High-yield WME-FP Exam 1 review: client discovery workflow, financial statements, return/risk math, TVM and loan formulas, equity/fixed income essentials, managed products, monitoring, plus a large terminology glossary.
WME-FP Exam 1 is about translating a client profile into an investment plan and portfolio. Use this cheatsheet for last‑mile review alongside the Syllabus and Practice.
If you’re preparing for the integrated case-based exam, use WME-FP Exam 2.
WME rewards candidates who can (1) gather the right facts, (2) convert them into constraints and goals, (3) choose a suitable strategy and portfolio, and (4) explain and document the rationale. Most misses are process misses (“skipped steps”) or constraint misses (“ignored liquidity/tax/horizon”).
flowchart TD
A["Client goals + scope"] --> B["Facts (KYC + cash flow)"]
B --> C["Risk profile (tolerance + capacity + required return)"]
C --> D["Strategy (allocation + products + tax placement)"]
D --> E["Implement (accounts + trades + paperwork)"]
E --> F["Monitor + rebalance + update KYC"]
If tolerance and capacity conflict, the safest answer is usually: prioritize capacity and constraints, adjust goals/plan, document.
| Constraint | Portfolio implication | Classic exam trap |
|---|---|---|
| Short horizon | reduce volatility + liquidity risk | “chasing yield” to meet a goal |
| Liquidity need | avoid lockups/illiquid alternatives | over-allocating to private/illiquid |
| High tax sensitivity | think after-tax return + asset location | confusing distributions with returns |
| Low risk capacity | lower drawdown tolerance | adding leverage to “catch up” |
| Concentration (employer/sector) | diversify gradually | ignoring correlated risks |
| Income need | balance yield + stability | reaching for yield (credit/duration) |
| Diversify across… | Why it helps | Limitation |
|---|---|---|
| Asset classes | different return drivers | correlations rise in stress |
| Regions | different cycles and currencies | FX risk |
| Sectors | reduces single-sector blowups | factor crowding |
| Styles/factors | balances regimes | factor timing is hard |
\[ HPR=\frac{V_1-V_0+I}{V_0} \]
What it tells you: Total return over a period = change in value plus income, relative to starting value.
Symbols (what they mean):
Common pitfalls: forgetting \(I\) and dividing by \(V_1\) instead of \(V_0\).
\[ CAGR=\left(\frac{V_n}{V_0}\right)^{1/n}-1 \]
What it tells you: The constant annual compound rate that turns \(V_0\) into \(V_n\) over \(n\) years.
Symbols (what they mean):
Common pitfalls: using a simple average return instead of compounding; mixing months/years for \(n\).
\[ E[R_p]=\sum_{i=1}^{k} w_i E[R_i] \]
What it tells you: Expected portfolio return is the weighted average of component expected returns.
Exam cue: If weights don’t sum to 1, you’re missing cash or have a rounding issue.
\[ \sigma_p^2=w_1^2\sigma_1^2+w_2^2\sigma_2^2+2w_1w_2\sigma_1\sigma_2\rho_{12} \]
What it tells you: Portfolio risk depends on individual volatilities and correlation.
Interpretation (fast):
Where correlation \(\rho_{12}\) drives diversification benefit.
\[ R_{\text{real}}\approx R_{\text{nominal}}-\pi \]
What it tells you: Approximate purchasing-power return after inflation.
Exam note: The exact relationship is \(1+r_{real}=\frac{1+r_{nom}}{1+\pi}\).
| Measure | What it means | What to remember |
|---|---|---|
| Standard deviation (\(\sigma\)) | volatility | higher \(\sigma\) → wider outcomes |
| Correlation (\(\rho\)) | co-movement | lower \(\rho\) → better diversification |
| Beta (\(\beta\)) | market sensitivity | \(\beta>1\) amplifies market moves |
| Sharpe ratio | return per unit risk | compare risk-adjusted performance |
CAPM (conceptual) \[ E[R_i]=R_f+\beta_i\left(E[R_m]-R_f\right) \]
What it tells you: A simple “required return” model—expected return rises with market exposure (beta).
Symbols (what they mean):
Exam cue: Higher \(\beta\) implies higher expected volatility and higher required return (all else equal).
\[ \frac{\Delta P}{P}\approx -D_{\text{mod}}\cdot \Delta y \]
What it tells you: Approximate percentage bond price change for a yield move.
Symbols (what they mean):
Exam cue: Longer duration → larger price change for the same \(\Delta y\).
Longer duration → more price sensitivity.
If quoted rate \(r\) compounds \(m\) times per year: \[ EAR=\left(1+\frac{r}{m}\right)^m-1 \]
What it tells you: The annualized rate that reflects compounding more than once per year.
Symbols (what they mean):
Common pitfalls: confusing EAR (effective) with nominal; mixing annual \(r\) with monthly \(m\) incorrectly.
\[ FV=PV(1+r)^n \] \[ PV=\frac{FV}{(1+r)^n} \]
What it tells you: How money grows (FV) or is discounted back (PV) under compounding at rate \(r\) for \(n\) periods.
Common pitfalls: mismatching period units (monthly vs annual), and forgetting that fees/taxes reduce the effective \(r\).
\[ FV_{\text{ann}}=PMT\cdot \frac{(1+r)^n-1}{r} \]
What it tells you: The accumulated value of regular end-of-period contributions.
Symbols (what they mean):
Common pitfall: Using this for an annuity-due case (payments at beginning) without adjusting.
\[ PV_{\text{ann}}=PMT\cdot \frac{1-(1+r)^{-n}}{r} \]
What it tells you: The present value of regular end-of-period payments (useful for retirement income gaps and loan payments).
\[ PV_{\text{perp}}=\frac{C}{r} \]
What it tells you: Present value of a level cash flow that continues forever (concept model).
Common pitfall: Using perpetuity when the cash flow is actually finite or growing/declining.
\[ PMT=\frac{r\cdot PV}{1-(1+r)^{-n}} \]
What it tells you: The fixed payment required to amortize a present value (loan) over \(n\) periods at rate \(r\).
Symbols (what they mean):
Common pitfalls: mixing annual vs monthly rates, and confusing amortization length with payment frequency.
Debt-to-income (conceptual heuristic) \[ DTI=\frac{\text{Total debt payments}}{\text{Gross income}} \]
What it tells you: A simple affordability stress indicator (higher DTI generally means less flexibility and lower risk capacity).
Explanations are provided above next to each formula; this section is a quick reference.
After-tax return — Return net of taxes; the correct comparison for many investors.
Allocation — How the portfolio is divided across asset classes/regions/sectors.
Annuity — Series of equal payments over time; PV/FV formulas are common.
Annuity due — Annuity with payments at the beginning of each period (vs ordinary at end).
Amortization — Loan repayment process where payments cover interest then principal over time.
Asset location — Placing assets in taxable vs sheltered accounts based on tax efficiency.
Asset mix — Another term for strategic asset allocation.
Asset allocation — Choosing weights across asset classes to match goals and risk constraints.
Balanced portfolio — Mix of growth and defensive assets intended to smooth outcomes.
Behavioral bias — Systematic decision error (overconfidence, loss aversion, recency).
Beneficiary — Person/entity designated to receive assets from certain accounts/policies on death.
Beta (\(\beta\)) — Sensitivity of a security/portfolio to the market; systematic risk proxy.
Bond ladder — Holding bonds with staggered maturities to manage reinvestment and liquidity.
Capital preservation — Objective emphasizing minimizing loss probability.
Capital gains — Increase in asset value; tax treatment differs from interest (jurisdiction-dependent).
CAGR — Compound annual growth rate; smooth annualized return measure.
Cash flow — Inflows/outflows over time; the foundation of planning feasibility.
Cash reserve / buffer — Liquid funds held to reduce forced selling and manage sequence risk.
Constraint — Limitation shaping recommendations (liquidity, horizon, tax, legal).
Core-satellite — Portfolio structure using a diversified core plus smaller thematic “satellite” positions.
Correlation (\(\rho\)) — Degree to which returns move together; lower is better for diversification.
Credit risk — Risk of issuer default/downgrade; affects bond pricing and spreads.
Decumulation — Withdrawal phase in retirement; sequencing and inflation become central.
Dollar-cost averaging — Investing fixed amounts periodically; reduces timing risk (doesn’t remove market risk).
Diversification — Reducing unsystematic risk by spreading exposures.
Drawdown — Peak-to-trough decline; often what clients feel most acutely.
