AFAI2 — Investment — Unit 2

What AFAI2 covers

• •Attitude to risk vs capacity for loss — they are not the same thing
• •Asset allocation, rebalancing and pound-cost averaging
• •Modern Portfolio Theory, systematic vs unsystematic risk, beta and Sharpe
• •Platforms, adviser charging and ongoing advice reviews
• •Consumer Duty: fair value, consumer understanding, support
• •Suitability: matching products to objectives, not past performance

3 free AFAI2 practice questions

Straight from Mock Paper 1, in the real exam style — no sign-up, no paywall.

1. Q1.Attitude to risk measures:

   1. AHow much money the client can afford to lose without affecting essential spending
   2. BThe client's willingness to accept volatility in pursuit of returns
   3. CThe adviser's preferred asset allocation
   4. DPast performance of the FTSE 100
   Reveal the answer

   B is correct. Attitude to risk (ATR) is psychological — how comfortable the client is with ups and downs. Capacity for loss is financial — what they can afford to lose. Both must be considered in suitability.

2. Q2.Capacity for loss reflects:

   1. AWhether the client enjoys reading fund factsheets
   2. BThe client's financial ability to absorb losses without jeopardising essential goals
   3. CThe FCA's risk classification of a product
   4. DThe fund manager's reputation
   Reveal the answer

   B is correct. Capacity for loss depends on income, expenses, emergency funds, time horizon and dependents. A client with adventurous ATR but low capacity should not receive a high-risk portfolio.

3. Q3.The primary purpose of strategic asset allocation is to:

   1. APick last year's best-performing fund
   2. BSet long-term target weights across asset classes aligned to objectives and risk
   3. CAvoid all bonds
   4. DMaximise platform cashback
   Reveal the answer

   B is correct. Strategic allocation defines the mix of equities, bonds, property etc. over the long term. Tactical shifts are secondary; the strategic mix drives most portfolio risk and return.

How to pass AFAI2

• ✓A high attitude to risk with a low capacity for loss still gets a cautious portfolio.
• ✓Past performance is not a suitability reason. The objective, horizon and tax wrapper are.
• ✓Consumer Duty questions: pick the option that helps the client understand and get fair value.

AFAI2 exam — common questions