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
When assessing a client's 'ability to take risk,' an advisor should primarily consider:
Answer: The client's financial capacity to absorb losses without jeopardizing goals
Ability to take risk is an objective assessment based on financial factors such as time horizon, liquidity needs, income stability, and wealth relative to goals.
A 'benchmark portfolio' specified in an IPS serves primarily to:
Answer: Provide a standard against which portfolio performance is evaluated
A benchmark provides a fair, relevant standard for evaluating whether the investment manager has added or destroyed value relative to a passive alternative.
The 'investment policy statement' for a high-net-worth individual typically includes all of the following EXCEPT:
Answer: Specific security recommendations from the manager
An IPS establishes goals, guidelines, and constraints at the policy level but does not include specific security picks, which are left to the portfolio manager's discretion.
Which of the following scenarios most appropriately calls for a more conservative investment policy?
Answer: A 68-year-old retiree fully dependent on portfolio distributions for living expenses
A retiree fully dependent on portfolio income has high liquidity needs, a shorter time horizon, and cannot easily recover from large losses — requiring a more conservative policy.
In developing capital market expectations, the 'building block' approach estimates equity returns by combining:
Answer: Expected inflation, real interest rate, and equity risk premium components
The building block approach decomposes expected equity returns into components: expected inflation, real risk-free rate, and the equity risk premium as additive building blocks.
A 'spending policy' is most critical for which type of institutional investor?
Answer: Endowments and foundations distributing annual grants
Endowments and foundations depend on a clearly defined spending policy to balance current distributions with portfolio growth needed to maintain purchasing power in perpetuity.
The 'investment decision-making hierarchy' in an institutional investment process typically places ultimate authority with:
Answer: The board of trustees or investment committee
The board of trustees or investment committee holds ultimate fiduciary authority and approves the IPS, strategic allocation, and key policy decisions.