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IFIC - Practice Test - Questions and Answes
Canadian Seceuirites Course (Canadian Securities Institute)
Studocu is not sponsored or endorsed by any college or university
IFIC - Practice Test - Questions and Answes
Canadian Seceuirites Course (Canadian Securities Institute)
Studocu is not sponsored or endorsed by any college or university
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Check: Practice Test 1
Reports
Attempt
Questions
Number
Correct
Your Score
1
100
69
69%
You have passed the test.
Overall Results
Score:
69%
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Learning Domain
Questions
Number
Correct
Your Score
An Introduction to the
Mutual Funds Marketplace
14
9
64%
The Know Your Client
Communication Process
19
15
79%
Understanding Investment
Products and Portfolios
18
14
78%
The Modern Mutual Fund
4
2
50%
Analysis of Mutual Funds
11
7
64%
Understanding Alternative
Managed Products
3
1
33%
Evaluating and Selecting
Mutual Funds
16
10
63%
Ethics, Compliance and
Mutual Fund Regulations
15
11
73%
Learning Domain Results
Score:
69%
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Question Results
1.
What is the purpose of the fund facts?
Good choice!
A.
To provide clients with key fund information that is relevant to their investment decisions.
B.
To better align the interests of the fund with the client.
C.
To determine if a fiduciary duty is present in the representative-client relationship.
D.
To clarify for clients the nature and terms of their relationship with the dealer of the fund.
Feedback: The fund facts document is a four page document designed to give investors key information that is relevant to their investment
decision, including facts about the fund itself, performance history, investments and the costs of investing in the fund. Reference |
Chapter 1 – The Role of the Mutual Fund Sales Representative
Learning Domain | An Introduction to the Mutual Funds Marketplace
2.
What term describes the range of possible future outcomes on the price of a security?
A.
Beta.
You chose:
B.
Return.
C.
Fluctuation.
The correct answer is:
D.
Risk.
Feedback: Risk is the potential volatility in returns or the range of possible future outcomes on the price of a security. Reference |
Chapter 1 – The Role of the Mutual Fund Sales Representative
Learning Domain | An Introduction to the Mutual Funds Marketplace
3.
A client has $100,000 in a savings account, $5,000 in a chequing account, and $10,000 in loans. Calculate his net worth.
A.
$90,000
B.
$105,000
Good choice!
C.
$95,000
D.
$115,000
Feedback: Net worth is calculated as the value of all of the client’s assets after subtracting outstanding loan and mortgage balances. In this
example, the client has $100,000 + $5,000 = $105,000 in assets, and $10,000 in loans. Therefore, his net worth is $105,000 - $10,000 =
$95,000. Reference |
Chapter 1 – The Role of the Mutual Fund Sales Representative
Learning Domain | An Introduction to the Mutual Funds Marketplace
4.
Which newspaper article would be likely to result in foreign capital moving out of a country?
A.
Government Re-elected for a Fourth Consecutive Term.
Good choice!
B.
New Taxes on Foreign Direct Investment.
C.
Corporate Taxes Reduced.
D.
International Ranking of Domestic Level of Education Rises Significantly.
Feedback: Capital moves in and out of a country based on a variety of risk factors. Increased trade barriers or increased taxes on foreign
investments would typically reduce the attractiveness of a country for foreign investment. (a), (b) and (d) would all indicate positive trends in
a risk factor analysis. Reference |
Chapter 2 – Overview of the Canadian Financial Marketplace
Learning Domain | An Introduction to the Mutual Funds Marketplace
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5.
Which example demonstrates direct use of capital savings?
A.
Depositing funds in a Canadian bank account.
You chose:
B.
Purchasing an investment fund.
C.
Purchasing a company’s stocks.
The correct answer is:
D.
Building a new factory.
Feedback: Capital savings are used directly by, for example, a couple investing their savings in a home; a government investing in a new
highway or hospital; or a domestic or foreign company paying start-up costs for a plant to produce a new product. Reference |
Chapter 2 – Overview of the Canadian Financial Marketplace
Learning Domain | An Introduction to the Mutual Funds Marketplace
6.
Which of the following transactions takes place in the secondary market?
Good choice!
A.
Resale of previously issued securities.
B.
Issue of federal Treasury bills.
C.
Sale of mutual funds.
D.
Issue of new debt and equity securities.
Feedback: The secondary market involves the resale of previously issued securities between investors. It enables investors who originally
bought the investment products to sell them and obtain cash. Reference |
Chapter 2 – Overview of the Canadian Financial Marketplace
Learning Domain | An Introduction to the Mutual Funds Marketplace
7.
Which exchange in Canada deals exclusively with financial and equity futures and options?
A.
Canadian Securities Exchange.
You chose:
B.
The TSX Venture Exchange.
The correct answer is:
C.
The Montreal Exchange.
D.
The Toronto Stock Exchange.
Feedback: The Montreal Exchange (Bourse de Montreal) is the only exchange in Canada that deals exclusively with financial and equity
futures and options. Reference |
Chapter 2 – Overview of the Canadian Financial Marketplace
Learning Domain | An Introduction to the Mutual Funds Marketplace
8.
What term applies to unemployment created by a new technology that eliminates the need for subway train drivers?
A.
Cyclical.
B.
Frictional.
The correct answer is:
C.
Structural.
You chose:
D.
Natural.
Feedback: Structural unemployment results from changes in the economy, such as technological advances that reduce the need for human
labour. Reference |
Chapter 3 – Overview of Economics
Learning Domain | An Introduction to the Mutual Funds Marketplace
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9.
The demand for blue widgets increases sharply due to a newspaper report that using blue widgets improves recovery from influenza. What
can be said about the law of supply?
A.
Price and production both decrease.
Good choice!
B.
Price and production both increase.
C.
Price decreases and production increases.
D.
Price increases and production decreases.
Feedback: The law of supply states that when demand is greater than supply, the price increases, and producers increase production to
meet demand and maximize profit. Reference |
Chapter 3 – Overview of Economics
Learning Domain | An Introduction to the Mutual Funds Marketplace
10.If the Consumer Price Index (CPI) was 140.6 last year and 146.9 this year, what was the inflation rate over the year?
A.
4.12%
B.
6.04%
C.
5.20%
Good choice!
D.
4.48%
Feedback: To calculate the rate of inflation over a period of time one must subtract the CPI at the beginning of the period from the CPI at the
end of the period and then divide the result by the CPI at the beginning of the period. In this example, the solution can be derived as follows:
(146.9 - 140.6) / 140.6 x 100. Reference |
Chapter 3 – Overview of Economics
Learning Domain | An Introduction to the Mutual Funds Marketplace
11.Gary chooses not to recommend that his client sell a current mutual fund to purchase a similar new mutual fund despite pressure to meet a
sales target for the new fund. What responsibility applies to Gary’s action?
A.
Professional.
B.
Legal.
C.
Compliance.
Good choice!
D.
Ethical.
Feedback: Gary is fulfilling his ethical responsibility by placing his client’s needs ahead of his own need to reach a sales target. As the new
fund is similar to the current investment, it would be an appropriate one for the client, so he would not be compromising his legal
responsibility to ensure that all client orders are suitable. Reference |
Chapter 1 – The Role of the Mutual Fund Sales Representative
Learning Domain | An Introduction to the Mutual Funds Marketplace
12.What does suitability mean?
A.
Recommendations are not based on the personal and financial knowledge of the client.
B.
Understanding the personal and financial knowledge of the client.
Good choice!
C.
Recommendations are appropriate for the client’s unique situation and investment objectives.
D.
The investor’s major concerns are addressed.
Feedback: Suitability means ensuring that all recommendations are appropriate for the client’s unique situation and investment objectives. It
also means that recommendations are based on a personal and financial knowledge of the client and knowledge of the investment products
being recommended. Reference |
Chapter 1 – The Role of the Mutual Fund Sales Representative
Learning Domain | An Introduction to the Mutual Funds Marketplace
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13.Which organization regulates mutual and investment funds?
A.
Bourse de Montreal.
The correct answer is:
B.
Securities commissions.
C.
Investment Industry Regulatory Organization of Canada.
You chose:
D.
Mutual Fund Dealers Association.
Feedback: The responsibility of regulating mutual funds lies with the securities commissions. The Mutual Fund Dealers Association
regulates dealers of mutual funds, but not the mutual fund itself. Reference |
Chapter 2 – Overview of the Canadian Financial Marketplace
Learning Domain | An Introduction to the Mutual Funds Marketplace
14.What stage in the business cycle typically has increasing wages, rising inflation, rising interest rates with slowing sales, and decreasing
business investment?
A.
Recovery.
B.
Expansion.
Good choice!
C.
Peak.
D.
Trough.
Feedback: The top of the cycle is called a peak. A peak is characterized by the following activities: demand begins to outstrip the capacity of
the economy to supply it; wages increase; inflation rises; interest rates rise and bond prices fall; sales begin to decline; business investment
slows, and stock market activity begins to decline. Reference |
Chapter 3 – Overview of Economics
Learning Domain | An Introduction to the Mutual Funds Marketplace
15.Based on the financial planning pyramid, what security would be appropriate for a very aggressive investor?
Good choice!
A.
Over the Counter (OTC) Securities.
B.
Commodities.
C.
Tax shelters.
D.
Foreign stocks.
