Risk Management & Asset Allocation Flashcards

A 68-year-old client has 90% of her portfolio in equities. Which risk is most relevant to address immediately?

Answer: Sequence of returns risk

Sequence of returns risk is critical near or in retirement because early portfolio losses combined with withdrawals can permanently impair long-term wealth.

Which asset allocation strategy automatically rebalances by selling appreciated assets and buying underperforming ones on a set schedule?

Answer: Calendar rebalancing

Calendar rebalancing restores target weights at fixed intervals (e.g., annually) regardless of market conditions.

A variable annuity's living benefit rider that guarantees income even if the account value drops to zero is called a:

Answer: GMWB

A Guaranteed Minimum Withdrawal Benefit (GMWB) allows withdrawals up to a specified percentage annually even if the account value is depleted.

When diversifying across asset classes, correlation is measured on a scale from:

Answer: -1 to +1

Correlation coefficients range from -1 (perfect negative correlation) to +1 (perfect positive correlation), with 0 indicating no linear relationship.

An advisor recommends shifting a client's fixed annuity to a variable annuity primarily to earn higher commissions. This best illustrates:

Answer: Suitability violation

Recommending a product that benefits the advisor rather than the client is a suitability violation and a breach of fiduciary/best-interest duty.

The 'bucket strategy' in retirement planning primarily addresses which type of risk?

Answer: Sequence of returns risk

The bucket strategy segments assets into short-, medium-, and long-term buckets to insulate near-term income needs from early market downturns.

Which measure best captures the total variability (upside and downside) of an investment's returns?

Answer: Standard deviation

Standard deviation measures the dispersion of all returns around the mean, capturing both upside and downside variability.