IFC Practice Test 1 - Practice Test 1 PDF

lOMoARcPSD|44867647 IFC-Practice Test 1 - Practice Test 1 Investment fund In Canada (IFIC) (Canadian Securities Institute) Scan to open on Studocu Studocu is not sponsored or endorsed by any college or...

lOMoARcPSD|44867647 IFC-Practice Test 1 - Practice Test 1 Investment fund In Canada (IFIC) (Canadian Securities Institute) Scan to open on Studocu Studocu is not sponsored or endorsed by any college or university Downloaded by Hero HWServices ([email protected])  lOMoARcPSD|44867647 Check Companion https://training.csi.ca/bbcswebdav/institution/products/MAAE/2018_... Check: Practice Test 1 Reports Overall Results Score: Number Attempt Questions Correct Your Score 98% 1 100 0 0% 2 100 98 98% You have passed the test. Downloaded by Hero HWServices ([email protected]) 1 sur 29 10/3/2023, 1:07 AM  lOMoARcPSD|44867647 Check Companion https://training.csi.ca/bbcswebdav/institution/products/MAAE/2018_... Learning Domain Results Score: Number Learning Domain Questions Correct Your Score 98% An Introduction to the Mutual Funds Marketplace 14 13 93% The Know Your Client Communication Process 19 19 100% Understanding Investment Products and Portfolios 18 18 100% The Modern Mutual Fund 4 4 100% Analysis of Mutual Funds 11 11 100% Understanding Alternative Managed Products 3 3 100% Evaluating and Selecting Mutual Funds 16 15 94% Ethics, Compliance and Mutual Fund Regulations 15 15 100% Downloaded by Hero HWServices ([email protected]) 2 sur 29 10/3/2023, 1:07 AM  lOMoARcPSD|44867647 Check Companion https://training.csi.ca/bbcswebdav/institution/products/MAAE/2018_... Question Results 1. What is the purpose of the fund facts? A. To clarify for clients the nature and terms of their relationship with the dealer of the fund. B. To determine if a fiduciary duty is present in the representative-client relationship. You chose: C. To better align the interests of the fund with the client. The correct answer is: D. To provide clients with key fund information that is relevant to their investment decisions. Feedback: The fund facts document is a four page document designed to give investors key information that is relevant to their investment decision, including facts about the fund itself, performance history, investments and the costs of investing in the fund. Reference | Chapter 1 – The Role of the Mutual Fund Sales Representative Learning Domain | An Introduction to the Mutual Funds Marketplace 2. What term describes the range of possible future outcomes on the price of a security? A. Return. B. Beta. Good choice! C. Risk. D. Fluctuation. Feedback: Risk is the potential volatility in returns or the range of possible future outcomes on the price of a security. Reference | Chapter 1 – The Role of the Mutual Fund Sales Representative Learning Domain | An Introduction to the Mutual Funds Marketplace 3. A client has $100,000 in a savings account, $5,000 in a chequing account, and $10,000 in loans. Calculate his net worth. A. $105,000 Good choice! B. $95,000 C. $90,000 D. $115,000 Feedback: Net worth is calculated as the value of all of the client’s assets after subtracting outstanding loan and mortgage balances. In this example, the client has $100,000 + $5,000 = $105,000 in assets, and $10,000 in loans. Therefore, his net worth is $105,000 - $10,000 = $95,000. Reference | Chapter 1 – The Role of the Mutual Fund Sales Representative Learning Domain | An Introduction to the Mutual Funds Marketplace 4. Which newspaper article would be likely to result in foreign capital moving out of a country? A. Government Re-elected for a Fourth Consecutive Term. B. Corporate Taxes Reduced. C. International Ranking of Domestic Level of Education Rises Significantly. Good choice! D. New Taxes on Foreign Direct Investment. Feedback: Capital moves in and out of a country based on a variety of risk factors. Increased trade barriers or increased taxes on foreign investments would typically reduce the attractiveness of a country for foreign investment. (a), (b) and (d) would all indicate positive trends in a risk factor analysis. Reference | Chapter 2 – Overview of the Canadian Financial Marketplace Learning Domain | An Introduction to the Mutual Funds Marketplace Downloaded by Hero HWServices ([email protected]) 3 sur 29 10/3/2023, 1:07 AM  lOMoARcPSD|44867647 Check Companion https://training.csi.ca/bbcswebdav/institution/products/MAAE/2018_... 5. Which example demonstrates direct use of capital savings? A. Purchasing a company’s stocks. Good choice! B. Building a new factory. C. Purchasing an investment fund. D. Depositing funds in a Canadian bank account. Feedback: Capital savings are used directly by, for example, a couple investing their savings in a home; a government investing in a new highway or hospital; or a domestic or foreign company paying start-up costs for a plant to produce a new product. Reference | Chapter 2 – Overview of the Canadian Financial Marketplace Learning Domain | An Introduction to the Mutual Funds Marketplace 6. Which of the following transactions takes place in the secondary market? A. Issue of federal Treasury bills. B. Sale of mutual funds. C. Issue of new debt and equity securities. Good choice! D. Resale of previously issued securities. Feedback: The secondary market involves the resale of previously issued securities between investors. It enables investors who originally bought the investment products to sell them and obtain cash. Reference | Chapter 2 – Overview of the Canadian Financial Marketplace Learning Domain | An Introduction to the Mutual Funds Marketplace 7. Which exchange in Canada deals exclusively with financial and equity futures and options? A. Canadian Securities Exchange. Good choice! B. The Montreal Exchange. C. The Toronto Stock Exchange. D. The TSX Venture Exchange. Feedback: The Montreal Exchange (Bourse de Montreal) is the only exchange in Canada that deals exclusively with financial and equity futures and options. Reference | Chapter 2 – Overview of the Canadian Financial Marketplace Learning Domain | An Introduction to the Mutual Funds Marketplace 8. What term applies to unemployment created by a new technology that eliminates the need for subway train drivers? Good choice! A. Structural. B. Natural. C. Cyclical. D. Frictional. Feedback: Structural unemployment results from changes in the economy, such as technological advances that reduce the need for human labour. Reference | Chapter 3 – Overview of Economics Learning Domain | An Introduction to the Mutual Funds Marketplace Downloaded by Hero HWServices ([email protected]) 4 sur 29 10/3/2023, 1:07 AM  lOMoARcPSD|44867647 Check Companion https://training.csi.ca/bbcswebdav/institution/products/MAAE/2018_... 9. The demand for blue widgets increases sharply due to a newspaper report that using blue widgets improves recovery from influenza. What can be said about the law of supply? A. Price and production both decrease. Good choice! B. Price and production both increase. C. Price decreases and production increases. D. Price increases and production decreases. Feedback: The law of supply states that when demand is greater than supply, the price increases, and producers increase production to meet demand and maximize profit. Reference | Chapter 3 – Overview of Economics Learning Domain | An Introduction to the Mutual Funds Marketplace 10.If the Consumer Price Index (CPI) was 140.6 last year and 146.9 this year, what was the inflation rate over the year? A. 4.12% Good choice! B. 4.48% C. 6.04% D. 5.20% Feedback: To calculate the rate of inflation over a period of time one must subtract the CPI at the beginning of the period from the CPI at the end of the period and then divide the result by the CPI at the beginning of the period. In this example, the solution can be derived as follows: (146.9 - 140.6) / 140.6 x 100. Reference | Chapter 3 – Overview of Economics Learning Domain | An Introduction to the Mutual Funds Marketplace 11. Gary chooses not to recommend that his client sell a current mutual fund to purchase a similar new mutual fund despite pressure to meet a sales target for the new fund. What responsibility applies to Gary’s action? A. Professional. B. Compliance. Good choice! C. Ethical. D. Legal. Feedback: Gary is fulfilling his ethical responsibility by placing his client’s needs ahead of his own need to reach a sales target. As the new fund is similar to the current investment, it would be an appropriate one for the client, so he would not be compromising his legal responsibility to ensure that all client orders are suitable. Reference | Chapter 1 – The Role of the Mutual Fund Sales Representative Learning Domain | An Introduction to the Mutual Funds Marketplace 12.What does suitability mean? Good choice! A. Recommendations are appropriate for the client’s unique situation and investment objectives. B. Understanding the personal and financial knowledge of the client. C. The investor’s major concerns are addressed. D. Recommendations are not based on the personal and financial knowledge of the client. Feedback: Suitability means ensuring that all recommendations are appropriate for the client’s unique situation and investment objectives. It also means that recommendations are based on a personal and financial knowledge of the client and knowledge of the investment products being recommended. Reference | Chapter 1 – The Role of the Mutual Fund Sales Representative Learning Domain | An Introduction to the Mutual Funds Marketplace Downloaded by Hero HWServices ([email protected]) 5 sur 29 10/3/2023, 1:07 AM  lOMoARcPSD|44867647 Check Companion https://training.csi.ca/bbcswebdav/institution/products/MAAE/2018_... 