Risk Management and Insurance in Financial Planning 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 Risk Management and Insurance in Financial Planning flashcards as text
Longevity risk in retirement planning refers to:
Answer: The risk of outliving one's retirement assets
Longevity risk is the risk that a retiree will outlive their savings — a key concern as life expectancies continue to increase.
Which strategy is most commonly recommended to hedge longevity risk in retirement?
Answer: Purchasing an annuity that provides guaranteed lifetime income
Annuities that guarantee income for life are the primary tool for hedging longevity risk, ensuring retirement income regardless of how long the retiree lives.
Interest rate risk primarily affects which type of investment?
Answer: Fixed-income (bond) investments
Bond prices move inversely to interest rates — when rates rise, existing bond prices fall — making fixed-income investments most exposed to interest rate risk.
Duration is a measure used to estimate a bond's sensitivity to changes in interest rates. A bond with a duration of 5 years will approximately lose how much in value if rates rise by 1%?
Answer: 5%
Duration approximates the percentage price change per 1% change in interest rates — a duration of 5 means approximately a 5% price change for a 1% rate move.
Credit risk (default risk) is best described as:
Answer: The risk that a bond issuer will fail to make promised payments
Credit risk is the risk that a bond issuer will default on interest payments or fail to repay principal, resulting in loss to bondholders.
A client asks about protecting against the risk of a major stock market decline in their portfolio. Which strategy provides the most direct hedge?
Answer: Purchasing put options on a stock index
Put options on a stock index increase in value when the index declines, providing a direct hedge against portfolio losses from market downturns.