Mixed Deck — All AAFM Topics Flashcards

Which client profiling dimension measures the financial capacity to absorb losses without affecting lifestyle?

Answer: Risk capacity

Risk capacity refers to the objective, financial ability to withstand investment losses based on income, assets, time horizon, and liabilities.

During data gathering, which item is an example of quantitative rather than qualitative information?

Answer: The client's annual income figure

Quantitative data are measurable numbers such as income, while attitudes are qualitative.

What does the Sharpe ratio measure?

Answer: Risk-adjusted return per unit of total risk

The Sharpe ratio divides excess return by standard deviation to gauge return earned per unit of risk.

Which statement best describes a fiduciary standard of care?

Answer: Acting in the client's best interest above the planner's own

A fiduciary must place the client's interests ahead of their own at all times.

Which estate planning strategy involves creating a trust where the charity receives an annuity first and the remainder passes to family heirs?

Answer: Charitable lead annuity trust

A charitable lead annuity trust (CLAT) pays a fixed annuity to a charity for a specified term, after which the remaining assets pass to non-charitable beneficiaries such as children.

What is the primary financial purpose of a stock buyback (share repurchase program)?

Answer: To return capital to shareholders while potentially increasing earnings per share

Share repurchases return excess capital to shareholders by reducing shares outstanding, which typically boosts earnings per share and can signal management's confidence in the company's value.

Dollar-cost averaging reduces which specific investment risk over time?

Answer: Timing risk

Dollar-cost averaging mitigates timing risk by spreading purchases over time, reducing the danger of investing a lump sum at a market peak.

Which type of trust allows the grantor to retain control and revoke the trust during their lifetime while avoiding probate at death?

Answer: Revocable living trust

A revocable living trust holds assets during the grantor's lifetime and distributes them at death without going through probate, providing privacy and continuity of management.

Which of the following reading strategies is effective for financial documents?

Answer: Skim structure then focus on key sections.

Financial documents are often lengthy and complex, so an effective strategy is to first skim the overall structure to understand the layout and identify the most relevant sections. Once the structure is clear, readers can then focus their attention and detailed reading on key sections, such as the executive summary, financial statements, or risk factors, that are most pertinent to their specific analytical goals. This approach saves time and improves efficiency.

What does 'time value of money' fundamentally state?

Answer: A dollar today is worth more than a dollar in the future

Money available now can be invested to earn returns, making it more valuable than the same amount later.

Comparing and contrasting two ideas in a passage means doing what?

Answer: Examining similarities and differences

Compare-and-contrast analysis identifies how ideas are alike and how they differ.

What is an Initial Public Offering (IPO)?

Answer: The first time a private company sells shares to the general public

An IPO is the process by which a privately held company first offers shares for sale to the general public, transitioning from private to public ownership.

In estate planning, what is the main advantage of establishing a revocable living trust?

Answer: Avoiding probate on transferred assets

Assets held in a revocable trust pass to beneficiaries without going through probate.

What is the primary purpose of an emergency fund in personal financial planning?

Answer: Cover unexpected expenses without incurring debt

An emergency fund provides liquid reserves so unplanned costs don't force high-cost borrowing or asset sales.

What are the key components of a financial plan?

Answer: Goals assessment, cash flow analysis, investment planning, tax planning, risk management, retirement planning, and estate planning

A comprehensive financial plan integrates goal identification, current financial analysis, cash flow management, investment strategy, tax planning, insurance/risk management, retirement projections, and estate planning.

In portfolio management, diversification primarily aims to reduce which type of risk?

Answer: Unsystematic risk

Diversification reduces unsystematic (company-specific) risk by spreading investments across assets.

When evaluating the credibility of a source, a reader should check what?

Answer: The author's expertise and supporting evidence

Credibility depends on the author's expertise and the quality of evidence provided.

Asset location refers to strategically placing assets in which type of accounts to minimize the total tax drag on a portfolio?

Answer: Tax-advantaged vs. taxable accounts

Asset location involves holding tax-inefficient assets (like bonds and REITs) in tax-deferred or tax-exempt accounts and tax-efficient assets (like index funds) in taxable accounts.

What is systematic risk versus unsystematic risk?

Answer: Systematic affects all markets (cannot be diversified away); unsystematic is specific to a company/industry (can be diversified away)

Systematic (market) risk affects all investments (inflation, interest rates, recessions) and cannot be eliminated through diversification. Unsystematic (specific) risk is unique to individual companies or industries and can be reduced through diversification.

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.