13.Which organization regulates mutual and investment funds? A. Bourse de Montreal. B. Investment Industry Regulatory Organization of Canada. C. Mutual Fund Dealers Association. Good choice! D. Securities commissions. Feedback: The responsibility of regulating mutual funds lies with the securities commissions. The Mutual Fund Dealers Association regulates dealers of mutual funds, but not the mutual fund itself. Reference | Chapter 2 – Overview of the Canadian Financial Marketplace Learning Domain | An Introduction to the Mutual Funds Marketplace 14.What stage in the business cycle typically has increasing wages, rising inflation, rising interest rates with slowing sales, and decreasing business investment? A. Expansion. Good choice! B. Peak. C. Recovery. D. Trough. Feedback: The top of the cycle is called a peak. A peak is characterized by the following activities: demand begins to outstrip the capacity of the economy to supply it; wages increase; inflation rises; interest rates rise and bond prices fall; sales begin to decline; business investment slows, and stock market activity begins to decline. Reference | Chapter 3 – Overview of Economics Learning Domain | An Introduction to the Mutual Funds Marketplace 15.Based on the financial planning pyramid, what security would be appropriate for a very aggressive investor? A. Tax shelters. Good choice! B. Over the Counter (OTC) Securities. C. Commodities. D. Foreign stocks. Feedback: As a visual aid, the planning pyramid helps you show clients how mutual funds fit into the investment universe. A very aggressive investor could consider investments such as OTC Securities. Reference | Chapter 4 – Getting to know the client Learning Domain | The Know Your Client Communication Process 16.Your client earns $100,000 from employment and $10,000 from investments each year. Her bills total $95,000 annually. What is her discretionary income? Good choice! A. $15,000 B. $5,000 C. $10,000 D. $20,000 Feedback: Discretionary income eligible for savings and investments is the difference between the amount of money coming in from employment and other sources and the amount of money going out to pay bills. In this example, $100,000 + $10,000 - $95,000 = $15,000. Reference | Chapter 4 – Getting to know the client Learning Domain | The Know Your Client Communication Process Downloaded by Hero HWServices ([email protected]) 6 sur 29 10/3/2023, 1:07 AM  lOMoARcPSD|44867647 Check Companion https://training.csi.ca/bbcswebdav/institution/products/MAAE/2018_... 17.What bias results in investors valuing an asset that they own over an asset that another individual owns? A. Risk aversion. Good choice! B. Endowment. C. Status Quo. D. Representativeness. Feedback: People who are subject to endowment bias place more value on an asset they hold property rights to than on an asset they do not hold property rights to. Reference | Chapter 5 – Behavioural Finance Learning Domain | The Know Your Client Communication Process 18.What response would a loss-averse investor be most likely to choose in selecting a preferred investment return scenario? Good choice! A. A 25% chance of gaining $2,000, and a 75% chance of losing nothing. B. A 75% chance of losing $1,000, and a 25% chance of losing nothing. C. A 5% chance of gaining $1,500, and a 95% chance of losing $800. D. An assured loss of $750. Feedback: The loss-averse investor will choose a lower potential of loss over a more rational choice. In this example, a 25% chance of gaining $2,000 and a 75% chance of losing nothing has the lowest possible loss potential, and will typically be the statement selected by the loss-averse investor. Reference | Chapter 5 – Behavioural Finance Learning Domain | The Know Your Client Communication Process 19.What bias would influence an investor’s decision to continue to hold an unprofitable investment despite little likelihood of an improvement in the investment’s value? A. Status quo. B. Availability. C. Representativeness. Good choice! D. Loss aversion. Feedback: Loss aversion bias states that people generally feel a stronger impulse to avoid losses than to acquire gains. Loss aversion can prevent people from unloading unprofitable investments, even when they see little to no prospect of a turnaround. Reference | Chapter 5 – Behavioural Finance Learning Domain | The Know Your Client Communication Process 20.Joanne’s earned income last year was $45,000 and her pension adjustment was $2,500. She has $2,000 in carry forward registered retirement savings plan (RRSP) room for the current taxation year. What is Joanne’s maximum tax-deductible RRSP contribution amount for the current year? A. $5,600 Good choice! B. $7,600 C. $12,600 D. $8,100 Feedback: Joanne’s tax-deductible RRSP contribution room would be calculated as (18% × $45 000) - $2,500 + $2,000 = $7,600. Reference | Chapter 6 – Tax and Retirement Planning Learning Domain | The Know Your Client Communication Process Downloaded by Hero HWServices ([email protected]) 7 sur 29 10/3/2023, 1:07 AM  lOMoARcPSD|44867647 Check Companion https://training.csi.ca/bbcswebdav/institution/products/MAAE/2018_... 21.Rebecca, an investor in a 40% marginal tax bracket, receives $1,200 in Canadian dividends eligible for the dividend tax credit. What is the dividend tax credit that applies to this income? Good choice! A. $248.73 B. $480 C. $1,200 D. $662.40 Feedback: The taxable amount of the dividend is the income received plus a 38% gross-up amount. In this example, $1,200 + ($1,200 × 38%) = $1,656. The dividend tax credit is 15.02% of the grossed-up amount, in this example, $1,656 × 15.02% = $248.73. Reference | Chapter 6 – Tax and Retirement Planning Learning Domain | The Know Your Client Communication Process 22.Which form of investment income is taxed at an investor’s marginal tax rate? A. Canadian dividend income. Good choice! B. Foreign dividend income. C. Capital gains. D. Capital losses. Feedback: Foreign dividend income is not eligible for any dividend tax credit and is taxed at an investor’s marginal tax rate. Reference | Chapter 6 – Tax and Retirement Planning Learning Domain | The Know Your Client Communication Process 23.What type of benefit plan has a final benefit that is dependent on the investment returns within the plan? A. Flat benefit plan. B. Final average plan. C. Career average plan. Good choice! D. Defined contribution plan. Feedback: In a defined contribution plan, also known as a money-purchase plan, the eventual benefits at retirement will be based on how the contributions were invested within the plan. Reference | Chapter 6 – Tax and Retirement Planning Learning Domain | The Know Your Client Communication Process 24.What is the step in the financial planning process that includes a discussion of a client’s household budget? Good choice! A. Identify financial situation and constraints. B. Interview the client. C. Gather data and identify goals and objectives. D. Develop a written financial plan. Feedback: The household budget is part of the discussions related to identifying financial problems and constraints. Reference | Chapter 4 – Getting to know the client Learning Domain | The Know Your Client Communication Process 25.What is the characteristic of a Stage 2 – Family Commitment investor that most affects the ability to save for the long term? Good choice! A. Lack of liquidity. B. Wealth transfer considerations. C. Marginal tax bracket. D. Risk tolerance. Feedback: In Stage 2, the lack of liquidity that is typical results in a difficulty in allocating funds to savings. Although they might identify long- term goals, such as retirement saving, they can barely manage to save enough for more pressing short-term goals. Reference | Chapter 4 – Getting to know the client Learning Domain | The Know Your Client Communication Process Downloaded by Hero HWServices ([email protected]) 8 sur 29 10/3/2023, 1:07 AM  lOMoARcPSD|44867647 Check Companion https://training.csi.ca/bbcswebdav/institution/products/MAAE/2018_... 