General IFC Questions Flashcards
Which exchange is exclusive for financial futures and options in Canada?
MX
Which Market is Considered OTC? (Over the counter)
Dealers Market
The political environment in Canada is very stable. In addition, the government decides to decrease taxes on foreign investment. Select the effect on the Canadian dollar.
The Canadian dollar will increase in value.
What is DTC? (Dividend Tax Credit)
15.02% of a grossed up dividend income. Dividend income is grossed up by 38%.
What is the difference between a RRIF and a LIF
a RRIF is created by converting an RRSP, while an LIF is usually created by converting a LIRA, locked-in RRSP or pension plan.
What is a Life Annuity ?
an insurance product that features a predetermined
periodic payout amount until the death of the retiree like a LIF
Maximum amount for RESP contribution?
50,000.
What’s happens if you over contribute to an RRSP
You’re allowed a 2000$ over contribution allowance. After that 2000, you will be charged 1% per month tax penalty.
Commissions received by a self-employed real estate agent would be considered what type of income?
Business Income
Individuals qualify for the full Old Age Security (OAS) pension if they were a Canadian resident for at least how many years after turning age 18?
40 years
What is Beta?
The degree to which individual equity securities or a portfolio of equities tend to move up and down with the market. (volatility)
What does a high Beta mean? Example: The Market has a Beta of 1
1. If the Beta for that security is higher than 1 then …
2. If the Beta of that security is less then 1 then…
The risk of that security is high if over 1, and the risk is low if less than 1.
What is Market/Systemic Risk?
Market risk is the risk of losses in positions arising from movements in market variables like prices and volatility.
What is Alpha?
The excess return earned on the portfolio.
What is perfectly positive correlation
A portfolio that contains similar securities therefore not reducing risk.
What is perfectly negative correlation
A portfolio that contains different securities to reduce risk.
What is Fundamental Analysis ?
Hint: Qualitative
studying everything other than historical returns. Mainly capital market conditions and the outlook for the national economy and for the
economies of countries with which Canada trades to shed light on securities’ prices.
What is Technical Analysis?
Hint: Quantitative
Historical Patterns, prices of the stock market and stocks.
What are the 3 basic mutual fund types?
Money Market Fund, Fixed-Income Fund, Equity Fund
What is a Money Market Fund?
Cashable funds, t-bills, commercial paper, short term low risk debt securities.
What is a Fixed-Income Fund?
Primarly Bonds, and Debt securities.
Goal of Equity fund?
Capital Gains and sometimes dividend income
Standard Equity fund goals?
Some combination of dividend
income and capital gains from investment in Canadian common stocks. Much stronger capital gains focus.
Preferred Dividend Fund Goals?
some combination of dividend
income and capital gains from investment in Canadian common stocks. Much stronger dividend income focus.
Equity Growth Fund Goals?
Capital gains, with minimal dividend income.
What is a small cap fund?
An aggressive growth fund that typically invests in smaller organizations. More volatile. Can be apart of an equity growth fund.
Goal of Equity Index fund?
Mirroring the movements of a market index. In Canada the S&P/TSX index. Earn capital gains and some dividend income.
What is balanced fund and what is their goal?
Balanced fund combines fixed-income and equity funds. It earns capital gains, dividend income, and preserves capital.
Target-Date Funds 2 main characteristics.?
They have a maturity date, and a glide path. Glide path means they can re-allocate securities throughout the term depending on funds performance.
Global Fund?
Holds funds globally including Canada. Can fight against foreign exchange risk.
International fund?
Holds funds globally EXCLUDIng canada.
Specialty funds?
Risky, can be natural resource funds, precious metal funds.
2 Types of Fund wraps?
FOF and PAS
Fund wraps can be funds of funds or portfolio allocation services. With a fund of funds, the client owns units of a
pool of mutual funds, while in a portfolio allocation service, the client owns units of several mutual funds in the
proportions established through the allocation service.
Difference between Equity Funds and Preferred Funds?
Equity funds are willing to put capital at greater risk than preferred dividend funds.
When will a balanced fund most likely hold money market securities?
When both stock and bond markets are volatile.
High-Water Mark?
Hedge fund related: ensures that a fund manager is paid an incentive fee only on NEW profits.
How is Performance Assessment Conducted?
Benchmark indexes—the performance of a well-known market index.
Comparison universe—the performance of a group of funds that have comparable asset classes and risk profiles. (PEER GROUP)
Calculate Sharpe Ratio
Return-Risk/Standard Deviation.
What is Survivorship bias?
An upward bias in the returns of longer-run funds in the universe. (Comparison Universe)
Which generally gives an investor a point of reference for evaluating a mutual fund’s performance?
Bench Mark Index
What type of operation best describes Morningstar as it relates to their extensive mutual fund and general market data?
Appraisal Firm
Who is the primary Mutual fund Dealer/Security Administrator in Quebec?
