CIC Investment Policy & Planning 2 — Questions and Answers
Question 1: An IPS typically specifies a 'rebalancing trigger' which activates when:
- The portfolio manager believes the market is overvalued
- An asset class drifts outside its target allocation band (Correct answer)
- The client requests a review of their portfolio
- The portfolio generates a negative return
Correct answer: An asset class drifts outside its target allocation band
Rebalancing triggers are defined as percentage bands around target allocations; once breached, rebalancing is required.
Question 2: Which client circumstance would most likely lead to a LOWER risk tolerance in an IPS?
- Long investment time horizon
- High current income relative to expenses
- Imminent large liquidity need within 12 months (Correct answer)
- Diversified income sources from multiple employers
Correct answer: Imminent large liquidity need within 12 months
An upcoming large liquidity need forces conservative positioning to ensure capital is available when required.
Question 3: A 'benchmark' specified in an IPS serves primarily to:
- Guarantee a minimum return to the client
- Provide a standard against which portfolio performance is measured (Correct answer)
- Determine the manager's compensation structure
- Limit the number of securities held in the portfolio
Correct answer: Provide a standard against which portfolio performance is measured
Benchmarks are performance measurement standards that allow objective evaluation of manager results relative to a stated objective.
Question 4: When establishing an IPS for a defined benefit pension plan, the primary liability-driven objective is to:
- Maximize total return without regard to plan liabilities
- Match or exceed the growth of plan liabilities to fund future benefit payments (Correct answer)
- Minimize contributions from the plan sponsor
- Achieve returns above the equity market index
Correct answer: Match or exceed the growth of plan liabilities to fund future benefit payments
Defined benefit plans are liability-driven; the portfolio must generate sufficient assets to meet future benefit obligations.
Question 5: Which of the following is an example of a LEGAL constraint that would be documented in an IPS?
- Client's preference to avoid airline stocks
- ERISA fiduciary requirements for a corporate pension plan (Correct answer)
- Manager's philosophy of concentrated positions
- Client's desire for monthly income distributions
Correct answer: ERISA fiduciary requirements for a corporate pension plan
ERISA (Employee Retirement Income Security Act) imposes legally binding fiduciary duties on pension plan managers that must be reflected in the IPS.
Question 6: A client states they 'cannot afford to lose more than 10% in any calendar year.' This statement in an IPS reflects:
- The client's return objective
- An absolute risk constraint (Correct answer)
- A relative risk benchmark
- A liquidity requirement
Correct answer: An absolute risk constraint
A maximum acceptable loss within a defined period is an absolute risk constraint that limits downside exposure regardless of market conditions.
Question 7: Which section of an IPS would address the client's prohibition on investing in tobacco companies?
- Return objectives
- Risk tolerance
- Unique circumstances and constraints (Correct answer)
- Liquidity requirements
Correct answer: Unique circumstances and constraints
ESG preferences, ethical restrictions, and personal exclusions are documented under unique circumstances or special constraints in the IPS.
CIC Investment Policy & Planning 2
An IPS typically specifies a 'rebalancing trigger' which activates when: