1.

DEC Mutual Fund has an offering price of $78.50 and charges a 4% front-end load. What is the net asset value per share (NAVPS) at
the time of purchase?
A.
$81.77.
You chose:
B.
$78.50.
C.
$81.64.
The correct answer is:
D.
$75.36.
Feedback: The offering price includes the NAVPS plus the fee to purchase the fund. If the offering price is $78.50, the NAVPS must be
lower than that. If $78.50 = NAVPS ÷ (100% - 4%), then NAVPS = $78.50 x (100% - 4%), which works out to NAVPS = $78.50 x 96%.
The NAVPS must be $75.36.
Reference | Chapter 17: Mutual Funds: Structure and Regulation
2.
Tan invested $4,000 in the ZEN Mutual Fund. The fund has a management expense ratio of 1.61%, a front-end load of 3%, and a
trading expense ratio of 0.05%. How much is the fee that Tan will pay to the distributor?
A.
$184.
Good choice!
B.
$120.
C.
$0.
D.
$66.
Feedback: Fee paid to distributor = Amount invested x Front-end load, = $4,000 × 3% = $120.
Reference | Chapter 17: Mutual Funds: Structure and Regulation
3.
What rule applies to the distribution of mutual funds by financial institutions (FIs)?
A.
FIs are strictly prohibited from distributing mutual funds sold by a third party.
B.
Full disclosure of dual employment is not required as long as customers of the FI are dealing with a person registered to sell mutual
funds.
The correct answer is:
C.
Dually employed salespersons cannot approve loans to finance mutual fund purchases unless approved by the FI’s senior
lending officer.
You chose:
D.
FIs can sell mutual funds only through affiliated dealers, but dealers do not have to be registered in every province where securities are
sold.
Feedback: Conflicts of interest can arise as a result of dual employment (employees of a FI who engage in financial services
activities can also become registered as salespersons). In order to avoid such conflicts, one of the rules requires that dually
employed salespersons cannot approve loans to finance mutual fund purchases, unless such loans are approved by the FI’s
senior lending officer.
Reference | Chapter 17: Mutual Funds: Structure and Regulation
4.
Which measure represents the total cost of operating a mutual fund as a percentage of its average net assets for the year?
The correct answer is:
A.
Management Expense Ratio (MER).
B.
Payout ratio.
You chose:
C.
Net capital ratio.
D.
Trading sales ratio.
Feedback: The management expense ratio (MER) represents the total of all management fees and other expenses charged to a fund,
expressed as a percentage of the fund’s average net asset value for the year. Trading or brokerage costs are excluded from the MER
calculation because they are included in the cost of purchasing or selling portfolio assets. MER is calculated as follows: Aggregate fees
and expenses payable during the year/Average net asset value for the year x 100.
Reference | Chapter 17: Mutual Funds: Structure and Regulation
5.
An investor in a 45% tax bracket buys 100 units of a mutual fund for $20 a unit in a non-registered account. In the same year, he
receives $1.50 per unit in capital gains distributions, and sells the units for $30 a unit. What is the income tax owing for this transaction?
You chose:
A.
$517.50.
B.
$345.00.
The correct answer is:
C.
$258.75.
D.
$388.13.
Feedback: Capital gains receive a special exemption under the Income Tax Act (Canada). Only 50% of any capital gains are subject to
tax, including capital gains distributions. The investor’s capital gain is ($30 - $20 x 100 units) + (1.50 x 100 units) = $1,150. On this, only
50% of the gain is taxable, and he will pay tax at his marginal rate of 45% on the remaining $575, or an amount of $258.75. Of course,
if the investor had held the funds in his RRSP or other tax-sheltered arrangement, he would have paid no current income taxes on his
capital gains. When he eventually withdraws these funds from the tax-sheltered arrangement, however, he will pay taxes on the full
amount of the disposition at his marginal tax rate, without the benefit of the capital gains treatment.
Reference | Chapter 17: Mutual Funds: Structure and Regulation
6.
A fund has the following financial position: Assets: Investments at market value $24,670,000, Receivables $1,230,000; Liabilities:
Current liabilities $6,450,000, Long-term liabilities $3,400,000; Shares outstanding 2,500,000. What is the fund’s net asset value per
share (NAVPS)?
A.
$7.78.
The correct answer is:
B.
$6.42.
You chose:
C.
$5.93.
D.
$9.14.
Feedback: NAVPS = (Assets - Liabilities) ÷ Number of Shares Outstanding. NAVPS = ($24,670,000 + $1,230,000) - ($6,450,000 +
$3,400,000) ÷ 2,500,000. NAVPS = $16,050,000 ÷ 2,500,000. NAVPS = $6.42.
Reference | Chapter 17: Mutual Funds: Structure and Regulation
7.
As of December 31, ABC Mutual Fund has a net asset value of $38,000,000, average net asset value of $34,500,000, and aggregate
fees and expenses of $1,120,000. What is ABC Mutual Fund’s management expense ratio (MER)?
A.
1.12%.
B.
10.14%.
The correct answer is:
C.
3.25%.
You chose:
D.
2.95%.
Feedback: Management Expense Ratio = (Aggregate Fees and Expenses Payable During the Year ÷ Average Net Asset Value for the
Year) × 100. Management Expense Ratio = ($1,120,000 ÷ $34,500,000) × 100 = 3.25%.
Reference | Chapter 17: Mutual Funds: Structure and Regulation
8.
What day’s net asset value per share (NAVPS) will a buyer receive if her order to purchase a no-load mutual fund whose NAVPS is
calculated daily is entered at 2:30 p.m. ET on Tuesday?
The correct answer is:
A.
Tuesday’s NAVPS.
You chose:
B.
Monday’s NAVPS.
C.
The NAVPS as of 2:30 p.m. ET on Tuesday.
D.
Wednesday’s NAVPS.
Feedback: Depending on the time of day on which the order is entered, the NAVPS may be priced at the end of the current business
day or the end of the next business day. Mutual fund companies specify the time by which a trade must be entered to receive the
closing price for the current business day. The general practice is to price orders entered before 4:00 p.m. ET at the end of the current
business day. Orders received after 4:00 p.m. ET are priced at the end of the next business day.
Reference | Chapter 17: Mutual Funds: Structure and Regulation
9.
When must the Fund Facts document be delivered to the client purchasing a mutual fund?
A.
With confirmation of purchase.
B.
Upon request.
C.
Within 48 hours after confirmation of purchase is received.
Good choice!
D.
Prior to purchase.
Feedback: Pre-purchase delivery of the Fund Facts document to investors is mandatory for each class or series of mutual funds. It
may be delivered in person, by email, or through other means, according to how the dealer typically interacts with its investors.
Reference | Chapter 17: Mutual Funds: Structure and Regulation
10.
When must a mutual fund representative doing business outside Quebec notify the provincial securities administrator of a change in
address?
A.
Address changes of registrants are not required to be disclosed to provincial securities administrators.
B.
Within six months.
Good choice!
C.
Within five business days.
D.
Within two business days.
Feedback: As a mutual fund representative, you must notify the provincial securities administrator within five business days (or 10 days
in Quebec) of any of the following changes in your provincial application:
 Change of address
 Disciplinary action of a professional body
 Personal bankruptcy (Ontario and Quebec)
 Criminal charges or civil judgments

