Practice Test 2 IFIC PDF

Learning Domain Results
Score: Number
Learning Domain Questions Correct Your Score
95% An Introduction to the
Mutual Funds Marketplace 13 13 100%
The Know Your Client
Communication Process 19 18 95%
Understanding Investment
Products and Portfolios 19 18 95%
The Modern Mutual Fund 4 4 100%
Analysis of Mutual Funds 10 8 80%

Understanding Alternative
Managed Products 3 3 100%
Evaluating and Selecting
Mutual Funds 16 15 94%
Ethics, Compliance and
Mutual Fund Regulations 16 16 100%
Question Results
1. A client tells you that she wishes to retire with $1,000,000 in 15 years. To which Know Your Client component does this apply?
Good choice! A. Financial goals and objectives.

B. Personal circumstances.
C. Financial circumstances.
D. Ability to tolerate risk.
Feedback: This is an example of a financial goal and objective. The client has a goal of a specific dollar value and a specific time frame.
Reference | Chapter 1 – The Role of the Mutual Fund Sales Representative

Learning Domain | An Introduction to the Mutual Funds Marketplace
2. A client asks for advice on setting his household budget. What is the first action that a mutual fund representative should take?
A. Schedule a meeting to discuss the budget.

B. Refer the client to a licensed stockbroker.
Good choice! C. Refer the client to a financial planner.
D. Gather the client’s financial information and prepare an initial budget.
Feedback: A mutual fund representative cannot help clients with developing a financial plan through establishing a household budget. The
representative would need to refer his client to a specialist in the appropriate area, in this case, a financial planner.

3. On what specific market does bond trading take place?
Good choice! A. Over-the-counter market.

B. Money market.
C. Primary market.
D. Bourse de Montreal.
Feedback: Virtually all bond market activity and trading takes place on the over-the-counter (OTC) market. The OTC market differs from an auction
market because it is considered a negotiated market where dealers post their bid and ask prices and deal among themselves. This contrasts with trades
on organized exchanges, in which dealers act as brokers for their clients’ accounts.
Reference | Chapter 2 – Overview of the Canadian Financial Marketplace

4. Nic’s client has asked to invest in a high-risk mutual fund. Although the fund is well-respected and has had a history of good returns, Nic is aware that
his client has low risk tolerance. He advises her that the investment is not suitable for her portfolio. What responsibility applies to Nic’s action?
A. Ethical.
B. Disclosure.
Good choice! C. Legal.
D. Professional.
Feedback: Nic is fulfilling his legal responsibility to ensure any investment recommended or client order accepted is suitable for the client. An investment
is suitable if it fits the client’s goals, financial condition, personal circumstances, investment knowledge and risk tolerance. In this example, Nic is aware
that the investment is too risky for the client’s risk tolerance.

5. Indicate the rule that states that you must use due diligence to learn the essential facts relevant to every client and every order.
Good choice! A. Know your client.

B. Disclosure.
C. Professional.
D. Suitability.
Feedback: The know your client rule states that you must use due diligence to learn the essential facts relevant to every client and every order.

6. The following clients all have $10,000 to invest. How would you rank your clients based on the probability that you would recommend an investment in
an equity fund to them, from least likely to most likely?
1. Bob, Age 35, Net Worth $500,000, no dependants.

2. Khalid, Age 55, Net Worth $85,000, 2 dependants.
3. Sabrina and Nick, Ages 28 and 32, Net Worth $300,000, 1 dependant.
4. Marg, Age 75, Net Worth $800,000, retired, 1 dependant.
Good choice! A. 2, 4, 3, 1
B. 3, 1, 4, 2
C. 1, 3, 2, 4
D. 4, 1, 3, 2
Feedback: An equity fund is among the most volatile type of mutual fund. In this example, Khalid’s low net worth and dependants make him the least
suitable for a volatile investment; Marg, would be next in order due to her age and her having one dependant, despite the size of her portfolio; an equity
investment is more suitable for Bob than for Sabrina and Nick, as Bob is young, has a high net worth, and no dependants.

7. XYZ is a dealer that registered with IIROC and is selling mutual funds to its investors. Which regulator is responsible for regulating the sale of mutual
funds to XYZ investors?
A. CSA.
B. TSX.
Good choice! C. IIROC.
D. MFDA.
Feedback: The MFDA is not responsible for regulating the activities of mutual fund dealers who are already members of another SRO.

8. What type of security gives an investor an ownership stake in a company?
A. Call option.
B. Futures contract.
C. Secured bond.
Good choice! D. Preferred share.
Feedback: With an investment in shares an investor actually buys a "share" of the company, thus gaining an ownership stake in the company.

9. HD Inc., a privately-owned company, is in talks with an underwriter because it wants to have its shares listed on the Toronto Stock Exchange. What type
of public offering would the underwriter make use of?
Good choice! A. Initial public offering.

B. Secured bond float.
C. Money market offering.
D. Secondary market offering.
Feedback: When a company has never issued securities to the public, an underwriter would make use of an initial public offering when selling the
securities to the market for the first time.

10.Assume that the provincial regulator advises all dealers to report any material changes within 5 business days, but IIROC advises its dealers to report
material changes within 2 business days. Which rule will apply?
A. It is up to the dealer to choose the rule that does not conflict with its business.
Good choice! B. IIROC rule will apply.
C. Provincial regulator rule will apply.
D. None of the two rules will apply as the dealers are authorized to design their own rule.
Feedback: If an SRO rule differs from a provincial rule, the more stringent rule of the two applies.

11. Calculate GDP using the expenditure approach in the following situation:
Consumption = $10,000,000
Investment = $1,000,000
Government Spending = $2,000,000
Exports = $2,000,000
Imports = $500,000
A. $10,000,000
B. $11,500,000
C. $15,000,000
Good choice! D. $14,500,000
Feedback: GDP is calculated using the expenditure approach as C + I + G + X - M. In this example, $10,000,000 + $1,000,000 + $2,000,000 +
$2,000,000 - $500,000 = $14,500,000
Reference | Chapter 3 – Economic Principles

12.A review of economic indicators shows that GDP, corporate profits and industrial production are steadily rising. Choose the correct statement.
A. Manufacturing and trade sales volume will likely fall.

B. Economic growth should be expected to decline soon.
Good choice! C. The economy is currently in the expansion phase.
D. Average duration of employment has likely fallen.
Feedback: The economic indicators listed are coincidental indicators. Coincidental indicators help economists to determine which phase of the business
cycle an economy is currently in. A coincidental indicator may be used to identify, after the fact, the dates of peaks and troughs in the business cycle.
Manufacturing and trade sales volume is also a coincidental indicator and would have likely risen along with the other indicators. Average duration of
employment is a lagging indicator and would typically fall after an economic downturn, which is not what is indicated here.

13.What is the term used to refer to the difference between GDP based on actual production and potential production?
A. Frictional unemployment.
B. Real GDP.
Good choice! C. Output gap.
D. Nominal GDP.
Feedback: The output gap is the difference between real GDP (actual production) and potential GDP (what the economy is capable of producing).

14.Mary purchased a $250,000 home 5 years ago with a $200,000 mortgage. Her home is now worth $350,000 and her mortgage balance is $150,000.
What is the change in Mary’s net worth?
A. $40,000 increase.
B. $100,000 increase.
C. $50,000 increase.
Good choice! D. $150,000 increase.
Feedback: Net worth is calculated as assets minus liabilities. Mary’s assets have increased in value by $100,000 ($350,000 - $250,000) and her
liabilities have decreased by $50,000 ($200,000 -$150,000). As a result, her net worth has increased by $100,000 + $50,000 = $150,000.
Reference | Chapter 4 – Getting to know the client

Learning Domain | The Know Your Client Communication Process
15.What type of mutual fund is most appropriate for an objective of safety of capital?
A. Equity.
B. Preferred dividend.
C. Fixed income.
Good choice! D. Money market.
Feedback: Safety of capital is an objective for a risk averse investor unwilling to take the risk that his capital investment may decline in value. A money
market mutual fund has a pure income objective, and provides the highest level of capital protection.

16.Choose the statement that is an example of a well-designed financial objective.
A. Have 70% of pre-retirement income after retirement.

B. Retire with a comfortable income.
C. Travel extensively in 15 years.
Good choice! D. Save $50,000 in 3 years to pay for a new boat.
Feedback: Properly set objectives should be stated in clear financial terms; that is, a monetary value for a financial target should be established for
whatever goal the client has in mind. Of the options, only saving $50,000 in 3 years to pay for a new boat is a specific and measurable goal; retiring with
a comfortable income and travelling extensively are not specific in monetary terms, and we do not know what the pre-retirement income will be at
retirement, making it impossible to determine the amount that will provide 70% of the value.

17.What bias is typically a characteristic of a female investor?
Good choice! A. Status quo bias.