26.Ian is 25, employed, and has no dependents. He has no current financial or family obligations. He has asked for your recommendation for investing a $50,000 inheritance. What asset allocation would typically suit an investor with Ian’s characteristics? A. 35% in equity, 25% in a money market fund, 60% in a bond fund. Good choice! B. 10% in a bond fund, 80% in equity funds, 10% in a money market fund. C. 50% in equity funds, 20% in a bond fund and 30% in a money market fund. D. 10% in equity funds, 70% in a bond fund, 20% in a money market fund. Feedback: Ian would be considered a Stage 1 – Early Earning Years investor. Stage 1 investors, in general, are free of family and financial commitments, and would typically have a higher ability to tolerate risk. Thus, with its higher level of risk and lower component of income based investments, 10% in a bond fund, 80% in equity funds and 10% in a money market fund would be most likely to be suitable. Reference | Chapter 4 – Getting to know the client Learning Domain | The Know Your Client Communication Process 27.Your client contacts you, requesting that you purchase a mutual fund based on a “hot tip” from a friend who has been a successful investor. What bias is your client most likely being affected by? A. Hindsight. Good choice! B. Overconfidence. C. Availability. D. Endowment. Feedback: Overconfidence is defined generally as unwarranted faith in one’s intuitive reasoning, judgements and cognitive abilities. People tend to overestimate both their predictive abilities as well as the precision of the information they have been given. For example, an investor may get a tip from a wealth advisor or read something on the Internet about an investment opportunity, and then take action (that is, make the decision to invest) based on her perceived knowledge advantage. Reference | Chapter 5 – Behavioural Finance Learning Domain | The Know Your Client Communication Process 28.Jeff is a new client. He is 50 years old with modest savings in the low six figures, and wants to reinvest his portfolio to ensure that he can retire comfortably at age 65. In his meeting with Jeff, the advisor uncovered some of Jeff’s biases. Jeff displayed several strong emotional biases along with a few weak cognitive biases. What should the advisor do? A. The advisor should moderate Jeff’s emotional biases. B. The advisor should moderate and adapt to Jeff’s cognitive biases. C. The advisor should adapt to Jeff’s cognitive biases. Good choice! D. The advisor should moderate and adapt to Jeff’s emotional biases. Feedback: Jeff has a relatively low level of wealth and strong emotional biases; that’s why the advisor should moderate and adapt to Jeff’s emotional biases. Reference | Chapter 5 – Behavioural Finance Learning Domain | The Know Your Client Communication Process 29.How is a $10,000 withdrawal from a registered retirement savings plan (RRSP) taxed? Good choice! A. As regular income. B. At a set rate of 30%. C. Based on the type of investment income type. D. As a deduction against other income. Feedback: Contributions withdrawn from an RRSP are taxed as regular income at the plan holder’s marginal tax rate. Reference | Chapter 6 – Tax and Retirement Planning Learning Domain | The Know Your Client Communication Process Downloaded by Hero HWServices ([email protected]) 9 sur 29 10/3/2023, 1:07 AM  lOMoARcPSD|44867647 Check Companion https://training.csi.ca/bbcswebdav/institution/products/MAAE/2018_... 30.What portion of the withdrawal from a Registered Educational Savings Plan is tax-free? A. Capital gains earned. B. Dividend income earned. Good choice! C. Original capital contributed. D. Canadian Educational Savings Grant (CESG) amounts. Feedback: The original capital withdrawn from an RESP is not taxed; all other amounts are taxed in the hands of the beneficiary. Reference | Chapter 6 – Tax and Retirement Planning Learning Domain | The Know Your Client Communication Process 31.An employer wants to offer his employees a pension plan. The goal is to provide a simple-to-understand plan that will reward all participants equally, regardless of their income level, and provide a retirement income based on a participant’s years of service with the company. What plan will best meet his requirements? A. Career average plan. B. Final average plan. C. Defined contribution plan. Good choice! D. Flat benefit plan. Feedback: The flat benefit plan is simple to understand, provides a retirement income based solely on years of service, and is not affected by plan members’ individual incomes. Reference | Chapter 6 – Tax and Retirement Planning Learning Domain | The Know Your Client Communication Process 32.Your client, a high-income earner in a high marginal tax bracket, is seeking to minimize the amount of tax he pays on investment income while continuing to invest in mutual funds. Which mutual fund would best meet his investment objective? Good choice! A. Canadian equity fund. B. Foreign equity fund. C. Fixed-income fund. D. Money market fund. Feedback: Of the funds listed, the most tax-effective would be a Canadian equity fund because it should generate some dividends and some capital gains. Money market funds and fixed income funds would each generate highly taxed interest income, while a foreign equity fund would not generate tax-advantaged Canadian dividend income or capital gains. Before recommending an equity fund, the mutual fund representative should ensure that the fund is suitable for his client because equity funds have a higher risk profile than funds that generate interest income. Reference | Chapter 6 – Tax and Retirement Planning Learning Domain | The Know Your Client Communication Process 33.Your client’s unused RRSP contribution room is $46,000. He contributes $15,000 in the current taxation year. How much RRSP contribution room can he carry forward? A. $38,000 B. $35,000 C. $46,000 Good choice! D. $31,000 Feedback: Any RRSP contribution room that is not used in a taxation year can be carried forward to be used in future years. There is no limit on the amount that can be carried forward. In this example, $46,000 - $15,000 = $31,000. Reference | Chapter 6 – Tax and Retirement Planning Learning Domain | The Know Your Client Communication Process Downloaded by Hero HWServices ([email protected]) 10 sur 29 10/3/2023, 1:07 AM  lOMoARcPSD|44867647 Check Companion https://training.csi.ca/bbcswebdav/institution/products/MAAE/2018_... 