AAFM Risk Management and Ethics Flashcards

A Chartered Wealth Manager discovers a conflict of interest between two clients. What is the ethically required first step?

Answer: Disclose the conflict to both affected parties

AAFM ethics require prompt, full disclosure of any material conflict of interest before proceeding.

Which risk type arises specifically from the possibility that a counterparty will fail to meet its contractual obligations?

Answer: Credit risk

Credit risk is the risk of loss from a counterparty defaulting on its obligations.

A fiduciary duty obligates a financial manager to act primarily in whose interest?

Answer: The client's best interest

Fiduciary duty requires placing the client's interests above all others, including one's own.

Value at Risk (VaR) at a 95% confidence level over one day tells you what?

Answer: The maximum expected loss not exceeded 95% of the time

VaR estimates the loss threshold that will not be exceeded with a given confidence over a set horizon.

Diversification primarily reduces which component of total portfolio risk?

Answer: Unsystematic (specific) risk

Diversification lowers unsystematic risk tied to individual assets, but not market-wide systematic risk.

Under AAFM ethical standards, accepting an undisclosed gift from a product provider that could influence advice is best described as?

Answer: A breach of integrity and independence

Undisclosed inducements compromise objectivity and violate the duty of independence and integrity.

Hedging a currency exposure with a forward contract is an example of which risk response strategy?

Answer: Risk transfer/mitigation

A forward contract transfers or offsets the exposure, mitigating currency risk.