sharpe ratio measures excess return (above the risk-free rate) per unit of total risk (standard deviation), allowing comparison of risk-adjusted performance.
A 65-year-old retiree is concerned about outliving her savings. Which type of risk is she MOST concerned about?
Answer: Longevity risk
Longevity risk is the risk of outliving one's financial resources, a primary concern for retirees who may live longer than anticipated.
A client holds a large concentration in their employer's stock. The MOST appropriate risk management strategy is to:
Answer: Diversify by gradually selling shares and reinvesting in a diversified portfolio
Gradually diversifying away from concentrated employer stock reduces company-specific risk while managing tax implications from large taxable gains.
Which of the following BEST describes reinvestment risk?
Answer: The risk that cash flows will be reinvested at a lower rate than the original investment
Reinvestment risk is the risk that future cash flows, such as coupon payments, will be reinvested at lower interest rates than the original investment earned.
Which risk management technique involves transferring risk to a third party?
Answer: Risk transfer
Risk transfer shifts the financial burden of a risk to another party, most commonly through purchasing insurance or using hedging instruments like derivatives.
Standard deviation as a measure of risk is MOST useful when comparing investments that:
Answer: Are normally distributed and of similar types
Standard deviation is most meaningful when comparing investments with similar return distributions (approximately normal) and of comparable asset classes.
A client has significant human capital remaining (many working years ahead). How should this affect their investment portfolio risk level?
Answer: Human capital acts like a bond, so they can hold more equity in their financial portfolio
Human capital (future earnings) often resembles a bond-like asset, so investors with high human capital can afford to hold more equity in their financial portfolio for total balance.