B. Cognitive dissonance bias.
C. Loss aversion bias.
D. Availability bias.
Feedback: Of the biases listed, only Status Quo Bias is typically considered to be a trait most commonly identified in female investors.
Reference | Chapter 5 – Behavioural Finance

18.You are writing an investment communication and decide to address biases in investor behavior. Your goal is to encourage investors to take advantage
of currently depressed equity investment prices. What bias would you focus on in terms of educating your investors regarding how a bias might affect
their ability to take advantage of the current opportunity?
A. Endowment.
Good choice! B. Regret aversion.
C. Overconfidence.
D. Loss aversion.
Feedback: Periods of depressed prices often present the greatest buying opportunities. People suffering from regret aversion bias hesitate most at such
moments that actually may merit aggressive behaviour.

19.Harry earns $36,000 in the current year. His employer contributes $1,500 to his defined contribution pension plan. What is Harry’s maximum contribution
to the plan?
A. $6,480
B. $1,500
C. $22,000
Good choice! D. $4,980
Feedback: The combined employer/employee contributions cannot exceed the lesser of 18% of current year compensation or a fixed dollar amount. In
this example, $36,000 × 18% = $6,480, well below the current year contribution limit. If Harry’s employer contributed $1,500, then, Harry could contribute
$6,480 - $1,500 = $4,980.
Reference | Chapter 6 – Tax and Retirement Planning

20.Keegan over-contributed to his Tax-Free Savings Account (TFSA). What penalty rate will be applied to his excess contribution amount until it is
withdrawn?
A. 5% per year.
B. 0.5% per month.
Good choice! C. 1% per month.
D. 1% per year.
Feedback: If you contribute more than your TFSA contribution room allows, you will be taxed at the rate of 1% of the excess contribution every month.

21.What is the term that refers to the required repayment of social benefits by taxpayers whose income is above a certain threshold?
A. Refund.
B. Penalty.
C. Income-tested repayment.
Good choice! D. Clawback.
Feedback: A provision exists in the Income Tax Act (ITA) for higher income Canadians to repay all or part of the social benefits they receive in any year.
This repayment is referred to as a "clawback".

22.Which of the following is a disadvantage of defined contribution pension plans?
A. They are difficult to understand and administer.

B. They are more highly regulated than defined benefit plans.
Good choice! C. The final benefit is not known until retirement.
D. The employer and the employee cannot anticipate how much they will need to contribute.
Feedback: Defined Contribution (money purchase) plans are generally easier to administer and understand, and are less regulated than Defined Benefit
Plans. Employees and employers are given a specific percentage of income that will be contributed to the plan, and employees can usually direct their
funds within a choice of investment vehicles. A key disadvantage is that employees will not know their final pension amount until they actually retire.

23.What phase in the life-cycle would typically be characterized by the lowest level of risk tolerance?
A. Stage 2 (family commitment years).

B. Stage 4 (nearing retirement).
Good choice! C. Stage 5 (retired).
D. Stage 3 (mature earning years).
Feedback: From low to high risk tolerance, the stages of the life-cycle hypothesis would be organized as: Stage 5 (retired); Stage 2 (family commitment
years); Stage 4 (nearing retirement); Stage 3 (mature earning years); and Stage 1 (early earning years).

24.What asset allocation would most likely be appropriate for a retired couple in their 80’s who, with a substantial pension income, are concerned about
wealth transfer and estate building?
A. 50% fixed-income funds, 50% equity funds.

B. 50% fixed-income funds, 20% equity funds, 30% money market funds.
C. 30% equity funds, 60% fixed-income funds, 10% money market funds.
Good choice! D. 10% equity funds, 10% fixed-income funds, 80% money market funds.
Feedback: A retired couple with no immediate need for income and with a focus on transferring of wealth to the next generation would typically choose
an asset allocation that would minimize income and maximize security of capital. 10% of equity, 10% fixed income and 80% money market has a mix of
investments, but, is primarily focused on preservation of capital due to the high concentration in money market funds.

25.When considering the life-cycle hypothesis, what is a key feature of the mature earning years?
A. Lack of liquidity.
The correct answer is: B. Shift towards a higher equity weighting.
C. Increased degree of risk aversion.
You chose: D. Estate building and wealth transfer.
Feedback: Stage 3 clients generally see an increase in disposable income levels, and this allows them to increase their holdings of equity securities. In
general, risk aversion tends to increase as the investor moves into Stage 4: nearing retirement because of the proximity of retirement savings needs.
Lack of liquidity tends to take place in Stage 2 because of family commitments, mortgages, etc.

26.What characteristic of human beings explains the process of cognitive bias?
A. Involuntary expressions related to feelings.

B. Spontaneously arising mental states.
Good choice! C. Subconscious mental procedures for processing information.
D. Abilities to expand upon minimal inputs.
Feedback: Cognitive biases do not result from emotional or intellectual predisposition toward a certain judgement, but rather from subconscious mental
procedures for processing information.

27.Samantha went to see a mutual fund representative a few years ago. She was happy with the asset allocation he recommended, so she never went
back to see him, even when he suggested that they review her portfolio and take into consideration new investment opportunities. Samantha believed
that her portfolio was well invested and liked the fact that she had invested in some companies dear to her heart. Which of the following biases does
Samantha demonstrate?
A. Cognitive Dissonance.
B. Regret Aversion.
C. Loss Aversion.
Good choice! D. Status Quo.
Feedback: When Samantha was presented with the opportunity to re-evaluate her holdings, she chose not to because she feels comfortable with her
current asset allocation.

28.What is the termination option available to holders of a locked-in Registered Retirement Savings Plan (RRSP) at retirement?
A. Tax-Free Savings Account (TFSA).

Good choice! B. Life Income Fund (LIF).
C. Registered Retirement Income Fund (RRIF).
D. Fixed Term Annuity.
Feedback: At retirement, holders of a locked-in RRSP are limited to specific vehicles, which include a Life Income Fund (LIF) or a Life Annuity; in
Saskatchewan, there is an additional option known as a Prescribed Registered Retirement Income Fund.

29.Ryan and Emily are both 35 and employed earning different incomes. They have two children for whom they wish to provide university tuition in the
future. What is the most effective income-splitting strategy that would apply to this family’s financial situation?
Good choice! A. Registered Educational Savings Plan.

B. Tax Free Savings Plan.
C. Spousal Registered Retirement Savings Plan.
D. Registered Retirement Savings Plan.
Feedback: Of the options listed, only two offer income-splitting potential: the Spousal RRSP and the RESP. As Ryan and Emily earn different incomes
and are of similar ages, the Registered Educational Savings Plan would offer the best benefit in terms of income splitting given the goal of funding their
children’s university tuition.

30.Gareth retired after 20 years of participation in a career average pension plan with a defined pension benefit percentage of 1.5%. His average annual
salary, before deductions, was $60,000. What is Gareth’s annual earned pension?
A. $27,000
Good choice! B. $18,000
C. $90,000
D. $36,000
Feedback: Gareth’s annual earned pension would be calculated as $60,000 × 1.5% × 20 = $18,000.

31.An individual has RRSP contribution room of $18,450. His spouse has RRSP contribution room of $8,500 and has contributed $4,400 to her RRSP this
year. If the individual contributed $8,000 to his own plan, how much can he contribute to a spousal RRSP plan?
Good choice! A. $10,450

B. $18,450
C. $8,500
D. $0
Feedback: A taxpayer may contribute to a spousal plan up to the maximum of his/her own contribution limit. The taxpayer has maximum contribution
room of $18,450 and has already contributed $8,000 to his plan. He may, therefore, contribute $10,450 ($18,450 - 8,000) to his wife’s spousal plan. The
spousal contribution does not affect the ability of the spouse to contribute to her own plan up to her contribution limit.

32.Which of the following statements about the carry-forward rule for unused RRSP contributions is correct?
A. Unused RRSP contributions cannot be carried forward.

Good choice! B. Unused RRSP contributions may be carried forward indefinitely.
C. Unused RRSP contributions may be carried back 3 years, but cannot be carried forward.
D. Unused RRSP contributions may be carried forward a maximum of 5 years.
Feedback: As of 1996, individuals can carry forward any unused RRSP contribution limits indefinitely.

33.Which of the following options for terminating an RRSP will result in the highest immediate tax consequences?
Good choice! A. Lump sum withdrawal.

B. Fixed-term annuity.
C. Life annuity.
D. Registered Retirement Income Fund (RRIF).
Feedback: When an investor chooses to terminate an RRSP by making a lump-sum withdrawal, the entire amount is then added to income and taxed
accordingly. The other options allow the investor to defer taxes and/or spread the receipt of income over a period of years, thus reducing the tax
consequences.
Reference | Chapter 7 – Types of Investment Products and How They Are Traded
Learning Domain | Understanding Investment Products and Portfolios
34.Which supplier of capital to a corporation will benefit most if the corporation is successful?
A. Debenture holder.
Good choice! B. Common shareholder.
C. Preferred shareholder.
D. Secured bondholder.
Feedback: Common shareholders will benefit the most among all the suppliers of the firm’s capital if the firm is successful, but they must wait until all
other suppliers of capital have been paid before they get anything.
35.Which security will be subject to the most interest rate risk?
A. A corporate bond maturing in 10 years.

