Instructions: Choose the best answer for each multiple-choice question.
Time Limit: 3 Hours
Total Questions: 100
Passing Grade: 60%
Section 1: Regulation and Ethics (10 Questions)
Which of the following is NOT a key principle of PIPEDA?
a. Accountability
b. Limiting collection
c. Prior approval for disclosure
d. Openness
Which of the following is a potential benefit of a well-defined code of ethics for an investment management firm?
a. Guaranteeing ethical behavior
b. Removing all ethical dilemmas
c. Decreasing the risk of regulatory audits
d. Reducing the potential for client litigation
FINTRAC requires investment firms to report:
a. All transactions over $5,000
b. Any suspicious transactions
c. Quarterly portfolio performance
d. Employee personal trading activity
High closing is considered unethical because:
a. It disadvantages buyers of the fund
b. It violates the principle of best execution
c. It inflates the fund manager's compensation
d. All of the above
A soft dollar arrangement is acceptable if:
a. It benefits the client in a specific and measurable way
b. The client is fully informed and consents to the arrangement
c. It is used to purchase research that enhances investment decisions
d. All of the above
An investment advisor's fiduciary duty requires them to:
a. Always achieve the highest returns for the client
b. Avoid any potential conflicts of interest
c. Act solely in the client's best interests
d. Guarantee the safety of the client's principal
Which of the following is NOT a strength of a code of ethics?
a. Provides guidance for appropriate behavior
b. Lulls management into a false sense of security
c. Creates a social contract for the workplace
d. Supports individual and firm accountability
Which of the following is an example of a right-versus-right ethical dilemma?
a. Using insider information for personal gain
b. Misrepresenting a fund's performance to clients
c. Choosing between client confidentiality and reporting illegal activity
d. Allocating trades unfairly to benefit certain clients
Which of the following would NOT be considered a "best practice" in portfolio management?
a. Seeking best execution for client trades
b. Disclosing conflicts of interest to clients
c. Sharing client information within the firm without consent
d. Maintaining accurate records of all client transactions
Which of the following is a key responsibility of a CIRO-regulated firm’s Chief Compliance Officer?
a. Approving all trades in client accounts
b. Developing and implementing a compliance supervision system
c. Setting investment objectives for managed accounts
d. Calculating performance returns for client portfolios
Section 2: The Institutional Portfolio Management Process (8 Questions)
Which of the following is NOT a typical responsibility of a pension fund's board of trustees?
a. Hiring and firing investment managers
b. Setting the fund's investment objectives
c. Executing trades in the fund's portfolio
d. Monitoring the fund's performance
The primary difference between a defined benefit and defined contribution pension plan is:
a. The types of investments held by the fund
b. The allocation of investment risk between the sponsor and beneficiary
c. The level of regulatory oversight by securities commissions
d. The fees charged to plan participants
Endowment funds typically invest in:
a. Short-term, liquid assets
b. High-growth, speculative securities
c. Long-term assets with a targeted rate of return
d. Tax-advantaged investments only
The primary role of an investment consultant is to:
a. Manage investments on behalf of institutional clients
b. Advise institutions on the selection of investment managers
c. Rate the performance of mutual funds and ETFs
d. Develop investment strategies for individual investors
Which of the following is NOT a typical function of a corporate treasury department?
a. Managing cash flow and liquidity
b. Overseeing foreign exchange risk management
c. Setting investment objectives for the company's pension plan
d. Providing investment advice to individual employees
The principal-agent problem in investment management arises from:
a. The separation of ownership and control of financial wealth
b. The competition between active and passive investment managers
c. The differences in investment objectives between various institutions
d. The complexity of financial markets and instruments
Which of the following is a key responsibility of an institutional investment fund's investment committee?
a. Preparing and filing the fund's prospectus
b. Executing trades in the fund's portfolio
c. Developing the fund's investment policy statement
d. Reporting the fund's performance to individual investors
Which of the following is a responsibility of the Office of the Superintendent of Financial Institutions (OSFI)?
