Investment (Risk Tolerance) 5

Question 1

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

Accepted Answer

An overly conservative investor holding mostly cash long-term

Answer

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

Question 2

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

Accepted Answer

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

Answer

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

Question 3

Which statement about the risk-return tradeoff is accurate?

Accepted Answer

Higher potential returns generally require accepting higher risk

Answer

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

Question 4

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

Accepted Answer

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

Answer

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

Question 5

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

Accepted Answer

Failing to grow wealth enough to meet long-term goals

Answer

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

Investment Practice Test