(Risk Tolerance) Flashcards
7 cards from real Investment practice questions. Tap to flip, then mark Knew It or Still Learning — missed cards come back until you master them.
Read the first 7 (Risk Tolerance) flashcards as text
An investor's risk tolerance is BEST described as which of the following?
Answer: The willingness and ability to endure declines in portfolio value
Risk tolerance combines an investor's psychological willingness and financial ability to withstand losses.
Which factor generally INCREASES an investor's capacity to take on risk?
Answer: A longer investment time horizon
A longer time horizon allows more time to recover from market downturns, increasing risk capacity.
A questionnaire that asks how an investor would react to a 20% portfolio drop is measuring which dimension of risk?
Answer: Risk willingness (attitude)
Reaction to losses measures psychological willingness, the attitudinal component of risk tolerance.
An investor with LOW risk tolerance would most likely prefer which asset?
Answer: U.S. Treasury bonds
Treasury bonds offer stability and low volatility, suiting a low risk tolerance.
Why is it important to distinguish between risk capacity and risk willingness?
Answer: An investor may be willing to take risk but unable to afford the consequences
Willingness and capacity can conflict, so both must be assessed to set an appropriate strategy.
Which scenario suggests an investor has HIGH risk capacity but LOW risk willingness?
Answer: A wealthy retiree who panics during market dips
Ample wealth provides capacity, but the panic reaction reveals low psychological willingness.
How should a financial advisor typically handle a mismatch where willingness is lower than capacity?
Answer: Generally build the portfolio toward the lower of the two and educate the client
Advisors usually anchor to the more conservative measure to avoid the client abandoning the plan during stress.