CISI Investment, Risk and Taxation Practice Test

The CISI Investment, Risk and Taxation paper is the commercial heart of the UK retail-investment advice lane. It goes deeper than a foundation paper into asset classes, macro conditions, risk and return, investor taxation, investment products, portfolio construction, advice process, and portfolio review. If you are searching for Investment, Risk and Taxation sample questions, a practice test, mock exam, or simulator, this is the main Securities Prep page to start on web and continue on iPhone or Android with the same Securities Prep account.

Free diagnostic: Try the 80-question CISI IRT full-length practice exam before subscribing. Use it as one advice-core baseline, then return to Securities Prep for timed mocks, topic drills, explanations, and the full Investment, Risk and Taxation question bank.

What this page gives you

• a direct route into Securities Prep practice for CISI Investment, Risk and Taxation
• 24 sample questions with detailed explanations spread across all current topic areas on the page
• UK-specific practice language around HMRC-facing tax treatment, ISA-style wrappers, retail-investment products, suitability, and portfolio-review decisions
• free-preview access on web before you subscribe
• the same Securities Prep account across web, iPhone, iPad, macOS, and Android

CISI Investment, Risk and Taxation exam snapshot

Topic coverage for CISI Investment, Risk and Taxation

These figures are aligned to the current CISI topic blueprint and the real paper’s 80-question format, so they are best read as approximate questions on the real paper, not as percentages.

Best fit by UK role

Real-paper timing target

CISI Investment, Risk and Taxation decision filters

• Suitability first: identify objective, risk capacity, time horizon, tax position, wrapper fit, and liquidity before choosing a product.
• Tax and wrapper effect: check how income, gains, reliefs, allowances, ISA-style wrappers, pensions, trusts, and ownership change the answer.
• Risk-return trade-off: connect asset class, volatility, diversification, income need, and client tolerance instead of solving only a calculation.
• Advice process: separate fact-finding, recommendation, disclosure, implementation, and review steps.

When IRT practice is enough

If several unseen mixed attempts are above roughly 75% and you can explain the suitability, tax, wrapper, or risk-return logic behind each answer, you are likely ready. More practice should improve advice judgment, not train memorised product-tax combinations.

Best page to open next

What CISI Investment, Risk and Taxation is really testing

• whether you can balance tax treatment, risk, return, and wrapper choice rather than optimise only one variable
• whether you can distinguish product structure from client suitability and recommendation process
• whether macro conditions, asset classes, and risk-return concepts are being applied to advice decisions correctly
• whether portfolio construction and review decisions still fit the client objective after tax and risk are considered together

How Investment, Risk and Taxation differs from similar routes

How to use the Investment Risk & Tax simulator efficiently

1. Keep Asset Classes, Taxation, Investment Products, and Giving Investment Advice at the centre of your revision because they dominate the paper.
2. Work product, tax, and suitability questions together so wrappers and investor outcomes stay connected.
3. Review misses by classifying them as product misunderstanding, tax misunderstanding, or advice-process error.
4. End with timed mixed sets so you can move quickly between taxation, suitability, and performance-review decisions.

Free preview vs premium

• Free preview: 24 public sample questions on this page plus the web app entry so you can validate the question style and explanation depth.
• Premium: the full Investment Risk Tax practice bank, focused drills, mixed sets, timed mock exams, detailed explanations, and progress tracking across web and mobile.

Focused sample questions

Use these child pages when you want focused Securities Prep practice before returning to mixed sets and timed mocks.

• Free CISI IRT Full-Length Practice Exam
• CISI IRT: Asset Classes
• CISI IRT: Macro-Economic Environment
• CISI IRT: Principles of Investment Risk and Return
• CISI IRT: Taxation of Investors and Investments
• CISI IRT: Investment Products
• CISI IRT: Portfolio Construction and Planning
• CISI IRT: The Process of Giving Investment Advice
• CISI IRT: Portfolio Performance and Review

Free review resources

Use these free SecuritiesMastery.com resources for concept review, then return to this page when you are ready to practice in Securities Prep.

• CISI Investment Risk and Taxation Cheat Sheet
• CISI Investment Risk and Taxation Study Guide

Free samples and full practice

• Live now: this practice route is available in Securities Prep on web, iOS, and Android.
• On-page sample set: this page includes 24 public sample questions for this route.
• Full practice: open the Securities Prep web app or mobile app for mixed sets, topic drills, and timed mocks.

