Mixed Deck — All CIC Topics Flashcards

A CIC's firm receives soft-dollar arrangements from a broker. Under ethical guidelines, these arrangements are permissible only if:

Answer: The research or services received benefit the clients whose commissions generated them

Soft-dollar arrangements are permissible when the goods or services received benefit the clients who generated the commissions.

When a CIC manages both discretionary and non-discretionary accounts, trade allocation must be:

Answer: Conducted in a fair and equitable manner across all client accounts

Ethical standards require that trade allocations be fair and equitable to all clients regardless of account type or size.

Which of the following best describes the Sharpe Ratio?

Answer: Excess return per unit of total risk (standard deviation)

The Sharpe Ratio divides a portfolio's excess return (above the risk-free rate) by its standard deviation, measuring reward per unit of total risk.

What is GDP a measure of?

Answer: Total economic output

Gross Domestic Product (GDP) is the total monetary value of all finished goods and services produced within a country's borders in a specific time period. It serves as a comprehensive measure of a nation's economic activity and health. A rising GDP generally indicates economic growth, while a declining GDP can signal a recession.

Which strategy aims to outperform market benchmarks?

Answer: Active management

Active management is an investment strategy where portfolio managers make specific investment decisions, such as stock picking and market timing, with the goal of outperforming a specific market benchmark or index. This approach involves extensive research and analysis to identify undervalued assets or anticipate market trends. In contrast, passive management aims to replicate the performance of a benchmark.

The Capital Market Line (CML) differs from the Security Market Line (SML) in that the CML:

Answer: Applies only to efficiently diversified portfolios, not individual securities

The CML applies to efficient (fully diversified) portfolios using total risk (σ), while the SML applies to all assets and uses beta (systematic risk).

Under CIC standards, how should a designee handle a situation where firm policy conflicts with the CIC Code of Ethics?

Answer: Follow the CIC Code of Ethics, which sets the higher standard

When firm policy falls below the CIC Code of Ethics, the designee must adhere to the higher ethical standard.

A CIC is advising a client on their retirement portfolio. The counselor performs a thorough analysis of the client's risk tolerance, time horizon, and financial goals. Based on this, the counselor constructs a well-diversified portfolio using low-cost index funds and monitors it regularly. This approach is a clear demonstration of adherence to which of the following principles?

Answer: The prudent investor rule

The prudent investor rule requires a fiduciary to manage a portfolio by considering the portfolio as a whole and as part of an overall investment strategy. This includes evaluating the client's risk tolerance and goals, diversifying investments to avoid uncompensated risk, and monitoring the portfolio. The counselor's actions align directly with these core tenets.

According to the Investment Advisers Act of 1940's 'Books and Records' Rule (Rule 204-2), a registered investment adviser must make and keep true, accurate, and current records of all of the following EXCEPT:

Answer: Audio recordings of all telephone conversations with clients.

SEC Rule 204-2 specifies numerous records that must be maintained, including financial journals, order memoranda, and client agreements. However, it does not mandate the recording of all telephone conversations with clients. While firms must retain certain communications (like emails and texts relating to advice), a blanket requirement to record all calls is not part of the rule.

IAA Standards require that performance information presented to prospects must be:

Answer: Based on composite results that are fair, accurate, and not misleading

Performance presentations must use composites that fairly represent the adviser's track record and must not be misleading through selective inclusion of results.

Why is diversification important?

Answer: To reduce risk

Diversification is the strategy of spreading investments across various asset classes, industries, and geographies to minimize exposure to any single risk. By not putting all "eggs in one basket," the negative performance of one investment can be offset by the positive performance of another. This helps to reduce overall portfolio volatility and mitigate specific (unsystematic) risks without necessarily sacrificing returns.

Which of the following best defines 'active return'?

Answer: Portfolio return minus the benchmark return over the same period

Active return (also called excess return or alpha in the attribution context) is simply the portfolio's return minus the benchmark's return, representing the value added or subtracted by active management.

Under SEC Regulation Best Interest (Reg BI), which disclosure document must broker-dealers provide to retail customers?

Answer: Form CRS (Customer Relationship Summary)

Reg BI requires broker-dealers to provide retail customers with a Form CRS summarizing the relationship and services offered.

What does a rising information ratio indicate about an active portfolio manager?

Answer: The manager is generating more active return per unit of tracking error

The information ratio equals active return divided by tracking error; a higher ratio means the manager consistently adds more alpha for each unit of active risk taken.

The standard deviation of a portfolio that holds two perfectly positively correlated assets compared to holding each asset alone is:

Answer: Equal to the weighted average of the individual standard deviations

When two assets are perfectly positively correlated (ρ = +1), there is no diversification benefit and portfolio standard deviation equals the weighted average of the individual standard deviations.

Which communication practice is specifically required when an adviser changes its fee schedule?

Answer: Notifying affected clients in writing with sufficient advance notice

Material changes to fee schedules require advance written notice to clients so they can evaluate the impact.

What is asset allocation in investment planning?

Answer: Distributing investments across asset classes

Asset allocation is the process of dividing an investment portfolio among different asset categories, such as stocks, bonds, and cash equivalents. The goal is to balance risk and reward by diversifying across various asset classes that tend to perform differently under various market conditions. This strategy is a cornerstone of long-term investment planning.

Which measure adjusts portfolio return for market risk (beta) rather than total risk, making it useful for comparing non-diversified portfolios or individual securities?

Answer: Treynor ratio

The Treynor ratio divides excess return by beta (systematic risk), making it appropriate for evaluating components within a larger diversified portfolio.

Which document outlines investment objectives and constraints?

Answer: Investment policy statement

An Investment Policy Statement (IPS) is a formal document that clearly outlines an investor's objectives, constraints, and guidelines for managing their investment portfolio. It typically includes details on risk tolerance, return expectations, liquidity needs, time horizon, and asset allocation ranges. The IPS serves as a roadmap for the investment manager and a reference point for evaluating performance.

A client is the executor of an estate and must manage the estate's assets according to the terms of the deceased's will. The will stipulates that all assets must be managed under the state's Prudent Investor Act. This stipulation is an example of which type of investment constraint?

Answer: Legal and Regulatory

The requirement to adhere to specific laws, such as a state's Prudent Investor Act, is a legal and regulatory constraint. The CIC is bound by these statutory requirements when managing the portfolio, which dictates the level of risk, diversification, and overall management strategy.