Understanding a client's existing investments when making recommendations includes analyzing their current portfolio, risk tolerance, and objectives to ensure they align with the client's overall financial goals.
Which of the following is NOT a factor to consider when analyzing a client's existing investments?
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A) Risk tolerance is an essential factor to consider when analyzing a client's existing investments. B) Time horizon is essential when analyzing a client's existing investments. C) Investment objectives are an essential factor to consider when analyzing a client's existing investments. D) Favorite color is irrelevant to analyzing a client's existing investments.
What is the primary purpose of diversification in a client's investment portfolio?
A) Diversification does not guarantee high returns. B) The primary purpose of diversification is to reduce risk by spreading investments across a range of assets. C) Impressing friends and family is not a primary purpose of diversification. D) Avoiding taxes is not a primary purpose of diversification.
An investment adviser meets with a new client with a large portion of their investment portfolio in a single company's stock. The adviser analyzes the client's existing investments, risk tolerance, and investment objectives and recommends diversifying the portfolio by selling some single-company stock and investing in a mix of stocks, bonds, and other assets. This helps to reduce the client's overall risk and better align their portfolio with their financial goals.
What is the difference between risk tolerance and risk capacity?
A) This answer reverses the definitions of risk tolerance and risk capacity. B) Risk tolerance and risk capacity are not synonymous terms. C) Risk tolerance is the degree of uncertainty an investor is willing to accept, while risk capacity is the amount of risk an investor can take based on their financial situation. D) There is a difference between risk tolerance and risk capacity.
- Suitability of investment recommendation given current portfolio: Ensuring that an investment recommendation is appropriate for a client's existing investments, risk tolerance, and financial objectives.
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Example Series 65 Example Practice Question
- Suitability of investment recommendation given current portfolio: An investment advisor recommends a client to invest in a high-yield bond fund, considering the client's current portfolio of stocks and bonds, their risk tolerance, and their income needs.