a. Approving prospectuses for new mutual fund offerings
b. Regulating the trading of securities on stock exchanges
c. Supervising the activities of federally regulated financial institutions
d. Setting investment guidelines for pension funds and endowments
Section 3: Portfolio Management Organization and Operations (16 Questions)
The front office of an investment management firm is typically responsible for:
a. Portfolio management and trade execution
b. Compliance, legal, and audit functions
c. Trade settlement and accounting
d. All of the above
The primary responsibility of a portfolio manager is to:
a. Execute trades at the best possible prices
b. Market the firm's investment products to clients
c. Make investment decisions for client portfolios
d. Ensure compliance with regulatory requirements
A trader's primary focus is on:
a. Developing investment strategies for client portfolios
b. Analyzing economic and market trends
c. Executing trades at the best possible prices
d. Providing client service and support
An institutional investment management firm's sales and marketing team focuses on:
a. Attracting and retaining individual investors
b. Developing new investment products and services
c. Managing the firm's relationships with regulators
d. Accumulating assets for the firm to manage
The primary objective of client service in an investment management firm is to:
a. Provide clients with timely and relevant information about their portfolios
b. Attract new clients and grow the firm's assets under management
c. Ensure compliance with regulatory requirements
d. Execute trades at the best possible prices
Which of the following is NOT a best practice for managing employee personal trading?
a. Requiring pre-clearance of all trades
b. Monitoring employee trading activity
c. Prohibiting all personal trading by employees
d. Maintaining a restricted list of securities
An investment management agreement typically includes:
a. The portfolio's investment objectives and guidelines
b. The fees and expenses charged by the investment manager
c. The reporting requirements for the investment manager
d. All of the above
A key reason for terminating an investment management contract is:
a. Weak investment performance relative to peers
b. A change in the client's investment objectives
c. The departure of a key portfolio manager from the firm
d. Any of the above
The middle office of an investment management firm is typically responsible for:
a. Portfolio management and trade execution
b. Compliance, legal, and audit functions
c. Trade settlement and accounting
d. All of the above
The primary responsibility of the compliance function is to:
a. Ensure that the firm is operating in accordance with all applicable regulations
b. Provide legal advice and support to the firm
c. Audit the firm's operations and financial records
d. Manage the firm's relationships with clients
The legal function of an investment management firm is typically responsible for:
a. Reviewing and approving new investment products and services
b. Negotiating and drafting contracts with third-party service providers
c. Advising the firm on regulatory and legal matters
d. All of the above
The audit function of an investment management firm is typically responsible for:
a. Ensuring that the firm is operating in accordance with all applicable regulations
b. Providing legal advice and support to the firm
c. Auditing the firm's operations and financial records
d. Managing the firm's relationships with clients
The accounting function of an investment management firm is typically responsible for:
a. Maintaining the firm's financial records
b. Preparing financial statements and reports
c. Managing the firm's cash flow and liquidity
d. All of the above
A key best practice for the compliance function is to:
a. Have the chief compliance officer report directly to the firm's president
b. Require pre-approval of all new investment products and services
c. Maintain a close working relationship with the front office
d. All of the above
A key best practice for the legal function is to:
a. Have the head of legal report directly to the firm's president
b. Require pre-approval of all new contracts
c. Maintain a close working relationship with the compliance function
d. All of the above
A key best practice for the back office is to:
a. Have the trade settlement staff report to the head of trading
b. Use a straight-through processing (STP) system for trade settlement
c. Maintain a close working relationship with the front office
d. All of the above
Section 4: Managing Equity Portfolios (16 Questions)
A growth-oriented portfolio manager would likely favor companies with:
a. High dividend yields and low price-to-earnings ratios
b. Strong earnings growth and high price-to-book ratios
c. Stable earnings and a history of share buybacks
d. Low debt levels and strong cash flow generation
A value-oriented investor seeks companies that:
a. Are rapidly growing their revenues and earnings
b. Are undervalued by the market relative to their fundamentals
c. Have a strong track record of beating earnings expectations
d. Are leaders in their industry with a high market share
The primary goal of passive equity portfolio management is to:
a. Outperform the market by identifying undervalued securities
b. Minimize risk by holding a diversified portfolio of stocks
c. Track the performance of a specific market index
d. Generate income by investing in high-dividend-paying stocks
Which of the following is NOT a common technique for constructing an index fund?
a. Replicating the index by holding all of its constituent securities
b. Tracking the index by holding a representative sample of its securities
c. Using fundamental indexing to weight securities based on their fundamentals
d. Engaging in active trading to outperform the index
Closet indexing refers to the practice of:
a. Passively managing a portfolio to minimize tracking error
b. Actively managing a portfolio to closely mimic an index
c. Using derivatives to hedge against market risk
d. Investing in a concentrated portfolio of high-conviction stocks
Risk budgeting involves:
a. Setting a limit on the portfolio's tracking error relative to a benchmark
b. Allocating capital to different asset classes based on their risk levels
c. Using derivatives to hedge against specific risks
d. All of the above
Enhanced active equity investing involves:
a. Using leverage to amplify returns
b. Short selling to underweight overvalued securities
c. Reinvesting short sale proceeds into additional long positions
d. All of the above
Market-neutral long–short investing aims to:
a. Generate returns that are uncorrelated to the market
b. Maximize returns by taking advantage of market trends
c. Minimize risk by holding a diversified portfolio of stocks
d. Generate income by investing in high-dividend-paying stocks
A portable alpha strategy involves:
a. Separating alpha and beta decisions
b. Hedging market risk to isolate alpha
c. Applying alpha to a different asset class
d. All of the above
Which of the following is NOT a benefit of portable alpha?
a. Improved portfolio diversification
b. Lower transaction costs and expenses
c. Increased flexibility in asset allocation
d. Enhanced control over risk budgeting
When selecting an alpha engine for a portable alpha strategy, it is important to consider:
a. The consistency and sustainability of the alpha
b. The correlation of the alpha with the target beta
c. The risk and return characteristics of the alpha engine
d. All of the above
Which of the following is NOT a potential risk of using derivatives in equity portfolio management?
a. Basis risk
b. Counterparty risk
c. Liquidity risk
d. Diversification risk
Tax-loss selling is a strategy that involves:
a. Selling losing stocks to offset capital gains and reduce taxes
b. Holding losing stocks until they recover in value
c. Using derivatives to hedge against losses in a portfolio
d. Investing in tax-advantaged securities to minimize tax liabilities
A key feature of exchange-traded funds (ETFs) is:
a. Their low cost and tax efficiency
b. Their intraday trading and liquidity
c. Their transparency and targeted exposures
d. All of the above
Which of the following is a potential benefit of using ETFs in equity portfolio management?
a. Liquidity management
b. Transition management
c. Tactical asset allocation
d. All of the above
When selecting an ETF for portfolio management, it is important to consider:
a. The ETF's liquidity and tracking error
b. The ETF provider's management and servicing capabilities
c. The fees and expenses charged by the ETF
d. All of the above
Section 5: Managing Fixed Income Portfolios (19 Questions)
Which of the following is NOT a characteristic of a repurchase agreement (repo) transaction?
a. The sale and repurchase of a security
b. A short-term financing arrangement
c. A fixed interest rate for the term of the agreement
d. The use of a security as collateral
The primary goal of a fixed income trader at a broker/dealer is:
a. Generate alpha by outperforming a benchmark index
b. Provide liquidity to the market and facilitate trading
c. Earn trading profits by exploiting market inefficiencies
d. Manage the firm's inventory of fixed income securities
An institutional fixed income portfolio manager is typically evaluated based on:
a. Their absolute return performance
b. Their relative performance compared to peers
c. Their ability to generate income for clients
d. Their adherence to regulatory guidelines
Duration measures a bond's sensitivity to:
a. Credit risk
b. Inflation risk
c. Interest rate risk
d. Liquidity risk
Which of the following is a passive bond management strategy?
a. Buy-and-hold
b. Interest rate anticipation
c. Bond swaps
d. Box trades
A barbell portfolio consists of:
a. Bonds with maturities concentrated at the short and long ends of the yield curve
b. Bonds with maturities evenly distributed across the yield curve
c. Bonds with maturities clustered around a specific target date
d. Bonds with varying credit ratings to diversify credit risk
A laddered bond portfolio:
a. Minimizes interest rate risk by matching maturities to liabilities
b. Maximizes return by investing in long-maturity bonds
c. Provides a steady stream of income as bonds mature
d. Reduces reinvestment risk by staggering maturities
Immunization is a strategy that aims to:
a. Protect a portfolio from interest rate risk
b. Maximize return by investing in high-yield bonds
c. Minimize credit risk by investing in investment-grade bonds
d. Enhance liquidity by investing in short-term securities
Target date immunization involves:
a. Matching the duration of assets to the duration of liabilities
b. Investing in zero-coupon bonds that mature on a specific date
c. Hedging interest rate risk with interest rate futures
d. All of the above
Contingent immunization allows a manager to:
a. Pursue an active management strategy until a trigger point is reached
b. Switch to a passive management strategy if performance targets are not met
c. Guarantee a minimum return for a specified period
d. All of the above
Which of the following is an active bond management strategy?
a. Buy-and-hold
b. Interest rate anticipation
c. Bond indexing
d. Immunization
A rate anticipation swap involves:
a. Switching between short and long duration bonds based on interest rate forecasts
b. Swapping fixed-rate bonds for floating-rate bonds to manage interest rate risk
c. Exchanging bonds of different issuers to exploit yield spread differences
d. Hedging interest rate risk with interest rate options
A box trade involves:
a. Simultaneously executing two related bond swaps
b. Buying and selling bonds in a specific pattern to create a profit
c. Exploiting arbitrage opportunities in the bond market
d. Hedging interest rate risk with bond futures
An intermarket domestic box trade typically involves:
a. Bonds of two different issuers with the same maturity
b. Bonds of the same issuer with different maturities
c. Bonds of two different issuers with different maturities
d. Bonds of the same issuer with the same maturity
An intramarket box trade typically involves:
a. Bonds of two different countries with the same maturity
b. Bonds of the same country with different maturities
c. Bonds of two different countries with different maturities
d. Bonds of the same country with the same maturity
Asset-backed securities (ABS) are backed by:
a. A pool of mortgages
b. A pool of corporate bonds
c. A pool of loans or receivables
d. A pool of government securities
Collateralized debt obligations (CDOs) are backed by:
a. A pool of mortgages
b. A pool of corporate bonds
c. A pool of loans or receivables
d. All of the above
A forward rate agreement (FRA) is:
a. An exchange-traded contract for hedging interest rate risk
b. An over-the-counter contract for hedging interest rate risk
c. A standardized contract with fixed terms and conditions
d. A long-term agreement for exchanging interest payments
Interest rate swaps are used to:
a. Hedge interest rate risk
b. Modify interest rate exposure
c. Gain exposure to different interest rates
d. All of the above
Section 6: Permitted Use of Derivatives in Mutual Funds (5 Questions)
The primary regulation governing the use of derivatives by mutual funds in Canada is:
a. National Instrument 81-102
b. National Instrument 31-103
c. The Proceeds of Crime (Money Laundering) and Terrorist Financing Act
d. The Personal Information Protection and Electronic Documents Act
A mutual fund can use derivatives for hedging purposes to:
a. Reduce risk associated with existing positions
b. Increase exposure to a particular market or sector
c. Generate additional income for the fund
d. All of the above
A currency cross-hedge involves:
a. Hedging the currency risk of a foreign investment with a forward contract
b. Substituting exposure to one currency risk for another
c. Using options to hedge against adverse currency movements
d. Investing in a basket of currencies to diversify currency risk
Which of the following is NOT a permitted use of derivatives by mutual funds for non-hedging purposes?
