AAFM AAFM Risk Management and Ethics 2 — Questions and Answers
Question 1: A Chartered Wealth Manager discovers a conflict of interest between two clients. What is the ethically required first step?
- Disclose the conflict to both affected parties (Correct answer)
- Silently favor the larger account
- Resign from both engagements immediately
- Transfer both accounts to a colleague without notice
Correct answer: Disclose the conflict to both affected parties
AAFM ethics require prompt, full disclosure of any material conflict of interest before proceeding.
Question 2: Which risk type arises specifically from the possibility that a counterparty will fail to meet its contractual obligations?
- Credit risk (Correct answer)
- Market risk
- Liquidity risk
- Operational risk
Correct answer: Credit risk
Credit risk is the risk of loss from a counterparty defaulting on its obligations.
Question 3: A fiduciary duty obligates a financial manager to act primarily in whose interest?
- The client's best interest (Correct answer)
- The firm's shareholders
- The manager's own interest
- The regulator's interest
Correct answer: The client's best interest
Fiduciary duty requires placing the client's interests above all others, including one's own.
Question 4: Value at Risk (VaR) at a 95% confidence level over one day tells you what?
- The maximum expected loss not exceeded 95% of the time (Correct answer)
- The guaranteed profit for the day
- The average daily return
- The total portfolio value
Correct answer: The maximum expected loss not exceeded 95% of the time
VaR estimates the loss threshold that will not be exceeded with a given confidence over a set horizon.
Question 5: Diversification primarily reduces which component of total portfolio risk?
- Unsystematic (specific) risk (Correct answer)
- Systematic (market) risk
- Inflation risk
- Interest rate risk
Correct answer: Unsystematic (specific) risk
Diversification lowers unsystematic risk tied to individual assets, but not market-wide systematic risk.
Question 6: Under AAFM ethical standards, accepting an undisclosed gift from a product provider that could influence advice is best described as?
- A breach of integrity and independence (Correct answer)
- Standard industry practice
- Acceptable if the gift is small
- Permitted if the client benefits
Correct answer: A breach of integrity and independence
Undisclosed inducements compromise objectivity and violate the duty of independence and integrity.
Question 7: Hedging a currency exposure with a forward contract is an example of which risk response strategy?
- Risk transfer/mitigation (Correct answer)
- Risk acceptance
- Risk avoidance
- Risk ignorance
Correct answer: Risk transfer/mitigation
A forward contract transfers or offsets the exposure, mitigating currency risk.
AAFM AAFM Risk Management and Ethics 2
A Chartered Wealth Manager discovers a conflict of interest between two clients.
What is the ethically required first step?