IAR Risk Assessment & Management 5

Question 1

Which of the following best describes 'political risk' as it pertains to international investments?

Accepted Answer

The risk that government actions in a foreign country will adversely affect investment values

Answer

Political risk refers to the possibility that foreign government actions — such as nationalization, currency controls, or regulatory changes — will negatively impact an investor's returns.

Question 2

A client is 45 years old with a 20-year investment horizon. According to modern portfolio theory, which of the following is most appropriate for this time horizon?

Accepted Answer

A diversified portfolio tilted toward equities to pursue long-term growth

Answer

With a 20-year horizon, the client can weather short-term volatility, making a diversified equity-tilted portfolio appropriate to build wealth over time.

Question 3

The term 'risk-adjusted return' is most closely associated with which concept?

Accepted Answer

Evaluating investment performance relative to the amount of risk taken to achieve that return

Answer

Risk-adjusted return measures how much return was earned per unit of risk, allowing fair comparison between investments with different risk profiles.

Question 4

A client requests that the IAR move all assets to cash because they fear a market correction. The IAR's best response in the context of risk management is to:

Accepted Answer

Discuss the client's concerns, review the IPS, and explain the risks of market-timing including inflation and reinvestment risk

Answer

An IAR acting as a fiduciary must engage the client in a dialogue about the risks of market-timing, reference the agreed-upon IPS, and ensure any changes are in the client's best long-term interest.

Question 5

Systematic risk is also known as:

Accepted Answer

Market or non-diversifiable risk

Answer

Systematic risk is the risk inherent to the entire market (e.g., recessions, interest rate changes) and cannot be eliminated through diversification, hence it is called non-diversifiable risk.

IAR Practice Test

IAR Practice Test

IAR Risk Assessment & Management 5