Mixed Deck — All CIMA Topics Flashcards

Which of the following represents the real interest rate?

Answer: Nominal rate - inflation

The real interest rate represents the true return on an investment after accounting for the effects of inflation. It is calculated by subtracting the inflation rate from the nominal interest rate. This calculation provides a more accurate picture of the purchasing power gained from an investment, as it adjusts for the erosion of value caused by rising prices.

The Security Market Line (SML) plots expected return against beta. A stock plotting above the SML is considered:

Answer: Undervalued, because it offers excess return for its systematic risk

A stock above the SML has a positive alpha — it earns more than CAPM predicts, indicating undervaluation.

A portfolio manager generated a return of 12%. The risk-free rate is 2%, the market return is 10%, and the portfolio's beta is 1.2. What is the portfolio's Jensen's alpha?

Answer: 0.4%

Jensen's alpha is calculated using the Capital Asset Pricing Model (CAPM) formula: Alpha = Portfolio Return - [Risk-Free Rate + Beta * (Market Return - Risk-Free Rate)]. Plugging in the values: Alpha = 12% - [2% + 1.2 * (10% - 2%)] = 12% - [2% + 1.2 * 8%] = 12% - [2% + 9.6%] = 12% - 11.6% = 0.4%. A positive alpha indicates the manager outperformed the expected return for the given level of systematic risk.

Which of the following measures is most appropriate for evaluating a manager who runs a market-neutral long/short equity strategy?

Answer: Sharpe ratio

The Sharpe ratio is appropriate for market-neutral strategies because it uses total risk (standard deviation) rather than beta, which approaches zero for such strategies.

When an IPS includes an ESG (Environmental, Social, Governance) mandate, the primary portfolio implication is:

Answer: Certain securities or industries may be excluded or underweighted

ESG mandates typically result in screens that exclude or underweight companies or sectors that fail to meet specified environmental, social, or governance criteria.

Tracking error is best described as:

Answer: The standard deviation of the portfolio's active returns relative to the benchmark

Tracking error measures the volatility of the difference between the portfolio's returns and the benchmark's returns, quantifying active risk.

A defined benefit pension plan with a long investment horizon and stable contribution base would MOST likely be able to tolerate:

Answer: Higher allocations to illiquid asset classes such as private equity

A long-horizon, well-funded defined benefit plan can afford to accept illiquidity risk in exchange for the potential liquidity premium embedded in private equity and similar asset classes.

A consultant is evaluating a manager who claims to use a 'bottom-up' investment process. Which portfolio characteristic would be most consistent with this claim?

Answer: Individual security weights driven by fundamental research rather than top-down sector views

A bottom-up manager builds the portfolio based on individual security analysis, resulting in sector weights that are a residual of security selection rather than a deliberate top-down decision.

A CIMA professional developing an Investment Policy Statement (IPS) for a client with significant loss aversion should:

Answer: Establish a risk tolerance framework that explicitly accounts for the client's emotional response to drawdowns

The IPS must reflect the client's true risk capacity and tolerance, including behavioral tendencies like loss aversion, to ensure the strategy is sustainable long-term.

For purposes of the alternative minimum tax (AMT), which preference item must be added back to regular taxable income?

Answer: Municipal bond interest from private activity bonds

Interest on private activity bonds is a tax preference item that must be included in AMTI, unlike interest on general obligation municipal bonds.

A 'spending policy' is most critical for which type of institutional investor?

Answer: Endowments and foundations distributing annual grants

Endowments and foundations depend on a clearly defined spending policy to balance current distributions with portfolio growth needed to maintain purchasing power in perpetuity.

Strategic asset allocation (SAA) is BEST described as:

Answer: A long-term target mix of asset classes aligned with the investor's IPS objectives

SAA establishes a long-term policy portfolio that reflects the investor's return objectives, risk tolerance, and constraints as stated in the IPS.

The generation-skipping transfer (GST) tax is imposed on transfers to 'skip persons.' A skip person is generally defined as:

Answer: A person assigned to a generation two or more levels below the transferor

A skip person is a natural person assigned to a generation at least two levels below the transferor, or a trust where all interests are held by skip persons.

Core-satellite portfolio construction combines which two elements?

Answer: A passively managed core with actively managed satellite positions

Core-satellite combines a large, low-cost passively managed core for broad market exposure with smaller active or alternative satellite positions intended to generate alpha.

Which economic indicator is used to gauge inflation?

Answer: Consumer Price Index (CPI)

The Consumer Price Index (CPI) is the most commonly used economic indicator to measure inflation. It tracks the average change over time in the prices paid by urban consumers for a market basket of consumer goods and services. A rising CPI indicates that goods and services are becoming more expensive, signifying inflation.

A 'goals-based' investment approach differs from a traditional mean-variance approach in that it:

Answer: Segments client wealth into mental accounts linked to specific life goals

Goals-based investing divides a client's portfolio into separate 'buckets' or mental accounts, each designed to fund a specific goal with appropriate risk/return characteristics.

A CIMA professional manages both a charitable foundation and private client accounts with similar investment mandates. Shares of an undersubscribed IPO become available. What is the ethical approach to allocation?

Answer: Allocate shares proportionally based on each account's investment guidelines

Fair dealing requires that investment opportunities be allocated equitably across accounts with similar mandates, typically on a pro-rata basis.

Mental accounting, a concept from behavioral finance, refers to the tendency of investors to:

Answer: Treat money differently based on its source or intended use

Mental accounting causes people to create separate psychological 'accounts' for money, leading to irrational decisions such as treating a tax refund as 'free money.'

The 'carry trade' strategy in currency markets involves:

Answer: Borrowing in low-interest-rate currencies and investing in high-interest-rate currencies

A carry trade borrows in a low-yield currency (funding currency) and invests in a higher-yield currency, profiting from the interest rate differential unless exchange rates move adversely.

A convertible bond with a conversion premium of 25% means:

Answer: The convertible bond's price is 25% above the value of the shares it converts into

Conversion premium is the percentage by which the convertible bond's market price exceeds the current equity value (parity value) of the conversion option.