FPQP Risk Management Flashcards

Which type of risk refers to the possibility that a client will outlive their financial assets?

Answer: Longevity risk

Longevity risk is the danger that a client lives longer than their savings last, making it a core concern in retirement planning.

A client holds a concentrated position in a single stock. Which risk management strategy best addresses this?

Answer: Diversification

Diversification reduces concentration risk by spreading investments across multiple assets, lowering the impact of any single position.

Sequence-of-returns risk is most critical during which phase of a client's financial life?

Answer: Distribution phase

Poor returns early in the distribution phase permanently reduce the portfolio since withdrawals are being taken while assets are depressed.

Which of the following best defines systematic risk?

Answer: Risk affecting the entire market that cannot be diversified away

Systematic risk, also called market risk, affects all securities and cannot be eliminated through portfolio diversification.

A client nearing retirement is concerned about a major market downturn shortly after they retire. Which strategy specifically addresses this concern?

Answer: Bucket strategy

The bucket strategy separates assets into short-, medium-, and long-term segments so near-term withdrawals are not forced from depressed equity holdings.

Inflation risk most directly threatens which type of investment?

Answer: Fixed-rate bonds

Fixed-rate bonds pay a set nominal return, so rising inflation erodes their real purchasing power over time.