FPQP FPQP Risk Management 2 — Questions and Answers
Question 1: Which measure quantifies the volatility of a portfolio relative to a benchmark index?
- Alpha
- Beta (Correct answer)
- Sharpe ratio
- Standard deviation
Correct answer: Beta
Beta measures a portfolio's sensitivity to benchmark movements; a beta above 1.0 indicates greater volatility than the market.
Question 2: A client's risk tolerance questionnaire indicates high willingness but low ability to take risk. A paraplanner should recommend a portfolio based on:
- Willingness to take risk
- Ability to take risk (Correct answer)
- The average of both scores
- Neither; defer to the client's preference
Correct answer: Ability to take risk
When willingness and ability to take risk conflict, the more conservative measure—ability—should govern the recommended portfolio.
Question 3: Reinvestment risk is primarily a concern when interest rates:
- Rise sharply
- Fall significantly (Correct answer)
- Remain stable
- Become more volatile
Correct answer: Fall significantly
When rates fall, coupon payments and maturing bond proceeds must be reinvested at lower prevailing rates, reducing overall income.
Question 4: Which insurance product is specifically designed to transfer longevity risk from a client to an insurance company?
- Term life insurance
- Deferred income annuity (Correct answer)
- Disability income insurance
- Long-term care insurance
Correct 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.
Question 5: What does a Sharpe ratio measure?
- Total return of a portfolio
- Excess return per unit of total risk (Correct answer)
- Portfolio correlation to the market
- Maximum drawdown of a portfolio
Correct 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.
Question 6: A client's emergency fund is best held in which type of account from a risk management perspective?
- Equity mutual fund
- Long-term bond fund
- High-yield savings or money market account (Correct answer)
- Real estate investment trust
Correct 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.
FPQP FPQP Risk Management 2
Which measure quantifies the volatility of a portfolio relative to a benchmark index?