Reference | Chapter 17: Mutual Funds: Structure and Regulation

11.
An investor purchases $5,000 in mutual fund units. Over a two-year period, the investor receives and reinvests into additional units
$1,000 and $125 in dividends. At the end of two years, the total value of the investor’s portfolio rises to $7,225. What is the investor’s
adjusted cost base at that time?
A.
$5,000.
You chose:
B.
$2,225.
The correct answer is:
C.
$6,125.
D.
$1,100.
Feedback: The cost base for the units includes the purchases, and also the value of the reinvested dividend. Therefore, the cost based
for the investment would be $6,125 ($5,000 + $125 + $1,000).
Reference | Chapter 18: Mutual Funds: Types and Features
12.
An investor currently has $120,000 remaining under a withdrawal plan. He wants to maintain the principal for his estate while
still receiving some cash flow from the plan. What type of withdrawal plan would be appropriate?
A.
Fixed period withdrawal plan.
You chose:
B.
Contractual withdrawal plan.
C.
High constant dollar withdrawal plan.
The correct answer is:
D.
Ratio withdrawal plan.
Feedback: With a ratio withdrawal plan, the investor receives an annual income from the fund by redeeming a specified percentage of
fund holdings each year. The percentage chosen for redemption usually falls between 4% and 10% a year depending on the amount of
income the investor requires. If, year after year, the investor withdraws a percentage of fund holdings that is close to the fund’s return,
the principal may remain almost untouched for his estate.
Reference | Chapter 18: Mutual Funds: Types and Features
13.
Simone has $15,000 invested in a mutual fund. She has set up a withdrawal plan, in which she withdraws 10% at the beginning of each
year. Assuming that the portfolio will grow by a steady 8% per year, what is the value remaining in the portfolio at the end of the second
year?
The correct answer is:
A.
$14,171.76.
You chose:
B.
$14,580.00.
C.
$13,500.00.
D.
$14,246.40.
Feedback:

Value at
Beginning Value at End of Year
of Year Value of Withdrawal =
(A) (B) (C) (A - B) x 1.08
Year 1 15,000.00 10% 1,500.00 14,580.00
Year 2 14,580.00 10% 1,458.00 14,171.76
Reference | Chapter 18: Mutual Funds: Types and Features
14.
An investor purchases $25,000 in mutual fund units on January 1st. On April 1st, he receives $580 in dividends and reinvests them in
additional units. On July 1st, he purchases an additional $5,000 in units. At the end of the year, the value of his mutual fund units is
$31,000. Assuming no other transactions have occurred, what would his capital gain be if he were to sell his units for $31,000?
You chose:
A.
$5,000.
The correct answer is:
B.
$420.
C.
$5,420.
D.
$210.
Feedback: The cost base for the units includes the purchases, and also the value of the reinvested dividends. Therefore, he would
have a total cost base of $30,580 ($25,000 + $580 + $5,000). If he were to sell his units for $31,000, his capital gain would be $420
($31,000 - $30,580).
Reference | Chapter 18: Mutual Funds: Types and Features
15.
Joshua has a high level of risk tolerance and wants to purchase a mutual fund offering the highest potential for return. Based solely on
the relationship between risk and return of various types of mutual funds, which fund would be most suitable?
A.
Equity fund.
The correct answer is:
B.
Specialty fund.
C.
Asset allocation fund.
You chose:
D.
Dividend fund.
Feedback: The following ranks mutual funds from lowest return and lowest risk to highest return and highest risk: money market funds;
mortgage funds; bond funds; balanced funds; dividend funds; equity funds; real estate funds; specialty funds.(MM BB DE RS)
Reference | Chapter 18: Mutual Funds: Types and Features
16.
What type of mutual fund is most suitable for an investor whose main objective is long-term capital growth?
A.
Balanced fund.
B.
Bond fund.
You chose:
C.
Dividend fund.
The correct answer is:
D.
Equity fund.
Feedback: The main objective of equity funds is long-term capital growth by investing primarily in the common shares of publicly
traded companies.
Reference | Chapter 18: Mutual Funds: Types and Features
17.
How would an index fund’s returns compare to its market benchmark?
A.
Equal to the benchmark.
The correct answer is:
B.
Less than the benchmark.
You chose:
C.
Inverse of the benchmark.
D.
Greater than the benchmark.
Feedback: Because the indexing style is essentially a strategy that mirrors the market, the opportunity to outperform the market is lost.
Another disadvantage is that, after the payment of fees and expenses, index mutual funds return somewhat less than the market
benchmark in the long term.
Reference | Chapter 18: Mutual Funds: Types and Features
18.
Marco purchases an equity fund for $15 per unit on January 1st. On June 30th, he receives a distribution of $1 per unit. On
December 30th, he sells his units for $20 each. What tax slip will Marco receive for this tax year and what profit per unit will he
realize?
A.
A T5 and $5.
B.
A T5 and $1.
You chose:
C.
A T3 and $5.
The correct answer is:
D.
A T3 and $1.
Feedback: Mutual funds can generate taxable income in one of two ways:
 Through the distribution of interest income, dividends, and capital gains realized by the fund
 Through any capital gains realized when the investor sells the fund
When mutual funds are held outside a registered plan such as a registered retirement savings plan or a registered retirement income
fund, the fund holder is sent either a T3 form (for unitholders) or a T5 form (for shareholders).