a. Gaining exposure to a market without owning the underlying securities
b. Reducing transaction costs and expediting portfolio changes
c. Engaging in speculative trading to generate excess returns
d. Providing additional portfolio income
The simplified prospectus of a mutual fund must disclose:
a. Whether the fund is permitted to use derivatives
b. How the fund intends to use derivatives
c. The risks associated with the fund's use of derivatives
d. All of the above
Section 7: Creating New Portfolio Management Mandates (10 Questions)
The first step in developing a new investment product is to:
a. Identify potential market opportunities
b. Determine the required portfolio management skills
c. Develop a marketing and distribution strategy
d. Prepare a financial forecast
Market "pull" for a new investment product arises from:
a. Demand from existing investors or distributors
b. Internal innovation and product development
c. Competitive pressures from other firms
d. Changes in regulatory requirements
When assessing the market for a new investment product, it is important to consider:
a. The existing competition and their products
b. The target market and their investment needs
c. The current market conditions and investor sentiment
d. All of the above
The regulatory requirements for a new investment product depend on:
a. The product's structure and investment strategy
b. The target market and their investor status
c. The jurisdiction in which the product will be offered
d. All of the above
The key variable in the financial forecast for a new investment product is:
a. The investment management fee
b. The management expense ratio (MER)
c. The projected assets under management (AUM)
d. The distributor compensation
The final go/no-go decision for a new investment product is typically made by:
a. The portfolio manager
b. The product management team
c. The compliance department
d. The firm's senior management team
A key factor in the go/no-go decision is:
a. The product's potential profitability
b. The product's competitiveness in the market
c. The availability of distribution channels
d. All of the above
Investment guidelines and restrictions for a new fund are designed to:
a. Ensure the fund meets its investment objectives
b. Control risk and limit potential losses
c. Provide guidance for the portfolio manager
d. All of the above
The performance benchmark for a new fund should be:
a. Representative of the fund's investment objectives and strategy
b. Easy to track and measure
c. Recognized and accepted by investors
d. All of the above
When developing a new investment product, it is important to consider:
a. The legal and regulatory requirements
b. The target market and their investment needs
c. The firm's investment capabilities and resources
d. All of the above
Section 8: Alternative Investment Management (11 Questions)
Which of the following is NOT a characteristic of alternative investments?
a. Illiquidity
b. High transparency
c. Unconventional investment strategies
d. Limited historical data
Hedge funds are typically characterized by:
a. High fees and performance-based compensation
b. Flexibility in investment strategies and the use of leverage
c. Limited regulation and disclosure requirements
d. All of the above
Which of the following is a common strategy used by hedge fund managers?
a. Long-short equity
b. Arbitrage
c. Event-driven
d. All of the above
A managed futures fund invests in:
a. Publicly traded stocks and bonds
b. Private equity and venture capital
c. Real estate and commodities
d. Futures and options contracts
Private market investments typically involve:
a. Investing in publicly traded companies
b. Providing capital to startups and private companies
c. Acquiring controlling stakes in established businesses
d. All of the above
Real estate investments can provide:
a. Diversification benefits
b. Inflation protection
c. Income generation
d. All of the above
A key risk of alternative investments is:
a. Liquidity risk
b. Transparency risk
c. Manager risk
d. All of the above
Due diligence on alternative investments should include:
a. Evaluating the manager's experience and track record
b. Understanding the fund's investment strategy and risk controls
c. Reviewing the fund's legal and regulatory structure
d. All of the above
A lockup period in a hedge fund:
a. Restricts redemptions for a specified period
b. Guarantees a minimum return for investors
c. Protects the manager from losses
d. Allows the manager to charge higher fees
Gate provisions in a hedge fund:
a. Limit the amount of capital that can be invested in the fund
b. Restrict redemptions during periods of market stress
c. Prevent investors from withdrawing their capital prematurely
d. All of the above
Which of the following is a current trend in the alternative investment industry?
a. Increased institutionalization
b. Greater regulatory scrutiny
c. The emergence of new investment strategies
d. All of the above
Section 9: Client Portfolio Reporting and Performance Attribution (5 Questions)
The Global Investment Performance Standards (GIPS) are:
a. Mandatory for all investment management firms
b. Voluntary standards for performance presentation
c. Enforced by securities regulators
d. Specific to Canadian investment firms
A portfolio management report typically includes:
a. Detailed portfolio holdings
b. Performance attribution analysis
c. Market commentary and outlook
d. All of the above
Performance attribution aims to:
a. Identify the sources of a portfolio's return
b. Evaluate a manager's investment skill
c. Compare a portfolio's performance to a benchmark
d. All of the above
Style analysis is used to:
a. Determine a fund's investment style
b. Identify style drift in a portfolio
c. Compare a portfolio's performance to its peers
d. All of the above
Style drift occurs when:
a. A manager changes their investment process
b. A fund's returns deviate from its benchmark
c. A portfolio's holdings shift away from its intended style
d. A manager's performance deteriorates over time
Section 1: Regulation and Ethics
c. Prior approval for disclosure - PIPEDA requires organizations to obtain consent for the collection, use, and disclosure of personal information, but does not specify a prior approval process for disclosure in all circumstances.
