Client Suitability and Portfolio Management Flashcards
6 cards from real Investment Advisor practice questions. Tap to flip, then mark Knew It or Still Learning — missed cards come back until you master them.
Read the first 6 Client Suitability and Portfolio Management flashcards as text
Which factor is MOST important when determining the suitability of an investment recommendation for a client?
Answer: The client's individual financial situation, goals, and risk tolerance
Suitability is determined primarily by the client's specific financial situation, investment objectives, time horizon, and risk tolerance — not product characteristics alone.
A client's 'investment policy statement' (IPS) typically includes all of the following EXCEPT:
Answer: The adviser's personal investment preferences
An IPS documents the client's objectives, constraints, and guidelines — it reflects the client's needs, not the adviser's personal preferences.
Modern Portfolio Theory (MPT) suggests that portfolio risk can be reduced through:
Answer: Diversification across assets with low correlations
MPT demonstrates that combining assets with low or negative correlations reduces overall portfolio volatility without necessarily sacrificing expected return.
A 65-year-old retired client with no earned income and moderate expenses is MOST likely best served by a portfolio emphasizing:
Answer: Income generation and capital preservation with moderate growth
A retired client with no earned income typically needs income generation and capital preservation, with modest growth to hedge inflation — not aggressive growth.
The efficient frontier in portfolio theory represents portfolios that:
Answer: Offer the highest expected return for each level of risk
The efficient frontier represents the set of optimal portfolios offering the maximum expected return for each level of risk — no portfolio above it is achievable.
Which factor describes the client's ability to withstand losses, separate from their willingness to do so?
Answer: Risk capacity
Risk capacity refers to a client's financial ability to absorb investment losses, while risk tolerance refers to their psychological willingness to accept risk.