Since the investor holds units, the fund must be a mutual fund trust. The investor would therefore receive a T3 form from the fund
identifying any investment distributions that the fund generates. The $1 per unit distribution would be reported on a T3 form because
the distribution was generated by the fund. The sale of units, which resulted in a $5 per unit profit, was not generated by the fund, but in
fact was generated by the investor when he sold the units. Therefore, the $5 per unit profit would not be reported by the fund on the T3
form.
Reference | Chapter 18: Mutual Funds: Types and Features

T3 Form and Its Purpose

The T3 form is a tax slip issued by the mutual fund trust to Marco (the investor).
It reports the income distributions (interest, dividends, and capital gains) generated by the mutual fund itself during the year. In Marco's
case, this is the $1 per unit distribution he received on June 30th.
Capital Gain on Sale of Units
The $5 per unit profit realized by Marco when he sold his units is a capital gain.
This capital gain is not reported on the T3 form because it was generated by Marco's action of selling the units, not by the fund's
distributions.
Marco will need to report this capital gain on his own tax return. In Canada, capital gains are reported on Schedule 3 (Capital Gains (or
Losses)) of the T1 Income Tax and Benefit Return.
Summary
T3 Form: Issued to Marco by the mutual fund trust, reporting the $1 per unit distribution.
$5 per Unit Profit: Marco must report this capital gain on Schedule 3 of his T1 Income Tax and Benefit Return.
So, the T3 form is a tax slip that Marco receives from the mutual fund trust to report income distributions. The $5 per unit profit is a
capital gain that Marco must report separately on his own tax return.

19.
Ishneet invests $5,000 in a fund at $5 per unit and takes advantage of its dividend reinvestment plan. On December 30th, the
fund’s net asset value per share (NAVPS) is $6 and it pays a distribution of $1 per unit. How many units does Ishneet own
after the distribution?
A.
1,666.67.
B.
1,000.00.
Good choice!
C.
1,200.00.
D.
1,142.85.
Feedback: The reaction of the NAVPS to a distribution of funds is similar to that of a stock the day it begins to trade ex-dividend. The
NAVPS falls by an amount proportionate to the dividend. Because most investors receive their dividends in the form of more units
rather than cash, the net result of the distribution is that the investor owns more units, but the units are each worth less. Ishneet
originally purchased 1,000 units (calculated as $5,000 ÷ $5 per unit). When the mutual fund paid a $1 distribution, the NAVPS
dropped from $6 per unit to $5 per unit. Ishneet’s $1,000 distribution (calculated as $1 x 1,000 unit) can purchase an additional
200 shares (calculated as $1,000 ÷ $5 per unit)
Reference | Chapter 18: Mutual Funds: Types and Features

20.
What is survivorship bias?
You chose:
A.
Failure of a fund’s return to reflect a change in portfolio manager.
B.
Tendency for investors to believe that past performance is indicative of future performance.
The correct answer is:
C.
Tendency for peer group returns to be artificially high due to not including discontinued or merged funds.
D.
Failure of a fund’s performance to take into account changes in investment objectives over time.
Feedback: Although average returns for a peer group of funds are useful measures, they can reflect survivorship bias. This term
describes a tendency for poorly performing funds to be discontinued or merged. Therefore, average returns of surviving funds may be
artificially high because they do not fully reflect past performance of the entire spectrum of funds.
Reference | Chapter 18: Mutual Funds: Types and Features
21.
Rolf, an Investment Advisor (IA), constructs a portfolio for his client Knut using an S&P 500 Exchange-Traded Fund (ETF) as a large
passive holding and also smaller holdings in a US small-capitalization equities ETF and a European mid-capitalization equities ETF.
What investment strategy is Rolf using?
A.
Liquidity management.
The correct answer is:
B.
Core and satellite.
You chose:
C.
Transition management.
D.
Tax loss selling.
Feedback: Rolf is using a core and satellite portfolio construction strategy. Core holdings are typically passive ETF holdings intended
to provide the majority of returns; satellite holdings are more focused on riskier sector ETF holdings. Satellite holdings are used to boost
returns above the core asset returns.
Reference | Chapter 19: Exchange-Traded Funds
22.
How is a covered call option strategy implemented?
You chose:
A.
Buying a call option while owning an equivalent number of shares of the underlying stock.
The correct answer is:
B.
Selling call option while owning equivalent number of shares of the underlying stock.
C.
Buying a call option while short selling an equivalent number of shares of the underlying stock.
D.
Selling a call option while short selling an equivalent number of shares of the underlying stock.
Feedback: A covered call option strategy, also known as a buy-write strategy, is implemented by writing (selling) a call option contract
while owning an equivalent number of shares of the underlying stock.
Reference | Chapter 19: Exchange-Traded Funds
23.
What underlying asset is frequently purchased when a manager is using a sampling process in creating an exchange-traded
fund (ETF)?
You chose:
A.
Large-cap Canadian stocks.
B.
Canadian oil and natural gas stocks.
The correct answer is:
C.
Canadian bonds.
D.
North American currencies.
Feedback: Sampling is the process by which the portfolio manager selects securities and their weighting to best match the
performance of the index. This method is typically used to construct portfolios of fixed-income and some international and small cap
equity ETFs. The purpose of sampling with fixed-income ETFs is to achieve an outcome that replicates the performance of a large
number of bonds that may not be accessible in the open markets.
Reference | Chapter 19: Exchange-Traded Funds
24.
What benefits do a mutual fund of exchange-traded funds (ETFs) have in comparison to investing directly in a passively
managed exchange-traded fund?

1. Pre-authorized contributions.
2. Systematic withdrawal plans.
3. Lower management expense ratios.
4. Advisor compensation is lower.

