AAFM Risk Management and Ethics Flashcards

Operational risk in a financial institution most directly stems from what?

Answer: Failed internal processes, people, or systems

Operational risk arises from inadequate or failed internal processes, people, systems, or external events.

A client asks a wealth manager to guarantee a fixed 15% annual return on equities. The ethical response is to?

Answer: Explain that returns cannot be guaranteed and set realistic expectations

Ethical practice requires honest communication that market returns cannot be guaranteed.

The standard deviation of portfolio returns is a common measure of what?

Answer: Volatility/total risk

Standard deviation quantifies the dispersion of returns, a proxy for volatility or total risk.

Beta measures a security's sensitivity relative to what?

Answer: The overall market

Beta gauges how much an asset moves relative to the broader market.

Which practice best supports the ethical principle of confidentiality?

Answer: Sharing client data only with authorization or legal requirement

Confidentiality requires protecting client information and disclosing it only when authorized or legally compelled.

Stress testing a portfolio is designed to reveal what?

Answer: Potential losses under extreme adverse scenarios

Stress tests estimate portfolio impact under severe but plausible shock scenarios beyond normal conditions.

A manager who churns a client's account to generate commissions violates which duty?

Answer: Suitability and fiduciary duty

Excessive trading for commissions breaches suitability and the fiduciary obligation to act in the client's interest.