(Risk Tolerance) Flashcards

Inflation risk is especially important for which type of investor to consider?

Answer: An overly conservative investor holding mostly cash long-term

Holding too much cash exposes long-term investors to losing purchasing power from inflation.

A balanced (moderate risk tolerance) portfolio is typically described as which mix?

Answer: A blend of stocks and bonds, such as 60/40

A moderate investor balances growth and stability, often around 60% stocks and 40% bonds.

Which statement about the risk-return tradeoff is accurate?

Answer: Higher potential returns generally require accepting higher risk

The fundamental tradeoff is that pursuing higher returns typically means taking on more risk.

An investor's risk tolerance should be reviewed and possibly updated when?

Answer: After major life changes such as marriage, job loss, or nearing retirement

Significant life events alter financial capacity and goals, warranting a reassessment of risk tolerance.

What is the main danger of investing too conservatively relative to one's actual risk capacity?

Answer: Failing to grow wealth enough to meet long-term goals

Being too cautious can leave returns too low to reach goals like a comfortable retirement.

Which investor is demonstrating an appropriate alignment of risk tolerance and strategy?

Answer: A 25-year-old with stable income and long horizon investing heavily in stocks

A young investor with a long horizon and stable income is well-suited to a stock-heavy portfolio.

A 'risk premium' refers to what in investing?

Answer: The extra return investors demand for taking on additional risk

The risk premium is the additional expected return that compensates investors for bearing higher risk.