FPQP Risk Management Flashcards

Which term describes the risk that a portfolio's manager underperforms a benchmark?

Answer: Both A and B

Active risk (also called tracking error) quantifies the volatility of the difference between a portfolio's return and its benchmark, reflecting manager risk.

Credit risk in a bond portfolio refers to the risk that:

Answer: The bond issuer will default or be downgraded

Credit risk is the probability that a bond issuer fails to make scheduled interest or principal payments, or has its creditworthiness downgraded.

Which of the following is an example of unsystematic risk?

Answer: A product recall harming one company's stock price

Unsystematic risk is company- or industry-specific and can be reduced through diversification, unlike broad market risks.

When constructing a risk management plan, a paraplanner should prioritize risks based on:

Answer: Probability of occurrence and severity of impact

Effective risk management ranks exposures by how likely they are and how severe the financial impact would be if they occurred.

Liquidity risk in a client's portfolio is best described as the risk of:

Answer: Being unable to convert an asset to cash quickly without significant loss

Liquidity risk is the danger that an investor cannot sell an asset promptly at a fair price, potentially forcing a sale at a steep discount.

A client asks about using a stop-loss order to manage risk in their equity portfolio. This strategy is an example of:

Answer: Risk reduction

A stop-loss order limits downside losses by automatically triggering a sale if a stock falls to a specified price, reducing the magnitude of potential loss.