B. A callable preferred share maturing in 12 years.
C. A government bond maturing in 15 years.
Good choice! D. A perpetual preferred share.
Feedback: Preferred shares are subject to interest rate risk like bonds. In fact, because perpetual preferred shares have no maturity date, they are far
more sensitive to interest rate changes than coupon-paying bonds.
36.Which statement about increasing purchasing power is true?
A. To increase purchasing power, an investor’s nominal return must be higher than his real return.
B. To increase purchasing power, an investor’s real return must be higher than his nominal return.
Good choice! C. To increase purchasing power, an investor’s nominal return must be higher than the rate of inflation.
D. To increase purchasing power, an investor’s real return must be higher than inflation.
Feedback: Purchasing power is the ability to buy goods and services. Purchasing power is maintained when your dollar grows (or generates a nominal
return) at a rate that is at least equal to the rate of inflation. Thus, if inflation is 5% and your nominal return is 5%, then you will just maintain purchasing
power. Adjusting that 5% nominal return to reflect the 5% inflation rate means that a real return of 0% is needed to maintain purchasing power. The
difference between just maintaining purchasing power by keeping up with inflation and increasing an investor’s wealth is generating positive real returns
(real returns that are higher than the inflation rate).
Reference | Chapter 8 – Constructing Investment Portfolios

37.If you had invested $1,000 at the beginning of the first year in AAA Mutual Fund, held it for 2 years and reinvested any income earned back into the
fund, how much would you have at the end of the second year?
Year Price at Beginning Distribution Price at End Simple 1 -Yr Return

1st Year $10.00 $0.25 $11.00 12.50%
2nd Year $0.25 $10.20 -5.00%
A. $1,125.50
B. $950.50
C. $1,020.75
Good choice! D. $1,068.75
Feedback: AAA Mutual Fund Performance
Year Value Jan.1 % Return Amount to add Value Dec. 31

1 $1,000 12.50% $125.00 $1,125.00
2 $1,125 -5.00% -$56.25 $1,068.75

38.Calculate the 2-year time weighted return for the AAA Mutual Fund. Round your answer to 2 decimal places.
AAA Mutual Fund Performance
Year Price at Beginning Distribution Price at End Simple 1 -Yr Return

1st Year $10.00 $0.25 $11.00 12.50%
2nd Year $0.25 $10.20 -5.00%
Good choice! A. 3.38%

B. -2.45%
C. 7.50%
D. 6.88%
Feedback: To calculate the time weighted return for this example, let r1 be the return from the first year (12.50% or 0.125), and let r2 be the return from
the second year (-5.00% or -0.05).
For this two-year example, the time weighted return (TWR) is calculated as follows:
TWR = [(1 + r1) (1 + r2)] ½ - 1
Substituting the numbers from the example:

TWR = [(1 + .1250) (1 - .05)] ½ - 1
= [1.125 x .95] ½ - 1
= [1.06875] ½ - 1
= 1.0338- 1 = .0338 or 3.38%
The time weighted return is also known as the geometric mean return. The geometric mean calculates the average compound return over several time
periods. It is the best measure of the historical performance of a security or portfolio because it measures the actual change in wealth that would have
occurred if an investment had been made.

39.Select the most accurate statement about the effects of diversification on a portfolio.
A. Diversifying by adding a security that is negatively correlated with the rest of the portfolio, will increase the
risk of the portfolio.
Good choice! B. As the number of securities in a portfolio increases, the effects of additional diversification decrease.
C. As the number of securities in a portfolio decreases, the effects of additional diversification decrease.
D. Diversifying by adding a security that is positively correlated with the rest of the portfolio, will reduce the risk
of the portfolio.
Feedback: The correlation among the securities making up a portfolio is important when making decisions about adding a security. So long as the
returns from a security are not perfectly positively correlated with the returns from another security (or with the rest of the portfolio as a whole), adding
that security will reduce some of the total risk of the portfolio. This diversification has a larger effect when the portfolio contains only a few securities with
a similar risk level. The total risk of the portfolio falls quite significantly as the first few stocks are added. As the number of stocks increases, however, the
additional reduction in risk declines. Finally, a point is reached where a further reduction in risk through diversification cannot be achieved.

40.What does it take for an investment to maintain its purchasing power?
Good choice! A. The investment’s real rate of return is zero per cent.
B. The investment grows at rate greater than nominal interest rates.
C. The investment’s real rate of return is greater than its nominal rate of return.
D. The investment’s nominal rate of return is greater than the inflation rate.
Feedback: Purchasing power is the ability to buy goods and services. To maintain purchasing power means that your dollar must grow (or generate a
nominal return) at least equal to the rate of inflation. If inflation is 5% and your nominal return is 5% then you will just maintain purchasing power.
Adjusting that 5% nominal return for the 5% inflation rate implies a real return needed to maintain purchasing power of 0%.

41.If Widget Inc. pays out $10,000 in dividends, how much will its retained earnings increase this year?
Widget Inc.
Earnings Statement
Sales $200,000
Cost of Goods Sold $80,000
Selling & General Expenses $40,000
Depreciation $5,000
Total Expenses $30,000
Net Earnings $40,000
Good choice! A. $30,000

B. $200,000
C. $40,000
D. $10,000
Feedback: The profit or loss in a company’s most recent year is determined in the earnings statement and then transferred to the retained earnings
statement. Retained earnings are profits earned over the years that have not been paid out to shareholders as dividends. These retained profits accrue
to the shareholders. The retained earnings statement is the link between the earnings statement and the balance sheet as it makes the bridge between
the yearly earnings that appear in the earnings statement and the retained earnings that appear in the balance sheet. This statement starts with the
opening balance of the retained earnings account. This is the same amount as the retained earnings from the previous year’s balance sheet. Since
Widget Inc. has earned $40,000 from this year’s activities after all goods, workers, creditors and taxes have been paid, this additional amount belongs to
the shareholders. Thus, retained earnings should increase by $40,000. However, the board of directors paid a dividend on its common shares. Of the
$40,000 earned, $10,000 has been paid out in cash in the form of common share dividends.
Reference | Chapter 9 – Understanding Financial Statements

42.Identify the correct statement regarding the statement of financial position.
A. The statement presents the change in assets and liabilities over a specified period.
B. Assets plus shareholders’ equity equals liabilities.
C. The expenses incurred to generate revenue are listed under current liabilities on the statement.
Good choice! D. The statement presents a picture of the firm’s financial position on a specific date.
Feedback: Statement of financial position is a snapshot of the financial position of a firm at a specific date. In annual reports, that date is the last day of
the company’s fiscal year. One side of the statement (often the left side) shows what the company owns and what is owing to it. These items are called
assets. The other side of the statement shows (1) what the company owes (called liabilities) and (2) the shareholders’ equity or net worth of the company
which represents the shareholders’ interest in the company. Shareholders’ equity represents the excess of the company’s assets over its liabilities.
Accordingly, the company’s total assets are equal to the sum of the company’s liabilities plus the shareholders’ equity.

43.An investor with a margin account would like to purchase 100 shares of XYZ Co. selling for $18.00 a share. If her maximum loan value is 70%, how
much margin will she have to provide?
A. $1,800
B. $70
Good choice! C. $540
D. $1,260
Feedback: Margin refers to the amount of funds the investor must personally provide. The margin plus the amount provided by the dealer together make
up the total required to complete the transaction. In this case, the margin would equal: ($18 × 100)(0.3) = $540.
44.Which trade allows the investor the right, but not obligation, to buy an underlying asset at a specified price at a predetermined date?
A. Purchase stock on margin.

B. Purchase a put option.
C. Purchase a future contract.
Good choice! D. Purchase a call option.
Feedback: Puts and calls are exchange-traded options giving the owner the option to buy (for calls) or to sell (for puts) a number of shares at a fixed
price (the exercise or strike price) at any time prior to the option’s expiration date.
45.Interest rates are forecast to go down soon. Your customer, Mrs. Gupta, has a high risk tolerance and wishes to invest $1,000 in the bond market. She
says that she intends to sell the bond in less than a year. Which bond would you recommend to Mrs. Gupta?
Good choice! A. A zero coupon bond maturing in 12 years.

B. An 8% government of Canada bond maturing in 12 years.
C. A 6% Government of Canada bond maturing in 10 years.
D. A 4% Government of Canada bond maturing in 8 years.
Feedback: The most important feature of bonds is that bond values move in the opposite direction to changes in interest rates. The second most
important feature of bonds is that the longer their term of maturity the more sensitive they will be to changing interest rates.
There is a third feature of bonds that affects their interest rate risk: the size of the coupon payment. The rule is that the smaller the coupon payments, the
more sensitive the bond value is to changing interest rates. One type of bond, called a strip bond, pays no coupon interest at all. Instead, investors buy
the bonds at a discount and redeem them at par when they mature. As a result of the absence of coupon interest payments, “zeros” (zero-coupon bonds)
are extremely sensitive to changes in interest rates.
46.Which statement about market efficiency is correct?
A. If markets are efficient, security prices reflect excess returns.

B. If markets are inefficient, there is no justification for market timing.
C. If markets are inefficient, security prices reflect all the information about them.
Good choice! D. If markets are efficient, there is no justification for active portfolio management.
Feedback: If markets are efficient, then the prices of stocks and other securities listed in the newspaper reflect all the information that exists about them.
If you buy those securities, the best return you can hope for is compensation for risk. If markets are less than efficient, however, then some prices listed
will not completely reflect all information. You might have some favourable information that the market has not yet received or digested. If so, you could
buy a security at its current price, wait for the market to catch on and bid up its price, and then sell the security at the new price to make an excess
return.

