CPS Risk Management in Portfolios 2

Question 1

What is 'concentration risk' in a portfolio?

Accepted Answer

Risk from having too large a position in a single security or sector

Answer

Concentration risk arises when a portfolio has too much exposure to a single investment, sector, or geographic region.

Question 2

What is 'liquidity risk' in portfolio management?

Accepted Answer

The risk of not being able to sell an asset quickly at fair value

Answer

Liquidity risk is the possibility that an investment cannot be sold quickly enough or at a fair price when needed.

Question 3

What is 'credit risk' in the context of bond investing?

Accepted Answer

The risk that a bond issuer will default on payments

Answer

Credit risk is the probability that a bond issuer will fail to make required interest or principal payments.

Question 4

Which risk management technique involves setting a predetermined price to automatically sell a position?

Accepted Answer

Stop-loss order

Answer

A stop-loss order automatically sells a security when its price falls to a predetermined level, limiting downside losses.

Question 5

What is 'inflation risk' (purchasing power risk) in a portfolio?

Accepted Answer

The risk that returns will not keep pace with inflation

Answer

Inflation risk is the danger that investment returns will be eroded by inflation, reducing the portfolio's real purchasing power.

CPS - Certified Portfolio Specialist Practice Test