IFC Constructing Investment Portfolios 2

Question 1

A portfolio manager wants to reduce unsystematic risk. Which strategy is most effective?

Accepted Answer

Diversifying across uncorrelated asset classes

Answer

Diversifying across uncorrelated asset classes reduces unsystematic (company-specific) risk that cannot be eliminated by holding a single security type.

Question 2

Which of the following best describes the efficient frontier in portfolio construction?

Accepted Answer

The set of portfolios with the highest return for a given level of risk

Answer

The efficient frontier represents portfolios that offer the maximum expected return for each level of risk, forming the optimal trade-off curve.

Question 3

A balanced mutual fund typically holds which combination of assets?

Accepted Answer

Equities and fixed-income securities

Answer

A balanced fund holds both equities and fixed-income securities to provide growth and income while moderating risk.

Question 4

When constructing a client portfolio, what is the primary purpose of an Investment Policy Statement (IPS)?

Accepted Answer

To document the client's objectives, constraints, and investment guidelines

Answer

An IPS formalizes the client's goals, risk tolerance, time horizon, and constraints to guide ongoing portfolio management decisions.

Question 5

Which asset class typically has the lowest correlation with Canadian equities and provides the best diversification benefit?

Accepted Answer

Canadian government bonds

Answer

Canadian government bonds typically have low or negative correlation with Canadian equities, providing the strongest diversification benefit during equity downturns.

IFC - Investment Funds in Canada Practice Test

IFC - Investment Funds in Canada Practice Test

IFC Constructing Investment Portfolios 2