Good next pages after Investment Risk & Tax

• UK Regulation & Professional Integrity if you want the regulatory core that naturally pairs with this paper
• Investment Advice Diploma (IAD) if you want the broader advice qualification view
• Introduction to Investment if you want the shorter UK-first foundation before retrying this unit
• Investment Management (Level 4) if your next move is portfolio and valuation depth rather than retail-advice breadth

24 Investment Risk & Tax sample questions with detailed explanations

These are original Securities Prep practice questions aligned to the live CISI Investment, Risk and Taxation route and the main blueprint areas shown above. Use them to test readiness here, then continue in Securities Prep with mixed sets, topic drills, and timed mocks.

Question 1

Topic: Taxation of Investors and Investments

Amira earns £55,000 from employment and has no other income or reliefs. For this question, assume a personal allowance of £12,570, a basic rate of 20% on the first £37,700 of taxable income, and a higher rate of 40% above that. She says that because she is a higher-rate taxpayer, all of her earnings are taxed at 40%. Which response by her adviser is most accurate?

• A. Deduct the personal allowance first, tax the next £37,700 at 20%, and tax only the remaining taxable income at 40%.
• B. Set the personal allowance only against income that would otherwise face 40% tax.
• C. Apply 40% to all earnings once total income enters the higher-rate band.
• D. Remove the full personal allowance as soon as any income enters higher-rate tax.

Best answer: A

Explanation: Income tax on employment income is calculated progressively, not by applying one rate to the whole amount. Amira first uses her personal allowance, then pays 20% on the basic-rate band, and only the taxable income above that band is charged at 40%. The core concept is progressive banding. A private individual’s income tax liability is based on taxable income after deducting the personal allowance, unless a separate rule reduces that allowance. Here, Amira’s £55,000 income is reduced by the £12,570 personal allowance, leaving £42,430 taxable. The first £37,700 of that taxable income is charged at 20%, and only the remaining £4,730 is charged at 40%.

Crossing into a higher tax band does not cause earlier income to be re-taxed at the higher rate. The key point is that income tax bands apply in slices, not as a single rate on the whole income.

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Question 2

Topic: Principles of Investment Risk and Return

An investor buys units in an OEIC for £10,000. One year later the units are worth £10,600 and the investor has received £300 in distributions. CPI inflation over the year was 4.0%.

Using the exact inflation adjustment and rounding to one decimal place, which figure matches the investor’s real total return for the year?

• A. 6.0%
• B. 9.0%
• C. 4.8%
• D. 5.0%

Best answer: C

Explanation: Real total return adjusts the full nominal return, including income, for inflation. Here the nominal total return is 9.0%, then \((1.09/1.04)-1 = 4.8\%\), so 4.8% is the matching figure. Total return includes both capital growth and distributions, then real return adjusts that total for inflation. In the stem, the investment rose by £600 and paid £300, so the nominal total gain is £900 on £10,000, which is 9.0%.

• Nominal total return = \((10,600 - 10,000 + 300) / 10,000\) = 9.0%
• Real total return = \((1.09 / 1.04) - 1\) = 0.0481
• Rounded to one decimal place = 4.8%

The nearest trap is the simple subtraction method, but the question asks for the exact inflation-adjusted total return.

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Question 3

Topic: Investment Products

Which statement best describes an OEIC?

• A. An open-ended investment company that creates or cancels shares
• B. An offshore fund with reporting status for UK tax
• C. A trust-based fund in which investors buy units, not shares
• D. A listed closed-ended company with a fixed number of shares

Best answer: A

Explanation: An OEIC is an open-ended collective investment company with variable capital. Investors hold shares in the company, and the number of shares can expand or contract as money flows into or out of the fund. The core concept is fund structure. An OEIC is a corporate open-ended collective investment scheme, so investors own shares in the fund company itself. Because it has variable capital, the fund can create new shares when investors subscribe and cancel shares when they redeem. That is different from a unit trust, which is a trust structure where investors hold units, and from an investment trust, which is a closed-ended listed company with a fixed pool of capital. Reporting-fund status is instead a UK tax classification used for certain offshore funds. The key distinction is that an OEIC is both a company and open-ended.

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Question 4

Topic: Portfolio Performance and Review

A client’s Stocks and Shares ISA was worth £120,000 on 1 January. She added £80,000 on 1 July, just before a broad market fall. At the annual review, she asks her adviser to judge how well the underlying portfolio was managed, without her contribution timing distorting the result. What is the single best measure to use?