Feedback: As a visual aid, the planning pyramid helps you show clients how mutual funds fit into the investment universe. A very aggressive
investor could consider investments such as OTC Securities. Reference |
Chapter 4 – Getting to know the client
Learning Domain | The Know Your Client Communication Process
16.Your client earns $100,000 from employment and $10,000 from investments each year. Her bills total $95,000 annually. What is her
discretionary income?
Good choice!
A.
$15,000
B.
$5,000
C.
$20,000
D.
$10,000
Feedback: Discretionary income eligible for savings and investments is the difference between the amount of money coming in from
employment and other sources and the amount of money going out to pay bills. In this example, $100,000 + $10,000 - $95,000 = $15,000. Reference |
Chapter 4 – Getting to know the client
Learning Domain | The Know Your Client Communication Process
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17.What bias results in investors valuing an asset that they own over an asset that another individual owns?
A.
Risk aversion.
B.
Status Quo.
Good choice!
C.
Endowment.
D.
Representativeness.
Feedback: People who are subject to endowment bias place more value on an asset they hold property rights to than on an asset they do
not hold property rights to. Reference |
Chapter 5 – Behavioural Finance
Learning Domain | The Know Your Client Communication Process
18.What response would a loss-averse investor be most likely to choose in selecting a preferred investment return scenario?
A.
An assured loss of $750.
Good choice!
B.
A 25% chance of gaining $2,000, and a 75% chance of losing nothing.
C.
A 75% chance of losing $1,000, and a 25% chance of losing nothing.
D.
A 5% chance of gaining $1,500, and a 95% chance of losing $800.
Feedback: The loss-averse investor will choose a lower potential of loss over a more rational choice. In this example, a 25% chance of
gaining $2,000 and a 75% chance of losing nothing has the lowest possible loss potential, and will typically be the statement selected by the
loss-averse investor. Reference |
Chapter 5 – Behavioural Finance
Learning Domain | The Know Your Client Communication Process
19.What bias would influence an investor’s decision to continue to hold an unprofitable investment despite little likelihood of an improvement in
the investment’s value?
The correct answer is:
A.
Loss aversion.
You chose:
B.
Status quo.
C.
Representativeness.
D.
Availability.
Feedback: Loss aversion bias states that people generally feel a stronger impulse to avoid losses than to acquire gains. Loss aversion can
prevent people from unloading unprofitable investments, even when they see little to no prospect of a turnaround. Reference |
Chapter 5 – Behavioural Finance
Learning Domain | The Know Your Client Communication Process
20.Joanne’s earned income last year was $45,000 and her pension adjustment was $2,500. She has $2,000 in carry forward registered
retirement savings plan (RRSP) room for the current taxation year. What is Joanne’s maximum tax-deductible RRSP contribution amount for
the current year?
A.
$5,600
B.
$12,600
Good choice!
C.
$7,600
D.
$8,100
Feedback: Joanne’s tax-deductible RRSP contribution room would be calculated as (18% × $45 000) - $2,500 + $2,000 = $7,600. Reference |
Chapter 6 – Tax and Retirement Planning
Learning Domain | The Know Your Client Communication Process
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21.Rebecca, an investor in a 40% marginal tax bracket, receives $1,200 in Canadian dividends eligible for the dividend tax credit. What is the
dividend tax credit that applies to this income?
A.
$480
Good choice!
B.
$248.73
C.
$662.40
D.
$1,200
Feedback: The taxable amount of the dividend is the income received plus a 38% gross-up amount. In this example, $1,200 + ($1,200 ×
38%) = $1,656. The dividend tax credit is 15.02% of the grossed-up amount, in this example, $1,656 × 15.02% = $248.73. Reference |
Chapter 6 – Tax and Retirement Planning
Learning Domain | The Know Your Client Communication Process
22.Which form of investment income is taxed at an investor’s marginal tax rate?
A.
Capital losses.
B.
Capital gains.
C.
Canadian dividend income.
Good choice!
D.
Foreign dividend income.
Feedback: Foreign dividend income is not eligible for any dividend tax credit and is taxed at an investor’s marginal tax rate. Reference |
Chapter 6 – Tax and Retirement Planning
Learning Domain | The Know Your Client Communication Process
23.What type of benefit plan has a final benefit that is dependent on the investment returns within the plan?
A.
Career average plan.
Good choice!
B.
Defined contribution plan.
C.
Final average plan.
D.
Flat benefit plan.
Feedback: In a defined contribution plan, also known as a money-purchase plan, the eventual benefits at retirement will be based on how
the contributions were invested within the plan. Reference |
Chapter 6 – Tax and Retirement Planning
Learning Domain | The Know Your Client Communication Process
24.What is the step in the financial planning process that includes a discussion of a client’s household budget?
Good choice!
A.
Identify financial situation and constraints.
B.
Gather data and identify goals and objectives.
C.
Interview the client.
D.
Develop a written financial plan.
Feedback: The household budget is part of the discussions related to identifying financial problems and constraints. Reference |
Chapter 4 – Getting to know the client
Learning Domain | The Know Your Client Communication Process
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25.What is the characteristic of a Stage 2 – Family Commitment investor that most affects the ability to save for the long term?
A.
Marginal tax bracket.
B.
Risk tolerance.
Good choice!
C.
Lack of liquidity.
D.
Wealth transfer considerations.
Feedback: In Stage 2, the lack of liquidity that is typical results in a difficulty in allocating funds to savings. Although they might identify long-
term goals, such as retirement saving, they can barely manage to save enough for more pressing short-term goals. Reference |
Chapter 4 – Getting to know the client
Learning Domain | The Know Your Client Communication Process
26.Ian is 25, employed, and has no dependents. He has no current financial or family obligations. He has asked for your recommendation for
investing a $50,000 inheritance. What asset allocation would typically suit an investor with Ian’s characteristics?
A.
50% in equity funds, 20% in a bond fund and 30% in a money market fund.
The correct answer is:
B.
10% in a bond fund, 80% in equity funds, 10% in a money market fund.
You chose:
C.
35% in equity, 25% in a money market fund, 60% in a bond fund.
D.
10% in equity funds, 70% in a bond fund, 20% in a money market fund.
Feedback: Ian would be considered a Stage 1 – Early Earning Years investor. Stage 1 investors, in general, are free of family and financial
commitments, and would typically have a higher ability to tolerate risk. Thus, with its higher level of risk and lower component of income
based investments, 10% in a bond fund, 80% in equity funds and 10% in a money market fund would be most likely to be suitable. Reference |
Chapter 4 – Getting to know the client
Learning Domain | The Know Your Client Communication Process
27.Your client contacts you, requesting that you purchase a mutual fund based on a “hot tip” from a friend who has been a successful investor.
What bias is your client most likely being affected by?
A.
Hindsight.
B.
Endowment.
C.
Availability.
Good choice!
D.
Overconfidence.
Feedback: Overconfidence is defined generally as unwarranted faith in one’s intuitive reasoning, judgements and cognitive abilities. People
tend to overestimate both their predictive abilities as well as the precision of the information they have been given. For example, an investor
may get a tip from a wealth advisor or read something on the Internet about an investment opportunity, and then take action (that is, make
the decision to invest) based on her perceived knowledge advantage. Reference |
Chapter 5 – Behavioural Finance
Learning Domain | The Know Your Client Communication Process
28.Jeff is a new client. He is 50 years old with modest savings in the low six figures, and wants to reinvest his portfolio to ensure that he can
retire comfortably at age 65. In his meeting with Jeff, the advisor uncovered some of Jeff’s biases. Jeff displayed several strong emotional
biases along with a few weak cognitive biases. What should the advisor do?
A.
The advisor should moderate Jeff’s emotional biases.
B.
The advisor should moderate and adapt to Jeff’s cognitive biases.
C.
The advisor should adapt to Jeff’s cognitive biases.
Good choice!
D.
The advisor should moderate and adapt to Jeff’s emotional biases.
Feedback: Jeff has a relatively low level of wealth and strong emotional biases; that’s why the advisor should moderate and adapt to Jeff’s
emotional biases. Reference |
Chapter 5 – Behavioural Finance
Learning Domain | The Know Your Client Communication Process
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29.How is a $10,000 withdrawal from a registered retirement savings plan (RRSP) taxed?
A.
At a set rate of 30%.
The correct answer is:
B.
As regular income.
C.
As a deduction against other income.
You chose:
D.
Based on the type of investment income type.
Feedback: Contributions withdrawn from an RRSP are taxed as regular income at the plan holder’s marginal tax rate. Reference |
Chapter 6 – Tax and Retirement Planning
Learning Domain | The Know Your Client Communication Process
30.What portion of the withdrawal from a Registered Educational Savings Plan is tax-free?
A.
Canadian Educational Savings Grant (CESG) amounts.
B.
Dividend income earned.
Good choice!
C.
Original capital contributed.
D.
Capital gains earned.
Feedback: The original capital withdrawn from an RESP is not taxed; all other amounts are taxed in the hands of the beneficiary. Reference |
Chapter 6 – Tax and Retirement Planning
Learning Domain | The Know Your Client Communication Process
31.An employer wants to offer his employees a pension plan. The goal is to provide a simple-to-understand plan that will reward all participants
equally, regardless of their income level, and provide a retirement income based on a participant’s years of service with the company. What
plan will best meet his requirements?
A.
Defined contribution plan.
You chose:
B.
Career average plan.
The correct answer is:
C.
Flat benefit plan.
D.
Final average plan.
