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

Reducing equity exposure in favor of bonds lowers volatility as the client approaches retirement.

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

KYC gathers client information to give suitable advice and guard against money laundering and fraud.

Question 3

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

Accepted Answer

A recession affecting the entire economy

Answer

Systematic risk affects the whole market and cannot be diversified away, like an economic recession.

Question 4

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

Accepted Answer

Feel losses more strongly than equivalent gains

Answer

Loss aversion means the pain of a loss is felt more intensely than the pleasure of an equal gain.

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

A positive NPV means projected discounted cash flows exceed the initial cost, adding value.

American Academy of Financial Management (AAFM) Practice Test