34.What is a key difference between marketable government bonds and treasury bills? A. Marketable government bonds actively trade in the secondary market while treasury bills can only be bought from and sold to the government. Good choice! B. Treasury bills do not pay any coupon interest, while marketable bonds do. C. Marketable government bonds may be sold at a discount while treasury bills are sold at a premium. D. Treasury bills trade in the over-the-counter market, while marketable bonds trade on the exchange. Feedback: Because T-bills have such short maturities, they do not pay any coupon interest; instead, they are sold to investors at a discount from par value. When the T-bill matures, you receive par value. The difference between the price paid and the par value represents your return. Reference | Chapter 7 – Types of Investment Products and How They Are Traded Learning Domain | Understanding Investment Products and Portfolios 35.Which security is most likely to provide a capital gain if held to maturity? A. Cumulative preferred shares bought at par value. B. A government bond bought at a premium. C. Common shares of a mature company. Good choice! D. A corporate bond bought at a discount. Feedback: Bond prices are quoted using an index with a base value of 100. A bond trading at 100 is said to be trading at face value, or par. A bond trading below par, say at a price of 98, is said to be trading at a discount (the 98, based on the index of 100, indicates the bond is trading at 98% of par). A bond trading above par, say at a price of 104, is said to be trading at a premium. So if you hold buy a bond at a discount, at maturity, you will receive the par or face value. The difference between the discounted price and the par value received at maturity is considered a capital gain. The reverse is true for bonds bought at a premium. Preferred shares issued at par value will mature at par value. Common shares do not have a maturity date. Mature companies that do not have substantial expansion plans often pay generous current dividends, but their share price is not expected to increase much over time. Reference | Chapter 7 – Types of Investment Products and How They Are Traded Learning Domain | Understanding Investment Products and Portfolios 36.For the last year, an investor earned a return before adjustment for inflation of 2% on a money market fund, while inflation averaged 1.5%. What was his nominal rate of return? A. 0.50% B. 3.50% C. 1.50% Good choice! D. 2.00% Feedback: It is important to consider the effects of inflation on investments because we can isolate the difference between nominal and real returns. Investors are more concerned with the real rate of return – the return adjusted for the effects of inflation. A nominal return is a return that has not been adjusted for the impact of inflation. The approximate real rate of return is calculated as: Real Return = Nominal Rate - Annual Inflation Rate. Reference | Chapter 8 – Constructing Investment Portfolios Learning Domain | Understanding Investment Products and Portfolios 37.Fund A has a 5-year average return of 10% and a standard deviation of 5%. Fund B has a 5-year average return of 8% and a standard deviation of 2%. Select the most accurate statement about Funds A and B. A. Fund A’s returns have ranged from 5% to 10%. B. Fund B’s lowest return is lower than Fund A’s lowest return. Good choice! C. Fund B is less risky than Fund A. D. Fund A will always provide a higher return than Fund B. Feedback: We can find the probable range of returns as follows: Average Return + Standard deviation = Positive outcome. Average Return - Standard deviation = Negative outcome. In any given year Fund A, which has the higher standard deviation, could fluctuate much more widely, making it less attractive as an investment, even over the long-term. Volatility is the most common measure of risk. Reference | Chapter 8 – Constructing Investment Portfolios Learning Domain | Understanding Investment Products and Portfolios Downloaded by Hero HWServices ([email protected]) 11 sur 29 10/3/2023, 1:07 AM  lOMoARcPSD|44867647 Check Companion https://training.csi.ca/bbcswebdav/institution/products/MAAE/2018_... 38.Calculate the 2-year simple return for the AAA Mutual Fund. AAA Mutual Fund Performance Year Price at Beginning Distribution Price at End Simple 1 -Yr Return 1st Year $10.00 $0.25 $11.00 12.50% 2nd Year $0.25 $10.20 -5.00% A. -3% B. 8% C. 3% Good choice! D. 7% Feedback: Return = (Price at the end of the period + cash flow earned during the period - Price at the beginning of the period) / Price at the beginning of the period. In this case, ($10.20 + $0.50 - $10.00) / $10.00 = 7.00%. Reference | Chapter 8 – Constructing Investment Portfolios Learning Domain | Understanding Investment Products and Portfolios 39.Which statement best describes what a rational investor will do when comparing the risk and return of two investments? Good choice! A. He will select the one that minimizes risk and maximizes return. B. He will select the one with the lower risk because all investors are risk averse. C. He will select the one that maximizes risk and maximizes return. D. He will select the one with the higher expected risk because that is the only way to earn a higher return. Feedback: Given a choice between two investments with the same amount of risk, a rational investor would always take the security with the higher return. Given two investments with the same expected return, the investor would always choose the security with the lower risk. Investors are risk averse, but not all to the same degree. Each investor has a different risk profile. This means that not all investors choose the same low-risk security. Some investors are willing to take on more risk than others are, if they believe there is a higher potential for returns. Reference | Chapter 8 – Constructing Investment Portfolios Learning Domain | Understanding Investment Products and Portfolios 40.Why do speculators tend to avoid diversification? A. Diversifying a portfolio may result in overall risk that is lower than that of its component securities. B. Diversifying a portfolio tends to increase the probability of very large gains and losses. Good choice! C. Diversifying a portfolio tends to reduce the probability of very large gains and losses. D. Not diversifying a portfolio exposes the investor to the total risk of the securities. Feedback: Diversification affects the returns that investors hope to earn. Diversification tends to reduce the probability of both very large losses and very large gains. Speculators tend to avoid diversification for this reason. Great wealth can be achieved only through an absence of diversification. Reference | Chapter 8 – Constructing Investment Portfolios Learning Domain | Understanding Investment Products and Portfolios 41.What items are typically classified as current assets on the statement of financial position? A. Cash, accrued charges, and accounts receivable. B. Cash, inventories, and depreciation. C. Cash, accounts receivable, and retained earnings. Good choice! D. Cash, accounts receivable, and inventories. Feedback: Typical current asset accounts include cash, representing the total amount in all of the company’s deposit accounts; inventories, representing the finished and unfinished products which have not yet been sold; and accounts receivable. Reference | Chapter 9 – Understanding Financial Statements Learning Domain | Understanding Investment Products and Portfolios Downloaded by Hero HWServices ([email protected]) 12 sur 29 10/3/2023, 1:07 AM  lOMoARcPSD|44867647 Check Companion https://training.csi.ca/bbcswebdav/institution/products/MAAE/2018_... 42.Ally wishes to buy a preferred share where any regular dividend payment that the board skips will collect in arrears. What preferred share feature should Ally be seeking? A. Soft retraction. B. Voting. C. Callable. Good choice! D. Cumulative. Feedback: When the board of directors elect not to pay a dividend, unpaid dividends accumulate in what is known as arrears for those who hold cumulative preferred shares. Reference | Chapter 7 – Types of Investment Products and How They Are Traded Learning Domain | Understanding Investment Products and Portfolios 43.Which statement best describes one of the main differences between short and long transactions? A. Short sales must result in a decline in the price of the stock that is sold short. B. In a long transaction, the investor must pay the broker the cost of repurchasing the shares. Good choice! C. Investors using long transactions anticipate a price increase in the security. D. Short transactions are more common than long transactions. Feedback: Short transactions are a common feature of the capital markets, although not as common as long transactions – the transactions taken by investors who anticipate a price increase in the security. Investors who short sell stocks must first borrow the shares. They must also declare their short transactions. You are not allowed to pretend that you are simply selling stock. In addition, short positions require margin in excess of the value of the stock at the time of the short sale. The short seller repays the broker by replacing the borrowed shares. Reference | Chapter 7 – Types of Investment Products and How They Are Traded Learning Domain | Understanding Investment Products and Portfolios 44.Sonya, a mutual fund manager for Drake Financial has had a stellar year in managing their Canadian equity portfolio and has outperformed the benchmark by over 200 basis points. She is now concerned that within the last couple of months of this calendar year that the Canadian equity market is due for a 10 to 15% pullback. Which investment strategy would be most appropriate for her to implement for the last couple of months of the year to offset the market correction? Good choice! A. Buy put options on the iShares S&P/TSX 60 Index Fund. B. Increase her equity exposure to the consumer staples sector. C. Buy call options on the iShares S&P/TSX 60 Index Fund. D. Reduce her equity exposure to the energy sector. Feedback: A fund manager may have experienced a rapid growth in the value of her portfolio, but is concerned that the market may fall. To protect herself against a fall in value, she purchases put options on the iShares S&P/TSX 60 Index Fund (i60s). If the market declines, the fall in value of the portfolio is offset by an increase in the value of the put options. Other managers may sell call options on shares they already own in order to enhance the fund’s income. When fund managers deal internationally, they may use futures contracts as protection against changes in currency values. Reference | Chapter 7 – Types of Investment Products and How They Are Traded Learning Domain | Understanding Investment Products and Portfolios 45.Which statement about market risk is true? Good choice! A. Market risk can result from changes in inflation and interest rates. B. Market risk is cancelled out by diversification. C. Market risk is greater than the sum of the risks of all stocks. D. Market risk is measured by the standard deviation. Feedback: Once a portfolio becomes well diversified, the only remaining risk to be concerned about is market risk. Market risk is defined as the variability of a stock or a portfolio in relation to the market as a whole. The process of diversification cancels out much firm-specific risk, so market risk is less than the total risk you would calculate if you looked at each stock separately. Market risk is also referred to as systematic risk and arises from such things as inflation, the business cycle, and interest rates. Reference | Chapter 8 – Constructing Investment Portfolios Learning Domain | Understanding Investment Products and Portfolios Downloaded by Hero HWServices ([email protected]) 13 sur 29 10/3/2023, 1:07 AM  lOMoARcPSD|44867647 Check Companion https://training.csi.ca/bbcswebdav/institution/products/MAAE/2018_... 46.The Optima Equity Fund has a beta of 1.4. What is the most accurate way to describe the Optima Equity Fund’s relationship to the market as a whole? A. If the market goes up by 10%, the Optima Fund should go up by 11.4%. Good choice! B. If the market goes up by 5%, the Optima fund should go up by 7%. C. If the market goes down by 10%, the Optima fund should go up by 11.4%. D. If the market goes down by 5%, the Optima Fund should go down by 5.7%. Feedback: One way to measure market risk is by calculating a portfolio’s beta. Beta shows how much a portfolio fluctuates when the market as a whole fluctuates. A higher beta means that the portfolio is exposed to more risk. The market has a beta of 1.0. All portfolios can be viewed in terms of how volatile they are in relation to the market. In this example: The Optima Equity Fund has a beta of 1.4, which means the Fund is expected to be 1.4 times more volatile than the market as a whole. If the S&P/TSX Composite Index is used to measure the performance of the Optima Fund, then if the Index rose by 10% you would expect to see the Optima Fund rise by 14% (1.4 x 10%). Similarly, if the S&P/TSX should fall by 20%, then the Fund should fall by 28% (1.5 x 20%). Reference | Chapter 8 – Constructing Investment Portfolios Learning Domain | Understanding Investment Products and Portfolios 47.A portfolio manager first analyzes a variety of asset mixes to determine an optimal portfolio and then adjusts the mix by monitoring and rebalancing. What is the name for the process the portfolio manager is following? A. Market timing. B. Passive management. Good choice! C. Strategic asset allocation. D. Sector weighting. Feedback: When a portfolio manager develops a strategy to maximize portfolio returns, he or she does so with a particular asset mix or allocation in mind. For example, 60% equities and 40% bonds, or 10% cash, 40% bonds, and 50% equities, and so on. This base policy mix is called the strategic asset allocation. This is the long-term mix that will be adhered to by monitoring and, when necessary, rebalancing. To find this base policy mix, the portfolio manager will analyze a variety of asset mixes to determine the optimal portfolio. The manager then reviews the range of outcomes and chooses one to determine the long-term policy or strategic asset allocation. Reference | Chapter 8 – Constructing Investment Portfolios Learning Domain | Understanding Investment Products and Portfolios 48.Rank the decisions made by a portfolio manager in order of importance for the success of the portfolio. A. Sector weighting, security selection, asset allocation. B. Asset allocation, security selection, sector weighting. Good choice! C. Asset allocation, sector weighting, security selection. D. Security selection, sector weighting, asset allocation. Feedback: The single most important decision, one that accounts for most of the success or failure of a portfolio, is the asset allocation decision, which is the selection of the classes of securities to be held and in what proportion to hold them. The next most important decision is the selection of the specific industries from which stocks will be selected: the portfolio’s sector weighting. The final decision is the security selection: the choice of which individual companies within the industry or sector to invest in. Reference | Chapter 8 – Constructing Investment Portfolios Learning Domain | Understanding Investment Products and Portfolios 49.Which of the following asset allocation statements is correct? A. Portfolio security selection determines the long-term growth potential. B. Equity weightings greater than 90% should not be recommended. Good choice! C. You should review a client’s asset allocation when the investment environment changes. D. A fixed income component of less than 25% is appropriate for conservative portfolios. Feedback: In general terms, an equity weighting of less than 25% is considered conservative and more than 75% is considered aggressive. Only if the client is very aggressive should the weighting of his equity component reach 90%. Reference | Chapter 8 – Constructing Investment Portfolios Learning Domain | Understanding Investment Products and Portfolios Downloaded by Hero HWServices ([email protected]) 14 sur 29 10/3/2023, 1:07 AM  lOMoARcPSD|44867647 Check Companion https://training.csi.ca/bbcswebdav/institution/products/MAAE/2018_... 50.Which financial leverage ratio measures a company’s ability to repay its borrowings? A. Interest coverage ratio. B. Operating profit margin ratio. Good choice! C. Cash flow from operations to total debt ratio. D. Total debt ratio Feedback: The cash flow from operations/total debt ratio gauges a company’s ability to repay the funds it has borrowed. Bank advances are short-term and must normally be repaid or rolled over within a year. Corporate debt issues commonly have sinking funds requiring annual cash outlays. A company's annual cash flow should therefore be adequate to meet these commitments. Before calculating this ratio, it is important to define cash flow from operations and consider its significance. Cash flow from operations = a company’s net earnings + all deductions not requiring a cash outlay (such as depreciation) – all additions not received in cash (such as income from an equity investment in another company). Reference | Chapter 9 – Understanding Financial Statements Learning Domain | Understanding Investment Products and Portfolios 51.What is Widget Inc.’s gross profit? Widget Inc. Earnings Statement Sales $200,000 Cost of Goods Sold $80,000 Selling & General Expenses $40,000 Depreciation $5,000 Total Expenses $30,000 Net Earnings $40,000 A. $50,000 Good choice! B. $120,000 C. $45,000 D. $75,000 Feedback: Sales are reduced by the expenses that were incurred in order to generate the goods sold (cost of goods sold). These expenses include the cost of inventories used to produce the goods as well as the labour that went into their production. The sales revenue, net of the cost of producing those goods, is known as gross profit. In this case, gross profit = $200,000 - $80,000 = $120,000. Reference | Chapter 9 – Understanding Financial Statements Learning Domain | Understanding Investment Products and Portfolios 52.Apex Mutual Fund has been structured to avoid taxation by distributing any net interest, dividends, and capital gains to unitholders each calendar year. This is an example of what type of mutual fund structure? A. Mutual fund corporation. B. Open-ended mutual fund. C. Closed-end mutual fund. Good choice! D. Mutual fund trust. Feedback: The most common structure for mutual funds in Canada is the open-end trust. The trust structure allows a fund itself to avoid taxation. Any interest, dividends and capital gains income, net of the fund’s fees, expenses and capital losses, if passed to its unitholders each calendar year, will allow the trust to avoid being taxed on its income. Reference | Chapter 10 – The Modern Mutual Fund Learning Domain | The Modern Mutual Fund Downloaded by Hero HWServices ([email protected]) 15 sur 29 10/3/2023, 1:07 AM  lOMoARcPSD|44867647 Check Companion https://training.csi.ca/bbcswebdav/institution/products/MAAE/2018_... 