R05 Attitude to risk: free practice questions

1. Question 1 of 4

   For which type of contract is a client's attitude to investment risk most relevant?

   Option A: Level term assuranceOption B: Private medical insuranceOption C: A unit-linked whole of life policyOption D: Mortgage payment protection insurance

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   The answer is C: A unit-linked whole of life policy

   Attitude to investment risk is not usually relevant to pure protection, but it is crucial for contracts with an investment element, such as unit-linked or with-profits whole of life.

   Why the other options are wrong

   A

   Level term assurance has no investment element, so investment risk isn't relevant.

   B

   PMI has no investment element.

   D

   MPPI has no investment element.

2. Question 2 of 4

   Why can risk still be relevant when recommending a pure protection policy with reviewable premiums?

   Option A: Claims trends or medical changes could raise premiums, which must be explainedOption B: Reviewable premiums are directly linked to stock market pricesOption C: The adviser's commission may be reduced at each premium reviewOption D: The value of the client's underlying investment fund may fall at review

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   The answer is A: Claims trends or medical changes could raise premiums, which must be explained

   Reviewable IP or critical illness cover exposes the client to future claims trends and medical advances. Both investment and insurance risk must be clearly explained.

   Why the other options are wrong

   B

   Reviewable premiums aren't linked to stock market prices.

   C

   Adviser commission isn't the risk to the client.

   D

   A pure protection policy has no underlying investment fund.

3. Question 3 of 4

   Which of the following is NOT a factor relevant to assessing a client's attitude to investment risk?

   Option A: The client's postcode and type of propertyOption B: Whether the client has an emergency cash reserveOption C: The risk level of the client's existing investmentsOption D: The client's psychological comfort with risk

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   The answer is A: The client's postcode and type of property

   Relevant factors include financial capacity, emergency reserves, existing investment risk, expected changes in income or capital, psychological attitude and diversification.

   Why the other options are wrong

   B

   Having an emergency cash reserve is relevant, because it affects capacity for loss.

   C

   The risk level of existing investments is relevant to overall risk exposure.

   D

   Psychological comfort with risk is a central part of attitude to risk.

4. Question 4 of 4

   Hugo is wealthy enough to tolerate high risk financially but becomes very anxious when markets fall. How should this affect a recommendation?

   Option A: Recommend high risk, as he can afford any losses financiallyOption B: Ignore his feelings, as only his financial capacity for loss really mattersOption C: Allow for his psychological attitude, as a high risk choice may cause distressOption D: Refuse to recommend any product that involves investment risk

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   The answer is C: Allow for his psychological attitude, as a high risk choice may cause distress

   A client's psychological attitude matters as well as capacity for loss. Persuading a nervous client into high risk investments is likely to cause unhappiness, even if it looks sensible financially.

   Why the other options are wrong

   A

   Being able to afford losses isn't enough; his anxiety matters too.

   B

   Feelings matter: a recommendation should reflect both capacity and psychological attitude.

   D

   There's no need to rule out investment altogether; the risk level should suit him.

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