CIC Investment Policy & Planning 4 — Questions and Answers
Question 1: A client who is retired and relies entirely on portfolio distributions for living expenses would have which type of liquidity profile in the IPS?
- Low ongoing liquidity needs with no immediate withdrawals
- High liquidity requirement due to regular income distributions needed (Correct answer)
- Liquidity needs deferred for 10+ years
- No liquidity requirement because Social Security covers all needs
Correct answer: High liquidity requirement due to regular income distributions needed
Clients dependent on portfolio withdrawals for living expenses require significant liquidity planning to meet ongoing cash flow needs without forced asset sales.
Question 2: Which investment policy constraint refers to the minimum acceptable holding period before assets can be liquidated?
- Return objective constraint
- Liquidity constraint (Correct answer)
- Time horizon constraint
- Tax constraint
Correct answer: Liquidity constraint
Liquidity constraints specify how quickly assets must be convertible to cash, including both minimum hold periods and maximum transaction costs.
Question 3: An investment counselor revising an IPS after a client's divorce should pay closest attention to which potential change?
- The client's preference for growth stocks
- Changes to net worth, cash flow, risk capacity, and beneficiary designations (Correct answer)
- The portfolio's current benchmark composition
- Tactical asset allocation adjustments
Correct answer: Changes to net worth, cash flow, risk capacity, and beneficiary designations
Divorce dramatically alters financial circumstances, liquidity needs, risk capacity, and estate planning elements that are fundamental to a valid IPS.
Question 4: A 'total return' investment objective in an IPS differs from an 'income' objective primarily in that:
- Total return ignores capital appreciation
- Total return seeks to maximize the combination of income and capital gains (Correct answer)
- Income objectives always outperform total return objectives
- Total return objectives exclude dividends from performance measurement
Correct answer: Total return seeks to maximize the combination of income and capital gains
Total return combines both income (dividends, interest) and capital appreciation, whereas an income objective focuses primarily on cash yield generation.
Question 5: Which factor most directly determines whether a client's risk 'willingness' and 'ability' to take risk are aligned?
- The client's preference for brand-name mutual funds
- Whether subjective comfort with volatility matches objective financial capacity to absorb losses (Correct answer)
- The manager's assessment of market conditions
- The client's past investment returns
Correct answer: Whether subjective comfort with volatility matches objective financial capacity to absorb losses
Willingness is psychological comfort with risk; ability is financial capacity—when these conflict, the IPS must address the gap.
Question 6: An IPS for a high-net-worth taxable account should explicitly address which of the following tax management strategies?
- Strategies to minimize turnover, harvest losses, and locate assets tax-efficiently across accounts (Correct answer)
- Strategies to maximize dividend income regardless of tax consequences
- Strategies to concentrate all assets in tax-exempt municipal bonds
- Strategies to defer all gains indefinitely regardless of portfolio needs
Correct answer: Strategies to minimize turnover, harvest losses, and locate assets tax-efficiently across accounts
Tax-aware investing in taxable accounts includes tax-loss harvesting, minimizing turnover, and placing tax-inefficient assets in tax-advantaged accounts (asset location).
Question 7: When an IPS states 'the portfolio shall not hold more than 5% in any single security,' this is an example of a:
- Return objective
- Concentration risk constraint (Correct answer)
- Benchmark specification
- Spending rule
Correct answer: Concentration risk constraint
A maximum single-security holding limit is a diversification or concentration constraint that limits idiosyncratic risk exposure.
CIC Investment Policy & Planning 4
A client who is retired and relies entirely on portfolio distributions for living expenses would have which type of liquidity profile in the IPS?