Try 10 focused CISI IM questions on The Investment Management Industry, with answers and explanations, then continue with Securities Prep.
| Field | Detail |
|---|---|
| Exam route | CISI IM |
| Issuer | CISI |
| Topic area | The Investment Management Industry |
| Blueprint weight | 11% |
| Page purpose | Focused sample questions before returning to mixed practice |
Use this page to isolate The Investment Management Industry for CISI IM. Work through the 10 questions first, then review the explanations and return to mixed practice in Securities Prep.
| Pass | What to do | What to record |
|---|---|---|
| First attempt | Answer without checking the explanation first. | The fact, rule, calculation, or judgment point that controlled your answer. |
| Review | Read the explanation even when you were correct. | Why the best answer is stronger than the closest distractor. |
| Repair | Repeat only missed or uncertain items after a short break. | The pattern behind misses, not the answer letter. |
| Transfer | Return to mixed practice once the topic feels stable. | Whether the same skill holds up when the topic is no longer obvious. |
Blueprint context: 11% of the practice outline. A focused topic score can overstate readiness if you recognize the pattern too quickly, so use it as repair work before timed mixed sets.
These questions are original Securities Prep practice items aligned to this topic area. They are designed for self-assessment and are not official exam questions.
Topic: The Investment Management Industry
Alpha plc issued a public profit warning before the market opened on Day 0.
Exhibit:
| Day | Alpha return | Benchmark return |
|---|---|---|
| 0 | -7.8% | -0.3% |
| +1 | -2.4% | 0.1% |
| +2 | -1.1% | 0.0% |
Using the cumulative abnormal return for Days +1 and +2 only, what conclusion is best supported?
Best answer: C
What this tests: The Investment Management Industry
Explanation: The abnormal returns for Days +1 and +2 are -2.5% and -1.1%, giving a cumulative abnormal return of -3.6%. Because the profit warning was public before trading began on Day 0, continued benchmark-relative decline afterwards is evidence against semi-strong efficiency.
Semi-strong EMH states that security prices should adjust rapidly to all publicly available information. Here, the profit warning was released before the market opened, so a semi-strong efficient market would be expected to incorporate that news almost immediately rather than over several more trading days.
The relevant calculation is:
That continued negative abnormal performance after the announcement is consistent with post-announcement drift, a well-known practical challenge to semi-strong EMH. It suggests that assumptions such as instant dissemination, rational processing of news, and frictionless arbitrage may not hold perfectly in practice. Weak-form EMH is not the main issue because the evidence relates to public news, not just past price patterns.
Days +1 and +2 abnormal returns are -2.5% and -1.1%, totalling -3.6%, so prices continued adjusting after public information became available.
Topic: The Investment Management Industry
An equity analyst compares two shares using CAPM and a two-factor APT model.
| Share | Market beta | CAPM expected return | APT expected return | Price-implied expected return |
|---|---|---|---|---|
| Alpha | 1.1 | 8.6% | 9.4% | 9.5% |
| Beta | 1.1 | 8.6% | 7.8% | 9.5% |
The APT model uses inflation and exchange-rate factors. Which interpretation is best supported?
Best answer: B
What this tests: The Investment Management Industry
Explanation: CAPM uses only market beta, so the identical beta of 1.1 gives both shares the same required return of 8.6%. APT is multi-factor, so the shares can have different required returns; against a 9.5% price-implied return, Beta has the larger positive pricing gap.
The key distinction is that CAPM links expected return to one systematic factor, market beta, while APT can reflect several systematic influences. Here, both shares have the same beta, so CAPM cannot distinguish them on required return: each is compared with 8.6%, and each looks equally underpriced by 0.9%.
APT does distinguish them because their multi-factor exposures differ. Comparing the same 9.5% price-implied return with the APT required returns gives:
So APT indicates Beta is relatively more attractively priced. The important takeaway is that APT can alter relative pricing when non-market systematic factors matter.
Identical market betas give identical CAPM required returns, but APT allows extra factors to change required return, leaving Beta with the larger positive gap to 9.5%.
Topic: The Investment Management Industry
Two external managers both market a fund as ‘global equity income’. Fund 1 holds 28 shares, is materially overweight financials versus its benchmark, and leaves foreign currency exposure unhedged. Fund 2 holds 140 shares, keeps sector weights close to benchmark, hedges most currency exposure, and uses futures to remain fully invested. Which conclusion best applies investment-management principles when comparing the two funds?
Best answer: D
What this tests: The Investment Management Industry
Explanation: A strategy label is only a high-level classification, not a full description of portfolio risk. Here, concentration, benchmark-relative sector positions, currency hedging, and futures use all differ, so the funds can behave very differently despite sharing the same label.
