IFC Investment Strategies 4 — Questions and Answers
Question 1: Which investment strategy is most appropriate for an investor who wants to ensure that a specific sum is available at a future date regardless of market fluctuations?
- Immunization (Correct answer)
- Duration extension
- Yield curve steepening trade
- Momentum strategy
Correct answer: Immunization
Immunization matches the duration of assets to a specific liability date, ensuring the target sum is available even if interest rates change.
Question 2: A Canadian fund manager who increases equity exposure when valuations are low and reduces it when valuations are high is practicing:
- Passive rebalancing
- Contrarian tactical asset allocation (Correct answer)
- Momentum-based sector rotation
- Constant-mix strategy
Correct answer: Contrarian tactical asset allocation
Contrarian tactical asset allocation increases exposure to asset classes that appear undervalued and reduces it when they appear overvalued, betting against prevailing sentiment.
Question 3: What does a negative information ratio indicate about an active fund manager?
- The manager has taken on less risk than the benchmark
- The manager's active bets have detracted value relative to the benchmark on a risk-adjusted basis (Correct answer)
- The fund has experienced negative absolute returns
- The manager charges fees above the industry average
Correct answer: The manager's active bets have detracted value relative to the benchmark on a risk-adjusted basis
A negative information ratio means active return (alpha) is negative relative to tracking error, indicating the manager's decisions have subtracted value.
Question 4: In a 'covered call' options strategy applied to a Canadian equity fund, the fund manager:
- Buys call options to gain leveraged upside exposure
- Sells call options on holdings to generate premium income while capping upside (Correct answer)
- Buys put options to protect against downside losses
- Sells put options to acquire shares at a lower price
Correct answer: Sells call options on holdings to generate premium income while capping upside
A covered call involves selling call options on existing holdings to collect premium income, which enhances yield but limits participation if the stock rises sharply.
Question 5: Which of the following best describes the 'buy-and-hold' approach to investing in mutual funds?
- Continuously rebalancing to maintain target weights
- Purchasing fund units and retaining them regardless of short-term market movements (Correct answer)
- Shifting allocations monthly based on technical indicators
- Selling underperforming funds every quarter
Correct answer: Purchasing fund units and retaining them regardless of short-term market movements
Buy-and-hold investors purchase assets and maintain positions long-term, avoiding frequent trading costs and the risk of mistimed market exits.
Question 6: A mutual fund that caps maximum single-security weights at 10% and individual-sector weights at 25% is applying which risk management principle?
- Leverage constraints
- Concentration limits / diversification rules (Correct answer)
- Liability-driven investing
- Absolute value at risk limits
Correct answer: Concentration limits / diversification rules
Setting maximum weights per security and sector enforces diversification by preventing over-concentration in any single holding or industry.
Question 7: Under the IFC curriculum, which statement about 'lifecycle' or 'target-date' funds is correct?
- They maintain a fixed equity/bond split for the investor's entire holding period
- They automatically shift to a more conservative asset mix as the target retirement date approaches (Correct answer)
- They invest solely in money market instruments after the target date
- They require the investor to manually adjust allocations each year
Correct answer: They automatically shift to a more conservative asset mix as the target retirement date approaches
Target-date funds follow a glide path that progressively reduces equity exposure and increases fixed income as the target date nears, reducing risk automatically.
IFC Investment Strategies 4
Which investment strategy is most appropriate for an investor who wants to ensure that a specific sum is available at a future date regardless of market fluctuations?