47.What is the best way to define fundamental analysis?
Good choice! A. Fundamental analysis is the use of analytical tools to determine the intrinsic value of securities.
B. Fundamental analysis is the study of historical prices and trends in the stock market.
C. Fundamental analysis is the study of the effects of monetary and fiscal policy on the market.
D. Fundamental analysis is the evaluation of the risk and return characteristics of securities.
Feedback: A fundamental analyst, using a number of analytical tools, tries to determine the “true” or intrinsic value of a particular security. Fundamental
analysis involves assessing the short-, medium- and long-term prospects of different industries and companies. It involves studying capital market
conditions and the outlook for the national economy and for the economies of countries with which Canada trades to shed light on securities’ prices. In
fact, fundamental analysis means studying everything, other than the trading on the securities markets, which can have an effect on a security’s value:
economic factors, industry conditions, individual company financial conditions, and qualitative factors such as management performance.
This intrinsic value might or might not be the same as the currently quoted market price for a security. If the intrinsic value is above the quoted price, the
fundamental analyst will buy it or recommend that it be bought. If the intrinsic value is below the current price, the analyst will recommend that the
security be sold if his firm currently owns it, or he might recommend that the security be sold short if his firm does not.

48.You own shares in a company that makes sunglasses. You wish to add shares in one other company to your portfolio and are considering three
companies: one that makes suntan lotion, one that makes raincoats and one that makes hammers. Which statement best describes the effect adding
one of these companies would have on the diversification of your portfolio?
A. Adding the hammer company would decrease diversification.

B. Adding the suntan lotion company would decrease diversification.
C. Adding the hammer company would neither increase nor decrease diversification.
Good choice! D. Adding the raincoat company would increase diversification more than adding the hammer company.
Feedback: The correlation among the securities making up a portfolio is important when making decisions about adding a security. Correlation looks at
how securities relate to each other when they are added to a portfolio and how the resulting combination affects the portfolio’s total risk and return. If you
held only two stocks that are perfectly positively correlated (like shares in a sunglasses company and shares in a suntan lotion company), the portfolio
would not be diversified against any market downturns. Therefore, holding securities with perfect positive correlation does not reduce the overall risk of
the portfolio.
What if the stocks moved in opposite directions (like the sunglasses shares and the raincoat shares)?
When it is sunny, your sunglasses shares increase in value. When it is rainy, the sunglasses stock declines but the loss is offset by an increase in the
price of the raincoat company shares. Since the stock prices move exactly in the opposite direction, you earn a positive return with little risk. Therefore,
the maximum gain from diversification is achieved when securities held within the portfolio exhibit perfect negative correlation. In reality, however, it is
very difficult to find securities with such a high level of negative correlation. In fact, research has found that most equities are correlated to some degree
with the Canadian economy. So long as the returns from a security are not perfectly positively correlated with the returns from another security (or with
the rest of the portfolio as a whole), adding that security will reduce some of the total risk of the portfolio.

49.Which type of security analysis studies recurring patterns in stock prices and volumes?
A. Timing.
B. Fundamental.
Good choice! C. Technical.
D. Sector.
Feedback: Technical analysis is the study of historical stock prices and stock market behaviour to identify recurring patterns in the data. Because the
process requires large amounts of information, it is often ignored by fundamental analysts, who find the process too cumbersome and time consuming, or
believe that “history does not repeat itself.”

50.Widget Inc. has a P/E ratio of 10, while its main competitor, Doodad Inc., has a P/E ratio of 20. What best describes their relative financial positions and
outlook?
A. Doodad Inc. is more profitable than Widget Inc.

B. Widget Inc. is more profitable than Doodad Inc.
Good choice! C. The market expects Doodad Inc. to outperform Widget Inc. in the future.
D. The market expects Doodad Inc. to underperform Widget Inc. in the future.
Feedback: The price-earnings ratio or P/E ratio is probably the most widely employed of all financial ratios because it combines all the other ratios into
one figure. P/E ratio compares the company’s current share price to its earnings per share.
Price Earnings Ratio = Current Price of Common / Earnings per Share.
The main reason for calculating earnings per common share – apart from indicating dividend protection – is to make a comparison with the share’s
market price. The P/E ratio expresses this comparison in one convenient figure, showing that a share is selling at so many times its actual or anticipated
annual earnings. P/E ratios enable the shares of one company to be compared with those of another. To compare the P/E ratio for one company’s
common shares with that of other companies, the companies should usually be in the same industry. The P/E ratio comparison assists in the selection
process. For example: Two companies of equal stature in the same industry and both have similar prospects, but different P/E ratios. The company with
the lower P/E ratio is usually the better buy. As a rule, P/E ratios increase in a rising stock market or with rising earnings. The reverse is true in a
declining market or when earnings decline. P/E ratio is an indicator of investor confidence.

51.What conclusion can be drawn from the trend in Gizmo Inc.’s operations?
Gizmo Inc.
Year 1 Year 2 Year 3 Year 4 Year 5
Gross Profit Margin Ratio 14.6% 14.8% 15.2% 15.2% 15.5.%
Net Profit Margin Ratio 12.5% 10.8% 10.5% 9.6% 8.4%
The correct answer is: A. Gizmo Inc.’s interest and/or amortization expenses are increasing.
B. Gizmo Inc.’s inventory turnover ratio is improving.
C. Gizmo Inc.’s cost controls are strengthening.
You chose: D. Gizmo Inc.’s ability to turn over the company’s goods at a profit is deteriorating.
Feedback: Gross profit margin (revenue minus cost of sales divided by revenue) The gross margin is an indication of the efficiency of management in
turning over the company’s goods at a profit. The Net profit margin is an important indicator of how efficiently the company is managed after taking both
expenses and taxes into account By reviewing both ratios over several consecutive years, the trend indicated is a sign of increasing operating expenses
and/or taxes. It is a sign that management may not have effective cost controls in place.

52.Which individual or group has ultimate responsibility for the fund’s activities, including ensuring that the fund’s investments are in keeping with the fund’s
investment objectives?
Good choice! A. Board of directors.

B. Fund manager.
C. Independent review committee.
D. Portfolio manager.
Feedback: The board of directors of a mutual fund corporation, and the trustee(s) of a mutual fund trust, have the ultimate responsibility for the fund’s
activities, including ensuring that the fund’s investments are in keeping with the fund’s investment objectives. To assist in this task, the board of directors
or trustee(s) may rely on others to provide certain services to the fund, including a fund manager, a portfolio manager(s), a principal distributor, a
custodian, and a registrar and transfer agent for the fund’s units/shares.
Reference | Chapter 10 – The Modern Mutual Fund

Learning Domain | The Modern Mutual Fund
53.Which of the following types of information is not included in a fund fact document?
A. The tax consequences of the Fund

Good choice! B. The opinion of the securities administrators regarding the quality of the fund as an investment.
C. For which type of investor the fund may or may not be appropriate.
D. Cost of Buying, Owning and Selling the Fund
Feedback: In the fund fact document, the securities administrators will state no opinion whatsoever (good or bad) about the investment quality of a
mutual fund.

54.Sara advises her client that mutual funds now have lower fees, the ability in many cases to transfer between funds in a fund family at little to no cost,
can be used as loan collateral, and have the benefit of professional management which ensures higher returns. Which of Sara’s statements would be
considered a misleading statement?
A. Ability to transfer.
Good choice! B. Professional management ensuring higher returns.
C. Eligible for loan collateral.
D. Lower fees
Feedback: For most people, a weakness in investing in a mutual fund is the perceived steepness of their sales and management costs. Historically,
most mutual funds charged a front-end load or sales commission and a management fee that was typically higher than the cost to purchase individual
stocks or bonds from a broker. Competition in the market has subsequently reduced both load and management fees, and investors are now offered a
wider choice of investment options.
The availability of a wide range of mutual funds enables investors to meet a wide range of objectives (i.e., from fixed-income funds through to aggressive
equity funds). Many fund families also permit investors to transfer between two or more different funds being managed by the same sponsor, usually at
little or no added fee. Transfers are also usually permitted between different purchase plans under the same fund.
Fund shares or units are usually accepted as security for a bank loan. They are also acceptable for margin purposes, thus giving aggressive fund buyers
both the benefits and risks of leverage in their financial planning.

55.An investor with a small portfolio wishes to own a wide range of securities but is concerned about the costs of acquiring and trading her holdings. What
mutual fund feature could a salesperson discuss with the client as an advantage?
A. Liquidity.
B. Variety of purchase and redemption plans.
Good choice! C. Diversification.
D. Low-cost professional management.
Feedback: Diversification. A typical large fund might have a portfolio consisting of 60 to 100 or more different securities in 15 to 20 industries. For the
individual investor, acquiring such a portfolio of stocks is likely not feasible. Because individual accounts are pooled, sponsors of managed products
enjoy economies of scale that can be shared with mutual fund share or unit holders. As well as having access to a wider range of securities, managed
funds can trade more economically than the individual investor. Thus, fund ownership provides a low-cost way for small investors to acquire a diversified
portfolio.

