What must happen for a redemption to be processed from a mutual fund?
A
Explanation:
When a mutual fund redemption is processed, the fund must calculate the Net Asset Value per Share
(NAVPS) to determine the redemption price. The Canadian Securities Administrators (CSA)
regulations mandate that payment for redeemed securities be made within two business days
following the calculation of NAVPS, ensuring prompt transactions while protecting investor interests.
Reference:
CSC Volume 2, Chapter 17: "Mutual Funds: Structure and Regulation," details the process and timing
for mutual fund redemptions, including regulatory requirements.
What is the key objective for investors in alternative strategy funds?
C
Explanation:
Alternative strategy funds aim to achieve absolute returns, focusing on positive returns under
various market conditions rather than comparing performance to a benchmark index. These
strategies often include hedge funds and alternative mutual funds, using techniques like leverage,
short selling, and derivatives to manage risk and enhance returns. The goal is not necessarily to
outperform an index (as in option A) or match inflation rates (option D) but to deliver consistent
positive returns.
Reference
CSC Volume 2, Chapter 21: Alternative Investments: Strategies and Performance, p. 21-3 to 21-24.
Which ratio gauges a company’s ability to repay its debts using funds generated from operating
activities?
A
Explanation:
The cash flow-to-total debt ratio assesses a company's ability to repay its debts using cash generated
from its operating activities. It is calculated by dividing operating cash flow by total debt. A higher
ratio indicates better capacity to cover debts. This metric is crucial for evaluating financial health and
understanding a firm's liquidity position. Other ratios listed have different focuses:
Interest coverage (B) measures a company’s ability to pay interest with operating income.
Asset coverage (C) measures the protection provided to creditors.
Debt-to-equity (D) evaluates capital structure but not immediate debt repayment ability.
Reference
CSC Volume 2, Chapter 14: Company Analysis - Risk Analysis Ratios, p. 14-12 to 14-16.
Who generally executes portfolio strategy within a buy-side firm?
A
Explanation:
Within a buy-side firm, the portfolio manager is responsible for executing the portfolio strategy. They
oversee investment decisions, asset allocation, and security selection based on the investment
mandate and client objectives. Other roles:
Head of fixed income (B) specializes in fixed-income securities rather than overall strategy.
Investment advisor (C) interacts with clients, focusing on advice rather than execution.
Trader (D) carries out transactions but does not set the portfolio strategy.
Reference
CSC Volume 2, Chapter 27: Working with the Institutional Client - The Buy-Side Portfolio Manager, p.
27-8.
Which type of commodity ETF is most suitable for an investor seeking to gain exposure to the spot
price of a commodity?
A
Explanation:
Commodity Exchange-Traded Funds (ETFs) provide investors with exposure to commodities such as
gold, oil, and agricultural products. The most suitable type of commodity ETF for gaining exposure to
the spot price of a commodity is the Physical-based ETF because it involves direct ownership or
storage of the commodity. For instance, gold ETFs backed by physical gold store bullion in vaults.
1. Physical-based ETFs
These ETFs hold the actual commodity in physical form, which ensures a close tracking of the spot
price. Physical gold ETFs, for example, store gold bars and adjust the NAV (Net Asset Value) based on
the current spot price. This eliminates discrepancies caused by futures contracts or swaps, making
them ideal for tracking spot prices.
2. Swap-based ETFs
These rely on derivative agreements (swaps) to replicate the price movements of a commodity.
While cost-effective, they do not hold the actual commodity, and their performance may slightly
deviate from the spot price due to tracking errors or counterparty risks.
3. Futures-based ETFs
These use futures contracts to gain exposure. However, futures contracts come with complexities
such as contango and backwardation, which can cause performance differences from the spot price
over time.
4. Equity-based ETFs
These invest in shares of companies involved in the commodity sector (e.g., mining or energy
companies). Their performance is influenced by company-specific factors and broader equity market
trends, making them unsuitable for tracking spot prices.
Reference from CSC Study Documents:
Exchange-Traded Funds, Chapter 19, Volume 2: Discusses the characteristics and structure of ETFs,
including commodity-based ETFs and their classification.
Risks related to tracking error and direct ownership of assets are highlighted under ETF types in
Section 19.
What information must be disclosed in ETF Facts documents that may be excluded from Fund Facts
documents?
D
Explanation:
ETF Facts documents are required to disclose specific details related to the trading characteristics of
ETFs that may not be present in Fund Facts documents. These include the market price and bid-ask
spread, which provide transparency about the costs associated with buying and selling ETFs.
Key Elements in ETF Facts Documents:
Market Price and Bid-Ask Spread
Unlike mutual funds, ETFs trade on stock exchanges. The ETF Facts document must disclose the
average bid-ask spread, reflecting the cost of trading and the liquidity of the ETF. This is vital for
investors assessing transaction costs.
Investment Exposure
While investment exposure may also appear in mutual funds, ETFs provide unique insights into their
holdings and methodology due to their structure.
Management Fee
Management fees are included in both ETF Facts and Fund Facts documents, providing details on
operational costs.
Total Value of Units
This may also be found in mutual fund documents, not exclusively in ETF Facts.
The inclusion of trading-specific metrics like the bid-ask spread in ETF Facts ensures investors are
fully aware of trading costs, aiding informed decision-making.
Reference from CSC Study Documents:
Mutual Funds vs. ETFs, Chapter 19, Volume 2: Compares disclosure requirements for ETFs and
mutual funds, emphasizing details unique to ETFs.
General disclosure requirements outlined in Section 19, including bid-ask spreads and market prices.
What type of return is calculated for a security held for 18 months if no adjustments to the return are
made?
