AWMA UPDATED ACTUAL Exam
Questions and CORRECT Answers
Intestate - CORRECT ANSWER Dying without a will. The distribution of their assets will
be determined by a probate court.
1031 Exchange - CORRECT ANSWER A swap of one real estate investment property for
another that allows capital gains taxes to be deferred. The term—which gets its name from
Section 1031 of the Internal Revenue Code (IRC)—is bandied about by real estate agents, title
companies, investors, and more. Some people even insist on making it into a verb, as in, "Let's
1031 that building for another."
Emotional Intelligence - CORRECT ANSWER The ability to perceive and control one's
own emotions and use those emotions to guide thought and behavior.
Emotional Perception - CORRECT ANSWER The ability to notice and accurately express
emotions.
Ex: A client has been angry at his meetings w/his adviser. The client realizes his anger stems
from his work and is lashing out at his adviser's financial suggestions.
Emotional Facilitation - CORRECT ANSWER Describes how individuals use emotions to
assist thinking, including responding to changes in their environment and in themselves.
Ex: A client tells her planner that she prefers afternoon meetings at the planner's office. She's
aware that she'll be in a BETTER MOOD and away from distractions.
Emotional Understanding - CORRECT ANSWER Understanding and analyzing emotions
or employing emotional knowledge.
,Emotional Regulation - CORRECT ANSWER Regulation of emotions to promote
emotional and intellectual growth. Openness and understanding of feelings permit the individual
to learn to control their feelings and dictate expression when appropriate.
Total Risk - CORRECT ANSWER The combination of systematic risk and unsystematic
risk. It is measured by the standard deviation (variability).
Systematic Risk - CORRECT ANSWER The uncertainty of return inherent in the
"system" of which any asset is a part. Found in nearly all securities because comparable
securities generally move together in a systematic manner. It is non-diversifiable.
- Purchasing power risk
- Reinvestment risk
- Interest rate risk
- Market risk
- Exchange rate risk
Purchasing Power (Inflation) Risk - CORRECT ANSWER The risk of one's purchasing
power decreasing as a result of an increase in inflation. Inflation is most devastating to bond
prices since the interest and principal are usually fixed in terms of dollar amounts. Increase
inflation will send bond prices downward.
Inflation rate is pro-cyclical (moving in the same direction as the economy as a whole) but will
lag by a year or more.
Reinvestment Risk - CORRECT ANSWER The risk that market interest rates have
decreased at the time payments from an investment are received. An investor is forced to reinvest
his payment amount at a time when rates are not as favorable as they may have been previously.
Market Risk - CORRECT ANSWER This risk stems from factors independent of any
particular security. Factors include political events, broad economic and social changes, and the
mood of the investing public.
It is systemic in the sense that the price of any security can rise or fall in reaction to these larger
company's financial condition.
, Exchange Rate Risk (Currency Risk) - CORRECT ANSWER This risk occurs as the value
of foreign currencies fluctuate against the U.S. dollar. If the foreign currency strengthens, the
return is positive. If the foreign currency weakens, the return is negative.
Exogenous Risk - CORRECT ANSWER Risks found outside the financial system and is
taken into account when doing fundamental analysis.
Endogenous Risk - CORRECT ANSWER Risk found within the financial system itself.
This type of risk can be the most dangerous and is often overlooked or not taken seriously
enough by advisers and financial planners.
Unsystematic Risk - CORRECT ANSWER A risk that affects at most a small number of
assets. Also, unique or asset-specific risk. Can be reduced through diversification.
- Business risk
- Financial risk
- Default risk
- Credit risk
- Liquidity risk
- Event risk
Business Risk - CORRECT ANSWER The possibility of loss (failure) or gain (success)
inherent in conducting business. Also associated with the unique nature of the firm's operations,
management, and the firm's position in its industry.
Financial Risk - CORRECT ANSWER The degree to which a company utilizes debt to
finance its operations.
High debt levels increase the risk that shareholders will not receive dividends.
Heavy debt obligations also increase the risk to bondholders that the firm will not generate
sufficient funds to meet its obligations to repay either interest or principal.
