AWMA Practice Questions with Correct
Answers
One of the most important financial goals of wealthy individuals is:
a. travelling the world.
b. having good health.
c. achieving financial success.
d. assuring retirement lifestyle.
d.
The most-stated life goals for wealthy individuals are having good health, travelling the
world, and achieving financial success. To achieve financial success, the most common
financial goals are protecting wealth, assuring retirement lifestyle, minimizing taxes, and
leaving an estate to their heirs.
High net worth individuals under 30, as compared to those wealthy individuals over 60,
are more likely to have
a. relationships with multiple firms.
b. trust and confidence in a wealth management firm.
c. the feeling that a wealth manager understands their needs.
d. satisfaction with a wealth manager.
a.
,As compared to those wealthy individuals over 60, high net worth individuals under 30 are
more likely to have relationships with multiple financial firms, less likely to have trust and
confidence in a wealth management firm, and less likely to have the feeling that a wealth
manager understands their needs.
Which one of the following is a correct statement about mind mapping?
a. Mind mapping should be done only for existing clients and later in the client/adviser
relationship when advisers know the client well.
b. Mind mapping may be a tool to use with prospective clients.
c. Mind mapping questions concern only the finances of the client.
d. Mind mapping contains only questions about client goals.
b.
The open ended, probing questions of mind mapping are used to uncover the prospective or
existing client’s values, goals, interests, key relationships (both personal and professional),
preferences for communication and process, as well as net worth by category.
Dan Smith has bonds maturing in two weeks. Since he bought the bonds, interest rates
have fallen. To which one of the following risks are Dan's bonds most likely to be
subject?
a. Interest rate risk
b. Default risk
,c. Financial risk
d. Reinvestment rate risk
d.
Reinvestment rate risk is the risk associated with reinvesting interest and/or principal
payments when interest rates have fallen.
The risk-free rate is 3%, the market rate of return is 10%, the standard deviation of
XYZ stock is 20, and the beta of XYZ stock is 1.40.
Given this information, and using the capital asset pricing model, what is the expected
return of XYZ stock?
a. 9.17%
b. 12.20%
c. 12.80%
d. 13.20%
CAPM = rf + B (rm - rf)
.03 + 1.40(.10 - .03)
= .03 + .098
= .128
= 12.8%
C
Which one of the following is correct regarding how diversification can affect risk?
, a) Unsystematic risk is unaffected by diversification within an asset class.
b) Positive correlation of assets increases systematic risk with a corresponding increase
in return.
c) Negative correlation of assets increases systematic risk with a corresponding increase
in return.
d) Diversification of assets reduces unsystematic risk without necessarily reducing
return.
d.
Unsystematic risk decreases by diversification within an asset class. Positive or negative
correlations between assets do not necessarily increase return. Unsystematic risk is reduced
through diversification of assets, but this diversification does not necessarily reduce return.
As described by Gerald Perritt, which one of the following best describes a sound small
stock investment strategy?
A) 12 or more carefully selected issues, 1-year holding period or longer, turnover of
30% or less
B) 12issuesormore,1-to3-yearholdingperiod,sellwheninstitutionalownership reaches
40%
C) 20-30 issues, 3- to 5-year holding period, high ownership stake by management
D) 30issuesormore,5-to8-yearholdingperiod,buyandhold
c.
Answers
One of the most important financial goals of wealthy individuals is:
a. travelling the world.
b. having good health.
c. achieving financial success.
d. assuring retirement lifestyle.
d.
The most-stated life goals for wealthy individuals are having good health, travelling the
world, and achieving financial success. To achieve financial success, the most common
financial goals are protecting wealth, assuring retirement lifestyle, minimizing taxes, and
leaving an estate to their heirs.
High net worth individuals under 30, as compared to those wealthy individuals over 60,
are more likely to have
a. relationships with multiple firms.
b. trust and confidence in a wealth management firm.
c. the feeling that a wealth manager understands their needs.
d. satisfaction with a wealth manager.
a.
,As compared to those wealthy individuals over 60, high net worth individuals under 30 are
more likely to have relationships with multiple financial firms, less likely to have trust and
confidence in a wealth management firm, and less likely to have the feeling that a wealth
manager understands their needs.
Which one of the following is a correct statement about mind mapping?
a. Mind mapping should be done only for existing clients and later in the client/adviser
relationship when advisers know the client well.
b. Mind mapping may be a tool to use with prospective clients.
c. Mind mapping questions concern only the finances of the client.
d. Mind mapping contains only questions about client goals.
b.
The open ended, probing questions of mind mapping are used to uncover the prospective or
existing client’s values, goals, interests, key relationships (both personal and professional),
preferences for communication and process, as well as net worth by category.
Dan Smith has bonds maturing in two weeks. Since he bought the bonds, interest rates
have fallen. To which one of the following risks are Dan's bonds most likely to be
subject?
a. Interest rate risk
b. Default risk
,c. Financial risk
d. Reinvestment rate risk
d.
Reinvestment rate risk is the risk associated with reinvesting interest and/or principal
payments when interest rates have fallen.
The risk-free rate is 3%, the market rate of return is 10%, the standard deviation of
XYZ stock is 20, and the beta of XYZ stock is 1.40.
Given this information, and using the capital asset pricing model, what is the expected
return of XYZ stock?
a. 9.17%
b. 12.20%
c. 12.80%
d. 13.20%
CAPM = rf + B (rm - rf)
.03 + 1.40(.10 - .03)
= .03 + .098
= .128
= 12.8%
C
Which one of the following is correct regarding how diversification can affect risk?
, a) Unsystematic risk is unaffected by diversification within an asset class.
b) Positive correlation of assets increases systematic risk with a corresponding increase
in return.
c) Negative correlation of assets increases systematic risk with a corresponding increase
in return.
d) Diversification of assets reduces unsystematic risk without necessarily reducing
return.
d.
Unsystematic risk decreases by diversification within an asset class. Positive or negative
correlations between assets do not necessarily increase return. Unsystematic risk is reduced
through diversification of assets, but this diversification does not necessarily reduce return.
As described by Gerald Perritt, which one of the following best describes a sound small
stock investment strategy?
A) 12 or more carefully selected issues, 1-year holding period or longer, turnover of
30% or less
B) 12issuesormore,1-to3-yearholdingperiod,sellwheninstitutionalownership reaches
40%
C) 20-30 issues, 3- to 5-year holding period, high ownership stake by management
D) 30issuesormore,5-to8-yearholdingperiod,buyandhold
c.
