Risk Assessment & Management Flashcards
7 cards from real CFP 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 the concept of 'risk capacity' as distinct from 'risk tolerance'?
Answer: Risk capacity is the financial ability to absorb losses; tolerance is the emotional willingness
Risk capacity is an objective measure of financial ability to withstand losses without jeopardizing goals, while risk tolerance is the subjective, emotional willingness to accept volatility.
Value at Risk (VaR) at a 95% confidence level over one month means:
Answer: There is a 5% chance losses will exceed the stated VaR amount in a given month
A 95% VaR means there is a 5% probability that losses will exceed the stated amount over the specified period, not that losses are capped at that level.
A client's portfolio has a high correlation with the S&P 500. This indicates:
Answer: The portfolio will move similarly to the S&P 500, providing limited diversification benefit
High correlation with the S&P 500 means the portfolio tends to move in the same direction as the index, offering limited diversification away from U.S. equity market risk.
Which of the following is the PRIMARY benefit of rebalancing a portfolio?
Answer: Rebalancing maintains the client's intended risk level by restoring target allocations
Rebalancing restores the portfolio to its target asset allocation, ensuring the portfolio's risk profile remains consistent with the client's objectives and risk tolerance.
A client wants to protect a concentrated stock position without selling shares. Which strategy is MOST appropriate?
Answer: Purchasing protective put options on the stock
Purchasing protective puts gives the investor the right to sell the stock at a predetermined price, limiting downside risk while allowing continued ownership of the shares.
Which of the following scenarios illustrates sequence of returns risk?
Answer: A retiree experiences large losses in early retirement years despite good average long-term returns
Sequence of returns risk occurs when poor returns early in retirement deplete the portfolio through withdrawals before market recovery can restore value, even if long-term averages are acceptable.
When a CFP professional recommends a more conservative allocation than a client requests, the professional is MOST likely addressing:
Answer: The client's risk tolerance exceeding their risk capacity
When a client's emotional desire for returns (risk tolerance) exceeds their financial ability to absorb losses (risk capacity), the CFP should recommend an allocation aligned with the more limiting factor.