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
Value at Risk (VaR) is a risk measure that estimates:
Answer: The maximum loss expected within a specified confidence level over a defined period
VaR estimates the maximum loss likely to be exceeded with a given probability (e.g., 5%) over a specified time horizon, helping quantify downside risk.
An investment adviser uses a Monte Carlo simulation in retirement planning to:
Answer: Model thousands of potential market scenarios to estimate the probability of retirement success
Monte Carlo simulations run thousands of random market scenario models to estimate the probability that a retirement plan will succeed across a wide range of possible outcomes.
Which type of annuity allows the accumulation value to be invested in sub-accounts, subjecting it to market risk?
Answer: Variable annuity
Variable annuities allow contract holders to invest in sub-accounts similar to mutual funds, providing market participation but also market risk — unlike fixed or indexed annuities.
An adviser discussing 'concentration risk' with a client is warning about the danger of:
Answer: Having too large a proportion of assets in a single security or sector
Concentration risk arises when too much of a portfolio is invested in a single company, sector, or asset type, making the portfolio highly vulnerable to that specific position.
A client's portfolio has a standard deviation of 15% and the risk-free rate is 3%. If the portfolio returned 12%, what is the Sharpe Ratio?
Answer: 0.60
Sharpe Ratio = (Portfolio Return - Risk-Free Rate) / Standard Deviation = (12% - 3%) / 15% = 9% / 15% = 0.60.
An investment adviser building a liability-driven investment (LDI) strategy for a client is primarily focused on:
Answer: Matching portfolio assets to the timing and amount of specific future liabilities
LDI strategies design the portfolio to match the duration and cash flows of specific future obligations (liabilities), reducing the risk that assets will be insufficient to meet those obligations.