FREE IFC Risk Management Questions and Answers
What does suitability mean?
Suitability means ensuring that all recommendations are appropriate for the client’s unique situation and investment objectives. It also means that recommendations are based on a personal and financial knowledge of the client and knowledge of the investment products being recommended.
What stage in the business cycle typically has increasing wages, rising inflation, rising interest rates with slowing sales, and decreasing business investment?
The top of the cycle is called a peak. A peak is characterized by the following activities: demand begins to outstrip the capacity of the economy to supply it; wages increase; inflation rises; interest rates rise and bond prices fall; sales begin to decline; business investment slows, and stock market activity begins to decline.
Which form of investment income is taxed at an investor’s marginal tax rate?
Foreign dividend income is not eligible for any dividend tax credit and is taxed at an investor’s marginal tax rate.
Based on the financial planning pyramid, what security would be appropriate for a very aggressive investor?
As a visual aid, the planning pyramid helps you show clients how mutual funds fit into the investment universe. A very aggressive investor could consider investments such as OTC Securities.
Joanne’s earned income last year was $45,000 and her pension adjustment was $2,500. She has $2,000 in carry forward registered retirement savings plan (RRSP) room for the current taxation year. What is Joanne’s maximum tax-deductible RRSP contribution amount for the current year?
Joanne’s tax-deductible RRSP contribution room would be calculated as (18% × $45 000) - $2,500 + $2,000 = $7,600.
Your client earns $100,000 from employment and $10,000 from investments each year. Her bills total $95,000 annually. What is her discretionary income?
Discretionary income eligible for savings and investments is the difference between the amount of money coming in fromemployment and other sources and the amount of money going out to pay bills. In this example, $100,000 + $10,000 - $95,000 = $15,000.
What response would a loss-averse investor be most likely to choose in selecting a preferred investment return scenario?
The loss-averse investor will choose a lower potential of loss over a more rational choice. In this example, a 25% chance of gaining $2,000 and a 75% chance of losing nothing has the lowest possible loss potential, and will typically be the statement selected by the loss-averse investor.
Which organization regulates mutual and investment funds?
The responsibility of regulating mutual funds lies with the securities commissions. The Mutual Fund Dealers Association regulates dealers of mutual funds, but not the mutual fund itself.
What bias results in investors valuing an asset that they own over an asset that another individual owns?
People who are subject to endowment bias place more value on an asset they hold property rights to than on an asset they do not hold property rights to.
What bias would influence an investor’s decision to continue to hold an unprofitable investment despite little likelihood of an improvement in the investment’s value?
Loss aversion bias states that people generally feel a stronger impulse to avoid losses than to acquire gains. Loss aversion can prevent people from unloading unprofitable investments, even when they see little to no prospect of a turnaround.
Rebecca, an investor in a 40% marginal tax bracket, receives $1,200 in Canadian dividends eligible for the dividend tax credit. What is the dividend tax credit that applies to this income?
The taxable amount of the dividend is the income received plus a 38% gross-up amount. In this example, $1,200 + ($1,200 ×38%) = $1,656. The dividend tax credit is 15.02% of the grossed-up amount, in this example, $1,656 × 15.02% = $248.73.