Investment Advisor Risk Management and Insurance in Financial Planning

Question 1

Which type of life insurance provides a death benefit for a specified term and has no cash value component?

Accepted Answer

Term life insurance

Answer

Term life insurance provides pure death benefit protection for a defined period (e.g., 20 years) with no savings or cash value component, making it the most affordable option.

Question 2

An investment adviser recommending insurance products to clients should consider the client's insurance needs as part of which planning area?

Accepted Answer

Comprehensive risk management within the financial plan

Answer

Insurance is a key component of comprehensive risk management — protecting a client's human capital, assets, and estate — and should be integrated into the overall financial plan.

Question 3

What does 'systematic risk' refer to in portfolio management?

Accepted Answer

Market-wide risk that cannot be diversified away

Answer

Systematic risk (market risk) affects the entire market and cannot be eliminated through diversification — examples include recessions, interest rate changes, and geopolitical events.

Question 4

An investor holds a portfolio of 50 individual stocks. Further adding more stocks will primarily reduce which type of risk?

Accepted Answer

Unsystematic (company-specific) risk

Answer

Diversification eliminates unsystematic (idiosyncratic or company-specific) risk, while systematic risk remains regardless of how many stocks are held.

Question 5

Which risk describes the possibility that inflation will erode the purchasing power of a portfolio's returns?

Accepted Answer

Inflation (purchasing power) risk

Answer

Inflation risk (purchasing power risk) is the risk that investment returns will not keep pace with inflation, reducing the real value of wealth over time.

Investment Advisor Practice Test

Investment Advisor Practice Test

Investment Advisor Risk Management and Insurance in Financial Planning