WMS Risk Assessment & Mitigation 2

Question 1

A client's portfolio has a beta of 1.4. What does this indicate about the portfolio's systematic risk relative to the market?

Accepted Answer

It moves 40% more than the market on average

Answer

A beta of 1.4 means the portfolio is expected to move 40% more than the market in either direction, indicating higher systematic risk.

Question 2

Which risk mitigation technique involves transferring risk to a third party through an insurance contract or derivative instrument?

Accepted Answer

Risk transfer

Answer

Risk transfer shifts financial exposure to another party, such as through insurance policies, options, or swap agreements.

Question 3

A wealth manager uses a Monte Carlo simulation to evaluate a client's retirement plan. What is the PRIMARY purpose of this tool in risk assessment?

Accepted Answer

To model a range of probabilistic outcomes based on variable inputs

Answer

Monte Carlo simulations run thousands of randomized scenarios to produce a probability distribution of possible outcomes, not a single forecast.

Question 4

When assessing a client's risk capacity, which factor is MOST relevant?

Accepted Answer

The client's financial ability to absorb potential losses without compromising goals

Answer

Risk capacity is an objective measure of how much loss a client can financially sustain while still meeting essential financial goals.

Question 5

A portfolio manager notices that two asset classes in a client's portfolio have a correlation coefficient of -0.85. How does this affect diversification?

Accepted Answer

It significantly enhances diversification because the assets tend to move in opposite directions

Answer

A correlation of -0.85 means the assets move strongly in opposite directions, which substantially reduces overall portfolio volatility through diversification.

(WMS) Wealth Management Specialist Certification Practice Test

(WMS) Wealth Management Specialist Certification Practice Test

WMS Risk Assessment & Mitigation 2