CIMA Investment Policy and Process 2 — Questions and Answers
Question 1: An Investment Policy Statement (IPS) should be reviewed and updated at minimum:
- Every 5 years regardless of circumstances
- Whenever significant changes occur in client circumstances or market conditions (Correct answer)
- Only when the client requests a change
- After every quarterly performance review
Correct 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.
Question 2: Which element of the investment policy process involves translating client objectives into specific asset class targets?
- Risk profiling
- Strategic asset allocation (Correct answer)
- Manager selection
- Performance attribution
Correct answer: Strategic asset allocation
Strategic asset allocation converts the client's return objectives and risk tolerance into long-term target weights across asset classes.
Question 3: A client's 'required return' in the IPS context is best described as:
- The return the client desires based on aspirational goals
- The minimum return needed to meet essential financial objectives (Correct answer)
- The benchmark return set by the investment committee
- The inflation-adjusted historical market return
Correct 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.
Question 4: When constructing an IPS for an institutional client, 'time horizon' considerations differ from individual clients primarily because:
- Institutions always have shorter time horizons
- Institutions may have perpetual or indefinitely long time horizons (Correct answer)
- Time horizon is irrelevant for institutional investors
- Institutions use rolling 3-year time horizons exclusively
Correct 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.
Question 5: The 'prudent investor' standard in investment management primarily requires fiduciaries to:
- Guarantee positive returns for clients at all times
- Avoid all investments with any risk of loss
- Act with care, skill, and diligence while diversifying appropriately (Correct answer)
- Select only government-issued securities for safety
Correct 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.
Question 6: A 'goals-based' investment approach differs from a traditional mean-variance approach in that it:
- Ignores risk entirely and focuses only on returns
- Segments client wealth into mental accounts linked to specific life goals (Correct answer)
- Uses only passive index funds for all allocations
- Relies exclusively on historical return data for projections
Correct 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.
Question 7: Which constraint in an IPS addresses the need to sell assets quickly without significant price impact?
- Tax considerations
- Regulatory and legal constraints
- Liquidity requirements (Correct answer)
- Unique circumstances
Correct 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.
CIMA Investment Policy and Process 2
An Investment Policy Statement (IPS) should be reviewed and updated at minimum: