FPQP FPQP Risk Management 1 — Questions and Answers
Question 1: Which type of risk refers to the possibility that a client will outlive their financial assets?
- Market risk
- Longevity risk (Correct answer)
- Inflation risk
- Sequence risk
Correct 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.
Question 2: A client holds a concentrated position in a single stock. Which risk management strategy best addresses this?
- Hedging with options
- Diversification (Correct answer)
- Purchasing term life insurance
- Increasing bond allocation
Correct answer: Diversification
Diversification reduces concentration risk by spreading investments across multiple assets, lowering the impact of any single position.
Question 3: Sequence-of-returns risk is most critical during which phase of a client's financial life?
- Accumulation phase
- Early career phase
- Distribution phase (Correct answer)
- Education funding phase
Correct answer: Distribution phase
Poor returns early in the distribution phase permanently reduce the portfolio since withdrawals are being taken while assets are depressed.
Question 4: Which of the following best defines systematic risk?
- Risk specific to one company
- Risk that can be eliminated through diversification
- Risk affecting the entire market that cannot be diversified away (Correct answer)
- Risk from currency fluctuations only
Correct 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.
Question 5: A client nearing retirement is concerned about a major market downturn shortly after they retire. Which strategy specifically addresses this concern?
- Dollar-cost averaging
- Bucket strategy (Correct answer)
- Tax-loss harvesting
- Rebalancing annually
Correct 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.
Question 6: Inflation risk most directly threatens which type of investment?
- Growth stocks
- Real estate investment trusts
- Fixed-rate bonds (Correct answer)
- Commodity funds
Correct answer: Fixed-rate bonds
Fixed-rate bonds pay a set nominal return, so rising inflation erodes their real purchasing power over time.
FPQP FPQP Risk Management 1
Which type of risk refers to the possibility that a client will outlive their financial assets?