53.What criteria does the independent review committee use to determine if a potential conflict of interest, such as inter-fund trading, should be approved? A. Will the action require unitholder approval? Good choice! B. Will the action achieve a fair and reasonable result for the fund? C. Will the action contravene a unitholder’s statutory rights? D. Will the action contravene National Instrument 81-102? Feedback: The Independent Review Committee will only approve actions where a conflict of interest arises if certain requirements are met, including, most importantly the action achieves a fair and reasonable result for the fund. With regard to other conflicts of interest that are identified by the manager, the approval of the IRC is not required, but the IRC issues a report each year to unitholders where it is obliged to describe each instance where its recommendation with regard to a conflict of interest has not been followed by the manager of the fund. Reference | Chapter 10 – The Modern Mutual Fund Learning Domain | The Modern Mutual Fund 54.Why is it important that an investor receive a copy of the Fund Facts document prior to buying a mutual fund? A. The investor can verify that his statutory rights have been respected. B. The investor can verify that the fund has not misstated any material facts. Good choice! C. The investor can verify that the fund’s stated investment objectives and risk profile match his own. D. The investor can verify that the fund manager is adhering to the fund’s stated investment objectives. Feedback: The fundamental purpose of a Fund Facts document is to provide “full, plain and true” disclosure of material information concerning the securities and the issuer of the securities, so that potential purchasers can make informed decisions about purchasing the new securities. The fundamental investment objectives of a mutual fund can be found in the Fund Facts. It specifies what the fund intends to accomplish and how it is to be done. It is critically important, since this statement of investment objectives must correspond to investors’ needs based on their own investment objectives, personal and financial circumstances, investment knowledge, and risk profile. Reference | Chapter 10 – The Modern Mutual Fund Learning Domain | The Modern Mutual Fund 55.What entity receives all fund money obtained from investors buying units/shares? A. Dealer. B. Fund manager. Good choice! C. Custodian. D. Registrar. Feedback: The Custodian. When a mutual fund is established, a separate organization, most often a trust company, is appointed as the fund’s custodian. The custodian receives and holds the fund’s money obtained from all sources – investors buying the fund’s units or shares, income earned by the fund’s investment portfolio, proceeds from the sale of the fund’s investments, holds all the fund’s assets and distributes the fund’s money to pay the fund’s expenses, including management fees, purchases of securities for the fund’s investment portfolio, payments for redeemed units and shares and distributions or dividends to unitholders or shareholders respectively. Reference | Chapter 10 – The Modern Mutual Fund Learning Domain | The Modern Mutual Fund 56.The ZZZ Money Market Fund has a 7-day yield of 0.05%. What is the current yield for the fund? Round your answer to two decimal places. A. 1.61%. B. 2.22%. Good choice! C. 2.61%. D. 0.05%. Feedback: The current yield for a money market fund is calculated as the most recent seven-day yield on the fund, adjusted to an annual rate. The formula is: Current yield = (Seven-day yield × 365 / 7). In this case the current yield is (0.0005 × 365 / 7) = 0.0261 Reference | Chapter 11 – Conservative Mutual Fund Products Learning Domain | Analysis of Mutual Funds Downloaded by Hero HWServices ([email protected]) 16 sur 29 10/3/2023, 1:07 AM  lOMoARcPSD|44867647 Check Companion https://training.csi.ca/bbcswebdav/institution/products/MAAE/2018_... 57.Which type of fund is least likely to produce capital gains income? A. Mortgage fund. B. Preferred dividend fund. Good choice! C. Money market fund. D. Short-term bond fund. Feedback: All returns earned on money market funds are considered interest earnings and are taxed as interest income. Since money market funds invest only in money market securities that pay interest, no other type of income can be earned. Because the value of the units of a money market fund is constant ($10), no capital gains can be made on the sale of units of the fund. Reference | Chapter 11 – Conservative Mutual Fund Products Learning Domain | Analysis of Mutual Funds 58.What type of risk is the fundamental risk factor for fixed-income securities? A. Market risk. B. Reinvestment risk. Good choice! C. Interest rate risk. D. Liquidity risk. Feedback: Interest rate risk is the fundamental risk factor for fixed-income securities such as bonds, mortgages and preferred shares. As interest rates move up, the value of a fixed-income security falls. This is because the cash flow from the fixed-income security is fixed. For bonds, the cash flow is from the fixed coupon rate; for mortgages, it is from the fixed mortgage rate; and for preferred shares, it is from the fixed dividend rate. Reference | Chapter 11 – Conservative Mutual Fund Products Learning Domain | Analysis of Mutual Funds 59.Which statement is most accurate about fund wraps? A. The investor pays fees to both the wrap manager and the manager of the underlying funds. B. There is essentially no regulatory difference between a fund wrap and a standard mutual fund. Good choice! C. The fund wrap sponsor is responsible for asset allocation decisions. D. Each model is designed to meet the needs of the individual. Feedback: A fund wrap program provides a series of portfolios with multiple mutual funds to reflect pre-selected asset allocation models. Each model is designed to meet the needs of a group of investors sharing a similar client profile. Responsibility for the asset allocation decision falls to the wrap sponsor. For convenience, all administrative, management and trading costs are usually rolled into one wrap fee. From a regulatory point of view, fund wraps constitute a specific investment structure. A fund of funds exists as a legal entity, in addition to the legal existence of the underlying mutual funds. Thus, specific regulatory provisions govern the development and promotion of fund wraps. Regulations include, for example, prohibitions against “double dipping” (charging fees twice for the same services or components). Reference | Chapter 12 – Riskier Mutual Fund Products Learning Domain | Analysis of Mutual Funds 60.Your client, Mrs. DaSousa, would like to diversify her portfolio by investing in a global equity fund. What should you advise her about the foreign currency risk? Good choice! A. The fund may provide a hedge against a decline in the Canadian dollar. B. The foreign exchange risk will be offset by the lower liquidity risk. C. The value of the fund will go up if the Canadian dollar increases in value against the foreign currency. D. The fund manager can hedge the exchange risk by buying foreign currency through futures contracts. Feedback: Global mutual funds are attractive because they can provide a hedge against a decline in the relative value of the Canadian dollar. For example: if investors buy a Japanese fund, and then the value of the Canadian dollar falls relative to the yen, the Canadian dollar value of that investment will increase even if the value of the fund’s units in yen has remained unchanged. Not all global mutual funds expose clients to foreign exchange risk, however. Portfolio managers can undertake hedging transactions in the foreign exchange market to remove or greatly reduce the foreign exchange risk of their fund. They can do this by selling foreign currency for future settlement, either through currency futures contracts or currency forward contracts. Reference | Chapter 12 – Riskier Mutual Fund Products Learning Domain | Analysis of Mutual Funds Downloaded by Hero HWServices ([email protected]) 17 sur 29 10/3/2023, 1:07 AM  lOMoARcPSD|44867647 Check Companion https://training.csi.ca/bbcswebdav/institution/products/MAAE/2018_... 