56.What best describes the relationship between changes in interest rates and the performance of a money market fund?
A. A money market fund’s returns will not be affected by a rise in interest rates because its value is fixed at $10.
B. A money market fund’s returns will not be affected by a rise in interest rates because its value is set by the
amortized cost method.
Good choice! C. A money market fund’s returns will reflect changes in interest rates, rising as they go up and falling as they
go down.
D. A money market fund’s returns will not be affected by a rise in interest rates because it holds mainly short
term government-issued securities.
Feedback: The value of short-term debt securities is not very sensitive to changes in interest rates. Money market securities, and money market funds,
are expected to have a low amount of volatility (risk). Their returns reflect changes in short-term interest rates, moving up as interest rates rise, and down
as they fall.
Reference | Chapter 11 – Conservative Mutual Fund Products

Learning Domain | Analysis of Mutual Funds
57.Identify the statement about the current and effective yields of a money market fund that is correct.
You chose: A. The current yield assumes that the latest 7-day yield will remain constant for the next 52 weeks.
The correct answer is: B. The current yield is comparable to returns on term deposits of less than one year.
C. The current yield is always higher than the effective yield.
D. The effective yield does not take into account the reinvestment of distributions.
Feedback: National Instrument 81-102 gives money market funds the choice of reporting current yield or current and effective yield. However, money
market funds usually provide the two yield calculations. Both yields are required to avoid confusion in interpretation. Since the effective yield is always
higher than the current yield for the same fund, funds reporting only current yield appeared to be generating lower returns than funds that report the
effective yield, which was not necessarily the case.
To interpret the yields, you must examine the assumptions made in each yield calculation. First, note that the current yield calculation looks only at the
return over the most recent seven-day period and ignores what your client might do with the money if it were paid out. This calculation assumes,
therefore, that compounding of returns will not take place. The effective yield calculation, in contrast, makes the assumption that the yield generated over
the last seven days will remain constant for one year into the future, and that the returns earned weekly are re-invested in the fund. Thus, weekly
compounding of returns at the current rate is assumed in the effective yield calculation.
If you are looking for a short-term return, comparable to term deposits and GICs, and do not expect to re-invest the income, then the current yield (which
does not assume compounding) is perhaps better. If, however, you are looking for a somewhat longer-term investment, then the effective yield is better,
as it assumes the compounding of returns, which is more consistent with longer term investments.

58.What is the main difference between the two types of fund wraps?
A. In a fund of funds, the client owns units of several mutual funds in the proportions established by the
sponsor.
B. With a portfolio allocation service, the client does not own units of the underlying funds.
Good choice! C. With a fund of funds, the client owns units of a pool of mutual funds.
D. Portfolio allocation services are not available with advisor compensation excluded.
Feedback: Fund wraps can be funds of funds or portfolio allocation services. With a fund of funds, the client owns units of a pool of mutual funds, while
in a portfolio allocation service, the client owns units of several mutual funds in the proportions established through the allocation service. Thus, in a
portfolio allocation service, the investor actually owns units of the constituent mutual funds rather than units of a fund holding other funds. Fund wraps
are available with advisor compensation either built in or excluded (fee-based approach).
Reference | Chapter 12 – Riskier Mutual Fund Products

59.Your client, Mr. Dimka, has a $50,000 mutual fund portfolio with 40% in an equity fund, 25% in a mortgage fund, 25% in a bond fund and 10% in a
money market fund. He has indicated that he would like to invest his $10,000 salary bonus in natural resource fund. What advice will you give him?
A. Adding the natural resource fund may increase the risk of his portfolio because it lacks diversification.
B. Adding the natural resource fund may increase the risk of his portfolio because it is not well correlated with
his other holdings.
Good choice! C. Adding the natural resource fund may reduce the risk of his portfolio because it is not well correlated with his
other holdings.
D. Adding the natural resource fund will have no effect on the risk of his portfolio because it is already well
diversified.
Feedback: A client has a portfolio consisting of an equity fund and a bond fund. The client may be able to get more risk reduction without sacrificing
return by adding another mutual fund that is not well correlated with the returns of the existing portfolio. That additional mutual fund might be a specialty
fund, such as natural resource fund, or a real estate fund. In itself, the specialty fund is poorly diversified, but put together with the existing portfolio, the
client can have still more diversification. The key thing to remember is that no investment should be considered in isolation from the client’s existing
portfolio. It may not be a good investment strategy for clients to buy a specialty mutual fund as their only investment, as they may be exposing
themselves to more risk than necessary to earn the same expected return.

60.Your client, Mr. Leblanc, tells you that for tax purposes he would like to increase the Canadian dividend income he receives. Assuming that the fund is
within his risk profile, which fund would you recommend to Mr. Leblanc?
A. An equity index fund that uses futures contracts.

B. A global dividend equity fund.
Good choice! C. A blue chip equity fund.
D. An equity growth fund.
Feedback: Conservative equity funds holding common shares of large capitalization firms with strong dividend records are sometimes called blue chip
stocks. These firms almost always pay their quarterly dividend.
The investment objective of an equity growth fund is capital gains. Some dividend income may be earned, but probably not much. Equity growth funds
seek out smaller firms, sometimes referred to as small cap (for small capitalization) companies that do not have the financial ability to pay dividends.
An equity index fund has the goal of generating capital gains. Some equity index funds construct their portfolios by buying Canadian T-bills and S&P/TSX
60 Index Futures. The return from that combination of T-bills and futures will mimic the return on the Index, but the returns will be made up of interest
income from the T-bills and the futures contracts, not from dividends and capital gains on the stocks underlying the Index.
While the global dividend equity fund would pay dividends, the dividends would not be eligible for the Dividend Tax Credit, which would make them
inappropriate for the client’s focus on purchasing an investment for tax purposes.

61.You are the portfolio manager for the Steady Hand Bond Fund. The fund’s economist has forecast that interest rates will decrease sharply over the next
two quarters. What action should you take to protect the value of the fund and/or take advantage of this decrease in interest rates?
A. You should decease the fund’s duration by buying bonds with a short term to maturity.
The correct answer is: B. You should increase the fund’s duration by buying bonds with low coupon rates.
C. You should increase the fund’s duration by selling bonds with a long term to maturity.
You chose: D. You should decrease the fund’s duration by selling bonds with a short term to maturity.
Feedback: If fund managers believe that interest rates are ready to fall, then they will increase the duration of the bond portfolio (that is, make it more
sensitive to the fall in rates so that the portfolio will increase in value). If fund managers believe rates will rise, then they will shorten the duration of the
portfolio to make it less sensitive to interest rate changes. By shortening the portfolio’s duration, they will protect the portfolio from a decline in value to a
certain extent as rates rise. Increasing a bond portfolio’s duration is done by selling bonds with shorter durations (bonds with either shorter terms to
maturity or higher coupons) and replacing them with bonds with longer durations (bonds with either longer terms to maturity or smaller coupons). To
shorten the duration of a portfolio, you would sell bonds with longer durations and buy bonds with shorter durations. Duration is not the same as term to
maturity, but they are related. For all bonds except zero coupon bonds, the duration is always less than the term to maturity.

62.How does a bond portfolio manager increase the potential for capital gains for her bond fund?
Good choice! A. She invests in bonds with a longer term to maturity when interest rates are expected to fall.
B. She buys bonds at a premium and holds them to maturity.
C. She invests in short-term bonds and holds them to maturity.
D. She invests in more corporate bonds than government bonds.
Feedback: The most important feature of bonds is that bond values move in the opposite direction to changes in interest rates. The second most
important feature of bonds is that the longer their term of maturity the more sensitive they will be to changing interest rates. For example, a 20-year bond
will be much more sensitive to interest rate changes than a three-year bond.

63.Select the most accurate statement about the volatility of different types of fixed income funds.
A. A common equity dividend fund is generally less volatile than a preferred dividend fund.
B. An aggressively managed bond fund can’t be more volatile than an equity fund.
Good choice! C. The volatility of a mortgage fund is directly related to the average term of its portfolio.
D. A short-term bond fund is generally more volatile than a bond fund.
Feedback: The volatility of a mortgage fund is directly related to the average term of its mortgage portfolio. As with bonds, the longer the average term to
maturity, the higher the fund’s sensitivity to changes in mortgage interest rates.
Bond funds are considered less risky than equity funds. However, it is also true that individual bond funds can actually be riskier than individual equity
funds. The point is that the risk characteristics of a fund depend entirely on the composition of its investment portfolio. Some equity funds may be very
conservatively managed, while some bond funds may be very aggressively managed.

64.A client owns units of several mutual funds in the proportions established through the allocation service. What type of fund is the client likely invested in?
A. Target date fund.

B. Specialty mutual fund.
Good choice! C. Portfolio allocation service.
D. Fund of funds.
Feedback: Fund wraps can be funds of funds or portfolio allocation services. With a fund of funds, the client owns units of a pool of mutual funds, while
in a portfolio allocation service, the client owns units of several mutual funds in the proportions established through the allocation service. Thus, in a
portfolio allocation service, the investor actually owns units of the constituent mutual funds rather than units of a fund holding other funds.

