Stock Advisor Risk Assessment and Management 2

Question 1

What is 'hedging' in investment risk management?

Accepted Answer

Taking an offsetting position to reduce exposure to a specific risk

Answer

Hedging involves taking an offsetting position (such as buying put options) to reduce the potential loss from adverse price movements in another position.

Question 2

What does 'standard deviation' measure in a portfolio context?

Accepted Answer

The degree of variation in returns around the average, indicating volatility

Answer

Standard deviation measures how widely returns are dispersed around the average return, with a higher standard deviation indicating greater volatility and risk.

Question 3

What is 'tail risk' in investment management?

Accepted Answer

The risk of rare but extreme market events that fall beyond normal probability distributions

Answer

Tail risk refers to the probability of extreme, low-probability events (the 'tails' of a distribution) such as a financial crisis or market crash, which can cause outsized losses.

Question 4

What is 'political risk' (country risk) for US stock investors?

Accepted Answer

Risk that political events, policy changes, or instability in a country negatively affect investments

Answer

Political or country risk refers to the potential for investment losses due to political instability, policy changes, sanctions, or government actions in a country where a company operates.

Question 5

What does 'correlation' between assets mean for portfolio risk?

Accepted Answer

A statistical measure of how two assets move in relation to each other, affecting diversification benefits

Answer

Correlation measures how two assets move relative to each other — low or negative correlation between assets reduces overall portfolio risk through genuine diversification.

Stock Advisor Practice Test

Stock Advisor Practice Test

Stock Advisor Risk Assessment and Management 2