Feedback: The flat benefit plan is simple to understand, provides a retirement income based solely on years of service, and is not affected
by plan members’ individual incomes. Reference |
Chapter 6 – Tax and Retirement Planning
Learning Domain | The Know Your Client Communication Process
32.Your client, a high-income earner in a high marginal tax bracket, is seeking to minimize the amount of tax he pays on investment income
while continuing to invest in mutual funds. Which mutual fund would best meet his investment objective?
A.
Money market fund.
B.
Foreign equity fund.
C.
Fixed-income fund.
Good choice!
D.
Canadian equity fund.
Feedback: Of the funds listed, the most tax-effective would be a Canadian equity fund because it should generate some dividends and
some capital gains. Money market funds and fixed income funds would each generate highly taxed interest income, while a foreign equity
fund would not generate tax-advantaged Canadian dividend income or capital gains. Before recommending an equity fund, the mutual fund
representative should ensure that the fund is suitable for his client because equity funds have a higher risk profile than funds that generate
interest income. Reference |
Chapter 6 – Tax and Retirement Planning
Learning Domain | The Know Your Client Communication Process
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33.Your client’s unused RRSP contribution room is $46,000. He contributes $15,000 in the current taxation year. How much RRSP contribution
room can he carry forward?
A.
$38,000
Good choice!
B.
$31,000
C.
$46,000
D.
$35,000
Feedback: Any RRSP contribution room that is not used in a taxation year can be carried forward to be used in future years. There is no
limit on the amount that can be carried forward. In this example, $46,000 - $15,000 = $31,000. Reference |
Chapter 6 – Tax and Retirement Planning
Learning Domain | The Know Your Client Communication Process
34.What is a key difference between marketable government bonds and treasury bills?
Good choice!
A.
Treasury bills do not pay any coupon interest, while marketable bonds do.
B.
Treasury bills trade in the over-the-counter market, while marketable bonds trade on the exchange.
C.
Marketable government bonds actively trade in the secondary market while treasury bills can only
be bought from and sold to the government.
D.
Marketable government bonds may be sold at a discount while treasury bills are sold at a premium.
Feedback: Because T-bills have such short maturities, they do not pay any coupon interest; instead, they are sold to investors at a discount
from par value. When the T-bill matures, you receive par value. The difference between the price paid and the par value represents your
return. Reference |
Chapter 7 – Types of Investment Products and How They Are Traded
Learning Domain | Understanding Investment Products and Portfolios
35.Which security is most likely to provide a capital gain if held to maturity?
A.
Common shares of a mature company.
B.
Cumulative preferred shares bought at par value.
C.
A government bond bought at a premium.
Good choice!
D.
A corporate bond bought at a discount.
Feedback: Bond prices are quoted using an index with a base value of 100. A bond trading at 100 is said to be trading at face value, or par.
A bond trading below par, say at a price of 98, is said to be trading at a discount (the 98, based on the index of 100, indicates the bond is
trading at 98% of par). A bond trading above par, say at a price of 104, is said to be trading at a premium. So if you hold buy a bond at a discount, at maturity, you
will receive the par or face value. The difference between the discounted price and the par value received at maturity is considered a capital
gain. The reverse is true for bonds bought at a premium. Preferred shares issued at par value will mature at par value. Common shares do not have a maturity date. Mature companies that do not have substantial expansion plans often pay generous current
dividends, but their share price is not expected to increase much over time. Reference |
Chapter 7 – Types of Investment Products and How They Are Traded
Learning Domain | Understanding Investment Products and Portfolios
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36.For the last year, an investor earned a return before adjustment for inflation of 2% on a money market fund, while inflation averaged 1.5%.
What was his nominal rate of return?
You chose:
A.
3.50%
The correct answer is:
B.
2.00%
C.
0.50%
D.
1.50%
Feedback: It is important to consider the effects of inflation on investments because we can isolate the difference between nominal and real
returns. Investors are more concerned with the real rate of return – the return adjusted for the effects of inflation. A nominal return is a return
that has not been adjusted for the impact of inflation. The approximate real rate of return is calculated as: Real Return = Nominal Rate -
Annual Inflation Rate. Reference |
Chapter 8 – Constructing Investment Portfolios
Learning Domain | Understanding Investment Products and Portfolios
37.Fund A has a 5-year average return of 10% and a standard deviation of 5%. Fund B has a 5-year average return of 8% and a standard
deviation of 2%. Select the most accurate statement about Funds A and B.
A.
Fund A’s returns have ranged from 5% to 10%.
Good choice!
B.
Fund B is less risky than Fund A.
C.
Fund A will always provide a higher return than Fund B.
D.
Fund B’s lowest return is lower than Fund A’s lowest return.
Feedback: We can find the probable range of returns as follows: Average Return + Standard deviation = Positive outcome. Average Return - Standard deviation = Negative outcome. In any given year Fund A, which has the higher standard deviation, could fluctuate much more widely, making it less attractive as an
investment, even over the long-term. Volatility is the most common measure of risk. Reference |
Chapter 8 – Constructing Investment Portfolios
Learning Domain | Understanding Investment Products and Portfolios
38.Calculate the 2-year simple return for the AAA Mutual Fund. AAA Mutual Fund Performance
Year
Price at Beginning
Distribution
Price at End
Simple 1 -Yr Return
1
st
Year
$10.00
$0.25
$11.00
12.50%
2
nd
Year
$0.25
$10.20
-5.00%
A.
3%
B.
8%
Good choice!
C.
7%
D.
-3%
Feedback: Return = (Price at the end of the period + cash flow earned during the period - Price at the beginning of the period) / Price at the
beginning of the period. In this case, ($10.20 + $0.50 - $10.00) / $10.00 = 7.00%. Reference |
Chapter 8 – Constructing Investment Portfolios
Learning Domain | Understanding Investment Products and Portfolios
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39.Which statement best describes what a rational investor will do when comparing the risk and return of two investments?
A.
He will select the one with the lower risk because all investors are risk averse.
B.
He will select the one with the higher expected risk because that is the only way to earn a higher
return.
Good choice!
C.
He will select the one that minimizes risk and maximizes return.
D.
He will select the one that maximizes risk and maximizes return.
Feedback: Given a choice between two investments with the same amount of risk, a rational investor would always take the security with
the higher return. Given two investments with the same expected return, the investor would always choose the security with the lower risk.
Investors are risk averse, but not all to the same degree. Each investor has a different risk profile. This means that not all investors choose
the same low-risk security. Some investors are willing to take on more risk than others are, if they believe there is a higher potential for
returns. Reference |
Chapter 8 – Constructing Investment Portfolios
Learning Domain | Understanding Investment Products and Portfolios
40.Why do speculators tend to avoid diversification?
Good choice!
A.
Diversifying a portfolio tends to reduce the probability of very large gains and losses.
B.
Diversifying a portfolio may result in overall risk that is lower than that of its component securities.
C.
Diversifying a portfolio tends to increase the probability of very large gains and losses.
D.
Not diversifying a portfolio exposes the investor to the total risk of the securities.
Feedback: Diversification affects the returns that investors hope to earn. Diversification tends to reduce the probability of both very large
losses and very large gains. Speculators tend to avoid diversification for this reason. Great wealth can be achieved only through an absence
of diversification. Reference |
Chapter 8 – Constructing Investment Portfolios
Learning Domain | Understanding Investment Products and Portfolios
41.What items are typically classified as current assets on the statement of financial position?
Good choice!
A.
Cash, accounts receivable, and inventories.
B.
Cash, accounts receivable, and retained earnings.
C.
Cash, accrued charges, and accounts receivable.
D.
Cash, inventories, and depreciation.
Feedback: Typical current asset accounts include cash, representing the total amount in all of the company’s deposit accounts; inventories,
representing the finished and unfinished products which have not yet been sold; and accounts receivable. Reference |
Chapter 9 – Understanding Financial Statements
Learning Domain | Understanding Investment Products and Portfolios
42.Ally wishes to buy a preferred share where any regular dividend payment that the board skips will collect in arrears. What preferred share
feature should Ally be seeking?
A.
Voting.
B.
Soft retraction.
Good choice!
C.
Cumulative.
D.
Callable.
Feedback: When the board of directors elect not to pay a dividend, unpaid dividends accumulate in what is known as arrears for those who
hold cumulative preferred shares. Reference |
Chapter 7 – Types of Investment Products and How They Are Traded
Learning Domain | Understanding Investment Products and Portfolios
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43.Which statement best describes one of the main differences between short and long transactions?
A.
Short transactions are more common than long transactions.
The correct answer is:
B.
Investors using long transactions anticipate a price increase in the security.
C.
In a long transaction, the investor must pay the broker the cost of repurchasing the shares.
You chose:
D.
Short sales must result in a decline in the price of the stock that is sold short.
Feedback: Short transactions are a common feature of the capital markets, although not as common as long transactions – the transactions
taken by investors who anticipate a price increase in the security. Investors who short sell stocks must first borrow the shares. They must
also declare their short transactions. You are not allowed to pretend that you are simply selling stock. In addition, short positions require
margin in excess of the value of the stock at the time of the short sale. The short seller repays the broker by replacing the borrowed shares. Reference |
Chapter 7 – Types of Investment Products and How They Are Traded
Learning Domain | Understanding Investment Products and Portfolios
44.Sonya, a mutual fund manager for Drake Financial has had a stellar year in managing their Canadian equity portfolio and has outperformed
the benchmark by over 200 basis points. She is now concerned that within the last couple of months of this calendar year that the Canadian
equity market is due for a 10 to 15% pullback. Which investment strategy would be most appropriate for her to implement for the last couple
of months of the year to offset the market correction?