65.Identify the funds in order of least risky to most risky.
A. Standard equity funds, balanced funds, global funds, growth funds.

B. Small cap funds, standard equity funds, ethical funds, global funds.
Good choice! C. Balanced funds, standard equity funds, growth funds, specialty funds.
D. Ethical funds, standard equity funds, balanced funds, small cap funds.
Feedback: Although all equity mutual funds share the objective of investing in equities, the particular equities they select give different funds very
different risk and return characteristics. A standard equity fund seeks to earn some combination of dividend income and capital gains from investment in
Canadian common stocks.
The investment objective of an equity growth fund is capital gains. Equity growth funds seek out smaller firms that do not have the financial ability to pay
dividends. The key risk factor that equity growth funds have is that smaller, growing firms have a greater potential for failure than larger, well-established
firms. In addition, these growth firms often trade at very high price/earnings ratios. This tends to make a growth firm’s share price particularly volatile,
causing equity growth funds to have a lot of volatility.
Balanced mutual funds have the objective of earning some amount of both current income and capital gains while at the same time preserving capital.
Balanced funds ideally provide a “balanced” mix of safety, income and capital appreciation. These objectives are sought through a portfolio of fixed-
income securities for stability and income, plus a broadly diversified group of common stock holdings for diversification, dividend income and growth
potential.
A global mutual fund subjects the client to at least two types of risk: market risk of the country (or countries) in which the fund invests; and foreign
exchange risk, because the value of the Canadian dollar can rise or fall in relation to the currency of another country.
Ethical equity funds will have their assets invested as stated under their fundamental investment objective and following ethical principles. Ethical mutual
funds offer clients a highly specialized option concerning the nature of the investments selected for the fund’s portfolio.

66.A hedge fund manager anticipates a change in the level of interest rates. As a result he adjusts the mix of short- to long-term bonds in the hedge fund
he manages. What type of strategy has he used?
A. Event-driven strategy.
B. Arbitrage strategy.
Good choice! C. Directional strategy.
D. Relative value strategy.
Feedback: Directional strategies bet on anticipated movements in the market prices of equities, debt securities, foreign currencies and commodities.
Hedge funds using these strategies have high exposure to trends in the underlying markets.
Reference | Chapter 13 – Alternative Managed Products

Learning Domain | Understanding Alternative Managed Products
67.What feature of a segregated fund eliminates the fees that are levied on the assets in the investment prior to payment of the proceeds to a beneficiary?
Good choice! A. Bypassing probate.

B. Reset options.
C. Creditor protection.
D. Death benefits.
Feedback: Investing in segregated funds can avoid the costly probate fees levied on assets held in investment funds. Moreover, by passing assets
directly to beneficiaries through a segregated fund, contract holders can ensure that their beneficiaries save on fees paid to executors, lawyers and
accountants.

68.Mark is 30 years old and finally able to save and invest after paying off his student debt. He considers himself risk tolerant and wishes to invest in the
Canadian market. However, Mark is very conscious of hidden fees and other costs. Which investments would suit his needs?
Good choice! A. Exchange-traded funds and closed-end mutual funds.

B. Segregated funds and exchange-traded funds.
C. Exchange-traded funds.
D. Hedge funds.
Feedback: MERs tend to be lower than on other index and actively managed products. Both index mutual funds and ETFs tend to have lower MERs
than active mutual funds because the fund managers are not spending time or money researching companies in which to invest.
Like mutual funds, closed-end funds pay management fees from the assets of the portfolio. Unlike mutual funds, closed-end funds generally have lower
costs because of lower portfolio turnover and lower marketing costs. Buying a closed-end fund is similar to buying an individual stock, requiring no more
than a brokerage commission. In contrast, buying a mutual fund could require payment of a front-end or back-end sales charge plus ongoing trailer fees.
These fees can eat up a significant proportion of an investor’s return.

69.Which benchmark index is the most appropriate for a Canadian large-cap equity mutual fund?
A. MSCI EAFE Index.

B. S&P/TSX Composite.
Good choice! C. S&P/TSX 60.
D. S&P 500.
Feedback: All mutual funds have a benchmark index against which their returns can be measured. A benchmark index is an index that reflects a mutual
fund’s investment universe and can be used as a standard against which performance can be reliably assessed.
Reference | Chapter 14 – Understanding Mutual Fund Performance

Learning Domain | Evaluating and Selecting Mutual Funds
70.In the comparison universe method of mutual fund performance evaluation, what will be the result if the universe size is too broad?
Good choice! A. Managers who concentrate on particular subgroups will have different risk characteristics.
B. The performance of the universe cannot be measured accurately.
C. The average fund manager’s performance assessment will deteriorate over time.
D. The universe cannot be used to assess the performance of actively managed funds.
Feedback: A performance universe defined too broadly does not help to assess risk. Managers who concentrate on particular sub-groups of the
universe will have different risk characteristics than the universe in general. Because comparisons must be made among funds that take similar risk
profiles, the benchmark universe may not be appropriate.

71.The GKL Fund has generally been in the second quartile for performance over the past 3 and 5 year periods. However, the fund manager is concerned
that the fund will move down in quartile rankings as the historical period of comparison lengthens. What drawback with the Comparison Universe
Method would this concern be caused by?
A. Quartile performance.
B. Universe ranking.
C. Downward benchmark creep.
Good choice! D. Survivorship bias.
Feedback: Survivorship bias refers to the reality that, as time goes on, underperforming funds will cease to exist and only the better performing funds will
continue to be measured. For example, after 10 years of 1st quartile performance, a fund may be wound down and the fund itself dropped from the fund
universe ranking. All of the remaining funds in the universe would then be compared against a now smaller number of better performing funds, meaning
that all of the funds are now being compared to a higher standard and a smaller pool. If a fund had been in the 2nd quartile 10 years ago, the removal of
the lower-performing funds might mean that, looking at a 10 year history against the funds that have survived all 10 years, a fund may now be in the 1st
quartile.

72.What type of risk that can be found in all mutual funds except money market funds?
A. Exchange rate risk.

B. Default risk.
Good choice! C. Market risk.
D. Interest rate risk.
Feedback: All mutual funds except money market funds have some amount of market risk. After the unique risks are eliminated through diversification,
you are still left with market risk. Market risk cannot be eliminated through diversification.
Reference | Chapter 15 – Selecting a Mutual Fund

73.A mutual fund reports a 10-year compound rate of return of 15%. The fund charges a front-end load of 4% and has a 2.3% management expense ratio.
Which other factors have been taken into account in calculating the 15% return?
1. Management fees and expenses.

2. The front-end load.
3. The reinvestment of all dividends.
4. Transfer fees.
A. 2 and 3.
B. 1 and 2.
Good choice! C. 1 and 3.
D. 3 and 4.
Feedback: The annual compound return reported for a fund includes the reinvestment of all dividends, those distributed by the fund as well as dividends
that reflect the capital gains earned on the mutual fund’s portfolio. The return is also net of all management fees and expenses paid by the fund.
However, it does not include charges that individual investors may have paid, such as sales and transfer fees.

74.ABC Fund charges an acquisition fee (front-end load) of 3%. Calculate the load as a percentage of the net amount invested for a fund with a NAVPS of
$15. Round to 3 decimal places.
Good choice! A. 3.093%

B. 2.910%
C. 3.090%
D. 3.000%
Feedback: A front-end load must be disclosed in the prospectus both as a percentage of the purchase amount and as a percentage of the net amount
invested. In this case, the front-end load is $15.00 × 0.03 = $0.45. The net amount invested is $15.00 - $0.45 = $14.55. The front-end load expressed as
a percentage of the net amount invested would be $0.45 ÷ $14.55 = 0.03093 = 3.093%.
Reference | Chapter 16 – Mutual Fund Fees and Services

75.What type of additional fee do funds that charge sales commission generally not charge?
Good choice! A. Set-up fee.

B. Redemption fee.
C. Transfer fee.
D. Frequent trading charge.
Feedback: Some mutual fund distributors charge a one-time fee the first time an investor purchases mutual fund units. Funds that charge sales
commissions do not generally charge set-up fees.

76.Which of the following statements correctly relates the management expense ratio (MER) and the management fees associated with a mutual fund?
A. Management fees are usually higher than MERs because MERs do not include fees and expenses paid by
the fund manager.
B. Management fees are usually lower than MERs because MERs include taxes and interest charges paid by
the fund.
Good choice! C. Management fees are usually lower than MERs because MERs include fees and expenses paid by the fund
in addition to management fees.
D. Management fees are usually lower than MERs because MERs include brokerage fees and commissions
paid by the fund.
Feedback: The MER does not include brokerage fees or commissions paid by the fund, taxes, or interest charges. For a given fund, the MER will be
higher than the management fee because the MER will include fees and expenses paid by the fund in addition to management fees.

