CFP Risk Assessment & Management 2

Question 1

A client has a 10-year investment horizon and moderate risk tolerance. Which of the following best describes the role of time horizon in risk capacity?

Accepted Answer

Longer horizons increase risk capacity because there is more time to recover from losses

Answer

A longer time horizon increases risk capacity because the investor has more time to recover from market downturns before needing the funds.

Question 2

Which type of risk refers to the possibility that inflation will erode the purchasing power of an investment's returns?

Accepted Answer

Purchasing power risk

Answer

Purchasing power risk (inflation risk) is the danger that rising prices will reduce the real value of investment returns over time.

Question 3

A client asks about diversification. Which statement about diversification is MOST accurate?

Accepted Answer

Diversification reduces unsystematic risk but not systematic risk

Answer

Diversification reduces unsystematic (company-specific) risk, but systematic (market-wide) risk cannot be diversified away.

Question 4

What does a beta of 1.5 indicate about a stock relative to the overall market?

Accepted Answer

The stock is expected to move 1.5% for every 1% move in the market

Answer

A beta of 1.5 means the stock is expected to move 1.5% for every 1% move in the benchmark market index, indicating higher volatility.

Question 5

When assessing a client's risk tolerance using a questionnaire, a CFP professional should be aware that:

Accepted Answer

Stated risk tolerance often overstates actual tolerance during bull markets

Answer

During bull markets, clients often overstate their risk tolerance because they haven't experienced significant losses; actual behavior under stress may differ from stated preferences.

(CFP) Certified Fitness Professional Practice Test

(CFP) Certified Fitness Professional Practice Test

CFP Risk Assessment & Management 2