D
Explanation:
The return on a security held for a specific period, such as 18 months, without adjusting for time or
compounding, is referred to as the holding period return (HPR). This straightforward calculation
assesses total returns over the period of ownership.
1. Definition of Holding Period Return:
The HPR is calculated as:
HPR=(EndingValue-InitialValue)+DividendsReceivedInitialValueHPR = \frac{{\text{(Ending Value -
Initial Value) + Dividends Received}}}{{\text{Initial Value}}}HPR=InitialValue(EndingValue-
InitialValue)+DividendsReceived
This measure evaluates total growth, disregarding compounding or annualization.
2. Other Return Types (Incorrect Answers):
Effective Rate of Return: Reflects annualized returns considering compounding within a year. It is not
applicable to non-annualized periods like 18 months.
Nominal Rate of Return: The unadjusted rate of return without accounting for inflation. While
related, it does not specifically refer to the holding period concept.
Annualized Total Return: This adjusts returns to reflect an annual basis, assuming constant
performance throughout the period. It is unsuitable for raw, unadjusted returns like the HPR.
Reference from CSC Study Documents:
Chapter 15, Volume 2: Covers the calculation of different return metrics, with detailed examples of
HPR and its application.
Portfolio Return Analysis in Section 15 explains the non-compounded nature of holding period
calculations.
Let me know if further details or clarifications are needed!
What legal authority does the done receive under the protection mandate in Quebec?
B
Explanation:
In Quebec, the concept of a protection mandate (also known as a "mandate in case of incapacity")
allows a person (the donor) to appoint someone (the mandatary or donee) to act on their behalf if
they become unable to do so. The legal authority granted under this mandate encompasses decision-
making and taking actions on behalf of the donor when they are incapacitated, ensuring their
personal, medical, and financial interests are protected.
Key Aspects of the Protection Mandate:
Purpose: The primary purpose of the protection mandate is to prepare for a scenario where the
donor loses their mental or physical capacity to manage their own affairs. It is a proactive measure
for managing one's personal care and assets.
Scope of Authority:
The mandatary gains authority to make personal and financial decisions once the incapacity of the
donor is confirmed, usually by a medical and legal process.
The decisions may include managing bank accounts, paying bills, handling investments, and making
healthcare decisions on behalf of the donor.
Validation Requirement: The mandate only comes into effect after a formal validation process
involving legal authorities to confirm the donor's incapacity.
Legal Framework: The Quebec Civil Code governs the creation and execution of a protection
mandate, ensuring the mandatary acts in the best interest of the incapacitated individual.
Why Option B Is Correct:
The protection mandate specifically applies in cases where the donor is incapacitated. It grants the
donee authority to manage aspects of the donor's life that they can no longer handle themselves.
Options A, C, and D refer to different legal instruments or scenarios, such as probating a will (A),
acting while the donor is capable (C), or estate administration after death (D), none of which are
relevant under a protection mandate in Quebec.
Reference from CSC Study Materials:
Volume 2, Chapter 26: "Working with the Retail Client," Section on Estate Planning, Powers of
Attorney, and Living Wills.
A shareholder receive rights from a company through direct ownership in shares. Not expecting to
exercise them, she sells the right on the relevant exchange. What is her capital gain?
A
Explanation:
When a shareholder sells rights on the exchange, the proceeds of the sale represent the capital gain.
Rights provide shareholders with the opportunity to purchase additional shares of a company at a
discounted price. If a shareholder chooses not to exercise these rights and instead sells them on the
secondary market, the value they receive from the sale constitutes their capital gain.
Key Concepts:
Rights Offering:
A rights offering allows existing shareholders to purchase additional shares at a set price (exercise
price) within a specific period.
Shareholders can either exercise these rights or sell them on the market.
Capital Gain Calculation:
The capital gain from selling the rights equals the sale price. This is because the rights themselves
were issued at no cost to the shareholder.
The exercise price is irrelevant to the calculation as the rights were not exercised.
Tax Implications:
The gain from the sale of rights is treated as a capital gain for tax purposes. Only 50% of the capital
gain is taxable under Canadian taxation rules.
Why Option A Is Correct:
Since the shareholder did not exercise the rights but sold them, the capital gain is the sale price of
the rights. Subtracting the exercise price or using the share price is unnecessary and incorrect for this
scenario.
Reference from CSC Study Materials:
Volume 2, Chapter 24: "Canadian Taxation," Section on Capital Gains and Losses.
Which type of trader specializes in managing block trades on behalf of institution clients?
B
Explanation:
An agency trader specializes in executing large block trades for institutional clients without taking
ownership of the securities. Their role is critical in facilitating liquidity and minimizing market impact
during the execution of trades.
Key Responsibilities of Agency Traders:
Managing Block Trades:
Agency traders handle large transactions on behalf of institutions like pension funds or mutual funds,
ensuring the trades are completed efficiently.
They do not use the firm's capital; instead, they act as intermediaries between the buyer and seller.
Minimizing Market Impact:
Large trades can significantly impact stock prices if not executed strategically. Agency traders use
methods like algorithmic trading or dark pools to mitigate this impact.
Role vs. Other Traders:
Liability Trader: Trades using the firm's capital, assuming the risk of the position.
Market Maker: Provides liquidity by quoting buy and sell prices.
Responsible Designated Trader: Oversees order flow for specific securities on the exchange.
Why Option B Is Correct:
The question specifies managing block trades for institutional clients. This matches the role of agency
traders, as they focus on executing trades on behalf of clients without taking positions themselves.
Reference from CSC Study Materials:
Volume 2, Chapter 27: "Working with the Institutional Client," Section on Roles and Responsibilities
in the Institutional Market.