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NEW QUESTION # 126
In which type of ETF does the portfolio manager select securities and their weighting to best match the performance of an index?
Answer: C
Explanation:
In ETFs, portfolio management involves selecting securities to match an index ' s performance. Full replication is a method where the portfolio manager buys all the securities in the index in their exact proportions.
* Full Replication:
* Involves holding every security in the index.
* Ensures minimal tracking error and high fidelity to the benchmark.
* Suitable for highly liquid and straightforward indexes like the S & P/TSX Composite.
* Sampling:
* Used for large, complex indexes where holding all securities is impractical.
* Selects a representative sample to approximate the index ' s performance.
* Rules-Based and Synthetic ETFs:
* Employ predefined rules or derivatives rather than physical securities.
Option D reflects the primary method of mirroring an index ' s performance through full replication, ensuring accuracy and minimal tracking error.
References:
Volume 2, Section 19: Exchange-Traded Funds-Full Replication vs. Sampling.
Volume 2, Section 13: Efficient Market Hypothesis-Implications for Passive Management.
NEW QUESTION # 127
Which type of sell side equity revenue is earned when a dealer acts in thecapacity of an agent in clients trade?
Answer: C
Explanation:
In the context of sell-side equity revenue, when a dealer acts as anagentfor a client's trade, the revenue is typically earned as acommission. The dealer facilitates the trade between buyers and sellers without taking ownership of the securities, earning fees for providing this service.
* Commission: Earned when the dealer acts as an agent.
* Spreads: Earned when the dealer acts as a principal, buying securities at one price and selling at a higher price.
* Fees: Charged for additional services, such as research or analytics.
* Interest: Earned from financing activities or margin accounts, not directly tied to trading.
* A. Fees: Incorrect; fees are typically charged for services, not for acting as an agent.
* B. Spreads: Incorrect; spreads are earned when the dealer acts as a principal.
* C. Interest: Incorrect; interest revenue is unrelated to acting as an agent.
* D. Commission: Correct answer. Acting as an agent involves earning commissions for facilitating trades.
Types of Revenue in Sell-Side Trading:Explanation of Options:References:
* CSC Volume 2, Chapter 27: The Role of Sell-Side Dealers, which details revenue models in institutional and retail trading.
NEW QUESTION # 128
What type of risk were mortgage-backed securities designed to address?
Answer: A
Explanation:
Mortgage-Backed Securities (MBS) are designed to address prepayment risk, which arises when borrowers pay off their mortgages earlier than expected. Prepayments reduce the interest income investors receive and can affect the expected return on the security.
* Why Prepayment Risk is Addressed:
* Prepayment often occurs when interest rates decline, as borrowers refinance their mortgages. This leaves MBS investors reinvesting at lower yields, which impacts returns.
* Structuring MBS helps mitigate prepayment risk through mechanisms like tranches in Collateralized Mortgage Obligations (CMOs).
* Explanation of Options:
* A. Liquidity: Incorrect. MBS provides liquidity to lenders but is not designed to address liquidity risk directly.
* B. Interest Rate: Incorrect. MBS investors are still exposed to interest rate risk as rates impact prepayment behavior.
* C. Rollover: Incorrect. Rollover risk applies to short-term debt securities, not MBS.
* D. Prepayment: Correct. MBS structures are specifically designed to mitigate the impact of prepayments on investors.
:
CSC Volume 2, Chapter 23: Risks of structured products, particularly prepayment risks in MBS.
NEW QUESTION # 129
After reviewing a client's risk tolerance, time horizon and financial objectives. Andy recommends that a long- term asset mix of 55% equities, 40 bonds and 5% cash would be most appropriate for the client.
Which approach has Andy taken in his recommendation?
Answer: A
Explanation:
Strategic asset allocation is a long-term approach to portfolio management where a target allocation among asset classes (e.g., equities, bonds, cash) is established based on the client's risk tolerance, time horizon, and financial objectives. This allocation remains relatively constant over time, with periodic rebalancing to maintain the original proportions.
* Details of Andy's Recommendation:Andy recommends a fixed asset mix of 55% equities, 40% bonds, and 5% cash, which aligns with the principles of strategic asset allocation. The focus is on maintaining this allocation to meet long-term goals, without frequent shifts based on short-term market movements.
* Why Other Options Are Incorrect:
* A. Dynamic asset allocation: This involves frequent changes to asset allocation in response to market trends, which is not evident in Andy's recommendation.
* B. Tactical asset allocation: This is a short-term, active approach where adjustments are made based on market conditions to capitalize on opportunities.
* D. Ongoing asset allocation: While this involves periodic rebalancing, it is not a defined approach like strategic allocation.
:
CSC Volume 2, Chapter 16: Asset allocation strategies.
NEW QUESTION # 130
What is the best description of growth-style investment managers?
Answer: B
NEW QUESTION # 131
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