The key principle is to look through the strategy label to the actual portfolio construction and implementation. A 28-stock portfolio with a large benchmark overweight in financials and unhedged foreign currency has different concentration, sector, and currency risk from a 140-stock portfolio that stays close to benchmark sector weights, hedges currency, and uses futures to remain invested. Those choices affect diversification, active risk, and how returns are generated. Two funds can therefore sit under the same broad style label yet have meaningfully different behaviour in practice. The closest traps are to rely only on the label or only on the number of holdings, when both miss important sources of risk.
A shared label does not capture concentration, benchmark-relative exposures, currency policy, or derivative use, all of which affect portfolio behaviour.
Topic: The Investment Management Industry
A discretionary manager is appointing an ancillary provider for a new global equity segregated mandate. The client requires assets to be held in segregated custody accounts and wants low settlement-failure risk with strong operational resilience.
| Provider | Custody structure | Failed settlements (12m) | Reconciliation | Tested recovery time |
|---|---|---|---|---|
| Global Custodian X | Segregated | 0.3% | Intraday | 2 hours |
| Broker-Custodian Y | Omnibus | 0.2% | End-of-day | 4 hours |
| Local Network Z | Segregated | 1.1% | Next-day | 8 hours |
Which action is best supported?
Best answer: B
What this tests: The Investment Management Industry
Explanation: The mandate requires segregated custody, so the omnibus broker-custodian cannot be preferred even though its failed-settlement rate is slightly lower. Between the two segregated options, Global Custodian X has lower failed settlements, faster reconciliation, and quicker tested recovery, so it best supports implementation quality and resilience.
Ancillary provider selection should first be tested against the mandate’s explicit constraints and then against operational-quality measures. Here, segregated custody is mandatory, so Broker-Custodian Y is not the best choice despite its 0.2% failed-settlement figure. That leaves Global Custodian X and Local Network Z. X is stronger on every operational measure shown: failed settlements are lower at 0.3% versus 1.1%, reconciliation is intraday rather than next-day, and tested recovery time is 2 hours rather than 8 hours. These differences matter because they affect settlement efficiency, control over client assets, and the ability to continue operating through disruption. The best supported action is therefore to appoint Global Custodian X. The key takeaway is that the best provider is not the one with the single lowest figure, but the one that fits the custody requirement and overall control framework.
It is the only option that meets the segregated-custody requirement while also offering the strongest operational metrics.
Topic: The Investment Management Industry
A portfolio manager is reviewing a UK share using CAPM.
Exhibit:
Which conclusion is correct?
Best answer: C
What this tests: The Investment Management Industry
Explanation: Under CAPM, the required return is the risk-free rate plus beta times the market risk premium: 2% + 0.8 × (7% - 2%) = 6%. Because the share is expected to return 7%, it offers 1% more than CAPM requires, so it has positive alpha and sits above the security market line.
The core CAPM idea is that a security’s required return depends on the risk-free rate and its exposure to market risk, measured by beta. Here, the market risk premium is 7% - 2% = 5%. Applying CAPM gives a required return of 2% + 0.8 × 5% = 6%. The share’s expected return is 7%, which is 1% higher than the CAPM-required return.
That 1% difference is positive alpha, meaning the share offers more return than CAPM would predict for its level of systematic risk. A security with positive alpha plots above the security market line rather than on it.
A zero-alpha share in this case would have an expected return of exactly 6%.
CAPM gives a required return of 6%, so a 7% expected return implies positive alpha of 1% and a position above the security market line.
Topic: The Investment Management Industry
A UK discretionary manager runs a balanced mandate holding global equities, gilts, listed property and a private infrastructure fund. A junior analyst estimates each holding’s beta against the MSCI World Index and recommends overweighting the highest-beta assets because “CAPM says they should deliver the highest expected return”. Which response best applies sound investment-management practice?
Best answer: B
What this tests: The Investment Management Industry
Explanation: The best response is to treat CAPM as a limited tool, not a complete decision rule. In a multi-asset portfolio, beta depends on the chosen market index and is less meaningful for gilts, property and private assets, so managers should also use mandate-relevant benchmarks and broader risk analysis.
CAPM assumes a frictionless market, a single relevant market portfolio, and that market beta is the key priced risk for diversified investors. In real portfolio management, those assumptions often weaken simple CAPM conclusions. Here, using betas against the MSCI World Index may help for listed equities, but it is a poor standalone ranking tool for gilts, listed property and especially a private infrastructure fund, where interest-rate risk, valuation smoothing, liquidity and appraisal effects can matter more than equity-market beta. The sound approach is to use CAPM as one input to expected return, then test conclusions with asset-appropriate benchmarks, mandate context and additional risk measures. The closest trap is assuming diversification makes beta the only relevant risk across every asset class.
CAPM can inform required return, but beta depends on the market proxy and is much less reliable for non-equity and illiquid assets in a multi-asset mandate.