77.Statistical observations that fall within the bottom 51% and 75% of the peer group would be considered what quartile ranking?
A. Second quartile.
B. Fourth quartile.
Good choice! C. Third quartile.
D. First quartile.
Feedback: Quartile ranking is used to assess performance of a fund manager relative to its peer group. Like professional sports, where the best
performer is first among peers and the worst performer is last, mutual fund managers are ranked from best to worst within their peer group.
A quartile sorts performance into four equal parts or blocks. For instance, if you are looking at a peer group of 100 Canadian equity funds, there would be
four quartiles made up of 25 funds each. The quartiles are given a rank – 1, 2, 3, or 4 – to show how well a certain fund performed compared to all other
funds in the peer group:
1st quartile-Top 25 funds with the highest returns
2nd quartile-Next 25 best performers
3rd quartile-Next 25 performers
4th quartile-Bottom 25 performers in the peer group

78.From an investor’s standpoint, which measures quantify risk within a mutual fund?
1. Beta
2. Alpha
3. Standard deviation
4. The fund’s worst quarterly and annual losses
The correct answer is: A. 1 and 3 only.

B. 1, 2, 3, and 4.
C. 2, 3, and 4 only.
You chose: D. 1, 3 and 4 only.
Feedback: From an investor’s standpoint, a fund that exhibits significant volatility in returns will be riskier than those with less volatility. Measures used to
quantify volatility include:
the standard deviation of the fund’s returns
beta
the number of calendar years it has lost money
the fund’s best and worst 12-month periods
the fund’s worst annual, quarterly or monthly losses

79.A fund’s 3-year reward-to-risk ratio was 0.7. Calculate the fund returns if the fund’s standard deviation over the 3-year period averaged 15%. Round to 1
decimal place.
A. 25.5%
Good choice! B. 10.5%
C. 21.4%
D. 4.5%
Feedback: Reward-to-risk ratio = Fund Return ÷ Fund Standard Deviation. 0.7 = Fund Return ÷ 15%, therefore the fund’s return was 0.7 × 15% =
10.5%.

80.What characteristics of the fund sponsor’s business are desirable when selecting an investment firm?
1. Large number of client accounts.

2. Growth in assets under management.
3. Focus on a select group of clients.
4. Concentration in product offerings.
A. 1 and 4.
Good choice! B. 1 and 2.
C. 2 and 3.
D. 3 and 4.
Feedback: Steady growth in clients and in assets under management (AUM) is a good sign of a strong business. The number of client accounts and the
level of AUM should be sufficient to enable the firm to pay for overhead and other costs. The more diverse the client list, the smaller the potential
negative impact on the firm’s asset base if a client takes its assets away. The firm should also offer a sufficient breadth of products.

81.Your client has low risk tolerance, but is willing to make long-term investments in equities. Which investment philosophy would best suit his investment
profile?
Good choice! A. Value investing.

B. Sector rotation.
C. Growth investing.
D. Momentum investing.
Feedback: Value investing is a conservative approach to investing that seeks to identify undervalued investments. Value investors avoid paying large
premiums for growth companies and seek bargains in mature companies that are out of favour. Value investors have a better chance of succeeding
given a long time horizon (at least 5 years).

82.What two types of equity mutual funds are likely to have higher portfolio turnover rates?
1. Growth funds.
2. Sector funds.
3. Index funds.
4. Value funds.
Good choice! A. 1 and 2.

B. 1 and 3.
C. 2 and 4.
D. 3 and 4.
Feedback: Trading frequency is measured by calculating the fund’s turnover rate, which is the proportion of a total fund’s assets traded in a year.
Turnover varies with the investment style. Value funds typically have turnover rates of less than 50%, while growth funds frequently top 100% or more.
Funds that focus on specific countries, regions or sectors will almost always have high turnover. Index funds typically have low turnover depending on the
base index tracked.

83.The balance of your mutual fund is $100,000.You choose to withdraw funds under a 10-year fixed-period withdrawal plan. Calculate your withdrawal in
the second year for an investment return of 5% in each year.
A. $10,500
C. $10,000
D. $12,250
Feedback:
Beginning of Value Return End of Year Rate of Amount of
Year
Year Earned Value Withdrawal Withdrawal
1 $100,000 5% $105,000 1/10 $10,500
2 $94,500 5% $99,225 1/9 $11,025

84.A client needs to receive a specific amount of money each month from his mutual fund. The amount is larger than the combination of income and capital
gain generated by the fund. What risk should the client must be advised of?
Good choice! A. Account may run out of money.

B. Excess sales charges.
C. Adverse tax effect.
D. Risk of volatility.
Feedback: Not all clients realize that a reduction in capital might be required to maintain a minimum periodic payment. As a result, mutual funds offering
systematic withdrawal plans are required to have a statement similar to the following in their simplified prospectuses:
“If these payments are larger than the amount your investment in the fund is earning, your account will eventually run out of money.”

85.What are prohibited practices with respect to mutual fund representatives?
1. Confirming, upon request, that he is a registered dealing representative.

2. Accepting a box of chocolates from a client wishing him happy birthday.
3. Confirming the NAVPU of a proposed purchase.
4. Offering to sell the individual securities that are owned by the mutual funds he is licensed to sell.
Good choice! A. 3 and 4.

B. 1 and 3.
C. 2 and 4.
D. 1 and 2.
Feedback: While dealing representatives cannot advertise their registration, they may confirm their credentials upon request of a client. They may also
accept infrequent non-monetary gifts of little value. However, dealing representatives cannot know the NAVPU that will apply to a purchase order, nor can
they backdate an order to a previous day’s price. Dealing representatives may only sell products for which they are registered or licensed, i.e., mutual
funds.
Reference | Chapter 17 – Mutual Fund Dealer Regulation

Learning Domain | Ethics, Compliance and Mutual Fund Regulations
86.What is the main purpose of the MFDA Investor Protection Corporation?
A. To cover customer losses resulting from a market decline, to a maximum of $1,000,000 per customer
account.
B. To protect eligible customers from the default of a mutual fund or its manager.
Good choice! C. To provide protection for losses arising from the insolvency of an MFDA dealer member.
D. To assess and handle complaints against MFDA members.
Feedback: The MFDA Investor Protection Corporation provides protection from losses for eligible customers arising from the insolvency of a MFDA
dealer member. The MDFA IPC does not cover customers’ losses that result from changing market values, unsuitable investments, or the default of a
mutual fund or its manager.

87.What action is permitted to an individual who is not registered with the appropriate provincial or territorial securities administrator?
Good choice! A. Provide a current unitholder with the net asset value of a fund that he holds.
B. Inform a client about the risk characteristics of a particular mutual fund.
C. Distribute a mutual fund order form to interested clients.
D. Hand out a mutual fund prospectus to a prospective investor.
Feedback: An individual needs to be registered with the appropriate provincial or territorial securities administrator if he holds himself out as being in the
business of selling mutual funds or actually undertakes such activity. However, non-registered individuals would be permitted to receive redemption
requests for processing, receive completed order forms for the purpose of forwarding them to a registered salesperson, refer clients to a dealing
representative and provide basic information to unitholders regarding their current holdings.

88.Julie passes the required proficiency exam to work as a mutual funds representative during her 1-year maternity leave. Shortly afterwards, she and her
partner decide to marry. When Julie returns to work, she is transferred to a non-sales position in another province. Which statement summarizes Julie’s
position?
A. Julie will be required to successfully rewrite the proficiency exam before applying for registration.
B. Julie has 5 days to advise the appropriate securities administrator of her marriage.
Good choice! C. Julie has 3 years to register as a mutual funds representative in her new province.
D. Julie has 10 days to advise the appropriate securities administrator of her change of address.
Feedback: If an individual is not registered within three years of successful completion of the proficiency examination, or within three years of termination
or suspension of the individual’s registration, there is a general requirement that proficiency requirements must be met again, unless an exemption is
available or obtained.

89.A dealing representative receives an unsolicited order from a long-term client. The client is 60 years of age, works for a non-profit organization and
plans to retire within 2 years. She wishes to purchase a specialty fund that is heavily invested in the common shares of gold producers. What action
should the representative take?
Good choice! A. Review the order and establish that it is unsuitable, advise the client of the review and clear the order with
the compliance officer.
B. Reject the purchase order as it fails to meet suitability requirements.
C. Proceed with the trade as suitability requirements do not apply to unsolicited orders.
D. Review the order, establish that it is unsuitable and advise the client that the order cannot be executed.
Feedback: Suitability requirements apply to unsolicited orders. Where an unsolicited order is determined to be unsuitable for the client, the record of the
order must include evidence that the transaction was unsolicited, a suitability review was performed and the client was advised that the proposed
transaction was unsuitable. Before proceeding with the trade, dealing representatives should clear unsuitable, unsolicited orders with their branch
managers or compliance officer. There is no obligation to accept an unsuitable purchase order from a client.

90.What is the minimum CDN dollar amount of a cash deposit that requires specified entities to report the transaction to the Financial Transactions and
Reports Analysis Centre of Canada (FINTRAC)?
A. $25,000
C. $100,000
D. $50,000
Feedback: Under current legislation, specified persons and entities are required to: report any deposit transactions of $10,000 CDN or more made in
cash.

91.The Standards of Conduct expand upon the Code of Ethics of the securities industry. What considerations form part of Standard C: Professionalism?
1. Respect for client’s assets.

