RAA Risk Management & Asset Allocation 2 — Questions and Answers
Question 1: A 68-year-old client has 90% of her portfolio in equities. Which risk is most relevant to address immediately?
- Inflation risk
- Sequence of returns risk (Correct answer)
- Reinvestment risk
- Currency risk
Correct answer: Sequence of returns risk
Sequence of returns risk is critical near or in retirement because early portfolio losses combined with withdrawals can permanently impair long-term wealth.
Question 2: Which asset allocation strategy automatically rebalances by selling appreciated assets and buying underperforming ones on a set schedule?
- Tactical asset allocation
- Dynamic asset allocation
- Calendar rebalancing (Correct answer)
- Constant-proportion portfolio insurance
Correct answer: Calendar rebalancing
Calendar rebalancing restores target weights at fixed intervals (e.g., annually) regardless of market conditions.
Question 3: A variable annuity's living benefit rider that guarantees income even if the account value drops to zero is called a:
- GMDB
- GMWB (Correct answer)
- GMSB
- GMAB
Correct answer: GMWB
A Guaranteed Minimum Withdrawal Benefit (GMWB) allows withdrawals up to a specified percentage annually even if the account value is depleted.
Question 4: When diversifying across asset classes, correlation is measured on a scale from:
- -1 to 0
- 0 to 1
- -1 to +1 (Correct answer)
- -2 to +2
Correct answer: -1 to +1
Correlation coefficients range from -1 (perfect negative correlation) to +1 (perfect positive correlation), with 0 indicating no linear relationship.
Question 5: An advisor recommends shifting a client's fixed annuity to a variable annuity primarily to earn higher commissions. This best illustrates:
- Inflation risk
- Suitability violation (Correct answer)
- Reinvestment risk
- Liquidity risk
Correct answer: Suitability violation
Recommending a product that benefits the advisor rather than the client is a suitability violation and a breach of fiduciary/best-interest duty.
Question 6: The 'bucket strategy' in retirement planning primarily addresses which type of risk?
- Longevity risk
- Sequence of returns risk (Correct answer)
- Inflation risk
- Credit risk
Correct answer: Sequence of returns risk
The bucket strategy segments assets into short-, medium-, and long-term buckets to insulate near-term income needs from early market downturns.
Question 7: Which measure best captures the total variability (upside and downside) of an investment's returns?
- Beta
- Standard deviation (Correct answer)
- Sharpe ratio
- Semi-variance
Correct answer: Standard deviation
Standard deviation measures the dispersion of all returns around the mean, capturing both upside and downside variability.
RAA Risk Management & Asset Allocation 2
A 68-year-old client has 90% of her portfolio in equities.
Which risk is most relevant to address immediately?