Exam CIFC Topic 1 Question 10 Discussion
Actual exam question for IFSE Institute's CIFC exam
Question #: 10
Topic #: 1
Question #: 10
Topic #: 1
Danny is a Dealing Representative for Everbright Investments. He met with his client Adele, who has
$1,000,000 to invest. During their meeting Danny determines that Adele has a high-risk profile. In addition, he learns that she has an excellent understanding of equities and how volatile they can be. Danny is considering recommending growth funds specifically, and making a recommendation from the following investment options:
Based on the information provided, which mutual fund should Danny recommend?
$1,000,000 to invest. During their meeting Danny determines that Adele has a high-risk profile. In addition, he learns that she has an excellent understanding of equities and how volatile they can be. Danny is considering recommending growth funds specifically, and making a recommendation from the following investment options:
Based on the information provided, which mutual fund should Danny recommend?
Suggested Answer: D Vote an answer
Explanation
Adele has a high-risk profile and an excellent understanding of equities. Therefore, it would be appropriate for Danny to recommend growth funds. However, since Adele has $1,000,000 to invest, it would be prudent to diversify her investments and invest equally in all 3 funds. This way, she can benefit from the exposure to different regions and sectors, and reduce the impact of market fluctuations on her portfolio. Based on the table, all 3 funds have the same 5-year annualized returns net of MER, which is 15%. However, they have different MERs and Sharpe ratios. The MER is the fee charged by the fund manager for managing the fund, and the Sharpe ratio is a measure of risk-adjusted return. A lower MER means a lower cost for the investor, and a higher Sharpe ratio means a higher return per unit of risk. Therefore, investing equally in all 3 funds would allow Adele to achieve a balanced trade-off between cost and performance. References:
Canadian Investment Funds Course (CIFC) Study Guide, Chapter 4: Mutual Funds, Section 4.2: Types of Mutual Funds, page 4-6 Canadian Investment Funds Course (CIFC) Study Guide, Chapter 5: Fixed-Income Securities, Section
5.5: Risk-Return Trade-Offs, page 5-14
Sharpe Ratio Definition - Investopedia
Adele has a high-risk profile and an excellent understanding of equities. Therefore, it would be appropriate for Danny to recommend growth funds. However, since Adele has $1,000,000 to invest, it would be prudent to diversify her investments and invest equally in all 3 funds. This way, she can benefit from the exposure to different regions and sectors, and reduce the impact of market fluctuations on her portfolio. Based on the table, all 3 funds have the same 5-year annualized returns net of MER, which is 15%. However, they have different MERs and Sharpe ratios. The MER is the fee charged by the fund manager for managing the fund, and the Sharpe ratio is a measure of risk-adjusted return. A lower MER means a lower cost for the investor, and a higher Sharpe ratio means a higher return per unit of risk. Therefore, investing equally in all 3 funds would allow Adele to achieve a balanced trade-off between cost and performance. References:
Canadian Investment Funds Course (CIFC) Study Guide, Chapter 4: Mutual Funds, Section 4.2: Types of Mutual Funds, page 4-6 Canadian Investment Funds Course (CIFC) Study Guide, Chapter 5: Fixed-Income Securities, Section
5.5: Risk-Return Trade-Offs, page 5-14
Sharpe Ratio Definition - Investopedia
by Valentine at Sep 12, 2024, 11:43 AM
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