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 holds a variable annuity with a 7-year surrender schedule currently in year 3. The most significant liquidity risk is that:
Answer: Early withdrawal will trigger a surrender charge reducing accessible funds
During the surrender period, withdrawals above the free-withdrawal amount trigger charges that reduce the net proceeds available to the client.
The Sharpe ratio is calculated as:
Answer: (Portfolio return – risk-free rate) / standard deviation
The Sharpe ratio measures excess return per unit of total risk (standard deviation), using the risk-free rate as the baseline.
A tactical asset allocation strategy differs from strategic allocation primarily because it:
Answer: Makes short-term adjustments to capitalize on market opportunities
Tactical asset allocation allows temporary deviations from long-term targets to exploit perceived market mispricings or changing economic conditions.
Which annuity payout option provides the highest monthly payment but leaves no residual value for heirs?
Answer: Life only (straight life)
A straight life (life only) payout maximizes monthly income because payments cease at the annuitant's death with no guarantee period or beneficiary refund.
When a client's risk tolerance decreases significantly due to a major life event, the advisor should first:
Answer: Reassess the investment policy statement and reallocate accordingly
A material change in risk tolerance requires updating the investment policy statement and adjusting the allocation to reflect the client's current capacity and willingness to bear risk.
Duration risk in a fixed annuity portfolio is most relevant when:
Answer: Interest rates rise after the client locks in a long-term rate
Rising interest rates reduce the present value of future fixed cash flows, meaning the client is locked into below-market rates—the core exposure of duration risk.
A glide path in a target-date annuity strategy refers to:
Answer: The gradual shift from aggressive to conservative asset allocation as the target date approaches
A glide path systematically reduces equity exposure and increases fixed income/stable assets as the investor approaches and enters retirement.