Risk Assessment Flashcards

Under FINRA Rule 2111, which suitability obligation requires a broker to have a reasonable basis that a recommendation fits a specific customer's investment profile?

Answer: Customer-specific suitability

Customer-specific suitability ties the recommendation to the individual customer's profile, including risk tolerance.

An investor's risk tolerance is best described as a combination of:

Answer: Ability to take risk and willingness to take risk

Risk tolerance includes both financial capacity (ability) and psychological attitude (willingness).

A client with high willingness but low ability to take risk should generally be advised to:

Answer: Adopt a lower-risk allocation consistent with their ability

When the two conflict, the more conservative constraint, usually ability, should govern.

Which risk is most significant for a retiree holding mostly long-term cash and CDs over a 25-year horizon?

Answer: Purchasing power (inflation) risk

Low-yield cash holdings can lose real value to inflation over long periods.

Longevity risk for a retirement portfolio refers to the risk that:

Answer: The investor outlives their assets

Longevity risk is the chance that a person lives longer than their savings can support.

Sequence-of-returns risk is most damaging when poor returns occur:

Answer: Early in retirement while withdrawals are being taken

Early losses combined with withdrawals shrink the base that later returns can compound on.

A portfolio concentrated in a single employer's stock primarily exposes the investor to:

Answer: Unsystematic (concentration) risk

Heavy exposure to one company creates firm-specific risk that diversification could remove.