Stock Trading Risk Assessment & Management 2

Question 1

A trader holds a $50,000 position and is willing to risk 2% of their account on a single trade. What is the maximum dollar loss they should accept?

Accepted Answer

$1,000

Answer

2% of $50,000 equals $1,000, which is the maximum acceptable loss per the 2% rule.

Question 2

Which risk metric measures the ratio of potential profit to potential loss on a trade?

Accepted Answer

Risk/reward ratio

Answer

The risk/reward ratio compares the potential profit of a trade to the maximum potential loss.

Question 3

What is 'tail risk' in the context of stock trading?

Accepted Answer

The risk of rare but extreme market events

Answer

Tail risk refers to the probability of rare, extreme events occurring at the tails of a return distribution.

Question 4

A portfolio has a Sharpe ratio of 0.5. Which interpretation is most accurate?

Accepted Answer

The portfolio earns 0.50% of excess return per unit of risk

Answer

A Sharpe ratio of 0.5 means the portfolio earns 0.50 units of excess return (above risk-free rate) per unit of standard deviation.

Question 5

Which type of order best protects against a gap-down opening when holding a long position overnight?

Accepted Answer

Stop-loss order

Answer

A stop-loss (stop-market) order triggers a market sell if price gaps below the stop, executing at the next available price.

Stock Trading Practice Test