Pass the CISI level 3 Certificate in Wealth & Investment Management ICWIM Questions and answers with ExamsMirror

Determine the shortfall in income:

Desired income: £40,000

Pension provided: £35,000

Annual shortfall: £40,000 - £35,000 = £5,000

Adjust for inflation over 20 years:Future value = Present Value × (1 + Inflation Rate)^n£5,000 × (1 + 0.02)^20 = £7,430 (inflation-adjusted shortfall)

Calculate the lump sum required to generate this shortfall:Use the real rate of return formula: (1 + nominal return) ÷ (1 + inflation rate) - 1Real rate of return = (1 + 0.03) ÷ (1 + 0.02) - 1 = 0.98% per year

Use the present value of annuity formula:PV = PMT × [(1 - (1 + r)^-n) ÷ r]PV = £7,430 × [(1 - (1 + 0.0098)^-20) ÷ 0.0098]PV = £7,430 × 44.64 = £331,631

Equities are often used to hedge against inflation because they represent ownership in real assets that can grow in value. Companies generally have the ability to pass on inflationary costs to consumers, which can preserve or enhance their profitability and the equity value.

Lower cost (B): Equities may incur higher transaction and management costs than other asset classes.

Align liabilities (C): While equities offer returns, liability alignment is more relevant to fixed-income assets.

Low volatility (D): Equities are more volatile than bonds or cash, making this statement incorrect.

References:

International Certificate in Wealth & Investment Management: Equities as inflation hedges and their risk/reward profile.

Historical analysis of equity performance in inflationary periods.

Passive fund managers can use synthetic replication to track an index through derivatives like swaps. In this arrangement, the fund agrees to pay a pre-defined return (e.g., LIBOR or a fixed rate) to a counterparty in exchange for the counterparty delivering the total return of the index. This approach allows the fund to replicate index performance without holding the physical securities, reducing costs and eliminating tracking error.

Bearer shares are physical certificates that grant ownership, and the rights to those shares are with the bearer. If the certificate is lost or stolen, the investment could effectively be unrecoverable since ownership cannot be traced back to the investor.

Not being publicly named (A): This is an advantage of bearer shares, not a disadvantage.

Difficulty in valuation (C): Bearer shares’ value is similar to registered shares based on market conditions.

Impossible to sell part (D): Fractional transactions can still occur with bearer shares.

References:

International Certificate in Wealth & Investment Management: Risks associated with different forms of equity ownership.

Legal frameworks around bearer shares and their potential misuse in financial systems.

Financial advisers are required to explain the additional obligations associated with derivatives, such as margin requirements, leverage risks, and potential for substantial losses. This is because derivatives are complex financial instruments with high risk.

A client who is the spouse of the head of a foreign state is classified as a Politically Exposed Person (PEP). Firms are required to undertake enhanced due diligence (EDD) for PEPs and their immediate family members due to the increased risk of corruption, money laundering, or misuse of public funds.

Simplified (A): This applies to low-risk clients, not PEPs.

Standard (B): Standard due diligence is insufficient for PEPs or their relatives.

Additional (D): This term is not a formal category under anti-money laundering (AML) regulations.

References:

International Certificate in Wealth & Investment Management: AML procedures and the treatment of PEPs.

FATF (Financial Action Task Force) guidelines on enhanced due diligence for politically exposed persons.

Performance attribution analysis evaluates the performance of a portfolio by breaking it into components attributed to specific investment decisions. These include:

Asset Allocation: The decision on the proportion of the portfolio allocated to different asset classes (e.g., stocks, bonds).

Sector Choice: Selecting specific sectors (e.g., technology, healthcare) within asset classes.

Security Selection: Choosing individual securities within the selected sectors.

Risk analysis, while critical for investment management, is not typically part of standard performance attribution frameworks.

References:

International Certificate in Wealth & Investment Management: Portfolio performance evaluation section.

Standard attribution models: Brinson, Hood, and Beebower model widely used in performance attribution.

Relief at source for overseas dividend income typically operates by reducing the withholding tax applied to dividends at the source. This is achieved through double taxation agreements (DTAs) between countries, which set out reduced tax rates for such income.

Example:If the standard withholding tax rate in a country is 30%, a DTA may reduce this to 15% for eligible investors.

Demutualisation refers to the process by which a mutual savings institution, such as a building society, converts into a publicly traded company or bank. This transformation allows the institution to raise capital through equity issuance and expand its services beyond mutual members.

Example:

The Abbey National Building Society in the UK demutualised in the 1980s to become a bank.

Execution-only refers to situations where clients make investment decisions without receiving advice from the firm. The firm’s role is limited to executing the client’s instructions, without providing recommendations or assessing suitability.

Key features:

The firm does not offer advice.

The client takes full responsibility for their investment decisions.