You chose:
A.
1 and 4.
The correct answer is:
B.
1 and 2.
C.
3 and 4.
D.
2 and 3.
Feedback: Mutual Funds of ETFs have the benefit of pre-authorized contribution plans (PACs) and systematic withdrawal plans
(SWPs). However, they have higher management expense ratios and a higher advisor compensation rate than buying ETFs directly.
Reference | Chapter 19: Exchange-Traded Funds
25.
What is similar for exchange-traded funds (ETF) and exchange-traded notes (ETN)?
A.
Both have tracking error.
B.
Both face credit risk.
Good choice!
C.
Both trade on an exchange.
D.
Both are investment funds.
Feedback: Both trade on an exchange. Exchange-traded notes (ETNs) do not have tracking error while ETFs do. ETNs face credit risk,
while most ETFs do not. ETNs are not investment funds.
Reference | Chapter 19: Exchange-Traded Funds
26.
How are synthetic exchange-traded funds (ETFs) different from other types of ETFs?
A.
More transparent as they do not hold the actual securities being tracked.
B.
Designated broker can only be a Schedule I bank.
You chose:
C.
Do not have tracking error as they do not hold the actual securities being tracked.
The correct answer is:
D.
Constructed with derivatives, such as swaps, to achieve the same return as an index.
Feedback: Synthetic ETFs differ from other types because they do not hold the same underlying exposure as the index they track.
These ETFs are constructed with derivatives, such as swaps, to achieve the return effect of the index. As a result, the exposure of
synthetic ETFs is notional, rather than real.
Reference | Chapter 19: Exchange-Traded Funds
27.
What type of exchange-traded fund (ETF) structure attempts to earn a positive return on a day the S&P/TSX Composite declines
substantially?
The correct answer is:
A.
Inverse ETF.
B.
Standard ETF.
You chose:
C.
Synthetic ETF.
D.
Covered call ETF.
Feedback: An inverse ETF is designed to perform inversely to the index or benchmark they track. It seeks to replicate, net of expenses
the inverse daily performance of the index that it tracks.
Reference | Chapter 19: Exchange-Traded Funds
28.
What is a key advantage of an investment in an exchange-traded fund (ETF) that replicates the S&P 500 index?
A.
Lack of transparency.
The correct answer is:
B.
Tax efficiency.
C.
Low liquidity.
You chose:
D.
High management costs.
Feedback: Index-based ETFs, which make up a large portion of the ETF market, tend to have lower portfolio turnover. Stocks are sold
only when there are changes to the index, which results in fewer realizations of capital gains than other investment products (such as
actively traded mutual funds). Therefore, fewer taxable events allow the capital to compound over time.
Reference | Chapter 19: Exchange-Traded Funds
29.
How would a manager use exchange-traded funds (ETFs) to gain quick, diversified exposure to a targeted asset class while
instantly exiting a previous holding?
A.
Simplified exposure to a hard to access asset class.
B.
Rebalancing.
Good choice!
C.
Tactical asset allocation.
D.
Cash management.
Feedback: Investment managers can use ETFs as a tool to gain quick, diversified exposure to the targeted asset class, while instantly
exiting the previous holding. With today’s vast choice of ETFs, investors and advisors can use them as the primary tool to implement
tactical shifts in a portfolio.
Reference | Chapter 19: Exchange-Traded Funds
30.
A Canadian designated broker is buying shares of each security in a Canadian equity index in increments specified by the exchange-
traded fund (ETF) provider in exchange for 50,000 ETF units. What are the units he is receiving?
A.
Closed-end units.
The correct answer is:
B.
Prescribed number of units.
You chose:
C.
Blocks of units.
D.
Designated units.
Feedback: If an ETF is designed to track a particular index, the designated broker buys (or borrows from a securities lender) shares in
all of that index’s component parts, in increments set by the respective ETF company.
Reference | Chapter 19: Exchange-Traded Funds
31.
Aryk, a Quebec resident, dies suddenly in a car accident leaving business debts of $250,000, a student loan of $12,000 and a
segregated fund contract that he purchased 3 years previously in the amount of $300,000 that names his mother as beneficiary. How
much of the segregated fund contract can the creditors claim?
The correct answer is:
A.
$0.
You chose:
B.
$250,000.
C.
$262,000.
D.
$12,000.
Feedback: One of the chief benefits of segregated fund contracts is that they are, usually, creditor proof. Aryk’s contract named his
mother as a beneficiary, and, within Quebec, such a beneficiary must receive the full amount of any benefit under the contract,
regardless of any claims by creditors against the contract holder. This is part of why segregated funds contracts are a consideration for
those who may be liable for business debts, and who wish to protect their estate and beneficiaries. If Aryk’s holdings had been in non-
segregated fund contracts, the entire amount would have gone to pay off his debts, leaving his mother with no proceeds.
Reference | Chapter 22: Other Managed Products
32.
Jamar bought a segregated fund contract that included a 75% maturity guarantee. At the time of his death, the contract was worth less
than the guaranteed amount of $100,000. How much is the estate entitled to?
The correct answer is:
A.
Value of contract and the death benefit guarantee.
You chose:
B.
Value of contract.
C.
Value of contract and beneficiary guarantee.
D.
Value of contract and maturity guarantee.
Feedback: Segregated funds are differentiated from mutual funds based in part on the availability of a guarantee amount. This
guarantee may be reset, periodically, based on the terms of the initial contract. Specifically, at death, if the value of the contract is less
than the guarantee amount, a death benefit guarantee, separate from the usual maturity guarantee paid at maturity, is made to the
estate or beneficiary as appropriate.
Reference | Chapter 22: Other Managed Products

Key Terms
Segregated Fund: A type of investment fund held within an insurance contract. It combines investment growth potential with insurance features.

Death Benefit: A guarantee that ensures a minimum amount is paid to the beneficiary upon the policyholder's death.

Maturity Guarantee: A guarantee that the policyholder will receive at least a certain percentage of their original investment at the contract's maturity
date.

Net Asset Value (NAV): The value of the fund's assets minus its liabilities, divided by the number of outstanding shares.