The correct answer is:
A.
Buy put options on the iShares S&P/TSX 60 Index Fund.
You chose:
B.
Reduce her equity exposure to the energy sector.
C.
Buy call options on the iShares S&P/TSX 60 Index Fund.
D.
Increase her equity exposure to the consumer staples sector.
Feedback: A fund manager may have experienced a rapid growth in the value of her portfolio, but is concerned that the market may fall. To
protect herself against a fall in value, she purchases put options on the iShares S&P/TSX 60 Index Fund (i60s). If the market declines, the
fall in value of the portfolio is offset by an increase in the value of the put options. Other managers may sell call options on shares they
already own in order to enhance the fund’s income. When fund managers deal internationally, they may use futures contracts as protection
against changes in currency values. Reference |
Chapter 7 – Types of Investment Products and How They Are Traded
Learning Domain | Understanding Investment Products and Portfolios
45.Which statement about market risk is true?
A.
Market risk is cancelled out by diversification.
Good choice!
B.
Market risk can result from changes in inflation and interest rates.
C.
Market risk is measured by the standard deviation.
D.
Market risk is greater than the sum of the risks of all stocks.
Feedback: Once a portfolio becomes well diversified, the only remaining risk to be concerned about is market risk. Market risk is defined as
the variability of a stock or a portfolio in relation to the market as a whole. The process of diversification cancels out much firm-specific risk,
so market risk is less than the total risk you would calculate if you looked at each stock separately. Market risk is also referred to as
systematic risk and arises from such things as inflation, the business cycle, and interest rates. Reference |
Chapter 8 – Constructing Investment Portfolios
Learning Domain | Understanding Investment Products and Portfolios
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46.The Optima Equity Fund has a beta of 1.4. What is the most accurate way to describe the Optima Equity Fund’s relationship to the market
as a whole?
A.
If the market goes down by 5%, the Optima Fund should go down by 5.7%.
B.
If the market goes down by 10%, the Optima fund should go up by 11.4%.
C.
If the market goes up by 10%, the Optima Fund should go up by 11.4%.
Good choice!
D.
If the market goes up by 5%, the Optima fund should go up by 7%.
Feedback: One way to measure market risk is by calculating a portfolio’s beta. Beta shows how much a portfolio fluctuates when the market
as a whole fluctuates. A higher beta means that the portfolio is exposed to more risk. The market has a beta of 1.0. All portfolios can be
viewed in terms of how volatile they are in relation to the market. In this example: The Optima Equity Fund has a beta of 1.4, which means the Fund is expected to be 1.4 times more volatile than the market
as a whole. If the S&P/TSX Composite Index is used to measure the performance of the Optima Fund, then if the Index rose by 10% you
would expect to see the Optima Fund rise by 14% (1.4 x 10%). Similarly, if the S&P/TSX should fall by 20%, then the Fund should fall by
28% (1.5 x 20%). Reference |
Chapter 8 – Constructing Investment Portfolios
Learning Domain | Understanding Investment Products and Portfolios
47.A portfolio manager first analyzes a variety of asset mixes to determine an optimal portfolio and then adjusts the mix by monitoring and
rebalancing. What is the name for the process the portfolio manager is following?
Good choice!
A.
Strategic asset allocation.
B.
Passive management.
C.
Sector weighting.
D.
Market timing.
Feedback: When a portfolio manager develops a strategy to maximize portfolio returns, he or she does so with a particular asset mix or
allocation in mind. For example, 60% equities and 40% bonds, or 10% cash, 40% bonds, and 50% equities, and so on. This base policy mix
is called the strategic asset allocation. This is the long-term mix that will be adhered to by monitoring and, when necessary, rebalancing. To
find this base policy mix, the portfolio manager will analyze a variety of asset mixes to determine the optimal portfolio. The manager then
reviews the range of outcomes and chooses one to determine the long-term policy or strategic asset allocation. Reference |
Chapter 8 – Constructing Investment Portfolios
Learning Domain | Understanding Investment Products and Portfolios
48.Rank the decisions made by a portfolio manager in order of importance for the success of the portfolio.
A.
Security selection, sector weighting, asset allocation.
Good choice!
B.
Asset allocation, sector weighting, security selection.
C.
Sector weighting, security selection, asset allocation.
D.
Asset allocation, security selection, sector weighting.
Feedback: The single most important decision, one that accounts for most of the success or failure of a portfolio, is the asset allocation
decision, which is the selection of the classes of securities to be held and in what proportion to hold them. The next most important decision
is the selection of the specific industries from which stocks will be selected: the portfolio’s sector weighting. The final decision is the security
selection: the choice of which individual companies within the industry or sector to invest in. Reference |
Chapter 8 – Constructing Investment Portfolios
Learning Domain | Understanding Investment Products and Portfolios
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49.Which of the following asset allocation statements is correct?
You chose:
A.
A fixed income component of less than 25% is appropriate for conservative portfolios.
B.
Portfolio security selection determines the long-term growth potential.
C.
Equity weightings greater than 90% should not be recommended.
The correct answer is:
D.
You should review a client’s asset allocation when the investment environment changes.
Feedback: In general terms, an equity weighting of less than 25% is considered conservative and more than 75% is considered aggressive.
Only if the client is very aggressive should the weighting of his equity component reach 90%. Reference |
Chapter 8 – Constructing Investment Portfolios
Learning Domain | Understanding Investment Products and Portfolios
50.Which financial leverage ratio measures a company’s ability to repay its borrowings?
A.
Interest coverage ratio.
B.
Total debt ratio
Good choice!
C.
Cash flow from operations to total debt ratio.
D.
Operating profit margin ratio.
Feedback: The cash flow from operations/total debt ratio gauges a company’s ability to repay the funds it has borrowed. Bank advances are
short-term and must normally be repaid or rolled over within a year. Corporate debt issues commonly have sinking funds requiring annual
cash outlays. A company's annual cash flow should therefore be adequate to meet these commitments. Before calculating this ratio, it is important to define cash flow from operations and consider its significance. Cash flow from operations = a
company’s net earnings + all deductions not requiring a cash outlay (such as depreciation) – all additions not received in cash (such as
income from an equity investment in another company). Reference |
Chapter 9 – Understanding Financial Statements
Learning Domain | Understanding Investment Products and Portfolios
51.What is Widget Inc.’s gross profit? Widget Inc. Earnings Statement
Sales
$200,000
Cost of Goods Sold
$80,000
Selling & General Expenses
$40,000
Depreciation
$5,000
Total Expenses
$30,000
Net Earnings
$40,000
A.
$50,000
B.
$75,000
C.
$45,000
Good choice!
D.
$120,000
Feedback: Sales are reduced by the expenses that were incurred in order to generate the goods sold (cost of goods sold). These expenses
include the cost of inventories used to produce the goods as well as the labour that went into their production. The sales revenue, net of the
cost of producing those goods, is known as gross profit. In this case, gross profit = $200,000 - $80,000 = $120,000. Reference |
Chapter 9 – Understanding Financial Statements
Learning Domain | Understanding Investment Products and Portfolios
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52.Apex Mutual Fund has been structured to avoid taxation by distributing any net interest, dividends, and capital gains to unitholders each
calendar year. This is an example of what type of mutual fund structure?
A.
Closed-end mutual fund.
B.
Open-ended mutual fund.
Good choice!
C.
Mutual fund trust.
D.
Mutual fund corporation.
Feedback: The most common structure for mutual funds in Canada is the open-end trust. The trust structure allows a fund itself to avoid
taxation. Any interest, dividends and capital gains income, net of the fund’s fees, expenses and capital losses, if passed to its unitholders
each calendar year, will allow the trust to avoid being taxed on its income. Reference |
Chapter 10 – The Modern Mutual Fund
Learning Domain | The Modern Mutual Fund
53.What criteria does the independent review committee use to determine if a potential conflict of interest, such as inter-fund trading, should be
approved?
A.
Will the action contravene a unitholder’s statutory rights?
B.
Will the action contravene National Instrument 81-102?
Good choice!
C.
Will the action achieve a fair and reasonable result for the fund?
D.
Will the action require unitholder approval?
Feedback: The Independent Review Committee will only approve actions where a conflict of interest arises if certain requirements are met,
including, most importantly the action achieves a fair and reasonable result for the fund. With regard to other conflicts of interest that are
identified by the manager, the approval of the IRC is not required, but the IRC issues a report each year to unitholders where it is obliged to
describe each instance where its recommendation with regard to a conflict of interest has not been followed by the manager of the fund. Reference |
Chapter 10 – The Modern Mutual Fund
Learning Domain | The Modern Mutual Fund
54.Why is it important that an investor receive a copy of the Fund Facts document prior to buying a mutual fund?
The correct answer is:
A.
The investor can verify that the fund’s stated investment objectives and risk profile match his own.
B.
The investor can verify that the fund has not misstated any material facts.
C.
The investor can verify that the fund manager is adhering to the fund’s stated investment objectives.
You chose:
D.
The investor can verify that his statutory rights have been respected.
