Risk Assessment & Asset Allocation Flashcards

What is the primary goal of asset allocation?

Answer: To diversify and manage risk effectively

Asset allocation helps investors balance risk and reward by distributing investments among different asset classes.

What is a risk tolerance questionnaire used for?

Answer: To determine an investor's risk capacity and preferences

It helps determine how much risk an investor is willing and able to take based on their goals, time horizon, and financial situation.

Which portfolio strategy adjusts allocation based on market trends?

Answer: Tactical asset allocation

Tactical asset allocation is a dynamic strategy that adjusts portfolio weights to take advantage of market conditions.

What is considered a low-risk investment?

Answer: Government treasury bonds

Low-risk investments typically provide lower returns and include instruments like government bonds or high-yield savings accounts.

Why is diversification important in portfolio management?

Answer: It spreads risk across multiple investments

Diversification reduces the impact of poor performance from a single asset class or investment on the overall portfolio.

Which asset class is typically the most volatile?

Answer: Equities (stocks)

Equities (stocks) often experience greater fluctuations in value compared to bonds or cash equivalents.

What factor should influence asset allocation decisions?

Answer: Time horizon, goals, and risk tolerance

Time horizon, risk tolerance, and financial goals are essential in determining appropriate asset allocation.

What is the primary risk of an overly aggressive portfolio?

Answer: It faces higher volatility and risk of loss

Overly aggressive portfolios may yield higher returns but are exposed to greater volatility and potential losses.

What is rebalancing in the context of asset allocation?

Answer: Adjusting holdings to realign with target allocation

Rebalancing involves adjusting portfolio weights to maintain the desired asset allocation as market values shift.