CFP Risk Assessment & Management 3

Question 1

The Sharpe ratio is used to measure which of the following?

Accepted Answer

Risk-adjusted return per unit of total risk

Answer

The Sharpe ratio measures excess return (above the risk-free rate) per unit of total risk (standard deviation), allowing comparison of risk-adjusted performance.

Question 2

A 65-year-old retiree is concerned about outliving her savings. Which type of risk is she MOST concerned about?

Accepted Answer

Longevity risk

Answer

Longevity risk is the risk of outliving one's financial resources, a primary concern for retirees who may live longer than anticipated.

Question 3

A client holds a large concentration in their employer's stock. The MOST appropriate risk management strategy is to:

Accepted Answer

Diversify by gradually selling shares and reinvesting in a diversified portfolio

Answer

Gradually diversifying away from concentrated employer stock reduces company-specific risk while managing tax implications from large taxable gains.

Question 4

Which of the following BEST describes reinvestment risk?

Accepted Answer

The risk that cash flows will be reinvested at a lower rate than the original investment

Answer

Reinvestment risk is the risk that future cash flows, such as coupon payments, will be reinvested at lower interest rates than the original investment earned.

Question 5

Which risk management technique involves transferring risk to a third party?

Accepted Answer

Risk transfer

Answer

Risk transfer shifts the financial burden of a risk to another party, most commonly through purchasing insurance or using hedging instruments like derivatives.

(CFP) Certified Fitness Professional Practice Test

(CFP) Certified Fitness Professional Practice Test

CFP Risk Assessment & Management 3