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

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

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

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

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

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

Question 4

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

Accepted Answer

Compare returns relative to the amount of risk taken

Answer

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

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

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

Investment Practice Test