(Risk Tolerance) Flashcards

Standard deviation is commonly used in investing to measure what?

Answer: The volatility, or dispersion, of an asset's returns

Standard deviation quantifies how much returns vary, a core measure of risk.

An aggressive investor with high risk tolerance would typically hold a portfolio weighted toward which allocation?

Answer: A higher percentage of equities

Equities offer higher expected returns and volatility, fitting an aggressive, high-tolerance investor.

Which of these life events would most likely DECREASE an investor's risk tolerance?

Answer: Approaching retirement and needing income soon

Nearing retirement shortens the horizon and increases the need for capital preservation.

The concept of 'risk-adjusted return' helps investors do what?

Answer: Compare returns relative to the amount of risk taken

Risk-adjusted return evaluates how much return was earned per unit of risk, enabling fair comparison.

A 30-year-old investing for retirement at 65 can generally tolerate more risk because of which principle?

Answer: Time diversification allows recovery from short-term losses

A long horizon lets short-term volatility average out, supporting greater equity exposure.

Which behavioral bias can cause investors to MISJUDGE their true risk tolerance during a bull market?

Answer: Overconfidence

Rising markets often make investors overconfident, leading them to overestimate their tolerance for risk.

An emergency fund covering 3–6 months of expenses primarily supports risk tolerance by doing what?

Answer: Allowing investments to stay invested during downturns rather than being sold for cash

A cash cushion prevents forced selling, raising an investor's ability to ride out volatility.