IAR Risk Assessment & Management 2

Question 1

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

Accepted Answer

14%

Answer

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.

Question 2

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

Accepted Answer

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

Answer

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

Question 3

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

Accepted Answer

Time horizon and volatility risk

Answer

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.

Question 4

Standard deviation is used in portfolio analysis primarily to measure:

Accepted Answer

The total variability of returns around the mean

Answer

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

Question 5

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

Accepted Answer

Beginning to draw down their portfolio in retirement

Answer

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

IAR Practice Test

IAR Practice Test

IAR Risk Assessment & Management 2