CIMA Investment Policy & Portfolio Construction

Question 1

What is the primary purpose of an Investment Policy Statement (IPS)?

Accepted Answer

To communicate portfolio objectives and constraints

Answer

An Investment Policy Statement (IPS) is a crucial document that clearly outlines a client's investment philosophy, objectives, and constraints for their portfolio. Its primary purpose is to communicate the client's financial goals, risk tolerance, time horizon, and any specific restrictions or preferences. This ensures alignment between the client and the investment manager, guiding all investment decisions.

Question 2

Which factor is most relevant when determining a client's risk tolerance?

Accepted Answer

Client's financial capacity and emotional attitude

Answer

When assessing a client's risk tolerance, it is paramount to consider both their financial capacity to absorb potential losses and their emotional attitude towards market fluctuations. Financial capacity refers to their ability to withstand losses without jeopardizing financial goals, while emotional attitude reflects their psychological comfort with risk. A comprehensive evaluation ensures the investment strategy aligns with both aspects of the client's risk profile.

Question 3

What is strategic asset allocation primarily based on?

Accepted Answer

Long-term investor goals and risk profile

Answer

Strategic asset allocation is a long-term investment approach focused on establishing target allocations for various asset classes, such as stocks, bonds, and real estate. This strategy is primarily based on an investor's long-term goals, risk tolerance, and time horizon. It aims to create a diversified portfolio that aligns with the investor's fundamental characteristics, rather than reacting to short-term market conditions.

Question 4

Which of the following best describes tactical asset allocation?

Accepted Answer

Short-term adjustments to take advantage of market conditions

Answer

Tactical asset allocation involves making deliberate, short-term deviations from a strategic asset allocation. This is done to capitalize on perceived temporary market inefficiencies or short-term opportunities, aiming to enhance returns or mitigate risks based on current market views. It contrasts with strategic allocation, which is long-term and fixed.

Question 5

What is the main objective of portfolio diversification?

Accepted Answer

Reducing unsystematic risk

Answer

Portfolio diversification is the strategy of investing in a variety of assets to minimize risk. Its primary goal is to reduce unsystematic risk, also known as specific or idiosyncratic risk, which is unique to a particular company or industry. By combining different assets, the negative performance of one asset can be offset by the positive performance of another, thereby smoothing overall portfolio returns.

(CIMA) Certified Investment Management Analyst Practice Test

(CIMA) Certified Investment Management Analyst Practice Test

CIMA Investment Policy & Portfolio Construction