61.Which type of fixed income fund has a short duration, with the objectives of preserving capital and generating better current income than a money market fund? Good choice! A. Short-term bond fund. B. Mortgage fund. C. T-bill fund. D. Preferred dividend fund. Feedback: A short-term bond fund is part money market fund and part bond fund. You would expect its investment objectives to reflect this combination. A short-term bond fund’s objectives are to preserve capital and generate better current income than is likely from a money market fund. Although there is some capital gain potential, you would not expect this to be a key objective given the short duration of this type of fixed-income fund. Reference | Chapter 11 – Conservative Mutual Fund Products Learning Domain | Analysis of Mutual Funds 62.What best describes why mortgage funds generally have less sensitivity to changes in interest rates than bond funds? Good choice! A. Interest on mortgages is usually paid monthly, while interest on bonds is typically paid semi- annually. B. Many mortgage funds also hold T-bills and mortgage-backed securities, which are less volatile. C. Mortgage funds are highly diversified, often holding over 10,000 individual mortgages. D. Most mortgages held in mortgage funds are either NHA-insured or privately insured. Feedback: Interest rate sensitivity is expected to be lower for mortgage funds than for bond funds for two reasons. First, mortgage rates change much less frequently than interest rates on bonds. The decision to change mortgage rates rests with the banks and other mortgage lenders, while the interest rates (or yields) on bonds change when investors bid up or bid down the prices of bonds that trade in the market. This bidding takes place daily. Second, mortgages by nature have less interest rate risk than bonds. The reason, in part, is that interest on mortgages is paid monthly, while interest on bonds is paid semi-annually. Another reason is that the average mortgage has a shorter term than the average bond. Reference | Chapter 11 – Conservative Mutual Fund Products Learning Domain | Analysis of Mutual Funds 63.Recently interest rates have gone up. Your customer, Mr. Corelli, has asked you how this will affect the value of his mortgage fund. What is the best response to give to Mr. Corelli? Good choice! A. The value of the mortgage fund will go down because new mortgages will pay higher interest than those in the fund. B. The mortgage fund will not be affected because mortgages do not react to changes in interest rates the way bonds do. C. The mortgage fund will not be affected because the rise in interest rates will affect only new mortgages. D. The value of the mortgage fund should go up because mortgages will now be earning higher interest. Feedback: Fixed-income securities move in the opposite direction to market interest rates. Consider that a mortgage rate, once negotiated between the borrower and lender, is fixed until the end of the term. Let’s assume you are the fund manager for a mortgage mutual fund, which has mortgages paying 5%. If mortgage rates suddenly increase to 6%, only the interest rates on newly negotiated mortgages would increase. What would happen to the NAVPU of your fund? The rate on the mortgages you bought previously is fixed at 5% until the end of its term. Would you be able to sell those mortgages at par? Clearly, if someone had $100,000 to invest today, he or she would be able to buy a mortgage offering an interest rate of 6%. The investor would not pay you par for a 5% rate. If you wished to sell the mortgages, then you would have to lower your price until the price paid-given the 5% fixed payments to be made-results in a return to the buyer of 6%, the “going rate” on mortgages. In other words, the market value of your par value mortgages must fall. Reference | Chapter 11 – Conservative Mutual Fund Products Learning Domain | Analysis of Mutual Funds Downloaded by Hero HWServices ([email protected]) 18 sur 29 10/3/2023, 1:07 AM  lOMoARcPSD|44867647 Check Companion https://training.csi.ca/bbcswebdav/institution/products/MAAE/2018_... 64.You are the portfolio manager for the ABC Balanced Fund. Interest rates are going up; the stock market has been very volatile recently and is forecast to continue that way for the next two quarters. What changes, if any, will you make to your current asset allocation of 50% bonds and 50% equities? A. Increase the allocation to equities to take advantage of the volatility. Good choice! B. Temporarily move a significant amount into money market securities. C. None - the fund is balanced. D. Increase the allocation to bonds because interest rates are rising. Feedback: Balanced funds ideally provide a “balanced” mix of safety, income and capital appreciation. These objectives are sought through a portfolio of fixed-income securities for stability and income, plus a broadly diversified group of common stock holdings for diversification, dividend income and growth potential. The balance between defensive and aggressive security holdings is rarely 50-50. Rather, managers of balanced funds adjust the percentage of each part of the total portfolio according to current market conditions and future expectations. The distinguishing feature of balanced mutual funds is the way they go about meeting their investment objectives. Portfolio managers frequently attempt to shift the proportions of investments in fixed-income and equity securities in keeping with changing market conditions. When interest rates have peaked, managers want to be in fixed-income securities. When the stock market is set for an increase, they want to be in stocks. When both bond and stock markets are volatile, they will hold large amounts of money market securities. In other words, balanced mutual fund managers attempt to time the market to get the best returns depending on market conditions. Reference | Chapter 12 – Riskier Mutual Fund Products Learning Domain | Analysis of Mutual Funds 65.Which statement best describes key differences between dividend funds and standard equity funds? Good choice! A. Standard equity funds’ objectives do not include capital preservation. B. Standard equity funds cannot invest in preferred shares. C. Standard equity funds’ objectives are based on a belief in market efficiency. D. Standard equity funds’ objectives do not include current dividend income. Feedback: A standard equity fund seeks to earn some combination of dividend income and capital gains from investment in Canadian common stocks. This objective appears to be similar to that of a preferred dividend fund. The difference between the two is that an equity fund usually has a much stronger capital gains focus. Note as well that equity funds make no specific attempt to preserve capital; in other words, equity funds are willing to put capital at substantially greater risk than preferred dividend funds. Reference | Chapter 12 – Riskier Mutual Fund Products Learning Domain | Analysis of Mutual Funds 66.You are concerned about upcoming weakness in the Canadian dollar. Which type of fund should you invest in? A. An international fund that hedges its foreign currency risk. Good choice! B. A global fund that hedges its foreign currency risk. C. A specialty fund that uses derivatives to hedge the value of its portfolio. D. A global fund that does not hedge its foreign currency risk. Feedback: Global mutual funds are attractive in that they can provide a hedge against a decline in the relative value of the Canadian dollar. However, not all global mutual funds expose clients to foreign exchange risk. Portfolio managers can undertake hedging transactions in the foreign exchange market to remove or greatly reduce the foreign exchange risk of their fund. A global mutual fund’s prospectus will indicate if the fund hedges the foreign currency risk by using these currency derivatives. It is important for mutual fund sales representatives to know whether their global mutual funds hedge foreign exchange risk, because some clients will want to bear that risk themselves, while others will not. Reference | Chapter 12 – Riskier Mutual Fund Products Learning Domain | Analysis of Mutual Funds Downloaded by Hero HWServices ([email protected]) 19 sur 29 10/3/2023, 1:07 AM  lOMoARcPSD|44867647 Check Companion https://training.csi.ca/bbcswebdav/institution/products/MAAE/2018_... 