Investment Strategies Flashcards
7 cards from real IFC practice questions. Tap to flip, then mark Knew It or Still Learning — missed cards come back until you master them.
Read the first 7 Investment Strategies flashcards as text
A fund that benchmarks against the MSCI World Index but restricts holdings to companies meeting specific ESG criteria is best described as:
Answer: An ESG-integrated or socially responsible investment (SRI) fund
An ESG-integrated fund uses non-financial environmental, social, and governance criteria to screen or tilt holdings while still tracking a conventional benchmark.
Which scenario best illustrates 'style drift' in an actively managed Canadian equity fund?
Answer: A large-cap growth fund begins purchasing significant positions in small-cap value stocks
Style drift occurs when a fund deviates from its stated investment mandate — such as a large-cap growth fund migrating into small-cap value territory.
An investor in a Canadian mutual fund wants to reduce currency risk on U.S. dollar-denominated equity holdings. The most direct hedging tool would be:
Answer: Entering a forward contract to sell U.S. dollars and buy Canadian dollars
A CAD/USD forward contract locks in an exchange rate, directly offsetting the currency exposure from holding U.S. dollar assets.
Which strategy involves constructing a portfolio that mirrors the liability structure of a pension fund to minimize funding risk?
Answer: Liability-driven investing (LDI)
Liability-driven investing aligns the portfolio's duration and cash flows with a fund's liability profile to reduce the risk that assets will fall short of obligations.
A mutual fund that targets a consistent positive return regardless of market conditions and uses derivatives and alternative assets to achieve it is called:
Answer: An absolute return fund
Absolute return funds aim to deliver positive returns in both rising and falling markets by using long/short positions, derivatives, and unconstrained mandates.
In evaluating two Canadian equity mutual funds with identical returns, which fund is more efficient if Fund A has a standard deviation of 12% and Fund B has a standard deviation of 18%?
Answer: Fund A, because it achieves the same return with lower total risk
Fund A is more efficient because it produces the same return as Fund B while exposing investors to less total risk, yielding a superior Sharpe ratio.
Which of the following actions would MOST likely increase a fund's tracking error relative to its benchmark?
Answer: Making large active bets in sectors not represented in the benchmark
Large overweights or underweights in sectors absent from the benchmark create significant active risk, which directly increases tracking error.