33.
Jacqueline invested a total of $145,000 in the XYZ Segregated Fund and is the beneficiary of the fund. Ten years later, her
investment in the fund is valued at $114,000. If the fund offers the minimum provincial guarantee, how much would she receive if
she decides to withdraw her invested capital?
A.
$85,500.
Good choice!
B.
$114,000.
C.
$108,750.
D.
$145,000.
Feedback: Provincial legislation requires that a guarantee be at least 75% of the invested capital after a ten-year holding period.
However, since the current market value of the fund is greater than the minimum guaranteed amount, Jacqueline will be able to
withdraw $114,000.
Reference | Chapter 22: Other Managed Products
34.
Eleven years ago, Jean-Luc purchased 100 units in the TNG Segregated Fund, which has a 100% maturity guarantee, at a price of $15
per unit. One year after purchase, Jean-Luc reset the fund when the net asset value (NAV) per unit was $16.80. At maturity ten years
later, Jean-Luc withdraws his entire segregated fund when the NAV is $14.75. How much will Jean-Luc receive from the issuer?
Assume there were no allocations, commissions or fees.
Good choice!
A.
$1,475 of market value plus $205 of maturity guarantee.
B.
$1,475 of market value.
C.
$1,500 of capital invested.
D.
$1,680 of maturity value less $205 of capital loss.
Feedback: The withdrawal amount is the guaranteed maturity value. In this case, since the market value of the fund is $1,475 and the
guaranteed maturity value is $1,680, the fund issuer pays a maturity guarantee of $205 above the market value. => “reset” affects the
maturity guarantee amount, not number of units.
Reference | Chapter 22: Other Managed Products
35.
What is the impact of income allocation on the units and net asset value (NAV) of a segregated fund?
A.
New units are issued to the unitholders and the NAV declines.
The correct answer is:
B.
Income is allocated to existing units and the NAV remains unchanged.
C.
Income is allocated to existing units and the NAV declines.
You chose:
D.
New units are issued to the unitholders and the NAV remains unchanged.
Feedback: With segregated funds, the fund does not suffer a decline in the NAV after an allocation of income. Instead, the segregated
fund contract receives additional income, which is allocated to existing units.
Reference | Chapter 22: Other Managed Products
36.
ABC Hedge Fund has $10 million in capital invested in Canadian stocks. Presently, the fund is long $10 million and short $6
million. What is the net market exposure of the fund?
A.
150% long.
B.
25% long.
Good choice!
C.
40% long.
D.
60% long.
Feedback: The fund’s net exposure = (long exposure - short exposure) / capital. In this example, the net exposure = ($10 million -
$6 million) / $10 million or 40%.
Reference | Chapter 21: Alternative Investments: Strategies and Performance
37.
Eric purchased a hedge fund in his investment account and shortly thereafter tried to sell it. Eric was unable to sell the fund as it
required a minimum duration for investments placed in the fund. What is the feature of the hedge fund that prevented Eric from selling
his fund?
A.
Waiting period.
Good choice!
B.
Lock-up period.
C.
Holding period.
D.
Cooling-off period.
Feedback: A lock-up period refers to the span of time that initial investments cannot be redeemed from the fund. Once the lock-up
period is over, the investor is free to redeem shares on any liquidity date specified in the offering memorandum.
Reference | Chapter 20: Alternative Investments: Benefits, Risks and Structure
38.
Amna is a hedge fund manager who takes significant positions in companies she thinks are about to experience unique situations, such
as mergers and takeovers. What type of hedge fund strategy is Amna utilizing?
The correct answer is:
A.
Event-driven strategy.
B.
Maturity guarantee strategy.
C.
Relative value strategy.
You chose:
D.
Directional strategy.
Feedback: Event-driven hedge funds seek to profit from unique, particular events such as mergers, acquisitions, stock splits and
buybacks.
Reference | Chapter 20: Alternative Investments: Benefits, Risks and Structure
39.
A hedge fund lost $10 million in its first year of operation and gained $15 million in its second year. Assume incentive fees are 10% of
profits and a high watermark applies. How much did the investment manager earn in incentive fees in the first two years?
A.
$250,000.
B.
$0.
The correct answer is:
C.
$500,000.
You chose:
D.
$700,000.
Feedback: In addition to management and administration fees, hedge fund managers often charge an incentive fee based on
performance. Incentive fees are usually calculated after the deduction of management fees and expenses and not on the gross return
earned by the manager. This detail can make a significant difference in the net return earned by investors. The calculation of incentive
fees can be subject to a high-water mark, a hurdle rate, or both. ($15 million - $10 million) x 10% = $500,000.
Reference | Chapter 20: Alternative Investments: Benefits, Risks and Structure
40.
Lucie has a portfolio worth $1.2 million with $800,000 in a non-registered account and $400,000 in a registered retirement
savings plan (RRSP). Her income in each of the last two years was $190,000, and she expects to earn about $195,000 this
year. Is Lucie considered an accredited investor, and if not, why not?
You chose:
A.
No, because she expects to earn less than $200,000 this year.
B.
No, because her income in each of the last two years was less than $200,000.
The correct answer is:
C.
Yes.
D.
No, because the value of her non-registered investments is less than $1 million.
Feedback: The accredited investor exemption allows hedge funds to be sold without a prospectus to institutions and individuals who
are considered accredited investors. Individuals must beneficially own (alone or with a spouse) financial assets having an aggregate
realizable value (before taxes, but net of any related liabilities) exceeding $1 million. Individuals may also be accredited investors if
they have net income before taxes exceeding $200,000 (or $300,000 if combined with a spouse’s income) in each of the two most
recent years, and a reasonable expectation of exceeding the same net income level in the current year.
Reference | Chapter 20: Alternative Investments: Benefits, Risks and Structure
41.
If interest rates will be rising in the next six months to two years, what mortgage-backed securities (MBS) would be most
appropriate for an elderly retiree in a low tax bracket who is relying primarily on investment income for cash flow?
A.
Open Pool, Short Term to Maturity.
The correct answer is:
B.
Closed Pool, Short Term to Maturity.
You chose:
C.
Closed Pool, Long Term to Maturity.
D.
Open Pool, Long Term to Maturity.
Feedback: In an open NHA MBS, the owners of the underlying properties can prepay the principal. Therefore, the return and pricing of
open MBS is somewhat uncertain because of the unsteady or predictable cash flow. Since prepayment of principal is not allowed with
closed NHA MBS, cash flows and pricing are more certain than with open mortgage pools. Longer term to maturity bonds have greater
interest rate risk than shorter term to maturity bonds. Thus, the lowest risk investment, and the one most likely to ensure a constant and
predictable cash flow, would be the short-term closed pool MBS. (OPU-CNC)
Reference | Chapter 23: Structured Products
42.
Simon invests $5,000 in a principal-protected note (PPN). The PPN return will be determined by calculating the effective average of the
underlying common shares, and the maximum return attributed to any one share is 35%. What type of PPN has Simon purchased?
A.
Index-linked PPN with a participation rate.
B.
Zero-coupon bond plus option.
Good choice!
C.
Stock basket-linked PPN.
D.
Index-linked PPN with a performance cap.
Feedback: A stock basket-linked PPN is linked to the average return on a basket of common shares, and in most cases the average
return on each individual share is capped at a pre-set amount.
Reference | Chapter 23: Structured Products

