(Risk Tolerance) Flashcards

Diversification reduces which type of risk in a portfolio?

Answer: Unsystematic (company-specific) risk

Spreading investments reduces risk tied to individual companies, though not overall market risk.

A conservative investor most concerned with capital preservation would prioritize which goal?

Answer: Protecting principal from loss

Capital preservation focuses on minimizing the chance of losing the original investment.

Which pairing correctly matches an investor profile with a suitable strategy?

Answer: High risk tolerance → growth-oriented equity portfolio

A growth equity portfolio aligns with an investor able and willing to accept higher volatility.

As investors age, the traditional 'glide path' approach suggests doing what to the portfolio?

Answer: Gradually shifting from stocks toward bonds

Glide paths reduce risk over time by moving from growth assets toward more stable income assets.

Why might two investors with the same age and income have different risk tolerances?

Answer: Personal goals, experiences, and psychological comfort with loss differ

Risk tolerance is individual, shaped by goals, past experiences, and emotional makeup.

An investor who sells everything at the bottom of a market crash most likely did what?

Answer: Overestimated their true risk tolerance

Panic-selling at the bottom reveals the investor took on more risk than they could emotionally handle.

Which question best assesses an investor's risk capacity rather than willingness?

Answer: What portion of your income do you need to draw from these investments soon?

Capacity questions focus on financial facts like income needs and time horizon, not emotions.