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
A client is nearing retirement and shifts entirely to cash equivalents fearing a market downturn. This strategy MOST directly exposes them to:
Answer: Purchasing power risk and longevity risk
Holding only cash long-term exposes retirees to purchasing power erosion from inflation and longevity risk if low returns fail to sustain spending over a long retirement.
The coefficient of variation (CV) is MOST useful when:
Answer: Comparing risk per unit of return across investments with different expected returns
The coefficient of variation (standard deviation divided by expected return) allows comparison of relative risk per unit of return when investments have different expected returns.
Which of the following statements about Monte Carlo simulation in financial planning is MOST accurate?
Answer: Monte Carlo simulation runs thousands of scenarios to estimate the probability of achieving financial goals
Monte Carlo simulation uses random sampling across thousands of scenarios to model the probability that a financial plan will succeed under varying market conditions.
A client's portfolio has an R-squared of 0.95 relative to the S&P 500. This means:
Answer: 95% of the portfolio's return variability is explained by movements in the S&P 500
R-squared measures how much of a portfolio's return variation is explained by the benchmark; an R-squared of 0.95 means 95% of return variability is attributable to S&P 500 movements.
Which of the following risk management strategies involves accepting a risk and setting aside funds to cover potential losses?
Answer: Risk retention (self-insurance)
Risk retention, or self-insurance, means the individual accepts financial responsibility for a risk and sets aside reserves to cover potential losses rather than purchasing insurance.
A client's risk profile assessment reveals high risk tolerance but low risk capacity due to significant debt and limited emergency reserves. The CFP should MOST appropriately:
Answer: Recommend a conservative portfolio aligned with the client's risk capacity
When risk tolerance and risk capacity conflict, the CFP should recommend a portfolio consistent with the more restrictive factor—in this case, the client's limited financial ability to absorb losses.
Which of the following BEST describes 'political risk' in the context of international investing?
Answer: The risk that government actions, instability, or policy changes in a foreign country will negatively impact investment returns
Political risk refers to the possibility that government instability, policy changes, expropriation, or geopolitical events in a foreign country will adversely affect international investment returns.