Investment Policy and Process Flashcards

A 'total return' approach to an investment policy, as opposed to an 'income only' approach, allows the portfolio to:

Answer: Fund spending needs from both capital appreciation and income

A total return approach uses both realized capital gains and income to fund spending needs, providing greater flexibility and typically better long-term growth than relying solely on income.

When an IPS includes an ESG (Environmental, Social, Governance) mandate, the primary portfolio implication is:

Answer: Certain securities or industries may be excluded or underweighted

ESG mandates typically result in screens that exclude or underweight companies or sectors that fail to meet specified environmental, social, or governance criteria.

In the CIMA framework, 'manager due diligence' during the investment process should evaluate all of the following EXCEPT:

Answer: The manager's personal political affiliation

Manager due diligence focuses on investment-relevant factors such as process, performance, and organizational integrity — personal political views are not a relevant or appropriate evaluation criterion.

A portfolio's 'tracking error' relative to its benchmark is a measure of:

Answer: The standard deviation of the portfolio's excess returns versus the benchmark

Tracking error measures how consistently the portfolio returns deviate from the benchmark, calculated as the standard deviation of the return differential over time.

Which of the following best describes a 'liability-driven investing' (LDI) strategy?

Answer: Structuring the asset portfolio to match the duration and cash flows of specific liabilities

LDI matches the asset portfolio's characteristics (duration, cash flows) to the client's liabilities, reducing the risk that assets will be insufficient to fund obligations.

The 'policy portfolio' (or 'strategic benchmark') in an IPS represents:

Answer: The long-term target asset allocation reflecting the client's objectives and constraints

The policy portfolio is the long-term target mix of asset classes set to reflect the client's risk tolerance, return objectives, and constraints, serving as the strategic anchor for the portfolio.

When a client transitions from the 'accumulation phase' to the 'distribution phase' of their financial life, the most significant investment policy change is typically:

Answer: Shifting from growth-oriented allocations toward capital preservation and income generation

Transitioning to the distribution phase typically calls for reducing risk exposure and increasing income-generating assets, as the client now draws on rather than adds to the portfolio.