Feedback: The fundamental purpose of a Fund Facts document is to provide “full, plain and true” disclosure of material information
concerning the securities and the issuer of the securities, so that potential purchasers can make informed decisions about purchasing the
new securities. The fundamental investment objectives of a mutual fund can be found in the Fund Facts. It specifies what the fund intends to
accomplish and how it is to be done. It is critically important, since this statement of investment objectives must correspond to investors’
needs based on their own investment objectives, personal and financial circumstances, investment knowledge, and risk profile. Reference |
Chapter 10 – The Modern Mutual Fund
Learning Domain | The Modern Mutual Fund
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55.What entity receives all fund money obtained from investors buying units/shares?
A.
Dealer.
B.
Fund manager.
The correct answer is:
C.
Custodian.
You chose:
D.
Registrar.
Feedback: The Custodian. When a mutual fund is established, a separate organization, most often a trust company, is appointed as the
fund’s custodian. The custodian receives and holds the fund’s money obtained from all sources – investors buying the fund’s units or shares,
income earned by the fund’s investment portfolio, proceeds from the sale of the fund’s investments, holds all the fund’s assets and
distributes the fund’s money to pay the fund’s expenses, including management fees, purchases of securities for the fund’s investment
portfolio, payments for redeemed units and shares and distributions or dividends to unitholders or shareholders respectively. Reference |
Chapter 10 – The Modern Mutual Fund
Learning Domain | The Modern Mutual Fund
56.The ZZZ Money Market Fund has a 7-day yield of 0.05%. What is the current yield for the fund? Round your answer to two decimal places.
A.
1.61%.
Good choice!
B.
2.61%.
C.
0.05%.
D.
2.22%.
Feedback: The current yield for a money market fund is calculated as the most recent seven-day yield on the fund, adjusted to an annual
rate. The formula is: Current yield = (Seven-day yield × 365 / 7). In this case the current yield is (0.0005 × 365 / 7) = 0.0261 Reference |
Chapter 11 – Conservative Mutual Fund Products
Learning Domain | Analysis of Mutual Funds
57.Which type of fund is least likely to produce capital gains income?
You chose:
A.
Preferred dividend fund.
The correct answer is:
B.
Money market fund.
C.
Mortgage fund.
D.
Short-term bond fund.
Feedback: All returns earned on money market funds are considered interest earnings and are taxed as interest income. Since money
market funds invest only in money market securities that pay interest, no other type of income can be earned. Because the value of the units
of a money market fund is constant ($10), no capital gains can be made on the sale of units of the fund. Reference |
Chapter 11 – Conservative Mutual Fund Products
Learning Domain | Analysis of Mutual Funds
58.What type of risk is the fundamental risk factor for fixed-income securities?
Good choice!
A.
Interest rate risk.
B.
Reinvestment risk.
C.
Liquidity risk.
D.
Market risk.
Feedback: Interest rate risk is the fundamental risk factor for fixed-income securities such as bonds, mortgages and preferred shares. As
interest rates move up, the value of a fixed-income security falls. This is because the cash flow from the fixed-income security is fixed. For
bonds, the cash flow is from the fixed coupon rate; for mortgages, it is from the fixed mortgage rate; and for preferred shares, it is from the
fixed dividend rate. Reference |
Chapter 11 – Conservative Mutual Fund Products
Learning Domain | Analysis of Mutual Funds
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59.Which statement is most accurate about fund wraps?
A.
There is essentially no regulatory difference between a fund wrap and a standard mutual fund.
B.
Each model is designed to meet the needs of the individual.
C.
The investor pays fees to both the wrap manager and the manager of the underlying funds.
Good choice!
D.
The fund wrap sponsor is responsible for asset allocation decisions.
Feedback: A fund wrap program provides a series of portfolios with multiple mutual funds to reflect pre-selected asset allocation models.
Each model is designed to meet the needs of a group of investors sharing a similar client profile. Responsibility for the asset allocation
decision falls to the wrap sponsor. For convenience, all administrative, management and trading costs are usually rolled into one wrap fee.
From a regulatory point of view, fund wraps constitute a specific investment structure. A fund of funds exists as a legal entity, in addition to
the legal existence of the underlying mutual funds. Thus, specific regulatory provisions govern the development and promotion of fund
wraps. Regulations include, for example, prohibitions against “double dipping” (charging fees twice for the same services or components). Reference |
Chapter 12 – Riskier Mutual Fund Products
Learning Domain | Analysis of Mutual Funds
60.Your client, Mrs. DaSousa, would like to diversify her portfolio by investing in a global equity fund. What should you advise her about the
foreign currency risk?
The correct answer is:
A.
The fund may provide a hedge against a decline in the Canadian dollar.
You chose:
B.
The fund manager can hedge the exchange risk by buying foreign currency through futures
contracts.
C.
The foreign exchange risk will be offset by the lower liquidity risk.
D.
The value of the fund will go up if the Canadian dollar increases in value against the foreign
currency.
Feedback: Global mutual funds are attractive because they can provide a hedge against a decline in the relative value of the Canadian
dollar. For example: if investors buy a Japanese fund, and then the value of the Canadian dollar falls relative to the yen, the Canadian dollar
value of that investment will increase even if the value of the fund’s units in yen has remained unchanged. Not all global mutual funds expose clients to foreign exchange risk, however. Portfolio managers can undertake hedging transactions in the
foreign exchange market to remove or greatly reduce the foreign exchange risk of their fund. They can do this by selling foreign currency for
future settlement, either through currency futures contracts or currency forward contracts. Reference |
Chapter 12 – Riskier Mutual Fund Products
Learning Domain | Analysis of Mutual Funds
61.Which type of fixed income fund has a short duration, with the objectives of preserving capital and generating better current income than a
money market fund?
A.
Preferred dividend fund.
Good choice!
B.
Short-term bond fund.
C.
Mortgage fund.
D.
T-bill fund.
Feedback: A short-term bond fund is part money market fund and part bond fund. You would expect its investment objectives to reflect this
combination. A short-term bond fund’s objectives are to preserve capital and generate better current income than is likely from a money
market fund. Although there is some capital gain potential, you would not expect this to be a key objective given the short duration of this
type of fixed-income fund. Reference |
Chapter 11 – Conservative Mutual Fund Products
Learning Domain | Analysis of Mutual Funds
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62.What best describes why mortgage funds generally have less sensitivity to changes in interest rates than bond funds?
A.
Most mortgages held in mortgage funds are either NHA-insured or privately insured.
B.
Mortgage funds are highly diversified, often holding over 10,000 individual mortgages.
Good choice!
C.
Interest on mortgages is usually paid monthly, while interest on bonds is typically paid semi-
annually.
D.
Many mortgage funds also hold T-bills and mortgage-backed securities, which are less volatile.
Feedback: Interest rate sensitivity is expected to be lower for mortgage funds than for bond funds for two reasons.
First, mortgage rates change much less frequently than interest rates on bonds. The decision to change mortgage rates rests with the
banks and other mortgage lenders, while the interest rates (or yields) on bonds change when investors bid up or bid down the prices of
bonds that trade in the market. This bidding takes place daily.
Second, mortgages by nature have less interest rate risk than bonds. The reason, in part, is that interest on mortgages is paid monthly,
while interest on bonds is paid semi-annually.
Another reason is that the average mortgage has a shorter term than the average bond. Reference |
Chapter 11 – Conservative Mutual Fund Products
Learning Domain | Analysis of Mutual Funds
63.Recently interest rates have gone up. Your customer, Mr. Corelli, has asked you how this will affect the value of his mortgage fund. What is
the best response to give to Mr. Corelli?
A.
The mortgage fund will not be affected because mortgages do not react to changes in interest rates
the way bonds do.
B.
The value of the mortgage fund should go up because mortgages will now be earning higher
interest.
Good choice!
C.
The value of the mortgage fund will go down because new mortgages will pay higher interest than
those in the fund.
D.
The mortgage fund will not be affected because the rise in interest rates will affect only new
mortgages.
Feedback: Fixed-income securities move in the opposite direction to market interest rates. Consider that a mortgage rate, once negotiated
between the borrower and lender, is fixed until the end of the term. Let’s assume you are the fund manager for a mortgage mutual fund,
which has mortgages paying 5%. If mortgage rates suddenly increase to 6%, only the interest rates on newly negotiated mortgages would
increase. What would happen to the NAVPU of your fund? The rate on the mortgages you bought previously is fixed at 5% until the end of its
term. Would you be able to sell those mortgages at par? Clearly, if someone had $100,000 to invest today, he or she would be able to buy a
mortgage offering an interest rate of 6%. The investor would not pay you par for a 5% rate. If you wished to sell the mortgages, then you
would have to lower your price until the price paid-given the 5% fixed payments to be made-results in a return to the buyer of 6%, the “going
rate” on mortgages. In other words, the market value of your par value mortgages must fall. Reference |
Chapter 11 – Conservative Mutual Fund Products
Learning Domain | Analysis of Mutual Funds
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64.You are the portfolio manager for the ABC Balanced Fund. Interest rates are going up; the stock market has been very volatile recently and
is forecast to continue that way for the next two quarters. What changes, if any, will you make to your current asset allocation of 50% bonds
and 50% equities?
A.
Increase the allocation to bonds because interest rates are rising.
Good choice!
B.
Temporarily move a significant amount into money market securities.
C.
Increase the allocation to equities to take advantage of the volatility.
D.
None - the fund is balanced.
Feedback: Balanced funds ideally provide a “balanced” mix of safety, income and capital appreciation. These objectives are sought through
a portfolio of fixed-income securities for stability and income, plus a broadly diversified group of common stock holdings for diversification,
dividend income and growth potential. The balance between defensive and aggressive security holdings is rarely 50-50. Rather, managers of
balanced funds adjust the percentage of each part of the total portfolio according to current market conditions and future expectations. The distinguishing feature of balanced mutual funds is the way they go about meeting their investment objectives. Portfolio managers
frequently attempt to shift the proportions of investments in fixed-income and equity securities in keeping with changing market conditions.
When interest rates have peaked, managers want to be in fixed-income securities.
When the stock market is set for an increase, they want to be in stocks.
When both bond and stock markets are volatile, they will hold large amounts of money market securities. In other words, balanced mutual
fund managers attempt to time the market to get the best returns depending on market conditions.
Reference |
Chapter 12 – Riskier Mutual Fund Products
Learning Domain | Analysis of Mutual Funds
65.Which statement best describes key differences between dividend funds and standard equity funds?
A.
Standard equity funds’ objectives are based on a belief in market efficiency.
You chose:
B.
Standard equity funds’ objectives do not include current dividend income.
C.
Standard equity funds cannot invest in preferred shares.
The correct answer is:
D.
Standard equity funds’ objectives do not include capital preservation.
Feedback: A standard equity fund seeks to earn some combination of dividend income and capital gains from investment in Canadian
common stocks. This objective appears to be similar to that of a preferred dividend fund. The difference between the two is that an equity
fund usually has a much stronger capital gains focus. Note as well that equity funds make no specific attempt to preserve capital; in other
words, equity funds are willing to put capital at substantially greater risk than preferred dividend funds. Reference |
Chapter 12 – Riskier Mutual Fund Products
Learning Domain | Analysis of Mutual Funds
66.You are concerned about upcoming weakness in the Canadian dollar. Which type of fund should you invest in?
A.
An international fund that hedges its foreign currency risk.
B.
A specialty fund that uses derivatives to hedge the value of its portfolio.
The correct answer is:
C.
A global fund that hedges its foreign currency risk.
You chose:
D.
A global fund that does not hedge its foreign currency risk.
Feedback: Global mutual funds are attractive in that they can provide a hedge against a decline in the relative value of the Canadian dollar.
However, not all global mutual funds expose clients to foreign exchange risk. Portfolio managers can undertake hedging transactions in the
foreign exchange market to remove or greatly reduce the foreign exchange risk of their fund. A global mutual fund’s prospectus will indicate if
the fund hedges the foreign currency risk by using these currency derivatives. It is important for mutual fund sales representatives to know
whether their global mutual funds hedge foreign exchange risk, because some clients will want to bear that risk themselves, while others will
not. Reference |
Chapter 12 – Riskier Mutual Fund Products
Learning Domain | Analysis of Mutual Funds
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67.What is an implicit cost of principal protected notes?
A.
Commissions.
Good choice!
B.
Performance participation caps.
C.
Early redemption fees.
D.
Structuring costs and guarantee fees.
Feedback: Implicit costs include fees borne by investors that may or may not be immediately visible and that may or may not be openly
disclosed in the documents. Of the items listed, three are explicit costs, and only performance Participation Caps are an implicit cost. Reference |
Chapter 13 – Alternative Managed Products
Learning Domain | Understanding Alternative Managed Products
68.What type of managed fund, recently introduced to Canada, is allowed greater use of short sales, leverage, and derivatives compared to
mutual funds, but not to the same extent as hedge funds?
A.
Private equity.
B.
Closed-end discretionary fund.
You chose:
C.
Principal-protected notes.
The correct answer is:
D.
Liquid alts.
Feedback: Liquid alts, also known as alternative mutual funds, were recently introduced into Canada, and are allowed greater use of short
sales, leverage, and derivatives compared to regular mutual funds, but not to the same extent as hedge funds. Reference |
Chapter 13 – Alternative Managed Products
Learning Domain | Understanding Alternative Managed Products
69.An investor seeks an equity investment that will mirror the performance of the energy sector in Canada. She desires a low-cost, flexible
alternative that can quickly be bought or sold. Which product is most suited to her needs?
A.
Energy sector segregated fund.
B.
Energy-sector index mutual fund.
The correct answer is:
C.
Exchange-traded fund of energy sector stocks.
You chose:
D.
Direct investment in energy sector stocks.
Feedback: Like stocks, and unlike index mutual funds, ETFs are traded on an exchange and can be bought and sold throughout the trading
day. In this way, ETFs provide investors with a flexible way to participate in the performance of the underlying assets without having to
acquire the assets directly, incurring high transaction costs. MERS on ETFs also tend to be lower than on other index and actively managed
products. Reference |
Chapter 13 – Alternative Managed Products
Learning Domain | Understanding Alternative Managed Products
70.The performance of ABC Mutual Fund ranks 54 out of 100 funds in its peer group. What is its quartile ranking?
A.
2
nd
quartile.
B.
4
th
quartile.
Good choice!
C.
3
rd
quartile.
D.
1
st
quartile.
Feedback: A quartile sorts performance into four equal parts or blocks. The quartiles are given a rank – 1, 2, 3 or 4 – to show how well a
certain fund’s performance compared to all other funds in the peer group, with the 1
st
quartile representing the top 25 performers. Reference |
Chapter 14 – Understanding Mutual Fund Performance
Learning Domain | Evaluating and Selecting Mutual Funds
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71.Which drawback of the comparison universe method makes average fund managers look more like underperformers as the comparison
period lengthens?
A.
Matching of risk profiles.
Good choice!
B.
Survivorship bias.
C.
Definition of universes.
D.
Universe size.
Feedback: All comparison universes exhibit some degree of survivorship bias no matter how carefully the universes are constructed.
Survivorship bias develops as defunct portfolios drop out and are excluding from rankings in subsequent quarters. Funds that are terminated
or cease to exist are usually those who have been unsuccessful. As a result of this bias, adequately performing managers can appear to
have underperformed. Reference |
Chapter 14 – Understanding Mutual Fund Performance
Learning Domain | Evaluating and Selecting Mutual Funds
72.What type of fund offers the highest expected risk and the highest expected return in terms of the risk-return trade-off between different
types of mutual funds?
The correct answer is:
A.
Specialty fund.
You chose:
B.
Real estate fund.
C.
Mortgage fund.
D.
Canadian Equity fund.
Feedback: The highest risk, highest expected return mutual fund is a specialty fund. Reference |
Chapter 15 – Selecting a Mutual Fund
Learning Domain | Evaluating and Selecting Mutual Funds
73.A fund manager has diversified the equity portfolio he manages in order to reduce the potential negative impact of unfavourable information
relating to any one stock. What type of risk has he reduced?
A.
Interest rate risk.
B.
Market risk.
Good choice!
C.
Unique risk.
D.
Default risk.
Feedback: If a security’s price is affected by new information, and if new information arrives frequently, then its price will tend to be volatile
and so will the returns that it generates. This source of volatility is specific to a given security and is known as unique risk. Diversifying a
portfolio reduces unique risk. Reference |
Chapter 15 – Selecting a Mutual Fund
Learning Domain | Evaluating and Selecting Mutual Funds
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74.You are comparing the performance of ABC Equity Fund and XYZ Equity Fund to their benchmark. Indicate the correct statement. Return Year 1
Return Year 2
Return Year 3
3 Year
Compound Return
Benchmark
-2.0%
12.6%
20.6%
10.0%
ABC Equity
Fund
-10.0%
16.0%
24.0%
9.0%
XYZ Equity
Fund
8.0%
9.0%
10.0%
9.0%
A.
Fund ABC demonstrated a superior performance in a bearish market.
B.
Fund ABC showed greater consistency in its simple annual returns.
Good choice!
C.
Fund XYZ would have offered a lower likelihood of loss if a client needed to sell the investment.
D.
Fund XYZ offered less protection on the downside.
Feedback: After finding comparable funds with good long-term performance, look for funds with the best performance from year to year. In
comparing two funds, the one with less variation in simple rates of return from year to year is a more consistent performer. Although equity
funds are intended for the long-term, if liquidity is needed, the fund with a more consistent performance is less likely to be sold at a loss.
Simple rates of return also tell effectively how well a mutual fund performs when the markets have turned bearish. Reference |
Chapter 15 – Selecting a Mutual Fund
Learning Domain | Evaluating and Selecting Mutual Funds
75.What type of fee does a mutual fund sponsor often reduce the longer an investor holds a back-end load fund?
A.
Sales fee.
B.
Acquisition fee.
C.
Trailer fee.
Good choice!
D.
Redemption fee.
Feedback: Fund sponsors use a decreasing redemption fee (deferred sales charges) schedule to recover their costs from investors who opt
out of the fund early. In most cases, redemption fees on a back-end load fund decrease the longer the investor holds the fund. Reference |
Chapter 16 – Mutual Fund Fees and Services
Learning Domain | Evaluating and Selecting Mutual Funds
76.Which factors would cause the management expense ratio charged by a mutual fund to be higher?
1. The fund invests in foreign equities.
2. The fund is large in size.
3. The fund is managed by the fund sponsor’s management team.
4. The fund pays a trailer fee.
A.
3 and 4.
B.
2 and 3.
You chose:
C.
1 and 2.
The correct answer is:
D.
1 and 4.
