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CFP® > D.28 Types of investment risk > Flashcards

D.28 Types of investment risk Flashcards

Learners will be able to identify and differentiate between various types of investment risks, including market, credit, liquidity, operational, and systemic risks, as they pertain to investment decision-making and portfolio management.

1
Q

Which of the following is an example of market risk?

A. Changes in interest rates
B. Changes in government regulations
C. Changes in company management
D. Changes in consumer preferences

A

A. Changes in interest rates

D.28 Types of investment risk

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2
Q

Which of the following is an example of credit risk?

A. Changes in interest rates
B. Changes in company management
C. Changes in government regulations
D. Failure of a borrower to repay a loan

A

D. Failure of a borrower to repay a loan

D.28 Types of investment risk

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3
Q

Which of the following is an example of liquidity risk?

A. Changes in interest rates
B. Changes in company management
C. Difficulty selling an investment quickly without a significant loss of value
D. Changes in consumer preferences

A

C. Difficulty selling an investment quickly without a significant loss of value

.

D.28 Types of investment risk

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4
Q

Which of the following is an example of inflation risk?

A. Changes in government regulations
B. Changes in interest rates
C. Changes in consumer preferences
D. Decrease in the purchasing power of money

A

D. Decrease in the purchasing power of money

D.28 Types of investment risk

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5
Q

Which of the following is an example of concentration risk?

A. Investing in multiple industries
B. Investing in multiple countries
C. Investing in a single stock
D. Investing in a bond index fund

A

C. Investing in a single stock

D.28 Types of investment risk

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6
Q

Which of the following is an example of geopolitical risk?

A. Changes in interest rates
B. Changes in consumer preferences
C. Political instability in a foreign country
D. Changes in government regulations

A

C. Political instability in a foreign country

Geopolitical risk refers to the potential loss due to political instability or conflicts in a foreign country, which can affect international trade, investment, and economic growth.

D.28 Types of investment risk

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7
Q

Which of the following is an example of currency risk?

A. Changes in interest rates
B. Changes in consumer preferences
C. Fluctuations in exchange rates
D. Changes in government regulations

A

C. Fluctuations in exchange rates

Currency risk refers to the potential loss due to fluctuations in exchange rates when investing in foreign currencies or international markets.

D.28 Types of investment risk

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8
Q

Which of the following is an example of longevity risk?

A. Outliving your retirement savings
B. Losing your job unexpectedly
C. Changes in interest rates
D. Changes in consumer preferences

A

A. Outliving your retirement savings

Longevity risk refers to the potential loss due to the risk of outliving one’s retirement savings, particularly in the face of rising life expectancies.

D.28 Types of investment risk

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9
Q

Which of the following is an example of reinvestment risk?

A. Investing in a stock index fund
B. Investing in a bond index fund
C. Investing in a real estate investment trust (REIT)
D. Investing in a commodities exchange-traded fund (ETF)

A

B. Investing in a bond index fund

Reinvestment risk refers to the potential loss due to the risk of reinvesting income or principal at lower interest rates when existing investments mature, particularly in fixed-income securities like bonds.

D.28 Types of investment risk

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10
Q

Which of the following is an example of event risk?

A. Changes in interest rates
B. Changes in consumer preferences
C. Natural disasters
D. Changes in government regulations

A

C. Natural disasters

Event risk refers to the potential loss due to the risk of unforeseen and unexpected events, such as natural disasters, terrorist attacks, or pandemics.

D.28 Types of investment risk

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11
Q

Which of the following is an example of operational risk?

A. Changes in consumer preferences
B. Failure of internal controls and processes
C. Changes in government regulations
D. Changes in interest rates

A

B. Failure of internal controls and processes

Operational risk refers to the potential loss due to the risk of failures or breakdowns in internal processes, systems, or procedures, such as errors, fraud, or cyberattacks.

D.28 Types of investment risk

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12
Q

Which of the following is an example of legal risk?

A. Changes in interest rates
B. Changes in consumer preferences
C. Regulatory violations
D. Changes in company management

A

C. Regulatory violations

Legal risk refers to the potential loss due to the risk of regulatory violations, lawsuits, or other legal actions, such as breaches of contract or intellectual property disputes.

D.28 Types of investment risk

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13
Q

Which of the following is an example of reputational risk?

A. Changes in consumer preferences
B. Changes in interest rates
C. Changes in government regulations
D. Changes in company management

A

A. Changes in consumer preferences

Reputational risk refers to the potential loss due to the risk of damage to a company’s reputation, such as negative publicity, customer complaints, or ethical lapses.

D.28 Types of investment risk

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14
Q

Which of the following is an example of default risk?

A. Changes in government regulations
B. Changes in company management
C. Changes in consumer preferences
D. Failure of a bond issuer to make interest or principal payments

A

D. Failure of a bond issuer to make interest or principal payments

Default risk refers to the potential loss due to a borrower’s failure to fulfill their debt obligations, such as a bond issuer’s failure to make interest or principal payments.

D.28 Types of investment risk

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15
Q

Which of the following is an example of environmental risk?

A. Changes in interest rates
B. Changes in government regulations
C. Changes in consumer preferences
D. Climate change and natural resource depletion

A

D. Climate change and natural resource depletion

Environmental risk refers to the potential loss due to the risk of environmental factors, such as climate change, natural disasters, pollution, or natural resource depletion.

D.28 Types of investment risk

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16
Q

Which of the following is an example of systemic risk?

A. Changes in interest rates
B. Changes in consumer preferences
C. Market crashes and financial crises
D. Changes in government regulations

A

C. Market crashes and financial crises

Systemic risk refers to the potential loss due to the risk of widespread market crashes or financial crises, which can affect the entire financial system and economy.

D.28 Types of investment risk

17
Q

Which of the following is an example of counterparty risk?

A. Changes in interest rates
B. Changes in consumer preferences
C. Failure of a counterparty to fulfill a contractual obligation
D. Changes in government regulations

A

C. Failure of a counterparty to fulfill a contractual obligation

Counterparty risk refers to the potential loss due to the risk of a counterparty’s failure to fulfill their contractual obligations, such as defaulting on a loan or failing to deliver a security.

D.28 Types of investment risk

18
Q

Which of the following is an example of currency risk?

A. Investing in a US stock index fund
B. Investing in a Japanese bond index fund
C. Investing in a European real estate investment trust (REIT)
D. Investing in a Chinese commodities exchange-traded fund (ETF)

A

B. Investing in a Japanese bond index fund

Currency risk refers to the potential loss due to the risk of changes in currency exchange rates, which can affect the value of foreign investments and their returns when converted back into the investor’s currency.

D.28 Types of investment risk

19
Q

Which of the following is an example of liquidity risk?

A. Investing in a highly-traded stock index fund
B. Investing in a real estate investment trust (REIT)
C. Investing in a venture capital fund
D. Investing in a long-term bond

A

D. Investing in a long-term bond

Liquidity risk refers to the potential loss due to the risk of being unable to sell an investment quickly or at a fair price, such as with investments that are illiquid or have long maturities, like long-term bonds.

D.28 Types of investment risk

20
Q

Which of the following represents a potential risk for Gen Z regarding financial advice?

A. They only seek advice from certified professionals.
B. They rely heavily on traditional banking services.
C. They often take online financial advice from unknown sources.
D. They completely avoid financial advice from social media.

A

C. They often take online financial advice from unknown sources.

51% of Gen Z respondents admitted to having taken online financial advice from someone they didn’t know.

D.28 Types of investment risk

CFP® (70 decks)

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