CFM Risk Assessment & Asset Allocation — Questions and Answers
Question 1: What is the primary goal of asset allocation?
- To increase tax liabilities.
- To eliminate all investment risks.
- To diversify and manage risk effectively (Correct answer)
- To invest only in fixed-income assets.
Correct answer: To diversify and manage risk effectively
Asset allocation helps investors balance risk and reward by distributing investments among different asset classes.
Question 2: What is a risk tolerance questionnaire used for?
- To create a retirement plan.
- To assess investment product fees.
- To determine an investor's risk capacity and preferences (Correct answer)
- To predict interest rates.
Correct answer: To determine an investor's risk capacity and preferences
It helps determine how much risk an investor is willing and able to take based on their goals, time horizon, and financial situation.
Question 3: Which portfolio strategy adjusts allocation based on market trends?
- Strategic asset allocation.
- Tactical asset allocation (Correct answer)
- Fixed income laddering.
- Buy-and-hold strategy.
Correct answer: Tactical asset allocation
Tactical asset allocation is a dynamic strategy that adjusts portfolio weights to take advantage of market conditions.
Question 4: What is considered a low-risk investment?
- Cryptocurrency.
- Startup venture capital.
- Government treasury bonds (Correct answer)
- Emerging market stocks.
Correct answer: Government treasury bonds
Low-risk investments typically provide lower returns and include instruments like government bonds or high-yield savings accounts.
Question 5: Why is diversification important in portfolio management?
- It guarantees profit.
- It reduces transaction fees.
- It eliminates all investment risks.
- It spreads risk across multiple investments (Correct answer)
Correct answer: It spreads risk across multiple investments
Diversification reduces the impact of poor performance from a single asset class or investment on the overall portfolio.
Question 6: Which asset class is typically the most volatile?
- Government bonds.
- Real estate investment trusts.
- Cash equivalents.
- Equities (stocks) (Correct answer)
Correct answer: Equities (stocks)
Equities (stocks) often experience greater fluctuations in value compared to bonds or cash equivalents.
Question 7: What factor should influence asset allocation decisions?
- The investor's favorite company.
- Market rumors and media.
- Time horizon, goals, and risk tolerance (Correct answer)
- The popularity of the asset.
Correct answer: Time horizon, goals, and risk tolerance
Time horizon, risk tolerance, and financial goals are essential in determining appropriate asset allocation.
Question 8: What is the primary risk of an overly aggressive portfolio?
- It becomes too diversified.
- It underperforms in a bull market.
- It faces higher volatility and risk of loss (Correct answer)
- It earns guaranteed returns.
Correct answer: It faces higher volatility and risk of loss
Overly aggressive portfolios may yield higher returns but are exposed to greater volatility and potential losses.
Question 9: What is rebalancing in the context of asset allocation?
- Selling all assets regularly.
- Buying more of the most profitable assets.
- Adjusting holdings to realign with target allocation (Correct answer)
- Avoiding changes during volatility.
Correct answer: Adjusting holdings to realign with target allocation
Rebalancing involves adjusting portfolio weights to maintain the desired asset allocation as market values shift.
CFM Risk Assessment & Asset Allocation
What is the primary goal of asset allocation?