R02 Risk and return objectives: free practice questions
5 free questions on Risk and return objectives, part of learning outcome 7 (The investment advice process). Pick an answer to check it, or open the answer to see why each option is right or wrong.
Question 1 of 5
Why is it dangerous for a client to express objectives only as a target return?
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The answer is D: A high target may lead to unacceptably risky investments
The primary factor is the client's risk tolerance, which determines realistic return objectives. Start with the hoped-for return, then temper it by applying the client's attitude to risk.
Why the other options are wrong
A
The danger is that they're often too high.
B
Return targets are allowed.
C
Returns can be measured.
Question 2 of 5
What would a client in the 'no risk' class typically invest in?
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The answer is D: Cash-based products and perhaps short-dated bonds
No-risk clients won't accept any fall in value, so they invest in cash-based products and perhaps short-dated bonds.
Why the other options are wrong
A
These are high risk.
B
These are high risk.
C
Equities can fall in value.
Question 3 of 5
Which of the following are constraints an adviser must consider when building a portfolio?
1. Time horizon
2. Liquidity
3. Tax
4. Legal and regulatory factors
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The answer is D: 1, 2, 3 and 4
Constraints include time horizon, liquidity, tax, legal and regulatory factors, and needs and preferences. Time horizon and liquidity directly affect the ability to take risk.
Why the other options are wrong
A
Time horizon is a key constraint.
B
Legal and regulatory factors are also constraints.
C
Tax and legal factors are also constraints.
Question 4 of 5
As a client's time horizon lengthens, what becomes more important than short-term fluctuations?
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The answer is B: Producing returns above inflation
Over longer horizons, short-term volatility is more acceptable, provided clients are warned, and maintaining real value becomes the priority. Diversified asset-backed holdings are likely to recover from downturns.
Why the other options are wrong
A
Frequent trading isn't the priority.
C
Cash may not beat inflation over long periods.
D
That matters most over short horizons.
Question 5 of 5
When might a client be better off investing capital rather than paying off their mortgage?
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The answer is C: When the mortgage rate is low compared with expected returns
If the loan rate is higher than investments can earn, repaying usually makes sense. Some borrowers have low rates, or terms they couldn't get today, and may be better off investing.
Why the other options are wrong
A
Low-rate mortgages may be worth keeping.
B
The comparison of rates matters most.
D
Then repaying usually makes more sense.
Practise all 15 Risk and return objectives questions
These are 5 of the 15 questions on this topic in R0 Exam Prep, and the full R02 bank covers every learning outcome. Practise free, track your weak areas and sit timed mocks.
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