d. Reducing the potential for client litigation - A well-defined code of ethics can help reduce litigation by setting clear expectations for behavior, guiding ethical decision-making, and demonstrating a commitment to ethical conduct.
b. Any suspicious transactions - FINTRAC requires investment firms to report any transactions that raise suspicions of money laundering or terrorist financing.
d. All of the above - High closing is unethical because it artificially inflates the fund's NAV, disadvantages buyers, and increases the manager's compensation unfairly.
d. All of the above - Soft dollar arrangements are acceptable if they benefit the client in a measurable way, the client is informed and consents, and they are used to purchase research that enhances investment decisions.
c. Act solely in the client's best interests - A fiduciary duty requires advisors to prioritize the client's interests above their own and avoid conflicts of interest.
b. Lulls management into a false sense of security - This is a weakness, not a strength, of a code of ethics.
c. Choosing between client confidentiality and reporting illegal activity - This is a classic example of a right-versus-right dilemma where two ethical principles clash.
c. Sharing client information within the firm without consent - This is a violation of client confidentiality and privacy.
b. Developing and implementing a compliance supervision system - This is the primary responsibility of a CCO, ensuring the firm adheres to regulations.
Section 2: The Institutional Portfolio Management Process
c. Executing trades in the fund's portfolio - This is typically the responsibility of the investment manager, not the board of trustees.
b. The allocation of investment risk between the sponsor and beneficiary - In a DB plan, the sponsor bears the investment risk, while in a DC plan, the beneficiary bears the risk.
c. Long-term assets with a targeted rate of return - Endowment funds typically have a long-term investment horizon and aim to generate a steady stream of income.
b. Advise institutions on the selection of investment managers - Investment consultants specialize in helping institutions find and evaluate investment managers.
d. Providing investment advice to individual employees - This is not a typical function of a corporate treasury department.
a. The separation of ownership and control of financial wealth - The principal-agent problem arises when those who manage assets (agents) may not act in the best interests of the owners (principals).
c. Developing the fund's investment policy statement - The investment committee is responsible for creating the IPS, which outlines the fund's investment objectives, guidelines, and restrictions.
c. Supervising the activities of federally regulated financial institutions - OSFI is a federal regulator responsible for overseeing banks, insurance companies, and trust companies.
Section 3: Portfolio Management Organization and Operations
a. Portfolio management and trade execution - The front office is primarily focused on investment management and trading activities.
c. Make investment decisions for client portfolios - This is the primary responsibility of a portfolio manager.
c. Executing trades at the best possible prices - This is the primary focus of a trader.
d. Accumulating assets for the firm to manage - The sales and marketing team focuses on attracting new clients and increasing the firm's AUM.
a. Provide clients with timely and relevant information about their portfolios - This is the primary objective of client service, ensuring client satisfaction and retention.
c. Prohibiting all personal trading by employees - While some restrictions are necessary, completely prohibiting personal trading is not always practical or necessary.
d. All of the above - An investment management agreement should outline the key aspects of the relationship between the manager and the client, including objectives, fees, and reporting.
d. Any of the above - Any of these factors can be a valid reason for terminating an investment management contract.
b. Compliance, legal, and audit functions - The middle office functions provide oversight and support to ensure the firm operates in a sound and compliant manner.
a. Ensure that the firm is operating in accordance with all applicable regulations - This is the primary responsibility of the compliance function.
d. All of the above - The legal function handles all legal aspects of the firm's operations, including product development, contracts, and regulatory matters.
c. Auditing the firm's operations and financial records - This is the main role of the audit function, ensuring that all activities comply with policies and procedures.
d. All of the above - The accounting function handles all financial aspects of the firm's operations, including record-keeping, reporting, and cash management.
d. All of the above - These are all key best practices for the compliance function, ensuring independence, proactive oversight, and a strong relationship with management.
d. All of the above - These are all key best practices for the legal function, ensuring independence, proactive involvement, and close collaboration with compliance.
b. Use a straight-through processing (STP) system for trade settlement - An STP system automates the settlement process, minimizing errors and increasing efficiency.
