IAR Risk Assessment & Management 3

Question 1

A client's investment policy statement (IPS) should document risk tolerance as:

Accepted Answer

Both the client's willingness and ability to take risk

Answer

A complete risk assessment captures both risk capacity (financial ability to absorb losses) and risk tolerance (emotional willingness to endure volatility).

Question 2

Which of the following is an example of unsystematic risk that can be reduced through diversification?

Accepted Answer

A product recall that harms a single company's stock

Answer

Unsystematic (idiosyncratic) risk is company- or industry-specific and can be reduced by holding a diversified portfolio; a product recall affects only the specific company.

Question 3

When using Monte Carlo simulation in financial planning, an IAR is primarily assessing:

Accepted Answer

The probability of achieving financial goals across many scenarios

Answer

Monte Carlo simulation runs thousands of random scenarios to estimate the probability that a client's portfolio will meet its goals under various return and volatility assumptions.

Question 4

Duration is a key measure of risk for bond portfolios because it estimates:

Accepted Answer

The bond's sensitivity to changes in interest rates

Answer

Duration measures how much a bond's price will change for a 1% change in interest rates; longer duration means greater interest rate sensitivity.

Question 5

A client insists on concentrating 80% of investable assets in a single employer's stock. The IAR's primary responsibility is to:

Accepted Answer

Document the risk, explain diversification benefits, and retain the client's signed acknowledgment

Answer

IARs must act in the client's best interest by disclosing concentration risk and ensuring informed consent, while still respecting client autonomy.

IAR Practice Test

IAR Practice Test

IAR Risk Assessment & Management 3