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CSI IFC Exam Questions
Investment Funds in Canada (Page 9 )

Updated On: 28-Feb-2026
Page 9 of 99
PDF with 486 Questions

For the last year, an investor earned a return before adjustment for inflation of 2% on a money market fund, while inflation averaged 1.5%.
What was his nominal rate of return?

  1. 0.50%
  2. 1.50%
  3. 3.50%
  4. 2.00%

Answer(s): D

Explanation:

The nominal rate of return is the return before adjustment for inflation, which is given as 2%. The real rate of return would be adjusted for inflation (2% - 1.5% = 0.5%), but the question asks for the nominal rate. The feedback from the document states:

"It is important to consider the effects of inflation on investments because we can isolate the difference between nominal and real returns. Investors are more concerned with the real rate of return ­ the return adjusted for the effects of inflation. A nominal return is a return that has not been adjusted for the impact of inflation. The approximate real rate of return is calculated as: Real Return = Nominal Rate - Annual Inflation Rate."


Reference:

Chapter 8 ­ Constructing Investment PortfoliosLearning Domain: Understanding Investment Products and Portfolios



Fund A has a 5-year average return of 10% and a standard deviation of 5%. Fund B has a 5-year average return of 8% and a standard deviation of 2%. Select the most accurate statement about Funds A and B.

  1. Fund A will always provide a higher return than Fund B
  2. Fund B's lowest return is lower than Fund A's lowest return
  3. Fund A's returns have ranged from 5% to 10%
  4. Fund B is less risky than Fund A

Answer(s): D

Explanation:

A lower standard deviation indicates lower volatility and thus lower risk. Fund B, with a standard deviation of 2%, is less risky than Fund A, with a standard deviation of 5%. The feedback from the document states:

"We can find the probable range of returns as follows: Average Return + Standard deviation = Positive outcome. Average Return - Standard deviation = Negative outcome. In any given year Fund A, which has the higher standard deviation, could fluctuate much more widely, making it less attractive as an investment, even over the long-term. Volatility is the most common measure of risk."


Reference:

Chapter 8 ­ Constructing Investment PortfoliosLearning Domain: Understanding Investment Products and Portfolios



Calculate the 2-year simple return for the AAA Mutual Fund.

AAA Mutual Fund Performance

Year | Price at Beginning | Distribution | Price at End | Simple 1-Yr Return

1st Year | $10.00 | $0.25 | $11.00 | 12.50%

2nd Year | $11.00 | $0.25 | $10.20 | -5.00%

  1. 7%
  2. 3%
  3. 8%
  4. -3%

Answer(s): A

Explanation:

The 2-year simple return is calculated as:

Return = (Price at the end of the period + total cash flow earned during the period - Price at the beginning of the period) / Price at the beginning of the period.

Total cash flow = $0.25 (Year 1) + $0.25 (Year 2) = $0.50.

Return = ($10.20 + $0.50 - $10.00) / $10.00 = $0.70 / $10.00 = 7.00%.

The feedback from the document confirms:

"Return = (Price at the end of the period + cash flow earned during the period - Price at the beginning of the period) / Price at the beginning of the period. In this case, ($10.20 + $0.50 - $10.00) / $10.00 = 7.00%."


Reference:

Chapter 8 ­ Constructing Investment PortfoliosLearning Domain: Understanding Investment Products and Portfolios



Which statement best describes what a rational investor will do when comparing the risk and return of two investments?

  1. He will select the one that maximizes risk and maximizes return
  2. He will select the one with the lower risk because all investors are risk averse
  3. He will select the one that minimizes risk and maximizes return
  4. He will select the one with the higher expected risk because that is the only way to earn a higher return

Answer(s): C

Explanation:

A rational investor seeks to maximize return for a given level of risk or minimize risk for a given level of return. The feedback from the document states:

"Given a choice between two investments with the same amount of risk, a rational investor would always take the security with the higher return. Given two investments with the same expected return, the investor would always choose the security with the lower risk. Investors are risk averse, but not all to the same degree. Each investor has a different risk profile."


Reference:

Chapter 8 ­ Constructing Investment PortfoliosLearning Domain: Understanding Investment Products and Portfolios



Why do speculators tend to avoid diversification?

  1. Diversifying a portfolio may result in overall risk that is lower than that of its component securities
  2. Diversifying a portfolio tends to increase the probability of very large gains and losses
  3. Diversifying a portfolio tends to reduce the probability of very large gains and losses
  4. Not diversifying a portfolio exposes the investor to the total risk of the securities

Answer(s): C

Explanation:

Speculators avoid diversification because it reduces the potential for both large losses and large gains, which they seek to achieve significant wealth. The feedback from the document states:

"Diversification affects the returns that investors hope to earn. Diversification tends to reduce the probability of both very large losses and very large gains. Speculators tend to avoid diversification for this reason. Great wealth can be achieved only through an absence of diversification."


Reference:

Chapter 8 ­ Constructing Investment Portfolios






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