CIMA Ethics & Investment Consulting Process 3 — Questions and Answers
Question 1: A client's IPS states a 7% nominal return objective and a 60/40 equity/fixed income allocation. After five years, equities have grown to 75% of the portfolio. The consultant should:
- Leave the allocation unchanged since equities are performing well
- Rebalance the portfolio back toward the target 60/40 allocation (Correct answer)
- Increase the return objective to match the new allocation
- Immediately liquidate all equity holdings
Correct answer: Rebalance the portfolio back toward the target 60/40 allocation
Rebalancing restores the portfolio to the client's IPS-mandated risk profile, which is a core responsibility of the consulting process.
Question 2: Under the CIMA code of ethics, 'objectivity' requires that a consultant:
- Use only quantitative models free of personal judgment
- Provide recommendations free from personal bias and conflicts of interest (Correct answer)
- Agree with all client investment decisions
- Avoid recommending alternative investments
Correct answer: Provide recommendations free from personal bias and conflicts of interest
Objectivity means providing advice based on factual analysis and professional judgment without personal bias or undisclosed conflicts.
Question 3: Which of the following best describes the purpose of an Investment Policy Statement's 'constraints' section?
- To list the investment managers approved for the portfolio
- To document client-specific limitations such as liquidity needs, time horizon, taxes, and legal restrictions (Correct answer)
- To define the benchmark used for performance evaluation
- To specify the fee structure agreed upon by both parties
Correct answer: To document client-specific limitations such as liquidity needs, time horizon, taxes, and legal restrictions
The constraints section captures TTLLU factors—time horizon, taxes, liquidity, legal, and unique needs—that restrict investment choices.
Question 4: A pension fund consultant recommends an asset allocation that maximizes expected return without regard to the fund's liability structure. This approach most likely violates:
- The duty of objectivity
- The liability-relative investing principle and duty of care (Correct answer)
- The disclosure requirement only
- No standard if trustees approve the allocation
Correct answer: The liability-relative investing principle and duty of care
Institutional consultants must align asset allocation with liability structure; ignoring liabilities violates the duty of care owed to beneficiaries.
Question 5: In the manager selection process, a 'style box' analysis primarily helps consultants evaluate:
- A manager's fee transparency
- Whether a manager's investment style aligns with the portfolio's objectives (Correct answer)
- A manager's compliance history
- The correlation between a manager and the benchmark
Correct answer: Whether a manager's investment style aligns with the portfolio's objectives
Style box analysis categorizes managers by market cap and value/growth orientation to ensure style fit with portfolio goals.
Question 6: Soft-dollar arrangements raise ethical concerns primarily because they may:
- Increase transaction costs for the manager
- Create conflicts of interest by directing client brokerage to pay for services that benefit the manager (Correct answer)
- Violate securities laws in all jurisdictions
- Reduce research quality available to the portfolio
Correct answer: Create conflicts of interest by directing client brokerage to pay for services that benefit the manager
Soft dollars can benefit managers at clients' expense by using client brokerage commissions to pay for goods and services that favor the manager.
Question 7: When comparing manager performance, a CIMA professional should PRIMARILY use:
- Raw returns compared to the S&P 500 for all strategies
- Risk-adjusted returns relative to an appropriate peer group and benchmark (Correct answer)
- Absolute returns over the longest available period
- Returns net of all possible taxes and transaction costs
Correct answer: Risk-adjusted returns relative to an appropriate peer group and benchmark
Risk-adjusted returns measured against a relevant benchmark and peer group provide the most meaningful performance comparison.
CIMA Ethics & Investment Consulting Process 3
A client's IPS states a 7% nominal return objective and a 60/40 equity/fixed income allocation.
After five years, equities have grown to 75% of the portfolio.
The consultant should: