Investment Advisor Risk Management and Insurance in Financial Planning 2

Question 1

Longevity risk in retirement planning refers to:

Accepted Answer

The risk of outliving one's retirement assets

Answer

Longevity risk is the risk that a retiree will outlive their savings — a key concern as life expectancies continue to increase.

Question 2

Which strategy is most commonly recommended to hedge longevity risk in retirement?

Accepted Answer

Purchasing an annuity that provides guaranteed lifetime income

Answer

Annuities that guarantee income for life are the primary tool for hedging longevity risk, ensuring retirement income regardless of how long the retiree lives.

Question 3

Interest rate risk primarily affects which type of investment?

Accepted Answer

Fixed-income (bond) investments

Answer

Bond prices move inversely to interest rates — when rates rise, existing bond prices fall — making fixed-income investments most exposed to interest rate risk.

Question 4

Duration is a measure used to estimate a bond's sensitivity to changes in interest rates. A bond with a duration of 5 years will approximately lose how much in value if rates rise by 1%?

Accepted Answer

5%

Answer

Duration approximates the percentage price change per 1% change in interest rates — a duration of 5 means approximately a 5% price change for a 1% rate move.

Question 5

Credit risk (default risk) is best described as:

Accepted Answer

The risk that a bond issuer will fail to make promised payments

Answer

Credit risk is the risk that a bond issuer will default on interest payments or fail to repay principal, resulting in loss to bondholders.

Investment Advisor Practice Test

Investment Advisor Practice Test

Investment Advisor Risk Management and Insurance in Financial Planning 2