CISI IAD Portfolio Construction and Management 2

Question 1

What is the purpose of an 'investment policy statement' (IPS) for a client?

Accepted Answer

A formal document outlining the client's investment objectives, risk tolerance, time horizon, constraints, and the agreed investment strategy — serving as a blueprint for managing the portfolio

Answer

An IPS documents the agreed investment mandate — the client's objectives, risk profile, time horizon, income needs, tax position, liquidity requirements, and any ethical or ESG constraints. It guides portfolio construction and provides a basis for performance evaluation.

Question 2

What is 'ESG investing' and what do the letters stand for?

Accepted Answer

Environmental, Social, and Governance — an approach that incorporates non-financial factors into investment analysis and decision-making to assess sustainability and ethical impact

Answer

ESG investing considers Environmental (carbon emissions, resource use), Social (labour practices, community impact), and Governance (board composition, shareholder rights) factors alongside financial analysis. It aims to identify risks and opportunities not captured by traditional financial metrics.

Question 3

What is 'liquidity management' in a portfolio context?

Accepted Answer

Ensuring a portfolio holds sufficient liquid assets to meet anticipated cash flow needs without being forced to sell illiquid assets at unfavourable prices

Answer

Liquidity management involves ensuring sufficient liquid assets (cash, short-dated bonds, listed equities) are held to meet near-term cash requirements — such as income withdrawals or capital needs — without having to sell illiquid holdings (property, private equity) at a discount.

Question 4

What is a 'benchmark-aware' versus a 'benchmark-agnostic' investment approach?

Accepted Answer

Benchmark-aware managers construct portfolios with reference to an index, aiming to outperform with controlled tracking error; benchmark-agnostic managers invest without regard to index weights, pursuing best absolute returns

Answer

Benchmark-aware managers use an index as their reference point, managing tracking error and aiming to add alpha within controlled deviations. Benchmark-agnostic (or absolute return) managers have no fixed reference index — they aim for positive returns regardless of market conditions, with greater freedom to deviate significantly from any benchmark.

Question 5

What is 'performance attribution' in investment management?

Accepted Answer

An analysis that decomposes a portfolio's return relative to its benchmark to identify which decisions (asset allocation, stock selection, currency) contributed to outperformance or underperformance

Answer

Performance attribution breaks down the difference between a portfolio's return and its benchmark return into component decisions — typically allocation effect (being over/underweight an asset class), selection effect (stock picking), and interaction effect — to identify the source of alpha or underperformance.

CISI Investment Advice Practice Test

CISI Investment Advice Practice Test

CISI IAD Portfolio Construction and Management 2