AAFM AAFM Risk Management and Ethics 3

Question 1

Operational risk in a financial institution most directly stems from what?

Accepted Answer

Failed internal processes, people, or systems

Answer

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?

Accepted Answer

Explain that returns cannot be guaranteed and set realistic expectations

Answer

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?

Accepted Answer

Volatility/total risk

Answer

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?

Accepted Answer

The overall market

Answer

Beta gauges how much an asset moves relative to the broader market.

Question 5

Which practice best supports the ethical principle of confidentiality?

Accepted Answer

Sharing client data only with authorization or legal requirement

Answer

Confidentiality requires protecting client information and disclosing it only when authorized or legally compelled.

American Academy of Financial Management (AAFM) Practice Test