Free CISI ICWIM Practice Exam with Questions & Answers

Money laundering is the process of disguising the origins of illegally obtained money to make it appear legitimate. Concealing assets derived from criminal activities is a criminal offence under anti-money laundering (AML) laws.

Definition: "Concealing" means hiding or disguising the true nature, location, source, ownership, or control of funds derived from criminal activity.

Legal Framework: The Financial Action Task Force (FATF) and UK Proceeds of Crime Act 2002 (POCA) classify "concealing" as an offence.

Three Stages of Money Laundering:

Placement: Introducing illicit funds into the financial system.

Layering: Concealing the source via multiple transactions.

Integration: Reintroducing "cleaned" funds into the economy.

???? Reference: CISI Wealth & Investment Management (AML), FATF Guidelines, UK POCA 2002.

Relief at source is a mechanism that reduces the amount of overseas withholding tax deducted before the dividend is paid to the investor. Many countries levy withholding tax on dividends paid to non-residents. Where a double taxation treaty exists, it often specifies a maximum rate of withholding tax that the source country may deduct. Under relief at source, the investor, or their intermediary such as a custodian, provides the required documentation so that the payer applies the treaty rate immediately, meaning the dividend is paid net of a reduced withholding tax amount. This differs from a reclaim process, where tax is withheld at the domestic rate first and the investor later claims back the excess. It also differs from foreign tax credit relief, where the investor pays tax in the residence country but receives a credit for foreign tax suffered to reduce the domestic liability. The examinable point is that relief at source operates by reducing the withholding tax deducted at the time of payment, improving cashflow and avoiding or minimising later reclaims.

Standard deviation measures the volatility of returns, helping investors compare the risk levels of different portfolios or assets. A higher standard deviation indicates greater uncertainty in returns, which can signify higher risk.

Mutual funds often have different share classes with varying fee structures to suit different investor needs.

Why is Option C Correct?

Class C shares avoid front-end loads (initial sales charges).

Instead, they charge higher ongoing fees (expense ratios) and may have a short-term exit fee if sold within a year.

Why Not Other Options?

A (Class A) → Typically front-end loaded, meaning investors pay a fee when buying the fund.

B (Class B) → Usually back-end loaded, meaning fees apply when selling the fund.

D (Class D) → Less common, but often low-cost institutional shares.

???? Reference: SEC Mutual Fund Share Classes, CISI Wealth & Investment Management.

A custom benchmark is necessary when a portfolio contains multiple asset classes, as no single index can fully represent its performance.

Why is Option D Correct?

A diversified portfolio (e.g., equities, bonds, commodities) needs a composite benchmark that reflects its asset allocation.

Example: A portfolio with 60% equities and 40% bonds might use a benchmark of 60% MSCI World Index and 40% Barclays Global Bond Index.

Why Not Other Options?

A (Easier than a pre-defined benchmark) → Custom benchmarks require more effort, not less.

B (Absolute performance measure) → Benchmarks compare performance relative to the market, not in absolute terms.

C (Tracking error measurement) → A benchmark helps measure tracking error, but the need for a custom benchmark arises due to asset diversity.

???? Reference: CFA Institute (Benchmarking), CISI Wealth & Investment Management.

The EU and Financial Services

The European Union’s goal is to establish a single market where financial services, goods, and capital can move freely between member states.

This involves harmonizing laws and regulations across countries to reduce barriers to trade and investment.

Why the Other Options are Incorrect

A. Single regulator: The EU has no single financial regulator; financial regulation is shared across bodies like ESMA and EBA.

C. Power of veto: The EU does not override national regulators; instead, it ensures compliance with its directives.

D. ECB and systemic risk: The ECB handles systemic risk in the Eurozone but not for the entire EU, especially countries outside the Eurozone.

ICWIM Study Guide, Chapter on Global Financial Markets: Covers the EU’s role in creating a single market.

EU Financial Directives: MiFID and others promote cross-border market access.

ReferencesThus, the correct answer is B. It aims to bring about a single market.

???? Reference: FPSB Global Financial Planning Standards.

Fundamental analysis involves evaluating a security to determine its intrinsic value by examining factors such as financial statements, economic conditions, and industry trends. The goal is to identify whether the security is undervalued or overvalued compared to its current market price.

Synthetic replication uses derivative contracts (swaps) to track an index without directly holding the underlying assets.

Why is Option C Correct?

The fund manager enters into a swap agreement with an investment bank.

The bank provides the return of the target index, while the fund pays a fixed rate or cash return.

This is common for emerging markets or illiquid assets, where direct replication is difficult.

Why Not Other Options?

A (Full replication) → Buys all index components, no swaps used.

B (Stratified sampling) → Buys representative index samples, no swaps.

D (Optimisation) → Uses mathematical models to track an index, no swaps.

???? Reference: CFA Institute (Index Replication Strategies), CISI Wealth & Investment Management.

What is an Uncovered Dividend?

An uncovered dividend payment occurs when a company pays a dividend despite having insufficient earnings to support the payout.

The dividend is effectively "uncovered" by profits, meaning the company might be using reserves, taking on debt, or liquidating assets to fund the dividend.

Why Companies Pay Uncovered Dividends

To maintain investor confidence and avoid negative signals to the market.

Investors may interpret a dividend cut as a sign of financial trouble, so companies sometimes prioritize dividends even at a financial strain.

Other Options Explained

A. Ex-dividend payment: Refers to the status of a stock when a dividend has already been declared, and new buyers are not entitled to the dividend.

B. Proxy dividend payment: No such widely recognized term in this context.

C. Scrip dividend payment: A dividend paid in the form of additional shares rather than cash.

Example

A company reports $500,000 in profits but declares a $1,000,000 dividend, funding the shortfall through borrowing. This is an uncovered dividend.

ICWIM Textbook, Chapter on Corporate Actions: Discusses uncovered dividends and their implications.

Corporate Finance Standards: Defines uncovered dividends and contrasts them with scrip and ex-dividends.

References