Pass the CISI CISI level 3 Certificate in Wealth & Investment Management ICWIM Questions and answers with CertsForce

Investor Categories Based on Investable Assets

Mass Affluent: $100,000–$1,000,000

High-Net-Worth Individuals (HNWI): $1,000,000–$5,000,000

Very-High-Net-Worth Individuals (VHNWI): $5,000,000–$30,000,000

Ultra-High-Net-Worth Individuals (UHNWI): Over $30,000,000

Why $900,000 Falls into HNWI?

Although $900,000 is close to the HNWI threshold, the term is often used flexibly for individuals who are near the $1M mark.

Banks and wealth managers generally consider $900,000 within this category because they have similar service needs.

ICWIM Textbook, Chapter on Investor Profiling: Defines HNWI thresholds and explains their investment behavior.

Wealth Management Industry Standards: High-net-worth classification begins near $1M.

ReferencesThus, the investor would normally be categorized as B. High-net-worth.

An increase in earnings per share (EPS) indicates improved profitability on a per-share basis. This enhances the company’s ability to distribute dividends to shareholders, assuming a consistent payout ratio.

Widened share base (A): This would typically dilute EPS, not increase it.

Market share (C): Market share is unrelated to EPS; it is about the company’s competitive position.

P/E ratio (D): While EPS affects valuation, a rise in EPS does not guarantee a P/E increase.

References:

International Certificate in Wealth & Investment Management: Financial ratios and their implications.

EPS as a metric of profitability and dividend-paying capacity.

Double Taxation Relief (DTR) is a mechanism to prevent individuals or companies from paying tax on the same income in two different jurisdictions. This is critical for taxpayers with international earnings or investments. The relief is typically provided under double taxation agreements (DTAs) between countries.

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 is A. Governments are considered unlikely to default.

Critical Illness Cover (CIC) provides a lump sum payout if the policyholder is diagnosed with a covered illness. The policy specifies which conditions qualify for a payout.

Why is Option C Correct?

Policies list specific illnesses (e.g., cancer, stroke, heart attack) that qualify for coverage.

If an illness is not listed, no payout is made.

Why Not Other Options?

A (Any critical illness) → Policies cover only certain conditions.

B (However caused) → Coverage depends on medical definitions, not just cause.

D (Survive for 12 months) → Most policies require survival for 14-30 days, not 12 months.

???? Reference: FCA Insurance Regulations, CISI Wealth & Investment Management (Protection Planning).

A well-diversified portfolio reduces risk by holding assets that are negatively correlated (i.e., they move in opposite directions).

Why Negative Correlation?

When one asset class declines, the other may rise, reducing overall portfolio volatility.

Why Low Standard Deviation?

Lower standard deviation means less volatility, making the portfolio more stable.

Example:

Stocks and bonds typically have negative correlation—when stock prices fall, bond prices tend to rise.

???? Reference: Modern Portfolio Theory (Harry Markowitz), CFA Institute (Risk Diversification).

Commodities (e.g., gold, oil, agricultural products) are not covered by insider dealing regulations, as they are physical assets rather than securities.

Why Are Commodities Exempt?

Insider trading laws apply to securities markets, not physical goods.

Price movements in commodities are driven by supply and demand, not company disclosures.

Regulation of Commodities:

While insider trading rules don’t apply, market manipulation laws still govern commodities (e.g., FCA MAR rules).

???? Reference: FCA Market Abuse Regulation (MAR), CISI Wealth & Investment Management.

???? Reference: FCA Client Categorisation Rules.

Risk Tolerance Defined

Risk tolerance is the degree of variability in investment returns that an investor is willing to withstand.

Pillars of Risk Tolerance

Psychological Traits: Key determinants of how much risk an individual can emotionally handle.

Includes traits like optimism, pessimism, and loss aversion.

Other Factors (Secondary): Experience, education, and financial goals play roles, but they do not directly "underlie" the core risk tolerance.

Example

Two investors with identical knowledge and experience may have different risk tolerances due to differing psychological profiles.

ICWIM Study Guide, Chapter on Risk Profiling: Highlights psychological traits as the foundation of risk tolerance.

Behavioral Finance Theory: Psychological biases and emotional traits shape risk appetite.

ReferencesThus, the correct answer is A. Psychological traits.

Need for a Composite Benchmark:

Portfolios that span multiple asset classes (e.g., equities, bonds, commodities) require a composite benchmark to provide a fair performance comparison.

Single benchmarks (e.g., S&P 500) would not accurately represent multi-asset portfolios.

Elimination of Other Options:

A: Composite benchmarks complicate fund management rather than simplify it.

C: While portfolios are part of the investment universe, this does not necessitate a composite benchmark.

D: Reducing tracking error is a goal but not the main reason for composite benchmarks.

References:

ICWIM Module 3: Details on portfolio management and benchmark selection for performance measurement.