WMS Risk Assessment & Mitigation 3

Question 1

What does a Value at Risk (VaR) figure of $50,000 at a 95% confidence level over one month mean?

Accepted Answer

There is a 5% chance the portfolio will lose more than $50,000 in a given month

Answer

VaR at 95% confidence means there is a 5% probability that losses will exceed the stated amount over the specified period.

Question 2

A client holds a concentrated position representing 60% of their net worth in a single employer stock. Which risk is MOST acute?

Accepted Answer

Idiosyncratic risk due to lack of diversification

Answer

Idiosyncratic (unsystematic) risk is the company-specific risk that cannot be diversified away and is amplified by a concentrated single-stock position.

Question 3

Which hedging strategy would BEST protect a client with a large unrealized gain in a single stock from downside risk while deferring capital gains taxes?

Accepted Answer

Purchasing protective put options on the stock

Answer

Protective puts provide downside protection without triggering a taxable sale event, preserving the position while hedging the risk.

Question 4

In risk profiling, what is the distinction between risk tolerance and risk aversion?

Accepted Answer

Risk tolerance is the level of risk a client accepts willingly; risk aversion describes the degree to which they dislike uncertainty

Answer

Risk tolerance is the client's willingness to accept risk for potential reward, while risk aversion quantifies their psychological discomfort with uncertainty and potential loss.

Question 5

A corporate bond rated BB is downgraded to B. What type of risk has materialized for the bondholder?

Accepted Answer

Credit migration risk

Answer

Credit migration risk is the risk that a bond's credit rating will be downgraded, resulting in a higher required yield and lower market price.

(WMS) Wealth Management Specialist Certification Practice Test

(WMS) Wealth Management Specialist Certification Practice Test

WMS Risk Assessment & Mitigation 3