Free CSI IFC Practice Exam with Questions & Answers | Set: 14

Disclosure documents are documents that provide information about a mutual fund’s features, risks, performance, fees, and expenses to investors and regulators. Disclosure documents are required by securities laws and must be prepared and filed by the fund manager in accordance with the prescribed rules and standards. Disclosure documents relating to mutual funds include the following:

Statement of net assets: This is a document that shows the value of the fund’s assets and liabilities as of a specific date. It also shows the net asset value per unit (NAVPU) of the fund, which is the price at which investors can buy or sell units of the fund. The statement of net assets is part of the fund’s financial statements, which are prepared and filed semi-annually and annually.

Annual information form (AIF): This is a document that provides additional information about the fund that is not included in the simplified prospectus or the fund facts. The AIF includes information such as the fund’s history, organization, management, governance, policies, risks, conflicts of interest, fees, expenses, taxation, and legal matters. The AIF is prepared and filed annually.

Management reports of fund performance (MRFP): These are documents that provide information about the fund’s financial performance, portfolio composition, risk profile, and management expenses. The MRFPs are prepared by the fund manager and filed semi-annually and annually. The MRFPs include sections such as financial highlights, past performance, summary of investment portfolio, management discussion of fund performance, and financial statements.

Canadian Investment Funds Course, Chapter 6: Fund Operations and Regulations1

Withdrawals under a ratio withdrawal plan are based on the current portfolio value, ensuring the fund is never fully depleted unless a 100% payout ratio is used. The feedback from the document states:

"Under a ratio withdrawal plan, the ratio is always based on the current portfolio value. Technically, this means that clients will never fully exhaust their mutual fund investment under this type of plan. Only in the unrealistic situation of a 100% payout ratio would the fund be completely paid out."

Interest rates in the economy are determined primarily by the supply of capital (loanable funds) and the demand for capital, as explained in the Investment Funds in Canada (CIFC) text under Economic Factors and Financial Markets. The course states that “interest rates are influenced by changes in the supply and demand for money,” and that an increase in the supply of capital, all else being equal, will place downward pressure on interest rates.

When capital supply increases, there is more money available for lending from sources such as households, corporations, pension funds, insurance companies, and governments running budget surpluses. With more funds competing to be lent, lenders are willing to accept lower interest rates in order to attract borrowers. This inverse relationship between capital supply and interest rates is a foundational concept in CIFC economics.

The other options all result in higher, not lower, interest rates according to CIFC principles. An increase in default risk leads lenders to demand higher returns to compensate for the added risk. Increased business activity raises demand for borrowing, which pushes interest rates upward. Similarly, higher inflation erodes purchasing power, so lenders require higher nominal interest rates to maintain real returns.

Therefore, only an increase in capital supply leads to lower interest rates, making Option C the correct and fully verified answer based on the Investment Funds in Canada curriculum.

The correct answer is C. Manager D, because the Sharpe ratio is the primary measure used to evaluate risk-adjusted return, which is return earned per unit of total risk. The Investment Funds in Canada curriculum defines the Sharpe ratio as a tool that “measures how much excess return a portfolio generates relative to the risk taken.” A higher Sharpe ratio indicates superior risk-adjusted performance.

Manager D has the highest Sharpe ratio (+2) among all managers listed, meaning this manager generated the greatest excess return for each unit of risk, regardless of the portfolio’s beta. Although Manager D has a higher beta (2.75), beta measures systematic market risk, not total volatility. The Sharpe ratio already accounts for total risk (standard deviation), making it the preferred comparison metric when the question asks for return for a given level of risk.

Manager C has a positive Sharpe ratio (+1) but lower than Manager D, indicating inferior risk-adjusted performance. Managers A and B both have negative Sharpe ratios, which the CIFC text explains means the portfolio underperformed the risk-free rate, making them clearly inferior choices.

The CIFC curriculum stresses that when comparing managers across different risk profiles, “the Sharpe ratio is the most appropriate measure.” Since Manager D delivers the highest risk-adjusted return, Option C is the correct and fully CIFC-verified answer.