A. Index-Linked PPN with a Participation Rate

 Definition: Return linked to an index's performance, with a specified percentage (participation rate) of the index's gain.
 Key Feature: No cap on individual stock performance, return depends on overall index gain.
B. Zero-Coupon Bond Plus Option
 Definition: Combines a zero-coupon bond (ensuring principal protection) with an option on an underlying asset for potential gains.
 Key Feature: Principal is guaranteed by the zero-coupon bond, while the option provides growth potential.
C. Stock Basket-Linked PPN
 Definition: Return based on a basket of stocks, with performance determined by the average return of these stocks.
 Key Feature: May include caps on the maximum return attributed to individual stocks within the basket.
D. Index-Linked PPN with a Performance Cap
 Definition: Return linked to an index, but with a cap on the total performance credited to the investor.
 Key Feature: Limits the overall return regardless of index performance beyond the cap.

43.
What is the approximate return on a 6-year XYZ market-linked guaranteed investment certificate (GIC) that has a 25% cap rate in a
year where the relevant index had an initial index level of 9,700 and an ending index level of 14,000?
A.
31.00%.
Good choice!
B.
25.00%.
C.
44.33%.
D.
11.08%.
Feedback: The first step is to calculate the index growth, which is calculated as Index Growth = (Ending Index Level - Initial Index
Level) / Initial Index Level x 100. In this example, (14,000 - 9,700)/9,700 x 100 = 44.33%. The overall return is capped at a maximum
return of 25%. Since the rate of return on the index exceeds the cap rate, the investor’s return would be limited to 25%.
Reference | Chapter 23: Structured Products
44.
Parmida is asked by a client to identify a security that he has heard a co-worker discuss as part of her portfolio. The security is
described as allowing an easy and low-risk way to invest in mortgages, without having to own mortgages directly. What security is your
client’s co-worker likely holding?
A.
First Mortgage Bond.
Good choice!
B.
Mortgage Backed Security (MBS).
C.
Securitized Debt.
D.
Real Estate Investment Trust (REIT).
Feedback: A Real Estate Investment Trust (REIT) consolidates the capital of a large number of investors in order to invest in and
manage a portfolio of real estate. This is a relatively easy way to participate in the real estate market – but not the mortgage market.
First Mortgage Bonds are securities issued by corporations. The Mortgage in the title refers to the fact that the bonds are secured by
actual assets. Securitized Debt is a general term used to refer to the process of converting loans of various sorts into marketable
securities by packaging the loans into pools. Mortgage Backed Securities (MBS) are a type of securitized debt. Pools of residential
mortgages are grouped together and resold to institutional and private investors. They trade in the secondary market, although they are
not particularly liquid. They are considered to be fairly low risk, as The Canada Mortgage and Housing Corporation guarantee most
MBS.
Reference | Chapter 23: Structured Products
45.
The ABC index-linked guaranteed investment certificate (GIC) matured when the ending index level was 12,554. What is the
approximate overall return if the initial index level was 9,225 and the maximum cap on returns is 25%?
A.
0.00%.
B.
40.69%.
C.
36.09%.
Good choice!
D.
25.00%.
Feedback: The overall return on an index-linked GIC is calculated as:
Step One: Index Growth = (Ending Index Level - Initial Index Level) / Initial Index Level x 100.
In this question, (12,554 - 9,225)/9,225 x 100 = 36.09%
Step Two: Overall Return cannot exceed the maximum cap on returns.
In this question, 36.09% exceeds the maximum cap on returns of 25%. The total return on the investment is capped at a maximum of
25%.
Reference | Chapter 23: Structured Products
46.
Harvey considers himself to have a high-risk tolerance and a high-return expectation. He is interested in purchasing an Asset Backed
Security (ABS). Which tranche would be most suitable for this investor?
A.
Securitized.
Good choice!
B.
Junior.
C.
Senior.
D.
Mezzanine.
Feedback: The standard securitization scheme for an ABS generally has a 3-tier tranche hierarchy: Senior, Mezzanine and Junior. The
senior tranche has the least amount of credit loss risk associated with it and attracts the most credit-sensitive type of investor. The
junior tranche, normally the smallest of the three tranches, has the greatest amount of credit risk and attracts a somewhat smaller group
of investors who are more comfortable in assessing and taking more risk in the ABS. This tranche, however, anticipates a higher rate of
return than investors in the other ABS tranches.
Reference | Chapter 23: Structured Products
47.
An investor earns $10,000 in income over the 5-year life of an index-linked guaranteed investment certificate (GIC) in a non-registered
account. Assuming he is in a 26% marginal tax bracket, how much income tax is owed in the year of maturity?
A.
$2,000.
You chose:
B.
$0.
C.
$520.
The correct answer is:
D.
$2,600.
Feedback: The return on index linked GICs is classified as interest income. If the instrument is purchased outside of a registered
retirement savings plan, the gains will be added to income and taxed at the investor’s marginal tax rate. And because the return is
deferred to the maturity of the GIC, the interest income realized (if any) is all taxed in the year of maturity. In this example, $10,000 x
26% = $2,600.
Reference | Chapter 23: Structured Products
48.
The common shares of NFR Inc. increase sharply in price from the time of original issue to the time of wind-up of a split-share
arrangement. What stakeholders other than investors in the common shares themselves benefit from this transaction?
A.
NFR Corporation.
You chose:
B.
NFR split share preferred shareholders.
The correct answer is:
C.
NFR split share capital shareholders.
D.
NFR split share preferred and split share capital shareholders.
Feedback: Split shares are issued for a specific term stated in the prospectus; at the end of the term the split-share company will
redeem the shares. At that point, once the owners of the preferred shares have received back their principal investment and once other
obligations have been paid, the capital shares receive the remaining value. In this example, the capital shares will benefit from
receiving the increase in value from the initial price of the common share. NFR Corporation will not benefit, as there is no additional flow
of funds to the Corporation resulting from the windup.
Reference | Chapter 23: Structured Products
49.
What would the issuer of an index-linked principal-protected note (PPN) invest in to provide both a guarantee of principal and a return
that mimics the S&P/TSX 60?
The correct answer is:
A.
Primarily in a zero-coupon bond and remainder in an option on the S&P/TSX 60.
You chose:
B.
Entirely in an exchange-traded fund (ETF) that tracks the S&P/TSX 60.
C.
Half in a market-linked guaranteed investment certificate (GIC) and half in an exchange-traded fund (ETF) that tracks the S&P/TSX 60.
D.
Primarily in a T-bill and remainder in a basket of stocks which make up the S&P/TSX 60.
Feedback: In Canada today, PPN issuers use a structure known as the zero-coupon bond plus option structure. In this structure,
the issuer invests most of the proceeds in a zero-coupon bond that has the same maturity as the PPN. The zero-coupon bond
guarantees the return of principal at maturity. The remainder of the proceeds is invested in an option on the underlying asset.
Reference | Chapter 23: Structured Products
50.
Your client Seyone invests in a stock basket-linked principal-protected note (PPN) based on a basket of five common shares in which
the performance of any one share is capped at 30%. Given the table below, what is Seyone’s overall return?

