Practice Free ICWIM Exam Online Questions
Question #21
Why might a portfolio manager use an equity fund rather than direct equity investment within a portfolio?
- A . To avoid paying capital gains tax
- B . To gain exposure to a specialist sector
- C . In order to reduce ongoing charges
- D . To benefit from changes in volatility
Correct Answer: B
B
Explanation:
Equity funds allow portfolio managers to efficiently access a specific market or sector that may otherwise require significant resources and expertise to invest in directly. For instance, a fund specializing in renewable energy provides exposure to that sector without the need for individual stock selection. Avoiding capital gains tax (A): This is not applicable because funds do not inherently avoid tax obligations.
Reducing ongoing charges (C): Funds typically have higher fees than directly holding equities.
Changes in volatility (D): While funds manage diversification, they do not specifically capitalize on volatility.
Reference: International Certificate in Wealth & Investment Management: Section on mutual funds and specialized investment funds.
Use of funds for sectoral or thematic investment strategies.
B
Explanation:
Equity funds allow portfolio managers to efficiently access a specific market or sector that may otherwise require significant resources and expertise to invest in directly. For instance, a fund specializing in renewable energy provides exposure to that sector without the need for individual stock selection. Avoiding capital gains tax (A): This is not applicable because funds do not inherently avoid tax obligations.
Reducing ongoing charges (C): Funds typically have higher fees than directly holding equities.
Changes in volatility (D): While funds manage diversification, they do not specifically capitalize on volatility.
Reference: International Certificate in Wealth & Investment Management: Section on mutual funds and specialized investment funds.
Use of funds for sectoral or thematic investment strategies.
Question #22
Why would a composite benchmark be needed to measure portfolio performance?
- A . It makes it easier for the fund manager
- B . Because the portfolio spans several asset classes
- C . Because the portfolio forms part of the investment universe
- D . To lower the tracking error
Correct Answer: B
B
Explanation:
Need for a Composite Benchmark:
Portfolios that span multiple asset classes (e.g., equities, bonds, commodities) require a composite benchmark to provide a fair performance comparison.
Single benchmarks (e.g., S&P 500) would not accurately represent multi-asset portfolios.
Elimination of Other Options:
A: Composite benchmarks complicate fund management rather than simplify it.
C: While portfolios are part of the investment universe, this does not necessitate a composite benchmark.
D: Reducing tracking error is a goal but not the main reason for composite benchmarks.
Reference: ICWIM Module 3: Details on portfolio management and benchmark selection for performance measurement.
B
Explanation:
Need for a Composite Benchmark:
Portfolios that span multiple asset classes (e.g., equities, bonds, commodities) require a composite benchmark to provide a fair performance comparison.
Single benchmarks (e.g., S&P 500) would not accurately represent multi-asset portfolios.
Elimination of Other Options:
A: Composite benchmarks complicate fund management rather than simplify it.
C: While portfolios are part of the investment universe, this does not necessitate a composite benchmark.
D: Reducing tracking error is a goal but not the main reason for composite benchmarks.
Reference: ICWIM Module 3: Details on portfolio management and benchmark selection for performance measurement.
Question #23
An advisor is reviewing a client’s portfolio which has a time horizon of 15 years and is made up primarily of bonds and cash but with some exposure to equities and other higher-risk investments.
It is reasonable to believe that the client’s risk appetite is:
- A . Low Risk
- B . Low-Mid Risk
- C . Mid Risk
- D . Mid-High Risk
Correct Answer: B
B
Explanation:
Risk Appetite and Portfolio Composition
A portfolio primarily of bonds and cash indicates a conservative approach, but the inclusion of equities and higher-risk investments suggests some tolerance for risk.
A 15-year time horizon allows for a balanced approach, mitigating risks associated with equities over time.
Why the Answer is B
The mix of low-risk (bonds, cash) and some high-risk exposure (equities) aligns with Low-Mid Risk.
Why Other Options are Incorrect
B
Explanation:
Risk Appetite and Portfolio Composition
A portfolio primarily of bonds and cash indicates a conservative approach, but the inclusion of equities and higher-risk investments suggests some tolerance for risk.
A 15-year time horizon allows for a balanced approach, mitigating risks associated with equities over time.
Why the Answer is B
The mix of low-risk (bonds, cash) and some high-risk exposure (equities) aligns with Low-Mid Risk.
Why Other Options are Incorrect
Question #24
Establishing sufficient details about a client in order to give advice is known as:
- A . Assessing suitability and affordability
- B . Determining attitude to risk
- C . Giving information on status disclosure
- D . Following know your customer procedures
Correct Answer: D
D
Explanation:
Know Your Customer (KYC)
A regulatory process requiring firms to collect sufficient information about a client to ensure advice is appropriate.