Autorité des marchés financiers (
AMF)
Collectively, the
securities administrators of each province make up the
Canadian Securities Administrators (CSA)
What are the 3 broad powers of a security administrator?
Registration: everyone who sells securities(mutual funds) must be registered with the appropriate securities administrator or commission.
Disclosure: Must ensure disclosures to clients are up. to date
Enforcement: Enforce Law incase of violations.
What is The Canadian Investment Regulatory Organization
CIRO is the self-
regulatory organization (SRO) for mutual fund dealers across Canada, other than in Quebec,
What is the main objective of CIRO or AMF
The main objective of CIRO is to protect Canadian investors and ensure that they have the same level of protection regardless of which investment dealer or mutual fund dealer or dealing representative they deal with.
What the primary role of the Canadian Investor Protection Fund (CIPF) ?
To protect investors
Identify the term used for orders for mutual funds that have not been recommended by the dealing representative but instead come from the client.
Unsolicited Order
Q4. A mutual fund dealer has an arrangement with an investment advisor where the dealer refers his clients to the advisor in return for a share of commissions. The advisor and the dealer have a written agreement and provide full disclosure to the clients. Determine the relationship between the dealer and the advisor.
Referral Arrangment
What does The Financial Action Task Force (FATF) do?
They create and promote policies to combat money laundering and terrorist financing
Term used to refer to an account that is registered in the name of a dealer or third-party administrator on behalf of the owner of the mutual fund.
Nominee Account
How many dealers can a mutual fund dealer be sponsored by?
mutual fund dealing representatives may only be employed or sponsored by a single mutual fund dealer.
How do you acknowledge a WRITTEN complaint?
In writing.
How many days prior must we give written notice to clients for any new or increased operating charges in their accounts?
60 days
The mutual funds sales representative has a _______ responsibility to ensure that only suitable investments are recommended.
LEGAL
What is the term used to refer to potential fluctuations of a security, or range of outcomes of a security?
Risk
If someone wants advice on stocks, who should they be referred to?
Refer the client to someone licensed to sell equities.
Person responsible for investments in a fund according to the fund’s policies and objectives and based on a particular investing style.
Professional Money Manager
If Ranvir puts his own needs and interests ahead of his mutual fund client, what responsibility is Ranvir violating?
Ethical
Identify the role of capital investment in the economy.
Creating Growth
The federal government finances expenditures using
T-Bills and Bonds
Municipal governments may issue
Installment Debentures
What is a debenture
Medium-term to Long-term debt instrument
What is an Auction Market?
one where buyers and sellers enter competitive bids simultaneously.
Stock Market
Which Market is only over the phone or online
Dealer Market
Is a couple investing their savings in a home considered a Direct investment or Indirect Investment?
Direct Investment
What is a retail investor
Retail investors are individual investors who buy and sell securities for their own personal accounts
Who monitors the CONDUCT of SROS?
The provincial securities commissions. AMF
How do investment dealers transfers savers to users
Through underwriting that takes place in a primary market
Who are deposit taking companies?
Banks and Trust Companies
Create a Financial Plan in 4 steps.
- Achievable
- Could accommodate to changes
- Is realistic and not daunting
- Not only provides for necessities but also rewards.
Determine the life-cycle stage of a client who has successfully planned for medium term goals and has a new focus on achieving long term goals.
Stage 3 Mature Earning Years
Determine the life-cycle stage of a client that has a substantial investment portfolio with little in the way of day-to-day liquidity requirements.
Stage 4 Nearing Retirement
Which life-cycle stage is distinguished by a lack of liquidity?
Stage 2 Family Commitment
Example of Aggressive Investment
Specialty Funds, Precious metals/commodities.
Example of Security Investment on financial pyramid
Insurance
Example of Conservative investment on financial pyramid
Debenture
What are 4 things you need to know for KYC ?
- Age
- Personal Circumstances: Investment knowledge, Risk tolerance
3.Financial Circumstances: Net Worth, Income - Financial goals: objectives and time horizon
Determine the life-cycle stage of a client with lower risk tolerance and risk capacity but an increase in focus on estate planning and wealth transfer.
Retired
The weight of various securities classes within a client’s portfolio is best described as which of the following?
Asset Allocation
What’s a retractable preferred share and who can retract?
An investor can retract or redeem their share. they will pullback their money to their wallet.
What’s a callable preferred share and who can call?
The company can call or redeem the share from the investor. They will pay the investor their investment back. Company Call
Which Bias is “An unwarranted faith in one’s intuitive reasoning, judgements and cognitive abilities”
Over Confidence
Which bias claims that the outcome was predictable even though it was not?
Hindsight Bias
Which bias claims that the more possible a return is the more likely it is to happen? And the least possible a return is, the least likely it is to happen?
Availability Bias
Which Bias’ are most likely in men?