Feedback: Four factors primarily affect the management expense ratio. Funds that invest in foreign equities; are small in size; are managed
by an outside specialist firm; and charge trailer fees will have higher management expense ratios. Reference |
Chapter 16 – Mutual Fund Fees and Services
Learning Domain | Evaluating and Selecting Mutual Funds
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77.An investor purchases equity fund units for $17.60. In which of the following circumstances would an investor potentially owe taxes on
capital gains?
Good choice!
A.
The fund is sold today for $18.80 per unit and the proceeds are reinvested.
B.
A dividend distribution is reinvested into additional units of the same fund.
C.
The fund is currently valued at $18.80 per unit.
D.
The fund is currently valued at $16.45 per unit.
Feedback: Capital gains are generated when an investor sells an investment for more than the price paid; for example, selling a stock at a
profit will generate a capital gain. Capital gains are not realized when an investment goes up in price; a sale must occur. Regardless of how
the investor uses the proceeds from the sale, the investor will, if the investment is held in a non-registered account, need to report the capital
gain and pay any taxes that result. Reference |
Chapter 16 – Mutual Fund Fees and Services
Learning Domain | Evaluating and Selecting Mutual Funds
78.Which exemplifies the tendency of mutual fund companies to shut down poor performing funds?
A.
Standard lot.
B.
Standby underwriting.
Good choice!
C.
Survivorship bias.
D.
Short selling.
Feedback: All comparison universes also exhibit some degree of survivorship bias no matter how carefully the universes are constructed.
Survivorship bias develops as defunct portfolios drop out and are excluded from rankings in subsequent quarters. A performance universe is
essentially a universe of survivors. Funds that are terminated or cease to exist are usually those who have been unsuccessful. Reference |
Chapter 14 – Understanding Mutual Fund Performance
Learning Domain | Evaluating and Selecting Mutual Funds
79.Which index would investors use as a benchmark for doing research on the largest listed public companies in the US marketplace?
A.
FTSE Canada Universe Bond Index.
B.
MSCI EAFE Index.
The correct answer is:
C.
S&P 500.
You chose:
D.
S&P/TSX Composite.
Feedback: Index
Description
Performance
uses
S&P/TSX
Composite
The largest listed equities that trade on the Toronto Stock
Exchange as measured by market capitalization
Canadian equity
funds
S&P 500
The 500 largest publicly held companies that trade on U.S.
markets
U.S. equity funds
MSCI EAFE Index
The MSCI Inc. index of European, Australasian, and Far East
stocks
Non-North
American equity
funds
FTSE Canada
Universe Bond
Index
Broad measure of the Canadian government and corporate
bond market
Canadian bond
funds
Reference |
Chapter 14 – Understanding Mutual Fund Performance
Learning Domain | Evaluating and Selecting Mutual Funds
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80.Which Sharpe ratio result would indicate that the fund earned a return less than the risk-free return?
A.
0.5
B.
1
Good choice!
C.
-0.2
D.
2.5
Feedback: The Sharpe ratio is calculated as (Fund Return - T-bill Rate) ÷ Fund Standard Deviation. A negative Sharpe ratio means the
mutual fund has a return less than the risk-free rate, as the numerator of the ratio would be negative. Reference |
Chapter 15 – Selecting a Mutual Fund
Learning Domain | Evaluating and Selecting Mutual Funds
81.What equity investment philosophy places greater emphasis on industry weighting than on security selection?
Good choice!
A.
Sector rotation.
B.
Momentum investing.
C.
Growth at a reasonable price.
D.
Growth investing.
Feedback: Sector rotation is a portfolio manager’s attempt to profit through timing. It is based on the belief that different industries will
perform well during certain stages of the economic cycle. Industries expected to outperform would be overweighted. More emphasis is
placed on industry weighting than on security selection. Reference |
Chapter 15 – Selecting a Mutual Fund
Learning Domain | Evaluating and Selecting Mutual Funds
82.A fund manager who utilizes an interest rate anticipation philosophy forecasts a rise in interest rates. What change in asset allocation
should he implement?
You chose:
A.
Increase short-term T-bill and low coupon bond holdings.
B.
Increase long-term bond and low coupon bond holdings.
C.
Increase long-term and high coupon bond holdings.
The correct answer is:
D.
Increase short-term T-bill and high coupon bond holdings.
Feedback: Interest rate anticipation is a fixed-income investing philosophy that involves moving between long-term government bonds and
very short-term T-bills, based on a forecast of interest rates over a certain time horizon. Price sensitivity to interest rate movements
increases as the term to maturity increases and the coupon decreases. Therefore, to avoid a large capital loss if interest rates rise, the fund
manager would decrease the fund's interest rate sensitivity. Reference |
Chapter 15 – Selecting a Mutual Fund
Learning Domain | Evaluating and Selecting Mutual Funds
83.Your soon-to-be retired client has accumulated $700,000 in a mutual fund investment. He has consulted with you with respect to systematic
withdrawal plans. His other sources of income in retirement are uncertain. He is not interested in leaving a legacy at his death. Which plan
would best suit his needs?
The correct answer is:
A.
Annuity.
B.
Fixed-dollar withdrawal plan.
You chose:
C.
Life withdrawal plan.
D.
Ratio withdrawal plan.
Feedback: The client needs a steady source of income from his investment. This rules out a ratio withdrawal plan and a life withdrawal plan.
With a fixed-dollar withdrawal plan his capital could be exhausted before his dies. He should choose an annuity that will pay a fixed amount
every year until his death. If he lives beyond the guaranteed term, the annuity will cease with his death, but this fact is not important as he
does not wish to leave a legacy. Reference |
Chapter 16 – Mutual Fund Fees and Services
Learning Domain | Evaluating and Selecting Mutual Funds
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84.In what circumstance would an investor receive a T3 or T5 reporting a capital gain from a mutual fund investment?
A.
When the value of the investor’s fund units has risen.
Good choice!
B.
When the fund sells investments at a price higher than the average cost of the investment.
C.
When the investor sells her fund units at a price higher than their average cost.
D.
When the value of the fund’s investments has risen.
Feedback: In the normal course of portfolio management, shares are bought and sold either at a gain or at a loss for the fund. By the end of
the year, many funds will have generated net capital gains on their portfolio transactions. The capital gains are distributed in the form of a
capital gains dividend reported on a T5 or T3. Reference |
Chapter 16 – Mutual Fund Fees and Services
Learning Domain | Evaluating and Selecting Mutual Funds
85.What value are withdrawals under a ratio withdrawal plan based upon?
A.
Value at inception of plan.
B.
Average of start and year-end portfolio value.
You chose:
C.
End of year portfolio value.
The correct answer is:
D.
Current portfolio value.
Feedback: Under a ratio withdrawal plan, the ratio is always based on the current portfolio value. Technically, this means that clients will
never fully exhaust their mutual fund investment under this type of plan. Only in the unrealistic situation of a 100% payout ratio would the
fund be completely paid out. Reference |
Chapter 16 – Mutual Fund Fees and Services
Learning Domain | Evaluating and Selecting Mutual Funds
86.What is the securities administrator’s power that is intended to ensure investors can make fully informed investment decisions?
A.
Termination.
The correct answer is:
B.
Disclosure.
You chose:
C.
Enforcement.
D.
Registration.
Feedback: The securities administrators ensure that all documents and other required information are prepared in accordance with
requirements and provided to appropriate parties in a timely manner. The securities administrators also review all prospectuses for full, true
and plain disclosure. Complete, accurate and timely disclosure allows clients to make fully informed investment decisions. Reference |
Chapter 17 – Mutual Fund Dealer Regulation
Learning Domain | Ethics, Compliance and Mutual Fund Regulations
87.When must client complaints be acknowledged in writing?
A.
When complaints are made repeatedly by the same client with respect to the same representative.
B.
When the client has made a written complaint in letter format.
C.
Any time the client has made a verbal or written complaint.
Good choice!
D.
When the client has made a written complaint in any format.
Feedback: MFDA Policy No. 3 specifies the minimum procedures for dealing with written client complaints (including emails). All written
client complaints must be acknowledged in writing. Reference |
Chapter 17 – Mutual Fund Dealer Regulation
Learning Domain | Ethics, Compliance and Mutual Fund Regulations
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88.A mutual fund representative misrepresents the risks associated with a particular mutual fund in order to encourage a conservative client to
purchase it. What part of MFDA Rule No. 2 “Business Conduct” did the representative violate?
A.
Have such experience and training as it consistent with the standards acceptable to the industry.
Good choice!
B.
Deal fairly, honestly and in good faith with clients.
C.
Observe a high standard of ethics and conduct.
D.
Not engage in business conduct or practice that is unbecoming or detrimental to the public interest.
Feedback: MFDA Rule No 2 “Business Conduct” sets out the standards applicable to all MFDA members and their respective dealing
representatives. In this case, the representative has not dealt honestly with the client by misrepresenting information. Reference |
Chapter 17 – Mutual Fund Dealer Regulation
Learning Domain | Ethics, Compliance and Mutual Fund Regulations
89.When can an individual legally start selling mutual funds?
A.
Upon successful completion of the proficiency examination.
B.
Upon filing a registration application and paying the required registration fee.
Good choice!
C.
Upon receipt of notification of registration from the securities administrator.
D.
Upon completion of continuing education requirements.
