Chapter 4 MC Flashcards
Which of the following is considered the most direct approach to measuring a client’s financial risk tolerance?
Determine the client’s preferences for various investment products
Which of the following statements concerning the relationship between education and financial risk tolerance is correct?
Answer
Risk tolerance increases with the degree of formal education.
A person who overestimates the risk of flying because of the high degree of publicity given to a recent airplane crash is being influenced by which of the following limitations on rational thinking?
availability bias
Availability bias refers to the fact that events that are dramatic and vivid or that receive heavy media attention are easily available to one’s mind and, therefore, tend to be overestimated. (A) is incorrect because it refers to the tendency not to appreciate the true level of danger in the situation. (C) is incorrect because it refers to the tendency to believe after the fact that an event was more predictable than it usually was. (D) is incorrect because it refers to the tendency some people have to seek information that supports their beliefs
Which of the following lifestyle characteristics would seem to indicate that a client is disposed toward financial risk tolerance? I. The client has been in the same job with the same company for 25 years. II. The client’s annual income has varied substantially from year to year.
II only
I is incorrect because a stable employment history is more indicative of risk averters. The willingness to make frequent voluntary job changes is considered an indicator of a willingness to take financial risks.
Which of the following statements concerning the ability of people to rationally assess risk is (are) correct? I. People tend to perceive more risk in things that are familiar to them. II. People tend to overestimate the risk involved in activities under their control.
Neither I nor II
I is incorrect because people tend to perceive less risk in things that are familiar to them. II is incorrect because people tend to underestimate the risk involved in activities under their control.
Thrill seekers are characterized in which of the following ways? I. They tend to be outgoing and spontaneous. II. They tend to take their time when making decisions.
I only
II is incorrect because thrill seekers tend to be fast decision makers.
Monetary risk takers can be characterized in which of the following ways? I. They list their primary long-term goal as happiness. II. They tend to possess leadership and sales skills.
II only
I is incorrect because monetary risk takers list their primary long-term goal as success. Monetary risk averters stated their long-term goal as happiness.
I is incorrect because monetary risk takers list their primary long-term goal as success. Monetary risk averters stated their long-term goal as happiness.
Relative risk tolerance increases with wealth if housing is included in the definition of wealth or classified as a risky asset.
All the following statements concerning guidelines on risk assessment are correct EXCEPT
Answer
The client’s level of risk tolerance should be ascertained without involving him or her in the assessment
