RMA Risk Assessment & Mitigation 2 — Questions and Answers
Question 1: A 68-year-old retiree's portfolio loses 30% in year one of retirement. Which risk does this scenario BEST illustrate?
- Inflation risk
- Sequence-of-returns risk (Correct answer)
- Longevity risk
- Credit risk
Correct answer: Sequence-of-returns risk
Sequence-of-returns risk refers to the danger that large early losses in retirement permanently impair a portfolio because withdrawals are taken from a depleted base.
Question 2: Which of the following strategies BEST mitigates sequence-of-returns risk for a newly retired client?
- Concentrating assets in equities for growth
- Maintaining a 2–3 year cash reserve to avoid selling equities during downturns (Correct answer)
- Eliminating all fixed-income holdings
- Investing entirely in long-duration Treasury bonds
Correct answer: Maintaining a 2–3 year cash reserve to avoid selling equities during downturns
A cash buffer allows the retiree to fund living expenses without liquidating equities during market downturns, preserving the portfolio for recovery.
Question 3: A client's portfolio is heavily weighted in her former employer's stock. Which risk is MOST elevated?
- Systematic risk
- Reinvestment risk
- Concentration risk (Correct answer)
- Currency risk
Correct answer: Concentration risk
Concentration risk arises when a large portion of wealth is tied to a single security, increasing vulnerability to company-specific adverse events.
Question 4: Which of the following BEST describes the purpose of a Monte Carlo simulation in retirement planning?
- To guarantee a specific retirement income level
- To model the probability of portfolio survival across thousands of random market scenarios (Correct answer)
- To calculate the exact asset allocation needed for a given goal
- To determine optimal Social Security claiming age
Correct answer: To model the probability of portfolio survival across thousands of random market scenarios
Monte Carlo simulations run thousands of hypothetical return sequences to estimate the probability that a portfolio lasts through retirement.
Question 5: A retiree relies on a corporate pension as her primary income. Which risk should the adviser emphasize MOST?
- Market risk
- Counterparty/credit risk from the pension sponsor (Correct answer)
- Reinvestment risk
- Liquidity risk
Correct answer: Counterparty/credit risk from the pension sponsor
Corporate pension payments depend on the plan sponsor's financial health; if the sponsor fails, the PBGC backstop may not cover the full benefit.
Question 6: When stress-testing a retirement plan, an adviser evaluates outcomes if the client lives to age 100. This addresses which risk?
- Inflation risk
- Longevity risk (Correct answer)
- Sequence-of-returns risk
- Tax risk
Correct answer: Longevity risk
Longevity risk is the possibility of outliving one's assets, and testing plans against extended lifespans quantifies this exposure.
Question 7: Which withdrawal strategy is specifically designed to reduce the impact of sequence-of-returns risk by adjusting spending based on portfolio performance?
- Dollar-cost averaging
- The 4% rule applied rigidly each year
- Guardrails (dynamic withdrawal) strategy (Correct answer)
- Constant-percentage-of-income withdrawal
Correct answer: Guardrails (dynamic withdrawal) strategy
The guardrails strategy cuts spending when the portfolio falls to a lower threshold and allows increases when it rises, dynamically protecting against poor early returns.
RMA Risk Assessment & Mitigation 2
A 68-year-old retiree's portfolio loses 30% in year one of retirement.
Which risk does this scenario BEST illustrate?