Risk Management & Asset Allocation Flashcards
7 cards from real RAA practice questions. Tap to flip, then mark Knew It or Still Learning — missed cards come back until you master them.
Read the first 7 Risk Management & Asset Allocation flashcards as text
A client's annuity portfolio earns 6% annually but inflation averages 7%. The client is primarily experiencing:
Answer: Purchasing power risk
Purchasing power risk (inflation risk) occurs when investment returns fail to outpace inflation, eroding the real value of assets.
Modern Portfolio Theory (MPT) suggests that the optimal portfolio for a risk-averse investor lies on the:
Answer: Efficient frontier
MPT identifies the efficient frontier as the set of portfolios offering the highest expected return for a given level of risk.
A fixed indexed annuity credits interest based on which benchmark?
Answer: The performance of an external index subject to caps and floors
Fixed indexed annuities link interest credits to an external index (e.g., S&P 500) but use caps, floors, or participation rates to limit both gains and losses.
Which risk management technique involves spreading assets across multiple insurance carriers to reduce concentration risk?
Answer: Diversification across issuers
Holding annuities from multiple insurers limits exposure to any single carrier's credit risk, especially important near state guaranty fund limits.
Beta measures an investment's sensitivity to:
Answer: Movements in the overall market
Beta quantifies systematic (market) risk by measuring how much an asset's return moves relative to the overall market benchmark.
A client aged 55 wants guaranteed income starting at 70 with no access to funds during the deferral period. Which product best fits?
Answer: Deferred income annuity (DIA)
A deferred income annuity (also called longevity annuity) accepts a lump sum now and begins guaranteed income at a specified future date, typically with no access during accumulation.
Unsystematic risk in a client's annuity portfolio can best be reduced through:
Answer: Diversification across unrelated asset classes
Unsystematic (company-specific or sector-specific) risk is reduced through diversification, as uncorrelated assets offset each other's idiosyncratic movements.