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Risk Assessment & Mitigation Flashcards

7 cards from real RMA practice questions. Tap to flip, then mark Knew It or Still Learning — missed cards come back until you master them.

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  1. A 68-year-old retiree's portfolio loses 30% in year one of retirement. Which risk does this scenario BEST illustrate?

    Answer: Sequence-of-returns risk

    Sequence-of-returns risk refers to the danger that large early losses in retirement permanently impair a portfolio because withdrawals are taken from a depleted base.

  2. Which of the following strategies BEST mitigates sequence-of-returns risk for a newly retired client?

    Answer: Maintaining a 2–3 year cash reserve to avoid selling equities during downturns

    A cash buffer allows the retiree to fund living expenses without liquidating equities during market downturns, preserving the portfolio for recovery.

  3. A client's portfolio is heavily weighted in her former employer's stock. Which risk is MOST elevated?

    Answer: Concentration risk

    Concentration risk arises when a large portion of wealth is tied to a single security, increasing vulnerability to company-specific adverse events.

  4. Which of the following BEST describes the purpose of a Monte Carlo simulation in retirement planning?

    Answer: To model the probability of portfolio survival across thousands of random market scenarios

    Monte Carlo simulations run thousands of hypothetical return sequences to estimate the probability that a portfolio lasts through retirement.

  5. A retiree relies on a corporate pension as her primary income. Which risk should the adviser emphasize MOST?

    Answer: Counterparty/credit risk from the pension sponsor

    Corporate pension payments depend on the plan sponsor's financial health; if the sponsor fails, the PBGC backstop may not cover the full benefit.

  6. When stress-testing a retirement plan, an adviser evaluates outcomes if the client lives to age 100. This addresses which risk?

    Answer: Longevity risk

    Longevity risk is the possibility of outliving one's assets, and testing plans against extended lifespans quantifies this exposure.

  7. Which withdrawal strategy is specifically designed to reduce the impact of sequence-of-returns risk by adjusting spending based on portfolio performance?

    Answer: Guardrails (dynamic withdrawal) strategy

    The guardrails strategy cuts spending when the portfolio falls to a lower threshold and allows increases when it rises, dynamically protecting against poor early returns.