67.What is an implicit cost of principal protected notes? A. Structuring costs and guarantee fees. Good choice! B. Performance participation caps. C. Commissions. D. Early redemption fees. Feedback: Implicit costs include fees borne by investors that may or may not be immediately visible and that may or may not be openly disclosed in the documents. Of the items listed, three are explicit costs, and only performance Participation Caps are an implicit cost. Reference | Chapter 13 – Alternative Managed Products Learning Domain | Understanding Alternative Managed Products 68.What type of managed fund, recently introduced to Canada, is allowed greater use of short sales, leverage, and derivatives compared to mutual funds, but not to the same extent as hedge funds? Good choice! A. Liquid alts. B. Closed-end discretionary fund. C. Private equity. D. Principal-protected notes. Feedback: Liquid alts, also known as alternative mutual funds, were recently introduced into Canada, and are allowed greater use of short sales, leverage, and derivatives compared to regular mutual funds, but not to the same extent as hedge funds. Reference | Chapter 13 – Alternative Managed Products Learning Domain | Understanding Alternative Managed Products 69.An investor seeks an equity investment that will mirror the performance of the energy sector in Canada. She desires a low-cost, flexible alternative that can quickly be bought or sold. Which product is most suited to her needs? A. Energy sector segregated fund. Good choice! B. Exchange-traded fund of energy sector stocks. C. Energy-sector index mutual fund. D. Direct investment in energy sector stocks. Feedback: Like stocks, and unlike index mutual funds, ETFs are traded on an exchange and can be bought and sold throughout the trading day. In this way, ETFs provide investors with a flexible way to participate in the performance of the underlying assets without having to acquire the assets directly, incurring high transaction costs. MERS on ETFs also tend to be lower than on other index and actively managed products. Reference | Chapter 13 – Alternative Managed Products Learning Domain | Understanding Alternative Managed Products 70.The performance of ABC Mutual Fund ranks 54 out of 100 funds in its peer group. What is its quartile ranking? A. 4th quartile. Good choice! B. 3rd quartile. C. 2nd quartile. D. 1st quartile. Feedback: A quartile sorts performance into four equal parts or blocks. The quartiles are given a rank – 1, 2, 3 or 4 – to show how well a certain fund’s performance compared to all other funds in the peer group, with the 1st quartile representing the top 25 performers. Reference | Chapter 14 – Understanding Mutual Fund Performance Learning Domain | Evaluating and Selecting Mutual Funds Downloaded by Hero HWServices ([email protected]) 20 sur 29 10/3/2023, 1:07 AM  lOMoARcPSD|44867647 Check Companion https://training.csi.ca/bbcswebdav/institution/products/MAAE/2018_... 71.Which drawback of the comparison universe method makes average fund managers look more like underperformers as the comparison period lengthens? A. Definition of universes. B. Matching of risk profiles. Good choice! C. Survivorship bias. D. Universe size. Feedback: All comparison universes exhibit some degree of survivorship bias no matter how carefully the universes are constructed. Survivorship bias develops as defunct portfolios drop out and are excluding from rankings in subsequent quarters. Funds that are terminated or cease to exist are usually those who have been unsuccessful. As a result of this bias, adequately performing managers can appear to have underperformed. Reference | Chapter 14 – Understanding Mutual Fund Performance Learning Domain | Evaluating and Selecting Mutual Funds 72.What type of fund offers the highest expected risk and the highest expected return in terms of the risk-return trade-off between different types of mutual funds? A. Mortgage fund. B. Real estate fund. C. Canadian Equity fund. Good choice! D. Specialty fund. Feedback: The highest risk, highest expected return mutual fund is a specialty fund. Reference | Chapter 15 – Selecting a Mutual Fund Learning Domain | Evaluating and Selecting Mutual Funds 73.A fund manager has diversified the equity portfolio he manages in order to reduce the potential negative impact of unfavourable information relating to any one stock. What type of risk has he reduced? Good choice! A. Unique risk. B. Default risk. C. Market risk. D. Interest rate risk. Feedback: If a security’s price is affected by new information, and if new information arrives frequently, then its price will tend to be volatile and so will the returns that it generates. This source of volatility is specific to a given security and is known as unique risk. Diversifying a portfolio reduces unique risk. Reference | Chapter 15 – Selecting a Mutual Fund Learning Domain | Evaluating and Selecting Mutual Funds Downloaded by Hero HWServices ([email protected]) 21 sur 29 10/3/2023, 1:07 AM  lOMoARcPSD|44867647 Check Companion https://training.csi.ca/bbcswebdav/institution/products/MAAE/2018_... 74.You are comparing the performance of ABC Equity Fund and XYZ Equity Fund to their benchmark. Indicate the correct statement. 3 Year Return Return Return Compound Year 1 Year 2 Year 3 Return Benchmark -2.0% 12.6% 20.6% 10.0% ABC Equity -10.0% 16.0% 24.0% 9.0% Fund XYZ Equity 8.0% 9.0% 10.0% 9.0% Fund A. Fund ABC demonstrated a superior performance in a bearish market. Good choice! B. Fund XYZ would have offered a lower likelihood of loss if a client needed to sell the investment. C. Fund ABC showed greater consistency in its simple annual returns. D. Fund XYZ offered less protection on the downside. Feedback: After finding comparable funds with good long-term performance, look for funds with the best performance from year to year. In comparing two funds, the one with less variation in simple rates of return from year to year is a more consistent performer. Although equity funds are intended for the long-term, if liquidity is needed, the fund with a more consistent performance is less likely to be sold at a loss. Simple rates of return also tell effectively how well a mutual fund performs when the markets have turned bearish. Reference | Chapter 15 – Selecting a Mutual Fund Learning Domain | Evaluating and Selecting Mutual Funds 75.What type of fee does a mutual fund sponsor often reduce the longer an investor holds a back-end load fund? A. Sales fee. B. Trailer fee. C. Acquisition fee. Good choice! D. Redemption fee. Feedback: Fund sponsors use a decreasing redemption fee (deferred sales charges) schedule to recover their costs from investors who opt out of the fund early. In most cases, redemption fees on a back-end load fund decrease the longer the investor holds the fund. Reference | Chapter 16 – Mutual Fund Fees and Services Learning Domain | Evaluating and Selecting Mutual Funds 76.Which factors would cause the management expense ratio charged by a mutual fund to be higher? 1. The fund invests in foreign equities. 2. The fund is large in size. 3. The fund is managed by the fund sponsor’s management team. 4. The fund pays a trailer fee. A. 3 and 4. B. 1 and 2. C. 2 and 3. Good choice! D. 1 and 4. Feedback: Four factors primarily affect the management expense ratio. Funds that invest in foreign equities; are small in size; are managed by an outside specialist firm; and charge trailer fees will have higher management expense ratios.