OLAH
Overconfidence
Loss Aversion
Avalibility
Hindsight
Which Bias’ are most likely in women?
ERRS
Endowment Bias
Regret Aversion Bias
Representativeness Bias
Status Quo
Which Bias is likely to have a client want to purchase a security that THEY determine is “The best fit”
Representative Bias
When faced with a wide variety of options, the individual is PREDISPOSED to choose to keep things the same. Which Bias?
Status Quo
A state of placing more value on an asset to which you hold property rights to than on an asset you do not hold property rights to. Which Bias?
Endowment Bias
Filipe watches a lot of sports on television. He has seen many advertisements for LMN Canadian mutual funds. When meeting with his financial advisor, he chose LMN funds as his preferred investment because he knows the name. Which behavioural bias has Filipe demonstrated?
Availability
When are stocks generally moving higher?
January
What do standard theories of finance assume?
Standard theories of finance and investing assume that investors are:
Risk averse (Don’t like risk)
Rational in their decision-making abilities
Which behavioural biases would motivate an investor to retain an investment that is performing poorly?
Regret Aversion and endowment.
What is “Best Practical Asset Allocation”
An investor will be better served by adjusting risk and return levels depending on their behavioural bias’
What is a HARD RETRACTION
To pay the shares REDEMPTION value in cash. The investor must pay the issuer.
How often do bonds typically offer to pay interest back to their investors?
Semi-Annually
Federal and provincial government bonds are virtually free of what type of risk?
Default Risk
By and large, what type of debt instrument is not secured by physical assets or collateral and backed only by the general reputation of the issuer?
Debenture (unsecured bond)
Which unsecured, short-term debt instrument is issued by corporations with high credit ratings in order to finance temporary credit needs?
Commercial Paper
Generally speaking, for many investors what is the overriding attraction of owning common shares?
Capital appreciation
What is Callable Share?
An issuer CALLS back their investment from the investor.
What is Retractable Share?
The investor RETRACTS their investment from the issuer.
Your client is interested in reducing the potential for default risk in her fixed-income portfolio. What would you recommend to your client?
Avoid Specializing in Corporate Bonds
What is Systematic Risk caused by
factors beyond the control of a specific company or individual.
What is sector rotation?
Based on the belief that different industries will perform well during certain stages of the economic cycle.
This strategy involves moving between long-term government bonds and very short-term T-bills, based on changing forecasts.
Interest Rate Anticipation
What describes the divergence of a mutual fund from its statement of investment policies and procedures?
Style Drift
If the yield is lower than the coupon rate than the bond is trading at?
Premium
What Determines Purchasing Power
Real Return
Identify the type of ratio that the debt/equity ratio is categorized as.
Risk Analysis Ratio
Select the necessary criteria for meaningful external comparisons about Companies and Ratios
Companies should operate the same, and ratios should be evaluated the same for a meaningful external comparison.
Identify the section of a Canadian auditor’s report that outlines the financial statement responsibilities of management. First,Second,Third,Fourth
Second
An investor purchases a non-dividend paying stock at the beginning of Year 1 for $50. By the end of Year 1 it is worth $45, and by the end of Year 2 it is worth $55. What is her annual arithmetic mean return over the two-year period?
(45-50)/50 = -0.1 = -10%
(55-45)/45 =0.222 = 22%
(-10%+22.22%)/2=0.0611 =6.11%
Select the entity that is ultimately responsible for the activities of a mutual fund trust.
TRUSTEE
Identify who is responsible for the taxes on dividend income distributed to mutual fund unitholders from a mutual fund trust.
UNITHOLDER
Identify the organization responsible for regulating mutual funds in Canada.
PROVINCIAL SECURITES COMISSION
Identify the document in which the principal investment objectives and policies of a mutual fund trust are set out.
Declaration of TRUST
How often do money market funds distribute the earned income?
Monthly
Describe how the effective yield calculation treats the 7-days return.
It assumes that the returns earned weekly are re-invested in the fund.
What is riskier between a mortgage fund and a bond fund?
Bond fund is riskier
What type of risk is primarily associated with mortgage funds?
Default Risk
With regard to derivatives, what is the main difference between a hedger and a speculator?
A speculator taking a bet on future movements of the market and a hedger uses derivatives as insurance.
What is the assumption that target dates are structured on?
Risk tolerance declines as investors grow older
A hedge fund manager purchases shares of ABC Energy Ltd. because she expects their shares will rise in value after it takes over control of XYZ Energy Consolidated. Determine the strategy the manager has used.
Event Driven
Identify the minimum maturity guarantee permitted on a segregated fund contract under provincial legislation
75%
Select a factor that results in management expenses for portfolio funds being higher than for individual segregated funds.
The investor pays for the asset allocation service
The relatively small market value of preferred shares in Canada can lead to
Liquidity Risk
