Investment (Risk Tolerance) 2

Question 1

An investor's risk tolerance is BEST described as which of the following?

Accepted Answer

The willingness and ability to endure declines in portfolio value

Answer

The guaranteed rate of return on a portfolio

Answer

The total amount of money an investor has saved

Answer

The number of stocks held in a portfolio

Question 2

Which factor generally INCREASES an investor's capacity to take on risk?

Accepted Answer

A longer investment time horizon

Answer

A shorter time until retirement

Answer

A high level of essential expenses

Answer

An unstable source of income

Question 3

A questionnaire that asks how an investor would react to a 20% portfolio drop is measuring which dimension of risk?

Accepted Answer

Risk willingness (attitude)

Answer

Risk-free rate

Answer

Liquidity premium

Answer

Tax efficiency

Question 4

An investor with LOW risk tolerance would most likely prefer which asset?

Accepted Answer

U.S. Treasury bonds

Answer

Small-cap growth stocks

Answer

Cryptocurrency

Answer

Leveraged ETFs

Question 5

Why is it important to distinguish between risk capacity and risk willingness?

Accepted Answer

An investor may be willing to take risk but unable to afford the consequences

Answer

They always have the same value

Answer

Risk capacity changes daily with the market

Answer

Willingness is set by law

Question 6

Which scenario suggests an investor has HIGH risk capacity but LOW risk willingness?

Accepted Answer

A wealthy retiree who panics during market dips

Answer

A young worker eager to invest in startups

Answer

A retiree with little savings avoiding stocks

Answer

An investor with stable income buying aggressive funds

Question 7

How should a financial advisor typically handle a mismatch where willingness is lower than capacity?

Accepted Answer

Generally build the portfolio toward the lower of the two and educate the client

Answer

Always use the higher level to maximize returns

Answer

Ignore willingness entirely

Answer

Recommend the client stop investing