How Robo-Advisors Work Quiz

Answers and explanations appear as you take the quiz.

1. In robo-advisor onboarding, what is the difference between risk capacity and risk tolerance?
   • They mean the same thing
   • Capacity is how much loss you can afford; tolerance is how much loss you can stomach
   • Capacity measures fees; tolerance measures returns
   • Capacity applies only to retirees
2. How does a typical robo-advisor turn a questionnaire risk score into a portfolio?
   • It picks individual stocks it predicts will rise
   • It asks a human broker to design a portfolio each time
   • It maps the score to one of a set of pre-built model portfolios
   • It invests entirely in cash until markets improve
3. Before selling overweight assets during rebalancing, what does the engine usually try first?
   • Using deposits, dividends and withdrawals to move weights back toward target
   • Sending the client a phone call
   • Switching to a different risk score
   • Pausing all trading for a year
4. During tax-loss harvesting, why does the service buy a similar but not substantially identical fund?
   • To raise the advisory fee
   • To exit the market entirely
   • To increase dividends
   • To keep market exposure while avoiding the wash sale rule
5. What did Schwab's 2022 SEC settlement over Intelligent Portfolios concern?
   • Charging a large advisory fee
   • Inadequate disclosure about how its cash allocation affected clients
   • Failing to rebalance portfolios
   • Using AI to pick stocks
6. Which misconception about robo-advisors does the guide correct?
   • That they rebalance portfolios
   • That they charge fees
   • That they use AI to pick stocks or time the market
   • That they use questionnaires
7. What rebalancing approach does the guide say robo-advisors typically use?
   • Threshold bands that trigger trades when drift exceeds a tolerance
   • Rebalancing only when the client calls
   • Never rebalancing
   • Rebalancing every hour regardless of drift
8. Which limit of robo-advisors does the guide highlight?
   • They cannot hold bonds
   • They require at least $1 million to open
   • They trade only individual stocks
   • A short questionnaire cannot capture debts, employer plans, taxes or estate issues