Risk Management Flashcards
Anika is trying to decide if she should continue to rent or if she should buy a home. Her lease is up in four months. She has $10,000 saved so far for a down payment on a house. She also wants to be sure that if she buys a home she will still be able to have a high enough cash flow to continue to save.
Which decision should she make about housing and for what reason?
She should rent until the end of her lease in order to avoid paying rent and a mortgage.
She should purchase a home, because she has a large down payment saved.
She should continue to rent, because cash flow is higher for renters.
She should purchase a home, because cash flow is higher for homeowners.
She should continue to rent, because cash flow is higher for renters.
Lucas is buying a home. He found the perfect home for $210,000. He currently has $21,000 saved for the down payment.
What will his mortgage company require, given the amount of his down payment?
Homeowner’s insurance
Mortgage insurance
A lower loan to value (LTV) ratio
Home warranty insurance
Mortgage insurance
Correct: Lenders require at least a 70–80% loan-to-value ratio, meaning that the minimum down payment accepted is 20%. Lucas will have to pay mortgage insurance in case of default.
When Nora closed on her new home, she was given an amortization schedule for her mortgage.
How can an amortization schedule help Nora with her financial goals?
The amortization schedule will include payment options for Nora to consider so she can pay off her mortgage earlier rather than later.
Nora can see when her mortgage payment is due each month, so she can plan that in her personal budget.
Nora will know the dollar amount of every monthly payment for the life of the mortgage, so she can be precise in her budgeting.
The amortization schedule provides Nora with all the information from her mortgage, including lender, payment address, and monthly payment due.
Nora will know the dollar amount of every monthly payment for the life of the mortgage, so she can be precise in her budgeting.
The amortization schedule lists out every principal and interest payment for the life of the loan, so Nora will always know exactly how much is due.
Why would a buyer consider an adjustable-rate mortgage (ARM) over a conventional mortgage?
To take advantage of falling interest rates
To ensure lower monthly payments
To put risk of variable rates on the lender
To pay off the mortgage faster
To take advantage of falling interest rates
When interest rates are falling, an ARM is a wise move. However, the buyer should lock in at the lowest rate once the interest rates stabilize.
Why would a person choose a higher deductible for a homeowner’s insurance policy?
To reduce the insurance premium
To lessen the risk of loss
To decrease the coinsurance rate
To reduce the dollar amount of a loss
To reduce the insurance premium
Higher deductibles result in lower insurance payments to the insurance company.
Ren is considering purchasing disability income insurance, and he is trying to determine which type of policy to get.
Which policy should Ren choose if he is willing to pay more now to ensure the greatest disability income should he need it?
Social Security disability policy
Short-term disability policy
Any-occupation policy
Own-occupation policy
Own-occupation policy
Own-occupation policy provides benefits when someone is unable to perform the occupation they had at the time of the disability. It costs more in premiums but pays out more generously when you need it.
Sophia is calculating how much life insurance she needs to purchase.
Which method is the best method for calculating the amount?
Multiple-of-earnings approach
Cash-value approach
Needs-based approach
Existing asset approach
Needs-based approach
The needs-based approach estimates life insurance needs by considering all factors that could affect the level of need.
Eva decides that skydiving is dangerous, so she declines an invitation to join her friends.
How is Eva choosing to handle risk in this situation?
Risk transfer
Loss control
Risk avoidance
Risk reduction
Risk avoidance
By not going skydiving, Eva is preventing risk by avoiding the dangerous situation.
Michael is meeting with a financial services specialist to begin investing. Michael does not mind some risk and is content with seeking capital gains through slow and steady growth.
Which type of investor is Michael?
Aggressive investor
Passive investor
Moderate investor
Conservative investor
Moderate investor
Moderate investors welcome some risk, knowing that capital gains will come even if they are slow and steady.
What should a long-term investor do when market volatility is high?
Increase risk level
Start receiving retirement income
Hold on to their investment
Sell low-performing stocks
Hold on to their investment
Oliver has been investing for a year now, but he is not pleased with the rate of return. The market is doing well and Oliver is not losing money overall, but he expected a higher rate of return based on market averages.
Which reason could explain Oliver’s lower rate of return.
Oliver is trading too often.
Oliver is buying high and selling low.
Oliver is using the doubling-down strategy.
Oliver is holding on to losing stock.
Oliver is trading too often.
Perhaps Oliver is selling money-making stocks too soon, when he could have made more money. He is also likely selling losing stocks before they have a chance to rebound.
What is the risk of following herd behavior in investing?
Limiting diversification in a portfolio
Creating a stock market bubble
Decreasing rate return risk
Pushing stock prices too high
Pushing stock prices too high
Herd behavior artificially drives up the prices of shares in a stock, and once the hype is over, the prices may fall below the original purchase price.
Jack has $5,000 he wants to save. He is reviewing the different types of accounts that he can open.
Which account should Jack open if he wants to have the highest return and not be at a traditional depository institution?
Money market mutual fund
Money market account
Statement savings account
High yield savings account
Money market mutual fund
A money market mutual fund pays higher interest and is offered by mutual fund investment companies rather than a depository institution.
Malik has an account that earns interest. Each month, the interest is paid on the balance of the account, including any new deposits and previous interest earned.
Which type of interest does this describe?
Compound interest
Simple interest
Accrued interest
Prime interest
Compound interest
Compound interest is the interest paid on both the original deposit and any new deposits, including interest previously paid. Thus, the interest is also earning interest.
Maya started investing in the stock market a year ago. She owns stock in one company, and there was just a product recall on its best-selling product.
Which type of risk is Maya likely to experience?
Business failure risk
Liquidity risk
Random risk
Market risk
Random risk
Random risk can occur when someone owns only one investment of a kind, such as owning stock in only one company, that could perform poorly in the future because of random factors, such as lawsuits or product recalls.