Duration — Interest-rate sensitivity measure; higher duration means larger price moves for a given yield change.
Emergency fund — Liquid reserve for unexpected expenses; protects long-term plan from shocks.
Effective annual rate (EAR) — True annualized rate after compounding frequency is applied.
Efficient frontier — Set of portfolios with maximum expected return for a given risk level (concept).
Expected return — Probability-weighted average return; used in allocation thinking.
Expense ratio / MER — Ongoing fund costs; reduces net return.
Fee drag — Reduction in return due to fees; matters in long-horizon plans.
Fee-based account — Account where compensation is fee-based rather than transaction commissions (structure varies).
Financial statement (personal) — Net worth statement and cash flow statement used for planning.
Financial plan — Coordinated plan covering goals, cash flows, risk management, and investing.
First Home Savings Account (FHSA) — Tax-advantaged account for home ownership goals (rules vary; confirm current policy).
Geometric return — Compounded return measure; lower than arithmetic when volatility exists.
Goal-based planning — Designing strategy around explicit goals and timelines.
Holding period return (HPR) — Return over a period including income; baseline measurement.
Human capital — Present value of future earning ability; key input to risk capacity.
Income need — Requirement for periodic cash flow from the portfolio.
Inflation (\(\pi\)) — Erodes purchasing power; motivates real-return thinking.
Inflation risk — Risk that purchasing power declines faster than portfolio grows.
IPS (Investment Policy Statement) — Document defining objectives, constraints, allocation, and monitoring rules.
Liquidity — Ability to access cash quickly without large penalties/price impact.
Longevity risk — Risk of outliving assets.
Marginal tax rate — Tax rate on the next dollar of income; used for after-tax comparisons.
Market risk — Risk of broad market movements; cannot be diversified away fully.
Monte Carlo — Simulation approach for goal probability (conceptual, not always computed).
Net worth statement — Assets minus liabilities; planning baseline.
NPV (Net present value) — Present value of cash flows discounted at rate \(r\); used for “which option is better?” comparisons.
Nominal return — Return not adjusted for inflation.
Ordinary annuity — Payments at the end of each period.
Perpetuity — Payment stream with no end date; \(PV=C/r\) model (concept).
Probate — Legal process of validating a will and administering an estate (jurisdiction-dependent).
Probability of goal — Likelihood a plan funds the goal (often discussed conceptually).
Registered plan — Tax-advantaged account wrapper (e.g., RRSP/TFSA/RESP).
RRIF — Retirement income fund used for withdrawals after RRSP accumulation (tax rules vary).
RRSP — Retirement savings plan with tax deferral features (tax rules vary).
RESP — Education savings plan with tax advantages (rules vary).
TFSA — Tax-free savings account; tax-free growth and withdrawals (rules vary).
Rebalancing — Restoring target weights after drift; risk-control mechanism.
Rebalancing band — Threshold around target weights that triggers a rebalance.
Real return — Return adjusted for inflation; approximate \(R_{\text{real}}\approx R_{\text{nominal}}-\pi\).
Required return — Return needed to meet the goal; can imply goal/plan adjustments.
Risk budgeting — Allocating a limited “risk budget” across goals/portfolios.
Risk capacity — Financial ability to absorb losses; often the binding constraint.
Risk tolerance — Emotional willingness to accept volatility and loss.
Sequence-of-returns risk — Risk that poor early returns harm outcomes, especially during withdrawals.
Sharpe ratio — Excess return per unit of risk; risk-adjusted performance metric.
Tax-loss harvesting — Realizing losses to offset gains (jurisdiction-dependent; rules apply).
Strategic allocation — Long-term target mix; the main driver of risk/return.
Suitability — Fit of recommendations to client objectives/constraints, supported by documentation.
Time horizon — Time until funds are needed; key determinant of risk budget.
Trust — Legal arrangement to hold/manage assets for beneficiaries under specified terms.
Withdrawal rate — Rate at which assets are withdrawn over time; sustainability depends on returns/inflation.
Will — Legal document expressing distribution intent and executor appointment (jurisdiction-dependent).
Volatility — Variation of returns (often measured by \(\sigma\)); drives dispersion of outcomes.
WME answers score higher when they explicitly reference constraints, compare after-tax outcomes, and include documentation/monitoring.