Investment (Risk Tolerance) 3

Question 1

Standard deviation is commonly used in investing to measure what?

Accepted Answer

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

Answer

The dividend yield of a stock

Answer

The credit rating of a bond

Answer

The liquidity of a fund

Question 2

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

Accepted Answer

A higher percentage of equities

Answer

A higher percentage of cash

Answer

Mostly short-term CDs

Answer

Entirely money market funds

Question 3

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

Accepted Answer

Approaching retirement and needing income soon

Answer

Receiving a large, stable salary increase

Answer

Paying off all debts

Answer

Having a longer time horizon

Question 4

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

Accepted Answer

Compare returns relative to the amount of risk taken

Answer

Eliminate all investment risk

Answer

Guarantee a fixed return

Answer

Avoid paying taxes

Question 5

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

Accepted Answer

Time diversification allows recovery from short-term losses

Answer

Stocks never decline over any period

Answer

Younger investors pay no taxes

Answer

Bonds always outperform stocks

Question 6

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

Accepted Answer

Overconfidence

Answer

Loss aversion during downturns

Answer

Liquidity preference

Answer

Tax-loss harvesting

Question 7

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

Accepted Answer

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

Answer

Guaranteeing higher stock returns

Answer

Eliminating market volatility

Answer

Replacing the need for diversification