AAFM Professional Knowledge 5

Question 1

A client nearing retirement wants to reduce portfolio risk. Which strategy is most appropriate?

Accepted Answer

Gradually shift toward more fixed-income assets

Answer

Increase leverage significantly

Answer

Move entirely into small-cap stocks

Answer

Concentrate in a single sector

Question 2

What is the primary purpose of Know Your Client (KYC) procedures?

Accepted Answer

Understand the client's needs, risk tolerance, and prevent illicit activity

Answer

Maximize product sales

Answer

Reduce advisor workload

Answer

Increase transaction fees

Question 3

Which of the following is an example of a systematic risk?

Accepted Answer

A recession affecting the entire economy

Answer

A product recall at one company

Answer

A CEO resignation at a single firm

Answer

A factory fire at one manufacturer

Question 4

In behavioral finance, 'loss aversion' describes the tendency to do what?

Accepted Answer

Feel losses more strongly than equivalent gains

Answer

Always take maximum risk

Answer

Ignore all market news

Answer

Prefer losses over gains

Question 5

What does the term 'net present value (NPV)' indicate when it is positive?

Accepted Answer

The investment is expected to add value

Answer

The investment will lose money

Answer

There is no time value of money

Answer

Cash flows are irrelevant

Question 6

Which type of life insurance provides coverage for a specified period with no cash value component?

Accepted Answer

Term life insurance

Answer

Whole life insurance

Answer

Universal life insurance

Answer

Variable life insurance

Question 7

When constructing a client portfolio, 'asset allocation' primarily refers to what?

Accepted Answer

Dividing investments among asset classes like stocks, bonds, and cash

Answer

Picking individual winning stocks

Answer

Timing market entry and exit

Answer

Minimizing all taxes