IFC Investment Strategies 2 — Questions and Answers
Question 1: A portfolio manager using a 'core-satellite' strategy allocates the largest portion of assets to which component?
- Actively managed sector funds
- A broadly diversified low-cost index fund (Correct answer)
- Emerging market equities
- Alternative investments such as hedge funds
Correct answer: A broadly diversified low-cost index fund
The core component of a core-satellite strategy is a passive, broadly diversified index fund designed to capture market returns efficiently.
Question 2: Which investment strategy seeks to profit from pricing discrepancies between a convertible bond and the underlying equity?
- Momentum investing
- Convertible arbitrage (Correct answer)
- Tactical asset allocation
- Dollar-cost averaging
Correct answer: Convertible arbitrage
Convertible arbitrage exploits mispricings between a convertible bond and its underlying stock, typically by going long the bond and short the equity.
Question 3: A fund manager who tilts holdings toward small-cap value stocks relative to the benchmark is implementing which style of active management?
- Factor investing (smart beta) (Correct answer)
- Passive indexing
- Cash drag management
- Tactical overlay
Correct answer: Factor investing (smart beta)
Tilting toward factors such as size and value relative to a benchmark is the defining characteristic of factor or smart-beta investing.
Question 4: Under the IFC curriculum, which metric best captures the return earned per unit of total risk taken by a fund?
- Alpha
- Beta
- Sharpe ratio (Correct answer)
- Treynor ratio
Correct answer: Sharpe ratio
The Sharpe ratio divides excess return by standard deviation (total risk), making it the primary risk-adjusted measure per unit of total risk.
Question 5: An investor following a 'barbell' fixed-income strategy would hold which combination of bonds?
- Only intermediate-term bonds
- Short-term and long-term bonds, with minimal intermediate exposure (Correct answer)
- Only investment-grade corporate bonds
- A laddered mix of maturities from 1 to 10 years
Correct answer: Short-term and long-term bonds, with minimal intermediate exposure
A barbell strategy concentrates holdings at the short and long ends of the yield curve while avoiding intermediate maturities.
Question 6: Which of the following best describes 'sector rotation' as an investment strategy?
- Holding all sectors equally weighted at all times
- Shifting allocations among industry sectors based on the economic cycle (Correct answer)
- Replacing underperforming securities within a single sector
- Rebalancing a portfolio back to its target weights quarterly
Correct answer: Shifting allocations among industry sectors based on the economic cycle
Sector rotation involves moving capital into sectors expected to outperform and out of sectors expected to underperform based on economic cycle positioning.
Question 7: A Canadian balanced mutual fund that maintains a fixed 60% equity / 40% fixed income split is employing which rebalancing approach?
- Tactical asset allocation
- Dynamic asset allocation
- Strategic asset allocation with periodic rebalancing (Correct answer)
- Opportunistic rebalancing based on market signals
Correct answer: Strategic asset allocation with periodic rebalancing
Maintaining a fixed long-term target mix and returning to it periodically is the hallmark of strategic asset allocation with rebalancing.
IFC Investment Strategies 2
A portfolio manager using a 'core-satellite' strategy allocates the largest portion of assets to which component?