2. Client orders.
3. Unsolicited orders.
4. Trades by registered and approved individuals.
A. 1 and 4.
Good choice! B. 2 and 4.
C. 2 and 3.
D. 1 and 3.
Feedback: Standard C: Professionalism pertains to client business, client orders, trades by registered and approved individuals, personal business,
personal financial dealings with clients and other personal endeavours.
Reference | Chapter 18 – Applying Ethical Standards to What You Have Learned

92.A client places a purchase order for ABC Equity Fund. The sales representative is aware of a similar fund, XYZ Fund, that has shown almost identical
performance and management expense ratio, but has a higher trailer fee. The sales representative counsels the client to purchase XYZ Fund. What
aspect of Standard B – Trustworthiness, Honesty and Fairness did the representative violate?
A. Priority of client’s interests.

B. Respect for client’s assets.
C. Complete and accurate information.
Good choice! D. Disclosure.
Feedback: The sales representative must disclose all real and potential conflicts of interest in order to ensure fair, objective dealings with the client.

93.John, a 65-year old retiree in poor health and with minimal pension income, and his daughter Elizabeth, a 25-year old business finance graduate
beginning to save for retirement, wish to open a joint mutual fund account. What consideration would likely prevent the opening of this account?
Good choice! A. Elizabeth is saving for retirement, while John seeks retirement income from the account.
B. They wish that trading instructions be issued by Elizabeth only.
C. KYC information would be required from each.
D. Elizabeth has a higher level of investment knowledge than John.
Feedback: While the investment knowledge of different owners may differ, all parties must have identical time horizons, investment objectives and risk
tolerance. In this case, John’s investment objective is short-term and focuses on income, while Elizabeth’s investment objective is long-term and likely
focuses on growth. Obtaining the KYC information from both should not present problems. They can choose to have trading instructions issued by both,
or by only one account holder.

94.What is the reasoning for the requirement for in-trust accounts for minors at some mutual fund dealers?
A. Because a formal trust deed is required.

B. Because KYC information cannot be obtained for minors.
Good choice! C. Because minors can repudiate mutual fund orders.
D. Because minors cannot place mutual fund orders.
Feedback: Mutual fund dealers do not accept accounts for minors, since minors can repudiate mutual fund orders. Since mutual funds may fluctuate in
value, this could be a problem if the minor repudiates the purchase of a mutual fund that has declined in value. The in-trust structure eliminates this issue
as the minor is not the individual placing the order.

95.What type of mutual fund account is registered in the name of a dealer or third-party administrator?
A. Tenants in common account.

B. Partnership account.
C. Client name account.
Good choice! D. Nominee account.
Feedback: Securities owned by clients of an intermediary (e.g., mutual fund dealer) are generally recorded either in the client’s name or in the name of
the intermediary. Securities that are recorded in the client’s name are common referred to as “client-name securities”. Securities that are recorded in the
name of the intermediary are common referred to as “nominee-name securities.” A nominee account (also known as “on-book” for brokers) is an account
registered in the name of a dealer or third-party administrator on behalf of the owner of the mutual fund.

96.A dealing representative has several senior clients who occasionally forget to monitor their accounts or call to place redemption requests as funds are
needed for special purposes. What is a possible solution for this situation?
A. The dealing representative should obtain a general power of attorney for the accounts.
B. Have the clients sign blank order forms and follow up each trade with a telephone call.
C. The dealing representative should obtain a limited trading authorization for the accounts.
Good choice! D. Maintain regular contact with clients to assess their upcoming needs.
Feedback: The dealing representative cannot obtain a general power of attorney for the account and cannot have the client sign blank order forms.
Neither of these options would be permitted under the relevant legislation. While obtaining a limited trading authorization for the account is legal, doing so
would not assist the representative in managing the account for one-time needs. The only solution is to maintain regular contact with the client to assess
their needs on an on-going basis.

97.Henry works as a mutual fund sales representative but he just lost his job. What will happen with his registration?
A. Registration is immediately terminated.

Good choice! B. Registration is immediately suspended.
C. Registration remains valid for a period of six months.
D. Registration expires after two years.
Feedback: A sales representative’s registration is automatically suspended as soon as a he or she ceases to be employed or sponsored by a mutual
fund dealer (or other type of registered dealer). The dealer must notify the applicable securities administrator of the termination of the employment and
the reason for termination. Before a sales representative’s registration can be re-activated, notice in writing must be received by the applicable securities
administrators from another registered dealer of the employment or sponsorship of the sales representative by that other dealer.

98.Based on the requirements of the Personal Information Protection and Electronic Documents Act (PIPEDA), what must a firm do when they collect, use
or disclose the personal information of a client?
A. Obtain a waiver of required information.

Good choice! B. Obtain the consent of the client.
C. Document for the Financial Action Task Force (FATF).
D. Report to the Financial Transactions and Reports Analysis Centre of Canada (FINTRAC).
Feedback: Under PIPEDA, a firm must obtain consent from the client when they collect, use or disclose personal information.

99.Which standard of conduct is designed to ensure that the dealing representative’s recommendations are suitable, reflect the client’s needs and
objectives, and are well researched and understood?
Good choice! A. Duty of care.

B. Trustworthiness, honesty and fairness.
C. Professionalism.
D. Confidentiality.
Feedback: The representative must make a concerted effort to know the client – to understand the financial and personal status and aspirations of the
client. The representative will make recommendations that reflect, to the best of her knowledge, these considerations.

100.Which standard of conduct states: “All methods of soliciting and conducting business must be such as to merit public respect and confidence”?
A. Trades by registered and approved individuals.

B. Personal financial dealings with clients.
Good choice! C. Client business.
D. Client orders.
Feedback: This is the definition relating to “Client Business” included under Standard C - Professionalism.


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Learning Domain Results

The Modern Mutual Fund 4 4 100%

Analysis of Mutual Funds 10 8 80%

Good choice! A. Financial goals and objectives.

Reference | Chapter 1 – The Role of the Mutual Fund Sales Representative

A. Schedule a meeting to discuss the budget.

Reference | Chapter 1 – The Role of the Mutual Fund Sales Representative

3. On what specific market does bond trading take place?

Good choice! A. Over-the-counter market.

Reference | Chapter 2 – Overview of the Canadian Financial Marketplace

Reference | Chapter 1 – The Role of the Mutual Fund Sales Representative

Good choice! A. Know your client.

Reference | Chapter 1 – The Role of the Mutual Fund Sales Representative

1. Bob, Age 35, Net Worth $500,000, no dependants.

Reference | Chapter 1 – The Role of the Mutual Fund Sales Representative

Reference | Chapter 2 – Overview of the Canadian Financial Marketplace

8. What type of security gives an investor an ownership stake in a company?

Reference | Chapter 2 – Overview of the Canadian Financial Marketplace

Good choice! A. Initial public offering.

Reference | Chapter 2 – Overview of the Canadian Financial Marketplace

Reference | Chapter 2 – Overview of the Canadian Financial Marketplace

Reference | Chapter 3 – Economic Principles

A. Manufacturing and trade sales volume will likely fall.

Reference | Chapter 3 – Economic Principles

Reference | Chapter 3 – Economic Principles

Reference | Chapter 4 – Getting to know the client

Reference | Chapter 4 – Getting to know the client

16.Choose the statement that is an example of a well-designed financial objective.

A. Have 70% of pre-retirement income after retirement.

Reference | Chapter 4 – Getting to know the client

Good choice! A. Status quo bias.

Reference | Chapter 5 – Behavioural Finance

Reference | Chapter 5 – Behavioural Finance

Reference | Chapter 6 – Tax and Retirement Planning

Reference | Chapter 6 – Tax and Retirement Planning

Reference | Chapter 6 – Tax and Retirement Planning

22.Which of the following is a disadvantage of defined contribution pension plans?

A. They are difficult to understand and administer.

Reference | Chapter 6 – Tax and Retirement Planning

A. Stage 2 (family commitment years).

Reference | Chapter 4 – Getting to know the client

A. 50% fixed-income funds, 50% equity funds.

Reference | Chapter 4 – Getting to know the client

Reference | Chapter 4 – Getting to know the client

26.What characteristic of human beings explains the process of cognitive bias?

A. Involuntary expressions related to feelings.

Reference | Chapter 5 – Behavioural Finance

Reference | Chapter 5 – Behavioural Finance

A. Tax-Free Savings Account (TFSA).

Reference | Chapter 6 – Tax and Retirement Planning

Good choice! A. Registered Educational Savings Plan.

Reference | Chapter 6 – Tax and Retirement Planning

Reference | Chapter 6 – Tax and Retirement Planning

Good choice! A. $10,450

Reference | Chapter 6 – Tax and Retirement Planning

A. Unused RRSP contributions cannot be carried forward.

Reference | Chapter 6 – Tax and Retirement Planning

Good choice! A. Lump sum withdrawal.

35.Which security will be subject to the most interest rate risk?

A. A corporate bond maturing in 10 years.

36.Which statement about increasing purchasing power is true?

Reference | Chapter 8 – Constructing Investment Portfolios

Year Price at Beginning Distribution Price at End Simple 1 -Yr Return