CIMA - Certified Investment Management Analyst Investment Policy and Process Questions and Answers 1

Question 1

An investment advisor is developing an Investment Policy Statement (IPS) for a new client, a recently retired individual. Which of the following components is MOST critical to define the client's willingness and ability to endure market fluctuations?

Accepted Answer

Risk Tolerance

Answer

Risk tolerance is the most critical component for defining a client's attitude toward and capacity for handling investment risk and market volatility. While time horizon, liquidity, and taxes are all important constraints, risk tolerance directly addresses the psychological and financial ability to withstand losses.

Question 2

A CIMA professional is reviewing a client's portfolio and notices a significant deviation from the strategic asset allocation targets outlined in the Investment Policy Statement (IPS). What is the MOST appropriate first step in the investment process?

Accepted Answer

Contact the client to discuss potential revisions to the IPS.

Answer

The investment process is dynamic. A significant deviation from the IPS warrants a review and discussion with the client. Market conditions or the client's circumstances may have changed, necessitating a revision of the IPS before rebalancing. Immediately rebalancing without consultation could be inappropriate if the client's objectives have evolved.

Question 3

Which of the following is considered a primary objective within an Investment Policy Statement (IPS), as opposed to a constraint?

Accepted Answer

The client requires $50,000 in annual income.

Answer

An objective defines the purpose and desired outcome of the investment portfolio, such as generating a specific level of income or achieving a certain total return. Preferences, restrictions, and liquidity needs are all considered constraints that limit the investment strategy used to achieve the objectives.

Question 4

A family foundation's Investment Policy Statement (IPS) specifies a long-term return objective of inflation + 5% to maintain its real purchasing power and support its spending policy. This is an example of what type of investment objective?

Accepted Answer

Absolute Return

Answer

An absolute return objective specifies a target return that is independent of market benchmarks. In this case, 'inflation + 5%' is a specific target the portfolio aims to achieve regardless of how, for example, the S&P 500 performs. A relative return objective would be tied to a market index (e.g., 'S&P 500 + 2%').

Question 5

When constructing an Investment Policy Statement (IPS), which of the following best describes the role of capital market expectations?

Accepted Answer

To ensure the investment objectives are realistic and achievable.

Answer

Capital market expectations (i.e., forward-looking returns, risks, and correlations of various asset classes) are essential for determining if a client's return objectives can be met with an asset allocation that is consistent with their risk tolerance. They provide the necessary context to build a realistic and achievable investment plan.

(CIMA) Certified Investment Management Analyst Practice Test

(CIMA) Certified Investment Management Analyst Practice Test

CIMA - Certified Investment Management Analyst Investment Policy and Process Questions and Answers 1