IFC Investment Strategies 3

Question 1

Which strategy involves systematically selling appreciated securities to offset capital gains with capital losses, thereby reducing current tax liability?

Accepted Answer

Tax-loss harvesting

Answer

Tax-loss harvesting deliberately realizes capital losses to offset capital gains, reducing the investor's net taxable income in the current year.

Question 2

In the context of Canadian mutual funds, 'distribution reinvestment' (DRIP) primarily benefits investors by:

Accepted Answer

Allowing compounding without incurring transaction fees

Answer

DRIPs allow investors to automatically purchase additional units with distributions, enabling compounding while typically avoiding brokerage commissions.

Question 3

A portfolio constructed to minimize tracking error relative to a benchmark while allowing slight deviations for tax efficiency is known as:

Accepted Answer

Enhanced indexing

Answer

Enhanced indexing closely tracks a benchmark but permits small active tilts — often for tax efficiency or modest alpha — while keeping tracking error low.

Question 4

Which statement about dollar-cost averaging (DCA) is most accurate in volatile markets?

Accepted Answer

DCA reduces the average cost per unit when prices fluctuate

Answer

DCA reduces average cost per unit in volatile markets because the fixed periodic investment buys more units when prices are low and fewer when prices are high.

Question 5

A fund employing a 'long/short equity' strategy seeks to profit by:

Accepted Answer

Buying undervalued stocks while simultaneously selling short overvalued stocks

Answer

Long/short equity funds buy stocks expected to rise and short stocks expected to fall, aiming to generate returns independent of the overall market direction.

IFC - Investment Funds in Canada Practice Test

IFC - Investment Funds in Canada Practice Test

IFC Investment Strategies 3