CISI ICWIM - International Certificate in Wealth & Investment Management

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.

A risk-averse income-seeking investor needs stable, predictable returns with low volatility.

Why is Option B Correct?

Short-dated gilts (government bonds) have lower interest rate risk.

High coupon bonds provide regular income payments.

Why Not Other Options?

A (Low coupon long-dated gilts) → Long-dated gilts are highly sensitive to interest rate changes, making them riskier.

C (Deferred shares) → Offer no immediate income, only potential future returns.

D (Convertible preference shares) → Convertibles have market risk and may offer lower yields.

📌 Reference: UK Debt Management Office (Gilts Market), CISI Wealth & Investment Management.

📌 Reference: Modern Portfolio Theory (MPT), CFA Institute (Systematic Risk).

An execution-only sale occurs when a broker executes a trade without providing financial advice.

Key Features of Execution-Only Trading:

The client chooses the investment without guidance.

The broker only executes the trade (no suitability checks).

Typically used by experienced investors.

Regulatory Implications:

Under FCA rules, execution-only firms are not responsible for investment suitability.

Clients must confirm they are not receiving advice before execution.

📌 Reference: FCA Handbook (COBS 10 - Execution-Only Transactions), CISI Wealth & Investment Management.

Modern Portfolio Theory (MPT) and the Efficient Frontier

The efficient frontier represents portfolios that offer the highest return for a given level of risk.

Portfolios below the frontier are inefficient because they provide lower returns for the same level of risk or higher risk for the same level of return.

Why the Answer is D

Portfolios below the efficient frontier are suboptimal; the investor is not maximizing return relative to the risk taken.

ICWIM Study Guide, Chapter on Portfolio Theory: Discusses the efficient frontier and inefficiency of suboptimal portfolios.

MPT Literature: Explains risk-return optimization.

References

Active Fund Management

Active fund managers aim to outperform or avoid underperforming their peers by dynamically managing asset allocation.

Asset allocation by consensus ensures alignment with the strategies and expectations of the broader investment community, minimizing the risk of significant divergence from the peer group.

Why the Answer is A

Using consensus-driven allocation avoids extreme deviations in performance relative to peers, which is key for managers seeking to maintain competitive performance.

Why Other Options are Incorrect

B. Assessing prospects: This involves market analysis but does not specifically address peer performance.

C. Hedging risks: Focuses on risk management, not peer alignment.

D. Quantitative models: Useful for analysis but not tailored to peer group considerations.

ICWIM Study Guide, Chapter on Portfolio Management: Discusses consensus-driven asset allocation.

Active Fund Management Literature: Highlights peer-relative performance strategies.

ReferencesThus, the correct answer is A. Through the use of asset allocation by consensus.

The supply curve shifts left when production becomes more expensive or difficult.

Why Does a Leftward Shift Occur?

Increased raw material costs make production more expensive, leading to a reduction in supply.

Higher wages, taxes, or stricter regulations can also shift the supply curve left.

What Causes a Rightward Shift?

Technological improvements lower costs and increase supply.

Lower raw material costs reduce production expenses, encouraging more supply.

📌 Reference: CISI Wealth & Investment Management (Economic Principles), Microeconomics - Supply & Demand.

What is Withholding Tax?

Withholding tax is a tax levied by a foreign government on income, such as dividends or interest, paid to non-resident investors.

When a UK-based investor receives dividend income from overseas equity, the source country often deducts withholding tax before the payment is made.

Why the Other Options are Incorrect

A. Stamp Duty: This is a transaction tax levied in the UK on share purchases, not dividend income.

C. Value Added Tax: VAT is a consumption tax on goods and services, irrelevant to dividends.

D. UK Corporation Tax: This applies to company profits, not individual dividend payments.

ICWIM Study Guide, Chapter on Taxation: Explains withholding tax on cross-border investments.

UK Tax Regulations: Confirm the application of withholding tax on overseas income.

ReferencesThus, the correct answer is B. Withholding Tax.

Why High Coupon Short-Dated Gilts?

Gilts are UK government bonds and are considered low-risk investments.

High coupon provides a steady income stream, ideal for income-seeking investors.

Short-dated gilts reduce interest rate risk, suitable for risk-averse clients.

Why the Other Options are Incorrect

A. Low coupon long-dated gilts: Offer lower income and are more sensitive to interest rate changes, increasing risk.

C. Deferred shares: Generally high-risk and designed for capital growth, not immediate income.

D. Convertible preference shares: More volatile and often tied to company performance, unsuitable for risk-averse clients.

ICWIM Study Guide, Chapter on Fixed-Income Securities: Highlights the suitability of gilts for income-seeking, risk-averse investors.

UK Bond Market Analysis: Confirms the low-risk nature of short-dated gilts.

ReferencesThus, the correct answer is B. High coupon short-dated gilts.