Mixed Deck — All CIM Topics Flashcards

What does a high Price-to-Earnings (P/E) ratio typically indicate about investor expectations?

Answer: Investors expect high future earnings growth

A high P/E ratio generally indicates that investors are willing to pay a premium, expecting strong future earnings growth from the company.

Why does a callable bond exhibit negative convexity when yields are low?

Answer: Price appreciation is capped near the call price as the issuer becomes likely to call

As yields fall, the call option gains value and limits the bond's price upside, creating negative convexity.

The yield to maturity (YTM) of a bond assumes which of the following?

Answer: All coupon payments are reinvested at the YTM rate until maturity

YTM is calculated under the assumption that all coupon payments are reinvested at the same YTM rate, which may not hold in practice.

Real assets as an alternative investment class include which of the following?

Answer: Infrastructure, commodities, and timberland

Real assets encompass physical or tangible assets such as infrastructure, commodities, real estate, and natural resources.

Which regulatory body oversees investment advisors in Canada?

Answer: CIRO

The Canadian Investment Regulatory Organization (CIRO) is the national self-regulatory organization that oversees investment dealers and mutual fund dealers in Canada. CIRO is responsible for setting and enforcing rules regarding the business and financial conduct of its members and their registered employees. Its primary mandate is to ensure investor protection and maintain market integrity within the Canadian investment industry.

A fund manager acquires beneficial ownership of 6% of a public company's voting equity with the intent to influence control. Which filing is required?

Answer: Schedule 13D

Acquirers of more than 5% of a registered class of voting equity with an activist or control intent must file Schedule 13D.

Which client segment typically needs the most complex relationship management, including estate, tax, and multi-generational planning?

Answer: Ultra-high-net-worth families

UHNW families usually have complex structures, several stakeholders, and estate and tax issues that need coordinated advice.

A 45-year-old plans to retire at 65 and expects to live to about 90. How is this time horizon best described?

Answer: Long-term, multistage

A change in circumstances such as retirement creates separate stages within a long overall horizon.

What is the consequence of insider trading?

Answer: Regulatory fines and legal actions

The consequence of insider trading, which involves buying or selling securities based on material, non-public information, is severe regulatory fines and legal actions. This illegal and unethical practice undermines the fairness and integrity of financial markets. Individuals found guilty can face significant monetary penalties, civil lawsuits, and even criminal charges leading to imprisonment.

A key technique in liability-driven investing for a pension plan is:

Answer: Matching the duration of plan assets to the duration of plan liabilities

Duration matching protects funded status from changes in interest rates.

What is typically the first step in the investment planning process?

Answer: Understand client goals and profile

The first and most crucial step in the investment planning process is to thoroughly understand the client's goals and profile. This involves assessing their financial objectives, risk tolerance, time horizon, liquidity needs, and any other personal circumstances. Without this foundational understanding, an investment advisor cannot develop a suitable and effective strategy tailored to the client's unique situation.

Shorting stock you already own ('short against the box') to lock in a gain triggers which rule?

Answer: Constructive sale rule under Section 1259

Section 1259 treats such hedges as a constructive sale, so the gain is recognized immediately.

Fat-tailed (leptokurtic) return distributions imply that normal-distribution VaR will tend to:

Answer: Understate extreme losses

Fat tails mean extreme losses occur more often than a normal model predicts.

Which is the most effective way to report performance to clients?

Answer: Show returns against an appropriate benchmark and the client's IPS objectives, net of fees

Fair reporting compares net-of-fee results with relevant benchmarks and the client's stated goals.

Which of the following is a passive asset allocation strategy?

Answer: Strategic asset allocation

Strategic asset allocation is a passive investment strategy that involves setting target allocations for various asset classes and periodically rebalancing the portfolio to maintain those targets. This approach is long-term oriented, based on the investor's risk tolerance and financial goals, and assumes that market timing is difficult. It contrasts with active strategies that attempt to outperform the market through frequent adjustments.

Which beneficiary designation issue most commonly overrides a client's will?

Answer: Retirement accounts and life insurance pass by beneficiary designation, not by the will

Assets with named beneficiaries pass by contract directly to those beneficiaries regardless of the will.

How should risk be assessed in regulatory compliance?

Answer: Evaluate risk tolerance, capacity, time horizon, and investment objectives systematically

Comprehensive risk assessment considers tolerance, capacity, time horizon, and objectives to create appropriate strategies.

How often should an IPS normally be reviewed?

Answer: At least annually and whenever the client's circumstances change materially

The IPS should be updated regularly and after major life or market events so it stays relevant.

A portfolio has a 1-day 95% VaR of $2 million. Assuming i.i.d. normal returns, what is the approximate 10-day 95% VaR?

Answer: $6.32 million

VaR scales with the square root of time, so $2M × √10 ≈ $6.32M.

What is the primary goal of tax-loss harvesting?

Answer: Realizing losses to offset realized gains and up to $3,000 of ordinary income

Tax-loss harvesting realizes losses to offset gains and lower current taxes while keeping market exposure.