Common Share Starting Price Ending Price Return

1 $20 $25 25%

2 $10 $12 20%

3 $15 $12 -20%

4 $20 $26 30%

5 $10 $15 50%

You chose:
A.
25%.
B.
20%.
C.
21%.
The correct answer is:
D.
17%.
Feedback: The overall return on Seyone’s PPN is equal to the average of the effective returns, which is calculated as follows:
Effective Return Average = (25% + 20% -20% + 30% + 30%) ÷ 5 = 17%
Reference | Chapter 23: Structured Products
51.
What are considered second-order risks for alternative strategy funds?
 1. Liquidity risk.
2. Counterparty risk.
3. Currency risk.
4. Interest rate risk.

A.
2 and 4.
B.
1 and 3.
Good choice!
C.
1 and 2.
D.
3 and 4.
Feedback: Second-order risks include liquidity, leverage, deal break, default, counterparty, trading, concentration, pricing
model, and trading model risks.
Reference | Chapter 20: Alternative Investments: Benefits, Risks and Structure
52.
First-order risk affects what type of alternative strategy fund’s strategies?
A.
Event-driven strategies.
B.
Merger or risk arbitrage strategies.
Good choice!
C.
Directional strategies.
D.
Relative value strategies.
Feedback: First-order risk does not affect relative value strategies or event-driven strategies to any significant degree. It does,
however, affect directional strategies, which, by definition, are based on an alternative strategy fund manager’s views about the
direction of different markets, interest rates, commodity prices, and currencies.
Reference | Chapter 20: Alternative Investments: Benefits, Risks and Structure
53.
What benefit does alternative mutual funds provide to retail investors?
A.
The goal of earning relative returns.
Good choice!
B.
Access to investment strategies that were previously largely available only to accredited investors.
C.
Investor protection rights that are similar to hedge funds.
D.
Higher potential returns than hedge funds.
Feedback: Before the advent of alternative mutual funds, access to alternative investment strategies was restricted to a small segment
of the investing public.
Reference | Chapter 20: Alternative Investments: Benefits, Risks and Structure
54.
What is a characteristic of closed-end funds?
A.
Closed-end funds are not suitable for alternative investment strategies.
Good choice!
B.
Listed and trades on a stock exchange.
C.
Price is based solely on the value of the underlying asset.
D.
The NAVPS is typically at the fund’s par value.
Feedback: Like stocks and ETFs, closed-end funds are listed and trade on stock exchanges.
Reference | Chapter 20: Alternative Investments: Benefits, Risks and Structure
55.
How do the investment objectives of conventional mutual funds, liquid alts, and hedge funds compare?
The correct answer is:
A.
Mutual funds seek to maximize relative returns while liquid alts and hedge funds seek to maximize absolute returns.
You chose:
B.
Liquid alts and mutual funds seek to maximize relative returns while hedge funds seek to maximize absolute returns.
C.
Mutual funds seek to maximize absolute returns while liquid alts and hedge funds seek to maximize relative returns.
D.
Liquid alts seek to maximize relative returns while mutual funds and hedge funds seek to maximize absolute returns.
Feedback: Mutual funds seek to maximize relative returns – a mutual fund could produce a loss but is considered to have performed
well if their loss is lower than comparable mutual funds or the benchmark. Alternative mutual funds and hedge funds seek to earn a
positive return in any type of market environment.
Reference | Chapter 20: Alternative Investments: Benefits, Risks and Structure
56.
How does product redemption compare between conventional mutual funds, liquid alts, and hedge funds?
The correct answer is:
A.
Liquid alts and mutual fund redemptions usually take place daily while hedge funds usually take place monthly.
You chose:
B.
Mutual fund redemptions take place daily while liquid alts and hedge funds usually take place monthly.
C.
Mutual funds and hedge fund redemptions take place daily while liquid alts usually take place monthly.
D.
Hedge fund redemptions take place daily while mutual funds and liquid alts usually take place monthly.
Feedback: An aspect that conventional mutual funds and alternative mutual funds share is the frequency of NAV calculation and the
frequency with which redemptions can occur.
Reference | Chapter 20: Alternative Investments: Benefits, Risks and Structure
57.
If returns are normally distributed, approximately what percentage of all returns fall within one standard deviation of the average return?
A.
99%.
You chose:
B.
95%.
C.
32%.
The correct answer is:
D.
68%.
Feedback: If returns are normally distributed, approximately 68% of all returns lie within one standard deviation of the average or
expected return.
=> one standard deviation 68%
two standard deviations 95%
three standard deviations 99.7%

