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Risk Assessment & Management Flashcards

7 cards from real IAR practice questions. Tap to flip, then mark Knew It or Still Learning — missed cards come back until you master them.

Read the first 7 Risk Assessment & Management flashcards as text

  1. A client has a portfolio with a beta of 1.4. If the market declines by 10%, what is the expected portfolio decline?

    Answer: 14%

    Beta measures systematic risk; a beta of 1.4 means the portfolio is expected to move 1.4 times the market, so a 10% market decline implies a 14% portfolio decline.

  2. Which of the following best describes 'liquidity risk' in the context of investment management?

    Answer: The risk that an asset cannot be sold quickly without a significant price concession

    Liquidity risk is the danger that an investor cannot exit a position at a fair price due to insufficient market activity or depth.

  3. An IAR is reviewing a 70-year-old client's portfolio heavily weighted in small-cap growth stocks. The primary risk concern is:

    Answer: Time horizon and volatility risk

    A 70-year-old typically has a short time horizon, making high-volatility small-cap stocks inappropriate because there is limited time to recover from significant losses.

  4. Standard deviation is used in portfolio analysis primarily to measure:

    Answer: The total variability of returns around the mean

    Standard deviation quantifies how much a portfolio's returns deviate from its average return, serving as a measure of total risk.

  5. A client is concerned about sequence-of-returns risk. This risk is most relevant for clients who are:

    Answer: Beginning to draw down their portfolio in retirement

    Sequence-of-returns risk is the danger that poor early returns during the withdrawal phase can permanently deplete a portfolio before recovery can occur.

  6. Which risk management technique involves allocating a fixed percentage of a portfolio to different asset classes and periodically restoring those percentages?

    Answer: Rebalancing

    Rebalancing restores a portfolio to its target asset allocation by selling appreciated assets and buying underperforming ones.

  7. A client asks about the Sharpe Ratio. An IAR should explain that it measures:

    Answer: Excess return per unit of total risk (standard deviation)

    The Sharpe Ratio divides a portfolio's excess return (above the risk-free rate) by its standard deviation to indicate reward per unit of total risk.