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CISI Certification
ICWIM Exam
CISI.ICWIM.v2025-10-14.q70 Dumps

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Question 1

Why do investors demand a risk premium?

A.To cover the tax payments on profitable trades
B.So that they can outperform the benchmark
C.To cover the expenses of the fund manager
D.To compensate them for accepting additional risk

Correct Answer: D

A risk premium is the additional return investors require for taking on higher risk.
* Formula: Risk Premium=Expected Return#Risk-Free Rate\text{Risk Premium} = \text{Expected Return} - \text{Risk-Free Rate}Risk Premium=Expected Return#Risk-Free Rate
* Why It Exists:
* Riskier investments (e.g., stocks, high-yield bonds) must offer higher returns to attract investors.
* Lower-risk assets (e.g., government bonds) have lower expected returns.
* Example:
* If a government bond yields 2%, but an equity portfolio yields 8%, the equity risk premium is
6%.
# Reference: CFA Institute (Risk and Return), CISI Wealth & Investment Management.

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Question 2

What term describes the process that enables savings institutions to transform into banks?

A.Demutualisation
B.Peer-to-peer
C.Refinancing
D.Swap

Correct Answer: A

Demutualisation refers to the process by which a mutual savings institution, such as a building society, converts into a publicly traded company or bank. This transformation allows the institution to raise capital through equity issuance and expand its services beyond mutual members.
Example:
* The Abbey National Building Society in the UK demutualised in the 1980s to become a bank.

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Question 3

When a hedge fund puts together an equity arbitrage position, it will seek to balance respective:

A.Alphas
B.Betas
C.Deltas
D.Gammas

Correct Answer: B

Equity arbitrage strategies involve balancing betas to hedge risk while profiting from pricing inefficiencies.
* Key Concept:
* Beta measures systematic risk (market-related risk).
* Equity arbitrage strategies aim to neutralize beta while profiting from pricing anomalies.
* Example:
* A hedge fund buys an undervalued stock and shorts an overvalued stock with matching betas
, ensuring market-neutral exposure.
# Reference: CFA Institute (Hedge Fund Strategies), CISI Wealth & Investment Management.

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Question 4

A fiduciary relationship normally arises between:

A.A husband and his wife
B.A lawyer and his client
C.A company and its suppliers
D.A head of state and its government

Correct Answer: B

A fiduciary relationship arises when one party is legally obligated to act in the best interest of another. This relationship is characterized by trust and confidence. A classic example is the relationship between a lawyer and their client, where the lawyer must prioritize the client's interests above their own.
* Husband and wife (A): This is generally not a fiduciary relationship but rather a personal relationship.
* Company and suppliers (C): This is a contractual, not fiduciary, relationship.
* Head of state and government (D): This is a political or constitutional relationship, not fiduciary.
References:
* International Certificate in Wealth & Investment Management: Fiduciary duties and examples.
* Legal definitions of fiduciary relationships in professional settings.

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Question 5

When analysing rates of return, why is a short-dated government bond considered to be the risk-free rate?

A.Governments are considered unlikely to default
B.Investors can buy short-dated government bonds without risk
C.Government bonds are free from all types of risk
D.There is no tracking error when measuring the performance of government bonds

Correct Answer: A

* Risk-Free Rate
* The rate of return on an investment with virtually no risk of financial loss.
* Short-dated government bonds are considered risk-free because governments, especially in developed economies, are deemed highly unlikely to default.
* Why the Answer is A
* Short-dated bonds minimize risks associated with duration (interest rate risk).
* Governments can typically print money or increase taxes to meet debt obligations, reducing default risk.
* Why Other Options are Incorrect
* B. Without risk: Investors still face inflation risk and currency risk.
* C. Free from all risks: No investment is completely risk-free; risk is minimized, not eliminated.
* D. No tracking error: Irrelevant to the definition of a risk-free rate.
* ICWIM Study Guide, Chapter on Risk Management: Defines the risk-free rate and its attributes.
* Economic Theory: Short-dated government bonds as benchmarks for risk-free rates.
ReferencesThus, the correct answer isA. Governments are considered unlikely to default.

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