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FPQP Risk Management Flashcards

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Read the first 6 FPQP Risk Management flashcards as text

  1. Which measure quantifies the volatility of a portfolio relative to a benchmark index?

    Answer: Beta

    Beta measures a portfolio's sensitivity to benchmark movements; a beta above 1.0 indicates greater volatility than the market.

  2. A client's risk tolerance questionnaire indicates high willingness but low ability to take risk. A paraplanner should recommend a portfolio based on:

    Answer: Ability to take risk

    When willingness and ability to take risk conflict, the more conservative measure—ability—should govern the recommended portfolio.

  3. Reinvestment risk is primarily a concern when interest rates:

    Answer: Fall significantly

    When rates fall, coupon payments and maturing bond proceeds must be reinvested at lower prevailing rates, reducing overall income.

  4. Which insurance product is specifically designed to transfer longevity risk from a client to an insurance company?

    Answer: Deferred income annuity

    A deferred income annuity (DIA) provides guaranteed income starting at a future date, transferring the risk of outliving assets to the insurer.

  5. What does a Sharpe ratio measure?

    Answer: Excess return per unit of total risk

    The Sharpe ratio divides a portfolio's excess return above the risk-free rate by its standard deviation, indicating return earned per unit of risk.

  6. A client's emergency fund is best held in which type of account from a risk management perspective?

    Answer: High-yield savings or money market account

    Emergency funds require high liquidity and capital preservation, which are best provided by FDIC-insured savings or money market accounts.

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