CIM Investment Policy & Planning 2 — Questions and Answers
Question 1: Which IPS element defines the yardstick used to evaluate the manager's investment results?
- The benchmark (Correct answer)
- The liquidity requirement
- The tax constraint
- The time horizon
Correct answer: The benchmark
The benchmark specified in the IPS is the standard against which portfolio performance is measured.
Question 2: A client's willingness to take risk is high, but their ability to take risk is low. How should the adviser usually set the overall risk tolerance in the IPS?
- Average the two assessments
- Use willingness, since it reflects client preferences
- Use the lower ability-based assessment (Correct answer)
- Defer the risk decision until the next annual review
Correct answer: Use the lower ability-based assessment
When ability and willingness conflict, the more conservative assessment usually prevails, and ability constrains willingness.
Question 3: A retiree needs $80,000 a year from a $2,000,000 portfolio and expects 3% inflation. Using the multiplicative method, what is the required nominal return?
- 4.00%
- 7.00%
- 7.12% (Correct answer)
- 6.88%
Correct answer: 7.12%
(1.04 × 1.03) − 1 = 7.12%, where 4% is the real spending rate.
Question 4: Which item belongs in the 'unique circumstances' section of an IPS?
- A 15-year time horizon
- A restriction against selling inherited shares of a family company (Correct answer)
- A requirement to cover 6 months of expenses in cash
- The client's marginal tax bracket
Correct answer: A restriction against selling inherited shares of a family company
Unique circumstances cover client-specific restrictions, such as legacy holdings or ethical screens, that the other constraint categories don't address.
Question 5: A 45-year-old plans to retire at 65 and expects to live to about 90. How is this time horizon best described?
- Short-term, single-stage
- Long-term, single-stage
- Indeterminate
- Long-term, multistage (Correct answer)
Correct answer: Long-term, multistage
A change in circumstances such as retirement creates separate stages within a long overall horizon.
Question 6: Strategic asset allocation is best described as:
- Long-term target asset class weights that reflect the IPS objectives and constraints (Correct answer)
- Short-term bets on mispriced sectors
- Security selection within an asset class
- Day-to-day cash management
Correct answer: Long-term target asset class weights that reflect the IPS objectives and constraints
SAA turns the IPS into long-run policy weights for each asset class.
Question 7: Holding everything else constant, higher transaction costs for an asset class should lead to what kind of rebalancing corridor?
- A narrower corridor
- A wider corridor (Correct answer)
- Removing the asset class
- Daily rebalancing
Correct answer: A wider corridor
Higher trading costs justify wider tolerance bands, so the portfolio is rebalanced less often.
CIM Investment Policy & Planning 2
Which IPS element defines the yardstick used to evaluate the manager's investment results?