Risk Assessment & Management Flashcards
7 cards from real IAR 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
Which of the following best describes 'political risk' as it pertains to international investments?
Answer: The risk that government actions in a foreign country will adversely affect investment values
Political risk refers to the possibility that foreign government actions — such as nationalization, currency controls, or regulatory changes — will negatively impact an investor's returns.
A client is 45 years old with a 20-year investment horizon. According to modern portfolio theory, which of the following is most appropriate for this time horizon?
Answer: A diversified portfolio tilted toward equities to pursue long-term growth
With a 20-year horizon, the client can weather short-term volatility, making a diversified equity-tilted portfolio appropriate to build wealth over time.
The term 'risk-adjusted return' is most closely associated with which concept?
Answer: Evaluating investment performance relative to the amount of risk taken to achieve that return
Risk-adjusted return measures how much return was earned per unit of risk, allowing fair comparison between investments with different risk profiles.
A client requests that the IAR move all assets to cash because they fear a market correction. The IAR's best response in the context of risk management is to:
Answer: Discuss the client's concerns, review the IPS, and explain the risks of market-timing including inflation and reinvestment risk
An IAR acting as a fiduciary must engage the client in a dialogue about the risks of market-timing, reference the agreed-upon IPS, and ensure any changes are in the client's best long-term interest.
Systematic risk is also known as:
Answer: Market or non-diversifiable risk
Systematic risk is the risk inherent to the entire market (e.g., recessions, interest rate changes) and cannot be eliminated through diversification, hence it is called non-diversifiable risk.
An IAR is constructing a portfolio for a client with a low risk tolerance. Which metric would best confirm the portfolio's downside risk profile?
Answer: Maximum drawdown
Maximum drawdown measures the largest peak-to-trough decline in portfolio value, giving a clear picture of the worst historical downside experience — most relevant for low-risk-tolerance clients.
A client in the top federal tax bracket is concerned about after-tax returns. Which risk management strategy directly addresses this concern?
Answer: Utilizing tax-loss harvesting to offset capital gains
Tax-loss harvesting realizes losses to offset capital gains, directly reducing tax drag on the portfolio and improving after-tax risk-adjusted returns.