Investment Policy and Process Flashcards
7 cards from real CIMA practice questions. Tap to flip, then mark Knew It or Still Learning — missed cards come back until you master them.
Read the first 7 Investment Policy and Process flashcards as text
An Investment Policy Statement (IPS) should be reviewed and updated at minimum:
Answer: Whenever significant changes occur in client circumstances or market conditions
An IPS should be reviewed whenever there are material changes in the client's financial situation, goals, risk tolerance, or significant market/regulatory changes.
Which element of the investment policy process involves translating client objectives into specific asset class targets?
Answer: Strategic asset allocation
Strategic asset allocation converts the client's return objectives and risk tolerance into long-term target weights across asset classes.
A client's 'required return' in the IPS context is best described as:
Answer: The minimum return needed to meet essential financial objectives
Required return is the minimum return necessary to meet the client's essential needs and obligations, distinct from desired or aspirational returns.
When constructing an IPS for an institutional client, 'time horizon' considerations differ from individual clients primarily because:
Answer: Institutions may have perpetual or indefinitely long time horizons
Many institutions such as endowments and foundations have perpetual time horizons, allowing for higher illiquidity tolerance and different risk parameters than individual investors.
The 'prudent investor' standard in investment management primarily requires fiduciaries to:
Answer: Act with care, skill, and diligence while diversifying appropriately
The prudent investor standard requires fiduciaries to exercise care, skill, and caution in the context of the overall portfolio, emphasizing diversification and reasonable risk management.
A 'goals-based' investment approach differs from a traditional mean-variance approach in that it:
Answer: Segments client wealth into mental accounts linked to specific life goals
Goals-based investing divides a client's portfolio into separate 'buckets' or mental accounts, each designed to fund a specific goal with appropriate risk/return characteristics.
Which constraint in an IPS addresses the need to sell assets quickly without significant price impact?
Answer: Liquidity requirements
Liquidity requirements define how much of the portfolio must be readily convertible to cash to meet expected and unexpected near-term cash needs.