Accredited Wealth Management Advisor Practice Exam

Which risk profile is generally considered when managing a diversified portfolio?

1. High-risk investments are preferred at all times.

2. Investments should exclusively focus on fixed income securities.

3. A balanced approach based on individual risk tolerance.

4. Only large-cap stocks should be included in the portfolio.

The correct answer is: A balanced approach based on individual risk tolerance.

A diversified portfolio aims to spread risk across multiple asset classes and investment types to achieve a balance that aligns with the investor's financial goals and risk tolerance. A balanced approach based on individual risk tolerance ensures that the portfolio can withstand market fluctuations while still generating potential returns that meet the investor's objectives. This approach considers the investor's unique situation, such as their age, income, investment time horizon, and comfort level with risk. By assessing these factors, a wealth manager can recommend a mix of asset types—such as equities, fixed income, and possibly alternative investments—that aligns with the investor's capacity to take risks. The diversification helps mitigate the impact of underperformance in any single investment, which is crucial in managing overall portfolio risk. The other options focus on extremes—favoring only high-risk investments, fixed income securities, or large-cap stocks—which do not adequately address the need for a balanced risk-return profile suited to individual investor needs. These extremes can lead to either missed opportunities for growth or unnecessary exposure to volatility, contrary to the principles of effective risk management in a diversified portfolio.