Module 4 (Client Risk Tolerance)

Question 1

Risk is defined as the _______________ of loss.

Answer 1

possibility

Question 2

The difference between risk and uncertainty?

Answer 2

Risk can be measured and uncertainty cannot be measured.

Question 3

Someone that is always willing to except risk and will prefer uncertain outcomes over certain outcomes.

Answer 3

risk seekers

Question 4

Someone that is willing to assume risk only when they believe it will put them in a better position then if they would have not accepted the risk.

Answer 4

risk indifferent

Question 5

Someone who is willing to accept some level risk or even reject risk altogether.

Answer 5

risk averters

Question 6

Studies have shown that people would rather have a small return on their investment, that they know they will get, versus an…

Answer 6

uncertain large gain that they don’t know that they’re going to get.

Question 7

Studies have shown that individuals would rather have a certain small gain versus…

Answer 7

An uncertain large gain.

Question 8

Studies have shown that individuals rather have a large uncertain loss versus…

Answer 8

Small certain loss.

Question 9

Recent evidence suggests that people tend to be _____________ rational when dealing with investment solutions.

Answer 9

less than

Question 10

When people are making decisions about investments what are their decisions influenced by?

Answer 10

Their emotions

Question 11

This indicates there are limits as to how rational and individual could possibly be. What is it called?

Answer 11

bounded rationality

Question 12

True or false

Most individuals will generally stop being rational when making decisions involving risk.

Answer 12

True

Most people will generally not be rational when making investment decisions.

Question 13

Do most people tend to be overconfident in their judgments?

Answer 13

Yes

Question 14

Typically, people will use as much information as they can to make an investment decision. True or false?

Answer 14

False. People tend to use less information to make decisions.

Question 15

You get people enough facts they would generally make a decision that’s more accurate. True or false?

Answer 15

False. Even if you get people more information they generally will not improve the accuracy of the decision.

Question 16

How do people ignore the law of large numbers?

Answer 16

By making their decisions on small sample groups.

Question 17

Individual investors place too much importance on…

Answer 17

Short-term economic developments.

Question 18

When someone refuses to believe that a statistic applies to them and will be reluctant to purchase insurance. These individuals are generally…

Answer 18

in denial of risk.

Question 19

Research indicates individuals place a higher value on completely eliminating risk as opposed to…

Answer 19

Just reducing the level of risk.

Question 20

This causes individuals to overestimate risk when events are easy to imagine or recall. It’s usually influenced by media coverage.

Answer 20

availability bias

Question 21

This is when someone fears the risk of the unfamiliar more than they fear the risk of the familiar.

Answer 21

familiarity bias

Question 22

When someone overestimate The risk of flying because the news recently reported an airplane crash.

Answer 22

availability bias

Question 23

One someone will overestimate the risk of dying from a disease because their friend recently died of cancer.

Answer 23

availability bias

Question 24

When a US investor is unfamiliar with foreign investments, and will overestimate the risk associated with foreign investments.

Answer 24

familiarity bias

Question 25

When someone underestimate risk because they feel they have control over the situation.

Answer 25

illusion of control bias

Question 26

When someone underestimates the risk of driving a car and overestimates the chance of being in a plane crash.

Answer 26

illusion of control bias

Question 27

When someone will place different values on a money depending on the situation.

Answer 27

mental accounts

Question 28

When someone will drive 15 miles out of their way to save $10 on a $30 shirt but will not drive 50 miles to save $10 on $150 jacket.

Answer 28

mental accounts

Question 29

When individuals will take on more risk if they have more time for the investment to pan out.

Answer 29

time horizon

Question 30

When people are less risky with their investments because it affects other people that are close to them.

Answer 30

group dynamics

Question 31

When someone is in a good mood and will make more risky investment choices.

Answer 31

Mood

Question 32

When alcohol consumption causes individuals to take greater risk.

Answer 32

Alcohol

Question 33

The risk of investment loss

Answer 33

Monetary risk

Question 34

The risk of injury or loss of life

Answer 34

Physical risk

Question 35

The risk of loss of respect from your peers

Answer 35

Social risk

Question 36

The risk of compromising your standards

Answer 36

Ethical risk

Question 37

Monetary risk takers typically make their own…

Answer 37

Investment decisions

Question 38

What are the four elements of a monetary risk taker?

ROPU

Answer 38

1. Requires a little time to make major decisions
2. Optimistic and enjoys change
3. Prefers uncertainty and variability
4. Underestimate risk

Question 39

Someone that is risk tolerant in every area of their life.

Answer 39

Thrill Seeker

Question 40

What are the characteristics of a thrillseeker?

Answer 40

Hates routines
Outgoing
Makes emotional decisions
Enjoy loud parties
Spontaneous
Common among men
Quick decision-maker

Question 41

What are the behaviors that you normally can see with risk takers?

Answer 41

– Gravitate towards private-sector jobs
– Change jobs frequently
– Hold more senior-level positions
– Their jobs usually are based on commissions
– Those in small firms tend to be more risk-tolerant than those in large firms

Question 42

When people get older, do they tend to be more risky or less risky?

Answer 42

Less risky

Question 43

Are men more risky or women more risky?

Answer 43

Men are more risky

Question 44

Is the firstborn child or the last child more risky in decision-making?

Answer 44

The last child is more riskier

Question 45

Are married people or unmarried people more risky?

Answer 45

Unmarried people are more risky

Question 46

What are some things that advisor should be thinking about when creating an assessment for their clients?

Answer 46

– Monetary risk-taking
– Get their clients demographic information and personality traits
– Assume that their client is risk adverse
– Remember that most people will over state their risk tolerance
– know that some people are not willing to cut their losses.

Question 47

When measuring a client’s risk tolerance, what are the four (subjective) factors that an advisor should consider?

Answer 47

– Preferences
– Real-life choices
– Goals
– Attitude

Question 48

What are seven characteristics of someone that is likely to take on a lot of risk?

Answer 48

1. Aggressive investment portfolio
2. High ratio of debt
3. Net worth used for gambling
4. Lots of job changes
5. Large insurance deductible
6. Variable mortgage plan instead of a fixed mortgage plan
7. Variations in year to year income

Question 49

When asking a client about their attitude towards risk, what are the dangers that you could see?

Answer 49

– They might overstate their risk tolerance
– Their attitude may give you the false impression of their actual behavior towards risk
– You may not ask enough questions to get the information you need

Question 50

The higher the clients ratio of life insurance to their salary, the lower their…

Answer 50

Risk tolerance.