Topic: The Investment Management Industry
A portfolio manager is reviewing two UK-listed industrial shares against the same equity benchmark. Each has an estimated market beta of 1.0, but one is much more sensitive to oil prices and sterling, while the other is more sensitive to UK interest rates and credit spreads. She wants to judge whether the shares should have similar required returns. Which approach best applies investment theory?
Best answer: B
What this tests: The Investment Management Industry
Explanation: CAPM is a single-factor model centred on market beta, whereas APT allows several systematic factors to affect expected return. When two shares have the same beta but clearly different exposures to other priced macro risks, APT is the better framework for judging required return or relative pricing.
The core distinction is that CAPM explains expected return using one systematic risk factor: exposure to the market portfolio, measured by beta. APT is a multi-factor approach, so securities with the same market beta can still have different expected returns if they load differently on other priced factors such as oil, currency, interest-rate or credit-spread shocks.
In this scenario, the manager is specifically concerned with several macro influences beyond the broad equity market. That makes a multi-factor framework more appropriate.
So identical betas do not automatically justify identical required returns when other systematic factor exposures differ materially.
APT allows expected return to reflect several systematic factor loadings, so identical market betas do not by themselves imply identical required returns.
Topic: The Investment Management Industry
A manager is choosing a structure for a portfolio of directly held commercial property.
Exhibit:
Which statement is most accurate?
Best answer: B
What this tests: The Investment Management Industry
Explanation: The daily-dealing open-ended fund has only £16m of cash but faces £30m of redemptions, so it is short by £14m. This shows how fund structure affects liquidity management when the underlying assets are illiquid, such as direct property.
The key concept is that structure determines how investors exit and therefore how liquidity must be managed. In an open-ended fund, investors redeem with the fund itself, so the manager needs cash or asset sales to meet withdrawals. Here the calculation is straightforward:
That mismatch is important for directly held property because properties cannot usually be sold quickly without cost or valuation risk. In a closed-ended investment trust, investors normally exit by selling shares to another investor in the market, so shareholder dealing does not automatically force property sales by the fund. The main takeaway is that illiquid assets often fit closed-ended structures better when frequent dealing is desired by investors.
£30m of redemptions less £16m of cash leaves a £14m shortfall, showing the liquidity strain of daily dealing in an illiquid portfolio.
Topic: The Investment Management Industry
Following a central-bank quantitative easing programme, an analyst reduces the equity discount rate used in a DCF model from 9% to 7%.
Exhibit:
Based on these assumptions, which statement is correct?
Best answer: C
What this tests: The Investment Management Industry
Explanation: QE can lower required returns and discount rates, which increases present values. The effect is stronger for longer-dated cash flows, so the 5-year share benefits much more than the 1-year share, with an increase of about £6.3 versus about £1.7.
The core concept is that policy easing such as QE can reduce discount rates, and lower discount rates disproportionately support assets with longer-duration cash flows. Using \(PV=\frac{CF}{(1+r)^n}\):
$$ \begin{aligned} PV_V(9%) &= 100/1.09 = 91.74 \ PV_V(7%) &= 100/1.07 = 93.46 \ \Delta V &= 1.72 \ PV_G(9%) &= 100/1.09^5 = 64.99 \ PV_G(7%) &= 100/1.07^5 = 71.30 \ \Delta G &= 6.31 \end{aligned} $$
So the 5-year share gains about £6.3, which is much larger than the 1-year share’s gain of about £1.7. The closest trap is to recognise the right mechanism but assign the larger benefit to the near-term cash flow.
The lower discount rate increases the present value of the 5-year cash flow far more than the 1-year cash flow.
Topic: The Investment Management Industry
A diversified multi-asset portfolio has shown only weak sensitivity to its stated global equity benchmark. The manager finds that most of its return variation over the year came from changes in real interest rates, credit spreads and energy prices. Which framework is likely to be more useful at a high level for explaining this pattern?
Best answer: A
What this tests: The Investment Management Industry
Explanation: APT is more useful when returns are being driven by several common risk factors. CAPM is a single-factor framework centred on market beta, so it is less suitable when real rates, credit spreads and energy prices are all materially influencing performance.
The key distinction is that CAPM explains expected return using one main source of systematic risk: beta relative to the market portfolio. APT is a multi-factor framework, so it is more suitable when returns are better explained by exposure to several pervasive influences.
In the scenario, the portfolio has only weak sensitivity to its equity benchmark, while return variation is mainly associated with real interest rates, credit spreads and energy prices. That points to multiple systematic factor exposures rather than one dominant market-beta relationship. APT is therefore the more useful high-level framework for explaining the return pattern.
The closest trap is the diversification argument: diversification reduces idiosyncratic risk, but it does not mean a single-factor model must be sufficient.
APT is better here because the return pattern is linked to several macro risk factors, not mainly to a single market beta.
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