CIMA - Certified Investment Management Analyst Investment Policy and Process Questions and Answers 1 — Questions and Answers
Question 1: An investment advisor is developing an Investment Policy Statement (IPS) for a new client, a recently retired individual. Which of the following components is MOST critical to define the client's willingness and ability to endure market fluctuations?
- Time Horizon
- Risk Tolerance (Correct answer)
- Liquidity Needs
- Tax Considerations
Correct answer: Risk Tolerance
Risk tolerance is the most critical component for defining a client's attitude toward and capacity for handling investment risk and market volatility. While time horizon, liquidity, and taxes are all important constraints, risk tolerance directly addresses the psychological and financial ability to withstand losses.
Question 2: A CIMA professional is reviewing a client's portfolio and notices a significant deviation from the strategic asset allocation targets outlined in the Investment Policy Statement (IPS). What is the MOST appropriate first step in the investment process?
- Immediately rebalance the portfolio to the original targets.
- Contact the client to discuss potential revisions to the IPS. (Correct answer)
- Sell the outperforming asset class to realize gains.
- Conduct a manager search for a better-performing fund.
Correct answer: Contact the client to discuss potential revisions to the IPS.
The investment process is dynamic. A significant deviation from the IPS warrants a review and discussion with the client. Market conditions or the client's circumstances may have changed, necessitating a revision of the IPS before rebalancing. Immediately rebalancing without consultation could be inappropriate if the client's objectives have evolved.
Question 3: Which of the following is considered a primary objective within an Investment Policy Statement (IPS), as opposed to a constraint?
- The client requires $50,000 in annual income. (Correct answer)
- The client has a strong preference for socially responsible investments.
- The client's portfolio must not invest in derivatives.
- The client needs to liquidate a portion of the portfolio in three years for a down payment.
Correct answer: The client requires $50,000 in annual income.
An objective defines the purpose and desired outcome of the investment portfolio, such as generating a specific level of income or achieving a certain total return. Preferences, restrictions, and liquidity needs are all considered constraints that limit the investment strategy used to achieve the objectives.
Question 4: A family foundation's Investment Policy Statement (IPS) specifies a long-term return objective of inflation + 5% to maintain its real purchasing power and support its spending policy. This is an example of what type of investment objective?
- Total Return
- Relative Return
- Absolute Return (Correct answer)
- Risk-Adjusted Return
Correct answer: Absolute Return
An absolute return objective specifies a target return that is independent of market benchmarks. In this case, 'inflation + 5%' is a specific target the portfolio aims to achieve regardless of how, for example, the S&P 500 performs. A relative return objective would be tied to a market index (e.g., 'S&P 500 + 2%').
Question 5: When constructing an Investment Policy Statement (IPS), which of the following best describes the role of capital market expectations?
- To dictate the client's specific risk tolerance.
- To establish the legal and regulatory framework for the portfolio.
- To ensure the investment objectives are realistic and achievable. (Correct answer)
- To define the client's unique liquidity and time horizon constraints.
Correct answer: To ensure the investment objectives are realistic and achievable.
Capital market expectations (i.e., forward-looking returns, risks, and correlations of various asset classes) are essential for determining if a client's return objectives can be met with an asset allocation that is consistent with their risk tolerance. They provide the necessary context to build a realistic and achievable investment plan.
Question 6: A CIMA candidate is working with an institutional client to draft an Investment Policy Statement (IPS). The client is a defined benefit pension plan. Which of the following constraints is likely to be the MOST significant for this type of client?
- ESG (Environmental, Social, and Governance) preferences
- Time Horizon (Correct answer)
- Tax Concerns
- Unique Circumstances
Correct answer: Time Horizon
For a defined benefit pension plan, the time horizon is a critical constraint. The plan has a long-term liability (paying benefits to retirees) that must be funded over many years, often decades. This long-term nature heavily influences the plan's asset allocation and risk-taking capacity. While other constraints exist, the long-term nature of its liabilities is paramount.
CIMA - Certified Investment Management Analyst Investment Policy and Process Questions and Answers 1
An investment advisor is developing an Investment Policy Statement (IPS) for a new client, a recently retired individual.
Which of the following components is MOST critical to define the client's willingness and ability to endure market fluctuations?