IFC Constructing Investment Portfolios 4

Question 1

A client with a moderate risk profile asks for a portfolio recommendation. Which allocation is most appropriate?

Accepted Answer

50% equities / 50% fixed income

Answer

A 50/50 equity/fixed-income split balances growth potential with capital preservation, consistent with a moderate risk tolerance.

Question 2

Which of the following best describes 'home bias' in portfolio construction?

Accepted Answer

Overweighting domestic securities relative to a globally diversified benchmark

Answer

Home bias is the tendency for investors to over-allocate to their domestic market, reducing international diversification benefits.

Question 3

Which type of fund is designed to automatically adjust its asset allocation as the target date approaches?

Accepted Answer

Target-date (lifecycle) fund

Answer

Target-date funds automatically shift from higher equity exposure to more conservative fixed-income allocations as the specified retirement or goal date nears.

Question 4

What is the primary advantage of using ETFs in a portfolio construction strategy?

Accepted Answer

Low-cost, transparent, and tax-efficient market exposure

Answer

ETFs provide diversified market exposure at low cost, with intraday liquidity and generally greater tax efficiency compared to traditional mutual funds.

Question 5

A portfolio manager adds a real return bond to a client's portfolio. What primary risk is being hedged?

Accepted Answer

Inflation risk

Answer

Real return bonds (like Canadian RRBs) pay returns linked to the Consumer Price Index, protecting the portfolio's purchasing power against inflation.

IFC - Investment Funds in Canada Practice Test

IFC - Investment Funds in Canada Practice Test

IFC Constructing Investment Portfolios 4