Questions and CORRECT Answers
Intestate - CORRECT ANSWER Dying without a will. The distribution of their assets will
be determined by a probate court.
1031 Exchange - CORRECT ANSWER A swap of one real estate investment property for
another that allows capital gains taxes to be deferred. The term—which gets its name from
Section 1031 of the Internal Revenue Code (IRC)—is bandied about by real estate agents, title
companies, investors, and more. Some people even insist on making it into a verb, as in, "Let's
1031 that building for another."
Emotional Intelligence - CORRECT ANSWER The ability to perceive and control one's
own emotions and use those emotions to guide thought and behavior.
Emotional Perception - CORRECT ANSWER The ability to notice and accurately express
emotions.
Ex: A client has been angry at his meetings w/his adviser. The client realizes his anger stems
from his work and is lashing out at his adviser's financial suggestions.
Emotional Facilitation - CORRECT ANSWER Describes how individuals use emotions to
assist thinking, including responding to changes in their environment and in themselves.
Ex: A client tells her planner that she prefers afternoon meetings at the planner's office. She's
aware that she'll be in a BETTER MOOD and away from distractions.
Emotional Understanding - CORRECT ANSWER Understanding and analyzing emotions
or employing emotional knowledge.
,Emotional Regulation - CORRECT ANSWER Regulation of emotions to promote
emotional and intellectual growth. Openness and understanding of feelings permit the individual
to learn to control their feelings and dictate expression when appropriate.
Total Risk - CORRECT ANSWER The combination of systematic risk and unsystematic
risk. It is measured by the standard deviation (variability).
Systematic Risk - CORRECT ANSWER The uncertainty of return inherent in the
"system" of which any asset is a part. Found in nearly all securities because comparable
securities generally move together in a systematic manner. It is non-diversifiable.
- Purchasing power risk
- Reinvestment risk
- Interest rate risk
- Market risk
- Exchange rate risk
Purchasing Power (Inflation) Risk - CORRECT ANSWER The risk of one's purchasing
power decreasing as a result of an increase in inflation. Inflation is most devastating to bond
prices since the interest and principal are usually fixed in terms of dollar amounts. Increase
inflation will send bond prices downward.
Inflation rate is pro-cyclical (moving in the same direction as the economy as a whole) but will
lag by a year or more.
Reinvestment Risk - CORRECT ANSWER The risk that market interest rates have
decreased at the time payments from an investment are received. An investor is forced to reinvest
his payment amount at a time when rates are not as favorable as they may have been previously.
Market Risk - CORRECT ANSWER This risk stems from factors independent of any
particular security. Factors include political events, broad economic and social changes, and the
mood of the investing public.
It is systemic in the sense that the price of any security can rise or fall in reaction to these larger
company's financial condition.
, Exchange Rate Risk (Currency Risk) - CORRECT ANSWER This risk occurs as the value
of foreign currencies fluctuate against the U.S. dollar. If the foreign currency strengthens, the
return is positive. If the foreign currency weakens, the return is negative.
Exogenous Risk - CORRECT ANSWER Risks found outside the financial system and is
taken into account when doing fundamental analysis.
Endogenous Risk - CORRECT ANSWER Risk found within the financial system itself.
This type of risk can be the most dangerous and is often overlooked or not taken seriously
enough by advisers and financial planners.
Unsystematic Risk - CORRECT ANSWER A risk that affects at most a small number of
assets. Also, unique or asset-specific risk. Can be reduced through diversification.
- Business risk
- Financial risk
- Default risk
- Credit risk
- Liquidity risk
- Event risk
Business Risk - CORRECT ANSWER The possibility of loss (failure) or gain (success)
inherent in conducting business. Also associated with the unique nature of the firm's operations,
management, and the firm's position in its industry.
Financial Risk - CORRECT ANSWER The degree to which a company utilizes debt to
finance its operations.
High debt levels increase the risk that shareholders will not receive dividends.
Heavy debt obligations also increase the risk to bondholders that the firm will not generate
sufficient funds to meet its obligations to repay either interest or principal.