Section 4: Managing Equity Portfolios
b. Strong earnings growth and high price-to-book ratios - Growth-oriented managers prioritize companies with strong earnings potential, often reflected in high price-to-book ratios.
b. Are undervalued by the market relative to their fundamentals - Value investors seek companies whose market price is below their intrinsic value, determined by analyzing fundamentals.
c. Track the performance of a specific market index - Passive equity portfolio management aims to replicate an index's performance, accepting market returns.
d. Engaging in active trading to outperform the index - This is characteristic of active management, not passive index fund construction.
b. Actively managing a portfolio to closely mimic an index - Closet indexing attempts to disguise active management as passive by mimicking an index, minimizing underperformance risk.
d. All of the above - Risk budgeting involves setting tracking error limits, allocating capital based on risk, and potentially using derivatives for risk management.
d. All of the above - Enhanced active equity investing employs leverage, short selling, and reinvestment of proceeds to boost active returns.
a. Generate returns that are uncorrelated to the market - Market-neutral long–short investing aims to isolate alpha, generating returns independent of market movements.
d. All of the above - Portable alpha separates alpha from beta, hedges market risk, and applies the isolated alpha to a different asset class for enhanced returns.
b. Lower transaction costs and expenses - Portable alpha can be expensive due to the use of derivatives and active management.
d. All of the above - When choosing an alpha engine, consistency, correlation with the target beta, and risk-return characteristics are crucial considerations.
d. Diversification risk
a. Selling losing stocks to offset capital gains and reduce taxes - Tax-loss selling takes advantage of capital losses to reduce an investor's overall tax liability.
d. All of the above - ETFs are known for their low cost, tax efficiency, intraday trading, liquidity, transparency, and targeted exposures, making them attractive investment vehicles.
d. All of the above - ETFs can be used for liquidity management, transition management, and tactical asset allocation due to their flexibility and ease of trading.
d. All of the above - Liquidity, tracking error, management capabilities, and fees are all important considerations when selecting an ETF for a portfolio.
Section 5: Managing Fixed Income Portfolios
c. A fixed interest rate for the term of the agreement - Repo transactions typically involve a floating interest rate that is reset periodically based on prevailing market rates.
c. Earn trading profits by exploiting market inefficiencies - Fixed income traders aim to profit from price discrepancies and market movements.
b. Their relative performance compared to peers - Institutional fixed income managers are primarily evaluated based on their performance relative to other managers with similar mandates.
c. Interest rate risk - Duration is a measure of a bond's price sensitivity to changes in interest rates.
a. Buy-and-hold - Buy-and-hold is a passive bond management strategy that involves holding bonds to maturity, minimizing active trading and interest rate risk.
a. Bonds with maturities concentrated at the short and long ends of the yield curve - A barbell portfolio holds bonds at both extremes of the maturity spectrum, aiming to balance risk and return.
c. Provides a steady stream of income as bonds mature - A laddered bond portfolio has maturities spread out over time, providing regular income as bonds mature and reducing reinvestment risk.
a. Protect a portfolio from interest rate risk - Immunization strategies aim to match the duration of assets and liabilities, minimizing the impact of interest rate changes.
d. All of the above - Target date immunization can be achieved by matching durations, using zero-coupon bonds, or hedging with futures.
d. All of the above - Contingent immunization allows for active management with a safety net, switching to a passive strategy if a trigger point is reached to guarantee a minimum return.
b. Interest rate anticipation - Interest rate anticipation is an active strategy that involves adjusting a portfolio's duration based on forecasts of interest rate movements.
a. Switching between short and long duration bonds based on interest rate forecasts - A rate anticipation swap involves adjusting a portfolio's duration to profit from anticipated interest rate changes.
a. Simultaneously executing two related bond swaps - A box trade exploits perceived mispricing in the yield spreads of two related bond pairs.
a. Bonds of two different issuers with the same maturity - An intermarket domestic box trade involves swapping bonds of different issuers within the same country and maturity.
a. Bonds of two different countries with the same maturity - An intramarket box trade involves swapping bonds of different countries within the same maturity.
c. A pool of loans or receivables - ABS are backed by a diversified pool of assets, such as auto loans, credit card receivables, or student loans.
d. All of the above - CDOs can be backed by various debt instruments, including mortgages, corporate bonds, and other ABS.
b. An over-the-counter contract for hedging interest rate risk - FRAs are customized contracts traded directly between two parties for hedging interest rate exposure.
d. All of the above - Interest rate swaps can be used for hedging, modifying interest rate exposure, or gaining exposure to different interest rates.