It involves understanding the client’s financial situation, goals, and risk tolerance.
Why the Answer is D
Establishing sufficient client details is the essence of KYC. It ensures compliance with regulations and prevents mis-selling.
Why Other Options are Incorrect
D
Explanation:
Know Your Customer (KYC)
A regulatory process requiring firms to collect sufficient information about a client to ensure advice is appropriate.
It involves understanding the client’s financial situation, goals, and risk tolerance.
Why the Answer is D
Establishing sufficient client details is the essence of KYC. It ensures compliance with regulations and prevents mis-selling.
Why Other Options are Incorrect
Question #25
Which of the following is used to establish an investor’s total return from a bond?
- A . Running yield
- B . Annual coupon
- C . Price-to-book ratio
- D . Yield to maturity
Correct Answer: D
D
Explanation:
Yield to Maturity (YTM)
YTM is the total return an investor can expect from a bond if held to maturity, considering annual coupon payments and any difference between the purchase price and the bond’s face value.
Why the Answer is D
YTM incorporates all cash flows, providing a comprehensive measure of total return.
Why Other Options are Incorrect
D
Explanation:
Yield to Maturity (YTM)
YTM is the total return an investor can expect from a bond if held to maturity, considering annual coupon payments and any difference between the purchase price and the bond’s face value.
Why the Answer is D
YTM incorporates all cash flows, providing a comprehensive measure of total return.
Why Other Options are Incorrect
Question #26
The UCITS regulations have been integral to introducing a common format for:
- A . Company accounts
- B . Corporate actions
- C . Key investor information documents
- D . Trade settlement
Correct Answer: C
C
Explanation:
The UCITS (Undertakings for the Collective Investment in Transferable Securities) regulations mandate that fund managers provide a standardized Key Investor Information Document (KIID)to investors. This document ensures that all retail investors receive clear and concise information about the fund’s objectives, risks, charges, and past performance.
Company accounts (A): UCITS does not govern corporate accounting.
Corporate actions (B): Corporate actions such as dividends or mergers are unrelated to UCITS.
Trade settlement (D): UCITS does not standardize trade settlement processes.
Reference: International Certificate in Wealth & Investment Management: Regulations surrounding UCITS and KIIDs.
UCITS directives and their implementation across the European Union.
C
Explanation:
The UCITS (Undertakings for the Collective Investment in Transferable Securities) regulations mandate that fund managers provide a standardized Key Investor Information Document (KIID)to investors. This document ensures that all retail investors receive clear and concise information about the fund’s objectives, risks, charges, and past performance.
Company accounts (A): UCITS does not govern corporate accounting.
Corporate actions (B): Corporate actions such as dividends or mergers are unrelated to UCITS.
Trade settlement (D): UCITS does not standardize trade settlement processes.
Reference: International Certificate in Wealth & Investment Management: Regulations surrounding UCITS and KIIDs.
UCITS directives and their implementation across the European Union.
Question #27
How does standard deviation provide investors with a measure of historical volatility?
- A . By the analysis of historical share price movements
- B . Through the measurement of the highs and lows of each asset
- C . By measuring the degree of fluctuation around the mean
- D . Through the measurement of share price movements compared to the benchmark
Correct Answer: C
C
Explanation:
Standard deviation measures the dispersion of returns around the average (mean) return. A higher standard deviation indicates greater historical volatility, showing how much the returns deviate from the expected average.
Formula:
Standard Deviation=S(Ri-R?)2n ext{Standard Deviation} = sqrt{rac{Sigma (R_i – bar{R})^2}{n}}Standard Deviation=nS(Ri?-R?)2??
Where:
RiR_iRi? = Individual returns
R?bar{R}R? = Mean return
nnn = Number of data points
[Reference: ICWIM, Topic: Risk Measurement and Investment Analysis., CFA Curriculum: Standard Deviation in Portfolio Risk Assessment., , ]
C
Explanation:
Standard deviation measures the dispersion of returns around the average (mean) return. A higher standard deviation indicates greater historical volatility, showing how much the returns deviate from the expected average.
Formula:
Standard Deviation=S(Ri-R?)2n ext{Standard Deviation} = sqrt{rac{Sigma (R_i – bar{R})^2}{n}}Standard Deviation=nS(Ri?-R?)2??
Where:
RiR_iRi? = Individual returns
R?bar{R}R? = Mean return
nnn = Number of data points
[Reference: ICWIM, Topic: Risk Measurement and Investment Analysis., CFA Curriculum: Standard Deviation in Portfolio Risk Assessment., , ]