Feedback: Despite receiving notification of successful completion of the required proficiency examination, filing a registration application and
paying the required fee, an individual is not officially registered to sell mutual funds until notice has been received from the applicable
securities administrator. Reference |
Chapter 17 – Mutual Fund Dealer Regulation
Learning Domain | Ethics, Compliance and Mutual Fund Regulations
90.Karen works Monday to Wednesday for a member of the MFDA as a dealing representative and Thursday and Friday as a language
instructor at a local college. Client orders received on Thursdays and Fridays are held until Karen returns to work the following week. What
requirement did the dealer fail to do in these circumstances?
A.
The dealer must be aware of and approve of Karen’s other occupation.
You chose:
B.
The dealer must maintain procedures to address any potential conflicts of interest.
The correct answer is:
C.
The dealer must maintain procedures to ensure continuous service to clients.
D.
Karen’s alternate employment must not bring the MFDA, its members or the mutual fund industry
into disrepute.
Feedback: A mutual fund dealing representative who works for or is sponsored by a member of the MFDA may have, and continue in,
another gainful occupation, provided that the dealer establishes and maintains procedures to ensure continuous service to clients. In this
example, Karen’s clients are not receiving continuous service. Reference |
Chapter 17 – Mutual Fund Dealer Regulation
Learning Domain | Ethics, Compliance and Mutual Fund Regulations
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91.A married couple is opening a spousal RRSP account in the name of the wife. The dealing representative gathers the information required
on the NAAF, including the wife’s name, social insurance number, permanent address and investment objectives. The representative also
gathers KYC information for both and informs them that leveraging is not permitted with respect to RRSP accounts. Which information was
not required?
Good choice!
A.
Husband’s KYC information.
B.
Wife’s KYC information.
C.
Wife’s social insurance number.
D.
Disclaimer with respect to leveraging.
Feedback: The investment experience and knowledge of all individuals who have trading authority over the account should be obtained, as
well as KYC information for anyone with a financial interest in the account. For spousal RRSPs, the contributing spouse does not have a
financial interest in the account, so KYC information is required for the non-contributing spouse only. Reference |
Chapter 17 – Mutual Fund Dealer Regulation
Learning Domain | Ethics, Compliance and Mutual Fund Regulations
92.A mutual fund sales representative receives a client’s purchase order for equity mutual funds and confirms that the order is appropriate
based on the client’s recorded investment knowledge and risk profile. The client explains that she had inherited the funds from a family
member. The client states her investment objective to be long term. The representative records this information and processes the order.
What the representative doesn’t know is that the client has recently lost her job and is living on unemployment insurance. What step did the
representative need to take in order to uphold her duty of care?
A.
The representative should have applied the test of suitability to the unsolicited order.
Good choice!
B.
The representative should have verified that the client’s KYC information was updated before
applying the suitability test.
C.
The representative should have probed the client’s understanding of equity funds.
D.
The representative should have applied due diligence in matching the order to the client’s KYC
information.
Feedback: Duty of Care starts with the Know Your Client rule. It is impossible to apply due diligence and assess the suitability of an
investment if the client’s information has not been updated. Client account documentation should reflect all material information about the
client’s current status, and should be updated to reflect any material change to the client’s status in order to assure suitability of investment
recommendations. Reference |
Chapter 18 – Applying Ethical Standards to What You Have Learned
Learning Domain | Ethics, Compliance and Mutual Fund Regulations
93.A mutual fund sales representative is under pressure to meet certain sales objectives. However, he consistently ignores these quotas when
making client recommendations. Which obligation has he followed?
A.
The obligation to maintain a high standard of professional knowledge.
B.
The obligation to take appropriate cautions for potentially unsuitable investments.
Good choice!
C.
The obligations to put the client’s interests first.
D.
The obligation to keep client information confidential.
Feedback: The client’s interest must be the foremost consideration in all business dealings. In situations where you may have an interest
that competes with that of the client, the client’s interest must be given priority. Reference |
Chapter 18 – Applying Ethical Standards to What You Have Learned
Learning Domain | Ethics, Compliance and Mutual Fund Regulations
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94.What personal information must be obtained from clients opening a non-registered account?
1. Date of birth.
2. Social insurance number.
3. Permanent address.
4. Full legal name.
A.
2 and 3.
The correct answer is:
B.
3 and 4.
C.
1 and 4.
You chose:
D.
1 and 2.
Feedback: The first step as a dealing representative is to obtain a client’s personal data including full legal name, permanent and mailing
address, social insurance number and date of birth. While a permanent address is mandatory, providing a different mailing address is
optional. Neither the social insurance number nor date of birth are mandatory for non-registered accounts, but both are highly recommended. Reference |
Chapter 17 – Mutual Fund Dealer Regulation
Learning Domain | Ethics, Compliance and Mutual Fund Regulations
95.A husband wishes to transfer some of his non-registered mutual fund holdings to his wife, but wants to maintain trading authority over the
transferred assets. He also wishes to ensure that should she die the gift he is making will revert to him. What is the appropriate account
type?
A.
Open a tenants in common account.
B.
Open a nominee account.
C.
Open an account in his wife’s name only.
Good choice!
D.
Open a joint account.
Feedback: The husband would have no financial interest in a client name account, registered in his wife’s name only. A nominee account
would transfer trading authority to a dealer or third-party administrator. In a tenants in common account, each spouse would have trading
authority over his/her portion of the account. Therefore, the husband’s best option would be to open a joint account and retain full trading
authority. A joint account would also offer the right of survivorship, which is not a feature of a tenants in common account. Reference |
Chapter 17 – Mutual Fund Dealer Regulation
Learning Domain | Ethics, Compliance and Mutual Fund Regulations
96.Jack and Jill hold a mutual fund account as tenants in common. What conditions would apply to their account?
1. Should either die, full ownership of the account would pass to the other.
2. Each would be the owner of 50% of the account’s assets.
3. Either could issue trading instructions on all account assets.
4. Each would be required to provide KYC information.
The correct answer is:
A.
2 and 4.
B.
1 and 3.
C.
2 and 3.
You chose:
D.
1 and 4.
Feedback: If more than one person owns an account and it is not specifically identified as being a joint account, each owner owns a pro-rata
share of the account, unless ownership is divided in another manner and noted on the account. Where an account is held as tenants in
common, there is no right of survivorship and each owner, unless otherwise specified, can only give instructions with regard to the pro-rata
portion of the account. Reference |
Chapter 17 – Mutual Fund Dealer Regulation
Learning Domain | Ethics, Compliance and Mutual Fund Regulations
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97.A dealing representative explains the past performance of a mutual fund to a potential client, discussing the annual simple returns and
compound returns that the fund had earned. She concluded by indicating she expects the fund’s NAVPU was likely to rise at similar rates in
the future, given the economic outlook. What unacceptable selling practice has occurred?
Good choice!
A.
Representatives cannot promise NAVPU will increase by any amount.
B.
Representatives cannot comment upon the economic outlook.
C.
Representatives cannot discuss a fund’s past performance.
D.
Representatives cannot quote a future purchase price.
Feedback: There are a number of sales practices that are clearly illegal or otherwise unacceptable to securities regulators. A dealing
representative may not make promises that the NAVPS or NAVPU of a fund will achieve a certain level or increase by any amount. Reference |
Chapter 17 – Mutual Fund Dealer Regulation
Learning Domain | Ethics, Compliance and Mutual Fund Regulations
98.Sofie is a busy mutual fund sales representative. She would like to move clients that are invested in low yielding cash accounts to her firm’s
higher yielding proprietary money market mutual fund. She confirms the orders with the clients, then instructs her new sales assistant, who
will write the IFC exam next week, to enter orders to buy units in this fund. How has Sofie violated the standards of conduct?
Good choice!
A.
She allowed an unregistered individual to process the order to buy units.
B.
She violated no standards of conduct.
C.
She has done insufficient research and violated her due diligence requirement.
D.
She failed to establish a scheduled review for her clients’ accounts.
Feedback: Mutual fund sales representatives must be registered to sell mutual funds. This requires registration with the securities
administrator in each province and territory in which the clients to whom they sell mutual funds reside. You must renew your registration as
required by the provincial and territorial securities administrators and keep the administrators informed of material changes in the material
information you provided on your registration application that could affect your registration status. Reference |
Chapter 17 – Mutual Fund Dealer Regulation
Learning Domain | Ethics, Compliance and Mutual Fund Regulations
99.What is the time period during which an individual must complete a training program once she starts acting as a dealing representative?
A.
30 days.
Good choice!
B.
90 days.
C.
6 months.
D.
3 months.
Feedback: All mutual fund dealing representatives are required to complete a training program within 90 days from the day that they first
start acting as a dealing representative and must be closely supervised for six months. Reference |
Chapter 17 – Mutual Fund Dealer Regulation
Learning Domain | Ethics, Compliance and Mutual Fund Regulations
100.A mutual fund sales representative is asked to make a presentation to an investment club. During the presentation he discusses personal
experiences of a questionable nature. What aspect of Professionalism is relevant to this situation?
A.
Solicitation of client business.
B.
Personal financial dealings with clients.
C.
Conduct of personal business.
Good choice!
D.
Other personal endeavours.
Feedback: The representative must take care to ensure that any publicly visible activity in which he participates is conducted responsibly
and moderately so as not to present an unfavourable public image. Reference |
Chapter 18 – Applying Ethical Standards to What You Have Learned
Learning Domain | Ethics, Compliance and Mutual Fund Regulations
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