Managing Your Client's Investment Risk

Managing investment risk is a core portfolio-management task. It requires more than naming risk categories. Advisors and investors must understand what kinds of risk are present, how those risks are measured, how diversification works, and when derivatives can be used to reduce exposure rather than increase it.

This chapter follows the official IMT Chapter 16 sequence. It covers the main types of investment risk, the common measures used to quantify risk, the role of diversification, and the use of options, futures contracts, and contracts for difference as hedging tools. The exam emphasis is practical: students should be able to identify the relevant risk, select a suitable risk-reduction tool, and explain the main trade-offs.

In this section

• Investment Risks
  Main categories of investment risk, how they interact in portfolios, and which tools can and cannot reduce them.
• Measuring Investment Risk
  What the main risk measures mean, where they are useful, and why no single statistic is enough on its own.
• Diversification and Risk Reduction
  How diversification reduces issuer-specific risk, why correlation matters, and where diversification has clear limits.
• Options and Risk Reduction
  How protective puts, covered calls, and collars reshape downside and upside trade-offs in portfolio risk management.
• Futures and Risk Reduction
  How futures can hedge market, commodity, or rate exposure, and why basis risk, hedge sizing, and margin discipline still matter.
• Contracts for Difference and Risk Reduction
  How CFDs can offset price exposure, and why leverage, margin, counterparty risk, and retail suitability can still make them dangerous.