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 has a 10-year investment horizon and moderate risk tolerance. Which of the following best describes the role of time horizon in risk capacity?
Answer: Longer horizons increase risk capacity because there is more time to recover from losses
A longer time horizon increases risk capacity because the investor has more time to recover from market downturns before needing the funds.
Which type of risk refers to the possibility that inflation will erode the purchasing power of an investment's returns?
Answer: Purchasing power risk
Purchasing power risk (inflation risk) is the danger that rising prices will reduce the real value of investment returns over time.
A client asks about diversification. Which statement about diversification is MOST accurate?
Answer: Diversification reduces unsystematic risk but not systematic risk
Diversification reduces unsystematic (company-specific) risk, but systematic (market-wide) risk cannot be diversified away.
What does a beta of 1.5 indicate about a stock relative to the overall market?
Answer: The stock is expected to move 1.5% for every 1% move in the market
A beta of 1.5 means the stock is expected to move 1.5% for every 1% move in the benchmark market index, indicating higher volatility.
When assessing a client's risk tolerance using a questionnaire, a CFP professional should be aware that:
Answer: Stated risk tolerance often overstates actual tolerance during bull markets
During bull markets, clients often overstate their risk tolerance because they haven't experienced significant losses; actual behavior under stress may differ from stated preferences.
A client's portfolio lost 25% last year, and they are now requesting a much more conservative allocation. This behavioral response is BEST described as:
Answer: Loss aversion leading to recency bias
Loss aversion combined with recency bias causes investors to overweight recent painful experiences and shift to overly conservative allocations after market declines.
Which of the following is an example of unsystematic risk?
Answer: A pharmaceutical company losing a major patent lawsuit
Unsystematic risk is company-specific or industry-specific risk, such as a single company losing a patent lawsuit, which can be reduced through diversification.