ICWIM Exam Dumps - CISI level 3 Certificate in Wealth & Investment Management Questions and Answers

ROCE (Return on Capital Employed)

Measures the efficiency and profitability of a company relative to the capital invested in the business.

Formula: ROCE=Earnings Before Interest and Tax (EBIT)Capital Employed\text{ROCE} = \frac{\text{Earnings Before Interest and Tax (EBIT)}}{\text{Capital Employed}}ROCE=Capital EmployedEarnings Before Interest and Tax (EBIT)​

Why the Answer is C

ROCE specifically focuses on the returns generated from the capital base, providing insight into how effectively the business is using its resources.

Why Other Options are Incorrect

A. Net profitability: Refers to net profit margins, not ROCE.

B. Borrowing costs: ROCE ignores borrowing costs as it considers EBIT.

D. Net profit in relation to cost of sales: Refers to gross profit margin, not ROCE.

ICWIM Study Guide, Chapter on Financial Ratios: Covers ROCE and its applications.

Corporate Finance Texts: Defines ROCE as a key performance metric.

ReferencesThus, the correct answer isC. Returns generated from capital invested in the business.

Bullet Bond Portfolio

Invests in bonds with maturities focused on a single date or time period (a "bullet").

This structure eliminates the need for frequent adjustments as maturities naturally align with portfolio objectives.

Barbell Bond Portfolio

Invests in bonds with very short and very long maturities.

Requires regular rebalancing to maintain the intended allocation, increasing transaction costs.

Why the Answer is D

A bullet portfolio simplifies management by focusing on a single maturity period, avoiding the complexity of rebalancing inherent in barbell strategies.

ICWIM Study Guide, Chapter on Fixed-Income Strategies: Compares bullet and barbell portfolios.

Bond Portfolio Management Principles: Highlights the operational advantages of bullet structures.

References

Personal Accident Policies:

These policies often include a waiting period before payouts, allowing insurers to verify claims and ensure eligibility.

The waiting period varies depending on the policy terms.

Elimination of Other Options:

A: A doctor's visit is often necessary but not sufficient for payout.

B: Payments are not instantaneous.

D: Documentation is required, but it is part of the claim process, not the trigger for payout.

References:

ICWIM Module 5: Details on insurance policy structures and claims processes.

Personal Accident Policies:

These policies often include a waiting period before payouts, allowing insurers to verify claims and ensure eligibility.

The waiting period varies depending on the policy terms.

Elimination of Other Options:

A: A doctor's visit is often necessary but not sufficient for payout.

B: Payments are not instantaneous.

D: Documentation is required, but it is part of the claim process, not the trigger for payout.

References:

ICWIM Module 5: Details on insurance policy structures and claims processes.

Risk Tolerance Defined

Risk tolerance is the degree of variability in investment returns that an investor is willing to withstand.

Pillars of Risk Tolerance

Psychological Traits: Key determinants of how much risk an individual can emotionally handle.

Includes traits like optimism, pessimism, and loss aversion.

Other Factors (Secondary): Experience, education, and financial goals play roles, but they do not directly "underlie" the core risk tolerance.

Example

Two investors with identical knowledge and experience may have different risk tolerances due to differing psychological profiles.

ICWIM Study Guide, Chapter on Risk Profiling: Highlights psychological traits as the foundation of risk tolerance.

Behavioral Finance Theory: Psychological biases and emotional traits shape risk appetite.

ReferencesThus, the correct answer isA. Psychological traits.

What is Key Person Protection?

A policy designed to compensate a company for financial losses incurred if a key employee dies or becomes disabled.

A prerequisite is that the company must prove aninsurable interestin the key person.

Why D is Correct

Insurable interest ensures that the company has a legitimate financial dependency on the key person, a requirement for taking out such a policy.

Other Options Analyzed

A. Ever-increasing premiums: Not a feature specific to key person policies.

B. Moving to a competitor: Irrelevant; this is not an insurable risk.

C. Undefined sum: Key person policies require a specific sum based on financial calculations.

ICWIM Textbook, Chapter on Business Insurance: Emphasizes insurable interest in key person policies.

Insurance Industry Standards: Insurable interest is a fundamental requirement.

References

Purpose of the FATF:

Established in 1989, the FATF develops global policies to combat money laundering and terrorist financing.

It promotes international standards to ensure financial systems are not misused for criminal purposes.

Elimination of Other Options:

A: The FATF’s mandate is broader than G7 financial regulation.

B: It provides guidance but does not solely focus on developing financial regulation.

C: Ending safe havens for corrupt funds is part of its mission but secondary to its primary goal of combating money laundering and terrorism.

References:

ICWIM Module 5: Focus on global financial regulation and anti-money laundering efforts.

FATF Mandate (Official Publications): "Standards for combating money laundering, terrorist financing, and proliferation financing."

What is a Benchmark?

A benchmark is a standard against which the performance of a portfolio is measured.

Common benchmarks include stock indices like the S&P 500 or FTSE 100.

Why a Custom Benchmark is Required

When a portfolio spansseveral different asset classes, such as equities, fixed income, and alternative investments, a single pre-defined benchmark may not be sufficient.

A custom benchmark aligns with the specific composition and strategy of the portfolio, ensuring that performance is evaluated accurately.

Key Reason for Custom Benchmark

It reflects thediversity and allocationof the portfolio across asset classes.

Example: If a portfolio is 50% equity, 30% fixed income, and 20% real estate, the benchmark must reflect this mix, combining indices like MSCI World, Bloomberg Barclays Bond Index, and a real estate index.

ICWIM Study Material, Chapter on Performance Measurement: Highlights the necessity for custom benchmarks in multi-asset portfolios.

CFA Institute Standards: Custom benchmarks are required for complex portfolios spanning various classes.

ReferencesThus, the answer isD. The portfolio spans several different asset classes.

Investor Categories Based on Investable Assets

Mass Affluent: $100,000–$1,000,000

High-Net-Worth Individuals (HNWI): $1,000,000–$5,000,000

Very-High-Net-Worth Individuals (VHNWI): $5,000,000–$30,000,000

Ultra-High-Net-Worth Individuals (UHNWI): Over $30,000,000

Why $900,000 Falls into HNWI?

Although $900,000 is close to the HNWI threshold, the term is often used flexibly for individuals who are near the $1M mark.

Banks and wealth managers generally consider $900,000 within this category because they have similar service needs.

ICWIM Textbook, Chapter on Investor Profiling: Defines HNWI thresholds and explains their investment behavior.

Wealth Management Industry Standards: High-net-worth classification begins near $1M.

ReferencesThus, the investor would normally be categorized asB. High-net-worth.

What is an Accumulation and Maintenance Trust?

This is a trust designed primarily for minors or young beneficiaries.

Trustees have discretion over income and capital distributionsuntil a specified event or age, after which the discretion typically ceases.

When Does Discretion Cease?

Generally, trustees' discretion ends at theend of a prescribed periodor when the beneficiary reaches a predetermined age, often 18 or 25.

This ensures the trust complies with legal requirements, such as therule against perpetuitiesin some jurisdictions.

ICWIM Study Guide, Chapter on Trusts: Details the rules around accumulation and maintenance trusts.

Trust Law Principles: Highlights limitations of trustee discretion.

References

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.