Investment (Risk Tolerance) 4

Question 1

Diversification reduces which type of risk in a portfolio?

Accepted Answer

Unsystematic (company-specific) risk

Answer

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

Question 2

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

Accepted Answer

Protecting principal from loss

Answer

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

Question 3

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

Accepted Answer

High risk tolerance → growth-oriented equity portfolio

Answer

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

Question 4

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

Accepted Answer

Gradually shifting from stocks toward bonds

Answer

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

Question 5

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

Accepted Answer

Personal goals, experiences, and psychological comfort with loss differ

Answer

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

Investment Practice Test