RAA Risk Management & Asset Allocation 3

Question 1

A client's annuity portfolio earns 6% annually but inflation averages 7%. The client is primarily experiencing:

Accepted Answer

Purchasing power risk

Answer

Purchasing power risk (inflation risk) occurs when investment returns fail to outpace inflation, eroding the real value of assets.

Question 2

Modern Portfolio Theory (MPT) suggests that the optimal portfolio for a risk-averse investor lies on the:

Accepted Answer

Efficient frontier

Answer

MPT identifies the efficient frontier as the set of portfolios offering the highest expected return for a given level of risk.

Question 3

A fixed indexed annuity credits interest based on which benchmark?

Accepted Answer

The performance of an external index subject to caps and floors

Answer

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.

Question 4

Which risk management technique involves spreading assets across multiple insurance carriers to reduce concentration risk?

Accepted Answer

Diversification across issuers

Answer

Holding annuities from multiple insurers limits exposure to any single carrier's credit risk, especially important near state guaranty fund limits.

Question 5

Beta measures an investment's sensitivity to:

Accepted Answer

Movements in the overall market

Answer

Beta quantifies systematic (market) risk by measuring how much an asset's return moves relative to the overall market benchmark.

(RAA) Registered Annuity Advisor Practice Test

(RAA) Registered Annuity Advisor Practice Test

RAA Risk Management & Asset Allocation 3