To fulfill the know your client (KYC) obligation, an advisor must collect and document information about the client’s personal and financial situation, investment objectives, risk tolerance, and investment knowledge. The KYC rule is a regulatory requirement that ensures that the advisor understands the client’s needs and goals, and provides suitable recommendations that match the client’s profile. In this case, Cosmo has provided some information about his personal and financial situation, such as his age, occupation, income, assets, and inheritance. He has also given some indication of his investment objectives, such as saving for retirement, and his investment knowledge, such as making his own investment decisions and preferring balanced funds. However, he has not disclosed his risk tolerance, which is his willingness and ability to accept fluctuations in the value of his investments. Risk tolerance is an important factor that affects the choice of investment strategies and products. Therefore, to complete the KYC process, the advisor needs to obtain additional information about Cosmo’s risk tolerance. References:

Canadian Investment Funds Course (CIFC) Study Guide, Chapter 1: The Investment Funds Industry, Section 1.4: The Know Your Client (KYC) Rule, page 1-111

Know Your Client (KYC) Definition - Investopedia2

 A Fund Facts document is a summary disclosure document that provides key information about a mutual fund, such as its investment objectives, risks, past performance, and fees. One of the information items that a Fund Facts document provides to potential investors is what the mutual fund is currently investing in, such as its top 10 holdings, asset mix, geographic allocation, and sector allocation. A Fund Facts document does not provide information on how to calculate taxes, portfolio management strategy, or remuneration of the Independent Review Committee. References: Fund facts guide | Sun Life Global Investments, Mutual Funds - Fund Facts | ScotiaFunds

According to the Canadian Investment Funds Course, asset mix rebalancing is the process of restoring the portfolio to its original or target asset allocation by selling or buying assets. Asset mix rebalancing is necessary to maintain the desired level of risk and return, as well as to align the portfolio with the investor’s objectives and circumstances. Asset mix rebalancing can be done periodically, such as annually or quarterly, or based on a threshold, such as when an asset class deviates from its target weight by a certain percentage.

In this case, Jerry’s asset mix is deviating from the original target asset mix because the stock market has had strong performance. Equities are now over-weighted in Jerry’s account. The original target asset mix is still valid since Jerry’s situation has not changed. He is invested in several bond and equity mutual funds. Therefore, the best course of action is to advise him to sell a portion of assets invested in equity funds and reinvest the proceeds into bond funds. This will bring his portfolio back to its target asset mix and reduce his exposure to equity risk.

The other options are not advisable because:

Advising him to change his know your client (KYC) form to reflect more growth would imply that his risk tolerance and objectives have changed, which is not the case. Changing the KYC form would also require a new suitability assessment and documentation.

Advising him to do nothing since equities could outperform bonds in the next year would ignore the importance of asset mix rebalancing and expose him to more risk than he is comfortable with. Doing nothing would also mean that his portfolio is not aligned with his original plan and expectations.

Advising him to sell a portion of assets invested in bond funds and reinvest the proceeds into equity funds would further increase his equity weight and risk, which is contrary to his original target asset mix and risk tolerance.

Therefore, the correct answer is D. advise him to sell a portion of assets invested in equity funds and reinvest the proceeds into bond funds.

 1: Canadian Investment Funds Course - IFSE Institute 2 (Unit 10: Portfolio Management)

Fixed-income securities, including mortgage funds, decrease in value when interest rates rise because existing mortgages with lower rates become less attractive compared to new, higher-yielding mortgages. The feedback from the document states:

"Fixed-income securities move in the opposite direction to market interest rates… Let’s assume you are the fund manager for a mortgage mutual fund, which has mortgages paying 5%. If mortgage rates suddenly increase to 6%, only the interest rates on newly negotiated mortgages would increase… The investor would not pay you par for a 5% rate. If you wished to sell the mortgages, then you would have to lower your price until the price paid—given the 5% fixed payments to be made—results in a return to the buyer of 6%, the ‘going rate’ on mortgages. In other words, the market value of your par value mortgages must fall."