Reference | Chapter 21: Alternative Investments: Strategies and Performance

58.
What measures excess returns generated above the risk-free rate per unit of risk as measured by the standard deviation?
The correct answer is:
A.
Sharpe ratio.
You chose:
B.
Standard deviation.
C.
Alpha.
D.
Leverage.
Feedback: The Sharpe ratio measures excess returns generated above the risk-free rate per unit of risk as measured by the standard
deviation. It can be used to compare the returns across various investments and to distinguish between returns obtained at various
levels of risk.
Reference | Chapter 21: Alternative Investments: Strategies and Performance
59.
When does the standard deviation of returns best measure the variability of returns around the average return?
A.
Always.
You chose:
B.
When returns are skewed to the left.
The correct answer is:
C.
When returns are normally distributed.
D.
When 95% of returns lie within 1 standard deviation of the average.
Feedback: The standard deviation gives a good indication of the dispersion of returns only when returns are approximately normally
distributed. A return distribution is a graphical depiction of the potential returns plotted against their probability of occurrence. The
normal distribution is the familiar bell-shaped curve.
Reference | Chapter 21: Alternative Investments: Strategies and Performance
60.
Which alternative investment strategy would a manager with a relative value strategy mandate use?
A.
Global macro.
Good choice!
B.
Convertible arbitrage.
C.
High-yield bonds.
D.
Distressed securities.
Feedback: The convertible arbitrage strategy is an example of a relative value strategy. Global macro is an example of a directional
strategy, while distressed securities and high yield bonds are examples of event-driven strategies.
Reference | Chapter 21: Alternative Investments: Strategies and Performance
61.
How does a manager choose the pair of securities that will be used in an equity-market neutral strategy?
A.
Credit risk of security under consideration.
B.
Market capitalization.
Good choice!
C.
Degree of similarity between business activities of the companies.
D.
Theoretical value of underlying stock.
Feedback: The decision as to which two securities will make up the pair in an equity-market neutral strategy is based on the degree of
similarity between the business activities of the two companies. Typically, the companies would be head-to-head competitors with very
similar business strategies.
Reference | Chapter 21: Alternative Investments: Strategies and Performance
62.
Li executes a convertible arbitrage strategy by shorting ABC common stock for proceeds of $950.00 and purchasing ABC
convertible bonds for a cost of $1,150. Li reverses the trade 3 months later, selling the bond for proceeds of $1,175 and
buying back the shares for $965.00. What is the profit or loss on the trade?
The correct answer is:
A.
$10 profit.
You chose:
B.
$15 loss.
C.
$35 profit.
D.
$25 profit.
Feedback: Li received $950 for the shorted common stocks and paid out $1,150 for the convertible bonds for a net outlay of $1,150 -
$950 = $200. She later sells the bonds for $1,175 and buys the shares for $965, for a net gain of $1,175 - 965 = $210. $210 - $200
from the net cost of the original trade = $10 in profit.
Reference | Chapter 21: Alternative Investments: Strategies and Performance
63.
What is a risk of a multi-strategy approach?
A.
Higher volatility.
B.
Increased security-specific risks.
You chose:
C.
More time to monitor securities in each strategy.
The correct answer is:
D.
Each underlying strategy exposed to specific risks.
Feedback: In regard to the risks associated with multi-strategy funds, each underlying strategy is exposed to specific risks. Multi-
strategy funds can have the benefits of reduced volatility, and decreased security-specific risks. With more strategies that are brought
on by the manager, the less time the manager will have to monitor the securities held in each strategy and market movements at large.
Reference | Chapter 21: Alternative Investments: Strategies and Performance
64.
What does kurtosis measure?
A.
Measures recovery time from trough to a new peak.
B.
Measures the extent to which returns differ from the average or expected level of return, expressed as a percentage.
Good choice!
C.
Measures the tendency of a return distribution to have values that collect around the average return or conversely toward the tails.
D.
Measures the extent to which a distribution is tilted toward negative or positive returns.
Feedback: Kurtosis measures the tendency of a return distribution either to have values that collect around the average of all returns or
to have values that collect toward the tails of the distribution.
Reference | Chapter 21: Alternative Investments: Strategies and Performance
65.
Alice identifies the DEF fund average annual return to be 4.2% with a normal distribution and a standard deviation of 3.4%. What would
Alice’s expectations be for the fund if the return falls within two standard deviations of the average annual return?
A.
The return could range as low as -3.4%.
B.
The return could range as high as 14.4%.
Good choice!
C.
The return could range as high as 11.0%.
D.
The return could range as low as -6.0%.
Feedback: 4.2% (average return) + 3.4% (one standard deviation) + 3.4% (one standard deviation) = 11.0%.
Reference | Chapter 21: Alternative Investments: Strategies and Performance
66.
Who regulates segregated fund contracts?
A.
CIRO.
B.
Federal insurance regulators.
Good choice!
C.
Provincial insurance regulators.
D.
Office of the Superintendent of Financial Institutions.
Feedback: Segregated funds are insurance contracts, known as individual variable insurance contracts, between a contract holder and
an insurance company. For that reason, they are regulated by provincial insurance regulators.
Reference | Chapter 22: Other Managed Products
67.
What is assigned to investors by segregated funds to measure a contract holder’s participation in, and benefits from, a fund?
The correct answer is:
A.
Notional units.
B.
Participation units.
You chose:
C.
Shares.
D.
Distributions.
Feedback: Because of their legal structure, segregated funds do not issue actual units or shares to investors, because doing so would
imply ownership. Instead, an investor is assigned notional units of the contract – a concept that measures a contract holder’s
participation in and benefits from a fund.
Reference | Chapter 22: Other Managed Products
68.
Rejean, who is purchasing a segregated fund, wishes to have the flexibility to change his beneficiary designation at a later date. What
type of feature should he include in his segregated fund contract?
A.
Estate designation.
B.
Irrevocable designation.
Good choice!
C.
Revocable designation.
D.
Beneficiary designation.
Feedback: The beneficiary is the person or persons who will receive the benefits payable under the contract upon the death of the
annuitant. A revocable designation allows the contract holder to alter or revoke the beneficiary’s status.
Reference | Chapter 22: Other Managed Products
69.
How frequently must a segregated fund be valued?
The correct answer is:
A.
Monthly.
B.
Daily.
You chose:
C.
Weekly.
D.
Quarterly.
Feedback: A segregated fund, although it is often valued daily, must be valued at least monthly.
Reference | Chapter 22: Other Managed Products
70.
What type of closed-end funds have the flexibility to buy back their outstanding shares periodically?
A.
Real estate investment trusts (REITs).
You chose:
B.
Utility income trusts.
C.
Pooled funds.
The correct answer is:
D.
Interval funds.
Feedback: Funds that have the flexibility to buy back their outstanding shares periodically are known as interval funds or closed-end
discretionary funds.
Reference | Chapter 22: Other Managed Products