CIC Client Portfolio Management 3 — Questions and Answers
Question 1: A client's investment policy statement (IPS) specifies a maximum 15% allocation to alternative investments. The portfolio currently holds 22%. What must the counselor do?
- Obtain verbal consent to maintain the position
- Reduce alternatives to comply with the IPS constraint (Correct answer)
- Ignore the constraint if performance is strong
- Report only if the client asks
Correct answer: Reduce alternatives to comply with the IPS constraint
The IPS is a binding guideline; the counselor must reduce the alternatives allocation to within the stated maximum of 15%.
Question 2: Which factor primarily determines the appropriate asset allocation for a client?
- Current market trends
- Counselor's personal risk preference
- Client's time horizon, risk tolerance, and financial goals (Correct answer)
- The performance of the prior year's best asset class
Correct answer: Client's time horizon, risk tolerance, and financial goals
Asset allocation must be customized to the individual client's time horizon, risk tolerance, and specific financial objectives.
Question 3: Dollar-cost averaging into an equity fund most benefits an investor in which market condition?
- Steadily rising market
- Flat market with no volatility
- Declining or volatile market (Correct answer)
- A market at its all-time high with no fluctuations
Correct answer: Declining or volatile market
Dollar-cost averaging acquires more shares when prices fall, lowering the average cost basis and benefiting most in volatile or declining markets.
Question 4: A client in the highest tax bracket holds large unrealized capital gains. Which tax-efficient strategy can reduce current-year tax liability?
- Selling all appreciated positions immediately
- Tax-loss harvesting to offset gains with losses (Correct answer)
- Converting all assets to cash
- Increasing dividend-paying stock holdings
Correct answer: Tax-loss harvesting to offset gains with losses
Tax-loss harvesting realizes losses to offset capital gains, reducing the client's net taxable gain for the year.
Question 5: What is the primary purpose of a benchmark in portfolio management?
- To predict future market returns
- To measure portfolio performance against a relevant standard (Correct answer)
- To determine client risk tolerance
- To set management fees
Correct answer: To measure portfolio performance against a relevant standard
A benchmark provides a relevant standard to evaluate whether the portfolio's performance meets expectations relative to its investment mandate.
Question 6: Which scenario best illustrates concentration risk in a client's portfolio?
- Holding 50 stocks equally weighted across all sectors
- Having 60% of net worth in employer stock and stock options (Correct answer)
- Owning a global equity index fund
- Maintaining a 60/40 equity/bond split
Correct answer: Having 60% of net worth in employer stock and stock options
Concentration risk arises when a large portion of wealth is tied to a single security or entity, such as an employer's stock.
Question 7: A counselor recommends increasing bond duration ahead of an anticipated interest rate decline. What is the expected outcome if rates fall?
- Bond prices fall and portfolio value decreases
- Bond prices rise and portfolio value increases (Correct answer)
- Duration has no effect on bond price changes
- Short-term bonds outperform long-term bonds
Correct answer: Bond prices rise and portfolio value increases
Longer-duration bonds experience greater price appreciation when interest rates decline, benefiting the portfolio.
CIC Client Portfolio Management 3
A client's investment policy statement (IPS) specifies a maximum 15% allocation to alternative investments.
The portfolio currently holds 22%.
What must the counselor do?