Section 6: Permitted Use of Derivatives in Mutual Funds
a. National Instrument 81-102 - This NI specifically addresses the permitted uses of derivatives by mutual funds in Canada.
a. Reduce risk associated with existing positions - Hedging with derivatives aims to mitigate specific risks in a mutual fund's portfolio, such as currency or interest rate risk.
b. Substituting exposure to one currency risk for another - A currency cross-hedge involves replacing exposure to one currency with another, potentially mitigating overall currency risk.
c. Engaging in speculative trading to generate excess returns - Mutual funds are generally restricted from using derivatives for speculative purposes.
d. All of the above - The simplified prospectus must provide transparency regarding a mutual fund's use of derivatives, including permission, strategy, and associated risks.
Section 7: Creating New Portfolio Management Mandates
a. Identify potential market opportunities - The first step is to identify a need or gap in the market that a new product could address.
a. Demand from existing investors or distributors - Market pull arises from investors or distributors seeking a specific type of investment product.
d. All of the above - Understanding the competition, target market, and current market environment is crucial when assessing the potential for a new product.
d. All of the above - Regulatory requirements vary depending on the product's structure, investment strategy, target market, and the relevant jurisdiction.
c. The projected assets under management (AUM) - AUM is the key driver of revenue for an investment product, so accurately forecasting AUM is crucial.
d. The firm's senior management team - The final go/no-go decision involves considering factors like profitability, competitiveness, and distribution, requiring senior management approval.
d. All of the above - Profitability, competitiveness, and distribution are all crucial considerations in the go/no-go decision.
d. All of the above - Investment guidelines and restrictions serve to ensure a fund's consistency with its objectives, manage risk, and provide clear parameters for the manager.
d. All of the above - A good performance benchmark is representative, easily tracked, and widely recognized.
d. All of the above - Legal and regulatory aspects, market needs, and the firm's capabilities are all essential considerations when developing a new product.
Section 8: Alternative Investment Management
b. High transparency - Alternative investments are typically characterized by lower transparency than traditional investments.
d. All of the above - Hedge funds are known for high fees, performance-based compensation, flexible strategies, leverage use, limited regulation, and less stringent disclosure requirements.
d. All of the above - These are all common hedge fund strategies that exploit market inefficiencies, specific events, and price discrepancies.
d. Futures and options contracts - Managed futures funds utilize futures and options to gain diversified exposure to various asset classes and markets.
b. Providing capital to startups and private companies - Private market investments typically involve investing in companies not publicly traded on exchanges, including startups and private firms.
d. All of the above - Real estate can offer diversification, inflation hedging, and income generation, making it a valuable asset class.
d. All of the above - Liquidity risk, transparency risk, and manager risk are all key concerns when investing in alternative investments.
d. All of the above - Due diligence requires a comprehensive assessment of the manager's experience, the fund's strategy, risk controls, and legal structure to make informed investment decisions.
a. Restricts redemptions for a specified period - Lockup periods prevent investors from withdrawing their capital for a designated time, providing stability for the fund.
b. Restrict redemptions during periods of market stress - Gate provisions protect the fund from forced selling during challenging market conditions, minimizing potential losses.
d. All of the above - The alternative investment industry is evolving with increased institutional participation, stricter regulations, and ongoing innovation in strategies.
Section 9: Client Portfolio Reporting and Performance Attribution
b. Voluntary standards for performance presentation - GIPS are voluntary, but widely adopted, standards that aim to ensure fair and transparent performance reporting globally.
d. All of the above - Portfolio management reports provide a comprehensive overview of portfolio performance, holdings, attribution, market commentary, and outlook.
d. All of the above - Performance attribution seeks to break down returns, understand their drivers, assess manager skill, and compare performance against a relevant benchmark.
d. All of the above - Style analysis helps categorize funds, identify any style drift, and compare performance with peers using similar strategies.
c. A portfolio's holdings shift away from its intended style - Style drift indicates a deviation from the fund's original investment style, potentially impacting risk and return characteristics.
End of Mock Exam
This mock exam covers the key concepts outlined in the PMT® course material and provides a sense of the types of questions you may encounter on the actual exam. Remember that this is just a sample, and studying the full course content is crucial for success. Good luck with your preparation!