CIFC Risk Assessment and Financial Planning 3 — Questions and Answers
Question 1: Which of the following scenarios best illustrates concentration risk?
- Holding bonds from 10 different issuers
- Allocating 70% of a portfolio to a single sector (Correct answer)
- Investing in both domestic and international equities
- Balancing equity and fixed-income allocations equally
Correct answer: Allocating 70% of a portfolio to a single sector
Concentration risk arises when a large portion of a portfolio is allocated to a single sector, security, or asset class.
Question 2: A client's investment policy statement specifies a maximum equity allocation of 60%. The current equity weight is 68% after market gains. What action is required?
- No action; market drift is acceptable
- Rebalance the portfolio back to the 60% equity target (Correct answer)
- Increase the fixed-income allocation only if the client requests it
- Liquidate all equity positions immediately
Correct answer: Rebalance the portfolio back to the 60% equity target
Portfolio drift beyond policy limits requires rebalancing to realign with the client's agreed risk profile and investment policy statement.
Question 3: In the context of financial planning, what does 'time horizon' primarily influence?
- The tax treatment of capital gains
- The client's ability to recover from short-term losses and tolerate volatility (Correct answer)
- The number of securities in a portfolio
- The fee structure of the investment fund
Correct answer: The client's ability to recover from short-term losses and tolerate volatility
A longer time horizon allows an investor more time to recover from market downturns, generally supporting higher risk tolerance.
Question 4: Which type of risk CANNOT be eliminated through diversification?
- Business risk
- Default risk
- Systematic risk (Correct answer)
- Liquidity risk
Correct answer: Systematic risk
Systematic (market) risk affects all securities and cannot be diversified away, unlike unsystematic risks tied to individual issuers.
Question 5: A client has a high income but significant debt obligations and limited liquid savings. How should their risk capacity be assessed?
- High, because their income is high
- Low, because debt and illiquidity limit their financial cushion (Correct answer)
- Moderate, balancing income against liabilities
- Irrelevant, as income always offsets debt risk
Correct answer: Low, because debt and illiquidity limit their financial cushion
High income alone does not mean high risk capacity; significant debt and low liquidity reduce the client's ability to absorb investment losses.
Question 6: What is the primary purpose of an emergency fund in a financial plan?
- To maximize tax-deferred growth
- To provide liquidity for unexpected expenses without liquidating investments (Correct answer)
- To fund short-term speculative trades
- To satisfy RRSP contribution limits
Correct answer: To provide liquidity for unexpected expenses without liquidating investments
An emergency fund ensures clients can cover unexpected costs without being forced to sell investments at potentially unfavorable times.
Question 7: A risk questionnaire assigns a client a score of 35 out of 100. Which risk profile category would this MOST likely place them in?
- Aggressive growth
- Balanced
- Conservative (Correct answer)
- Speculative
Correct answer: Conservative
A low score on a risk questionnaire typically indicates low risk tolerance, placing the client in the conservative category.
CIFC Risk Assessment and Financial Planning 3
Which of the following scenarios best illustrates concentration risk?