Personal Financial Planning 2nd Edition By Altfest – Test Bank

Test Bank Questions, Chapter 11

1. Why is it so difficult to identify a group of assets or other techniques that can fully eliminate portfolio risk?

a. They types of assets that can eliminate portfolio risk are only available to professional money managers
b. The lack of a full hedge for the lifetime work-related income streams we call human assets
c. The volatility of portfolio returns over time
d. All of the above
e. None of the above

Answer: b

2. When a household revises its portfolio, it attempts to establish a risk/return strategy that:

a. Minimizes portfolio risk as much as possible while maintaining the current standard of living
b. Will not lead to an audit by the tax authorities
c. Optimizes portfolio income and brings about the highest standard of living possible
d. All of the above
e. None of the above

Answer: c

3. In practice, we can view risk as:

a. The probability of a loss or an outcome that is below expectations.
b. The inability to hedge a loss or an outcome that is below expectations.
c. The probability that more outcomes are below expectations than above expectations.
d. All of the above.
e. None of the above.

Answer: a

4. Which of the following defines risk management in practical terms?

a. The process by which we identify risks and control them so that we are able to achieve individual goals
b. The process by which we identify risks and eliminate them so that we are able to achieve individual goals
c. The process by which we identify risks and eliminate them so that we are able to achieve societal goals
d. All of the above
e. None of the above

Answer: a

5. What is the third step of the risk management process?

a. Match appropriate risk management tools to exposure.
b. Establish exposure.
c. Implement.
d. Identify available risk management tools.
e. None of the above.

Answer: d

6. Which of the following is not a common risk management approach?

a. Avoid risk.
b. Reduce risk.
c. Retain risk.
d. Share risk.
e. All of the above are common risk management approached.

Answer: e

7. Which of the following best describes self-insurance?

a. Actively setting aside money to fund any losses should that occur
b. Using precautionary savings to purchase insurance
c. Diversifying activities to minimize risk
d. All of the above are descriptions of self-insurance
e. None of the above

Answer: a

8. Which of the following is not a factor in determining the appropriate overall risk management tool to choose?

a. The cost of alternative risk management techniques
b. The amount and likelihood of loss
c. Convenience factors
d. The risk tolerance of the risk management tool.
e. All of the above are factors

Answer: d

9. Which of the following is not a risk faced by human-related assets?

a. Longevity – premature death
b. Longevity – extended life
c. Health and disability
d. Macro and microeconomic risks
e. All of the above are risks faced by human-related assets

Answer: e

10. What is longevity risk?

a. The possibility of living beyond normal expectations
b. The possibility of dying prematurely
c. The risk of outliving one’s insurance policy
d. Both a and b
e. Both a and c

Answer: d