AAFM AAFM Risk Management and Ethics 2

Question 1

A Chartered Wealth Manager discovers a conflict of interest between two clients. What is the ethically required first step?

Accepted Answer

Disclose the conflict to both affected parties

Answer

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?

Accepted Answer

Credit risk

Answer

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?

Accepted Answer

The client's best interest

Answer

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?

Accepted Answer

The maximum expected loss not exceeded 95% of the time

Answer

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?

Accepted Answer

Unsystematic (specific) risk

Answer

Diversification lowers unsystematic risk tied to individual assets, but not market-wide systematic risk.

American Academy of Financial Management (AAFM) Practice Test