WMS Risk Assessment & Mitigation 4

Question 1

A client nearing retirement has a 90% stock allocation. A wealth manager recommends shifting to 50/50. This is best described as managing which type of risk?

Accepted Answer

Horizon risk related to the client's reduced time to recover from losses

Answer

Horizon risk reflects the reality that clients with shorter investment timelines have less time to recover from market downturns, making aggressive allocations inappropriate.

Question 2

What is the primary function of a risk register in a wealth management practice's operational risk framework?

Accepted Answer

To document, classify, and monitor identified operational risks and their mitigation controls

Answer

A risk register is a central document that catalogs identified risks, their likelihood and impact, and the controls in place to mitigate them.

Question 3

Which scenario illustrates model risk in wealth management?

Accepted Answer

A firm's asset allocation model generates flawed recommendations due to incorrect historical return assumptions

Answer

Model risk arises when a financial model produces inaccurate outputs due to incorrect assumptions, poor data inputs, or fundamental design flaws.

Question 4

A client is concerned about losing purchasing power over a 30-year retirement. Which risk is MOST directly addressed by including TIPS in the portfolio?

Accepted Answer

Inflation risk

Answer

Treasury Inflation-Protected Securities (TIPS) adjust their principal based on CPI, directly hedging against inflation eroding real purchasing power.

Question 5

When a wealth manager uses a 'liability-driven investing' (LDI) approach, what risk is being primarily managed?

Accepted Answer

The risk that assets will be insufficient to meet specific future financial obligations

Answer

LDI aligns asset selection with the duration and magnitude of specific future liabilities, ensuring assets are sufficient to meet obligations as they come due.

(WMS) Wealth Management Specialist Certification Practice Test

(WMS) Wealth Management Specialist Certification Practice Test

WMS Risk Assessment & Mitigation 4