AAFM AAFM Risk Management and Ethics 3 — Questions and Answers
Question 1: Operational risk in a financial institution most directly stems from what?
- Failed internal processes, people, or systems (Correct answer)
- Changes in market interest rates
- Movements in equity prices
- Counterparty defaults
Correct answer: Failed internal processes, people, or systems
Operational risk arises from inadequate or failed internal processes, people, systems, or external events.
Question 2: A client asks a wealth manager to guarantee a fixed 15% annual return on equities. The ethical response is to?
- Explain that returns cannot be guaranteed and set realistic expectations (Correct answer)
- Promise the return to retain the client
- Agree verbally but not in writing
- Recommend the riskiest fund to try to hit it
Correct answer: Explain that returns cannot be guaranteed and set realistic expectations
Ethical practice requires honest communication that market returns cannot be guaranteed.
Question 3: The standard deviation of portfolio returns is a common measure of what?
- Volatility/total risk (Correct answer)
- Expected return
- Liquidity
- Credit quality
Correct answer: Volatility/total risk
Standard deviation quantifies the dispersion of returns, a proxy for volatility or total risk.
Question 4: Beta measures a security's sensitivity relative to what?
- The overall market (Correct answer)
- Its own past prices
- The risk-free rate
- The inflation rate
Correct answer: The overall market
Beta gauges how much an asset moves relative to the broader market.
Question 5: Which practice best supports the ethical principle of confidentiality?
- Sharing client data only with authorization or legal requirement (Correct answer)
- Discussing client details at social events
- Posting anonymized wins on social media
- Selling client contact lists to partners
Correct answer: Sharing client data only with authorization or legal requirement
Confidentiality requires protecting client information and disclosing it only when authorized or legally compelled.
Question 6: Stress testing a portfolio is designed to reveal what?
- Potential losses under extreme adverse scenarios (Correct answer)
- The average daily return
- Normal market behavior
- The management fee impact
Correct answer: Potential losses under extreme adverse scenarios
Stress tests estimate portfolio impact under severe but plausible shock scenarios beyond normal conditions.
Question 7: A manager who churns a client's account to generate commissions violates which duty?
- Suitability and fiduciary duty (Correct answer)
- Duty to diversify only
- Duty of profitability
- Duty to trade frequently
Correct answer: Suitability and fiduciary duty
Excessive trading for commissions breaches suitability and the fiduciary obligation to act in the client's interest.
AAFM AAFM Risk Management and Ethics 3
Operational risk in a financial institution most directly stems from what?