AAFM AAFM Risk Management and Ethics

Question 1

What is systematic risk versus unsystematic risk?

Accepted Answer

Systematic affects all markets (cannot be diversified away); unsystematic is specific to a company/industry (can be diversified away)

Answer

Systematic (market) risk affects all investments (inflation, interest rates, recessions) and cannot be eliminated through diversification. Unsystematic (specific) risk is unique to individual companies or industries and can be reduced through diversification.

Question 2

What are the key components of a financial plan?

Accepted Answer

Goals assessment, cash flow analysis, investment planning, tax planning, risk management, retirement planning, and estate planning

Answer

A comprehensive financial plan integrates goal identification, current financial analysis, cash flow management, investment strategy, tax planning, insurance/risk management, retirement projections, and estate planning.

Question 3

What ethical standards must AAFM-certified professionals uphold?

Accepted Answer

Integrity, objectivity, competence, fairness, confidentiality, professionalism, and diligence in all client interactions

Answer

AAFM-certified professionals must adhere to ethical standards including acting with integrity, maintaining objectivity, ensuring competence, treating clients fairly, protecting confidentiality, and exercising professional diligence.

Question 4

What is the fiduciary duty in financial management?

Accepted Answer

The legal and ethical obligation to act in the client's best interest, placing client needs above one's own

Answer

Fiduciary duty requires financial professionals to act solely in the client's best interest, disclose conflicts of interest, provide suitable recommendations, and prioritize client welfare above personal gain.

Question 5

What is the suitability standard in investment recommendations?

Accepted Answer

Ensuring investment recommendations are appropriate for the client's financial situation, objectives, risk tolerance, and time horizon

Answer

Suitability requires that investment recommendations match the client's financial situation, investment objectives, risk tolerance, time horizon, liquidity needs, and overall portfolio context.

American Academy of Financial Management (AAFM) Practice Test

American Academy of Financial Management (AAFM) Practice Test

AAFM AAFM Risk Management and Ethics