• A. Total return based on contributions paid in
• B. Portfolio dividend yield
• C. Time-weighted rate of return
• D. Money-weighted rate of return

Best answer: C

Explanation: Time-weighted return is best when the aim is to assess portfolio management rather than the investor’s cash-flow decisions. The large ISA top-up just before the market fall would distort measures that depend on when money was added. The key issue is the effect of external cash flows on measured performance. When a client adds a large amount just before a market fall, measures such as money-weighted return or simple gain against contributions are pulled down by that timing decision. Time-weighted return breaks the period around the cash flow and links the sub-period returns, so it shows how the portfolio itself performed, largely independent of when the client invested more money.

That makes it the standard measure for judging a manager, model portfolio, or underlying investment strategy. Money-weighted return is more useful when the question is the client’s personal return experience, not the manager’s skill.

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Question 5

Topic: Portfolio Construction and Planning

An adviser is selecting providers for a client’s ISA and GIA. The client wants both wrappers on one compatible platform, reliable online access, prompt transfer handling and clear annual tax reporting. Several providers can offer the same underlying funds. Which approach is most suitable?

• A. Choose the widest-range provider even if platform fit is poorer.
• B. Choose the most familiar provider to reduce adviser review time.
• C. Choose the lowest-charge provider and accept weaker administration.
• D. Choose a financially strong, compatible provider with suitable service and competitive total charges.

Best answer: D

Explanation: Where several providers can deliver the same investments, the adviser should compare total value to the client, not one feature in isolation. The best choice is a financially robust provider that works on the required platform, delivers the needed service and administration, and remains cost-competitive. The core principle is suitability and fair client treatment in provider selection. Because the underlying funds are the same, the deciding factors are the provider’s ability to meet the client’s operational needs: platform compatibility, reliable online access, efficient transfers, clear tax reporting, good administration and adequate financial strength. Charges are important, but they should be assessed as total charges after confirming the provider can actually deliver the required service.

A cheaper provider can still be unsuitable if administration is weak. A broader range adds little if the client’s chosen funds are already available. Adviser convenience is also not a valid primary reason for selection. The best provider is the one that is fit for purpose and competitively priced for this client.

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Question 6

Topic: Asset Classes

A saver wants a cash deposit that does not lock money away until a fixed maturity date, but does require advance warning before withdrawals. Which deposit arrangement best matches this feature?

• A. Instant-access account
• B. Notice account
• C. Fixed-rate term deposit
• D. Current account

Best answer: B

Explanation: A notice account is designed for savers who can wait a set period before taking money out. It differs from an instant-access account, which allows prompt withdrawal, and from a fixed-rate term deposit, which usually ties funds up until maturity. The core concept is matching withdrawal conditions to the deposit type. A notice account lets the saver withdraw funds, but only after giving the provider a specified notice period, such as 30, 60, or 90 days. That means the money is not fully locked in to a fixed end date, yet it is also not available immediately.

This distinguishes it from nearby deposit types:

• instant-access savings: withdrawals can usually be made straight away
• fixed-rate term deposits: money is usually committed for a set term
• current accounts: mainly for day-to-day banking rather than savings discipline

The key takeaway is that advance withdrawal notice points to a notice account, not a fixed-term or instant-access arrangement.

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Question 7

Topic: Macro-Economic Environment

During a year of rising UK inflation and interest rates, CPI inflation was 5%.

Using approximate real return = nominal return - inflation, which statement is correct?

• A. Commodity fund had the highest real return, about 2%.
• B. 5-year gilt had the highest real return, about -9%.
• C. Cash deposit had the highest real return, about -1%.
• D. Cash deposit had the highest real return, about 4%.

Best answer: A

Explanation: The commodity fund is the only holding with a positive approximate real return. Its 7% nominal gain minus 5% inflation gives about 2%, while the cash deposit falls to about -1% real and the gilt suffers both a capital loss and inflation drag. The key concept is that macro-economic inflation should be assessed in real, not just nominal, terms. Cash can lose purchasing power when deposit rates lag inflation, and fixed-income securities can be hit twice in a rising-rate environment: lower bond prices and weaker real returns. Using the stated approximation:

• 5-year gilt nominal return = (9,300 + 300 - 10,000) / 10,000 = -4%; real return ≈ -4% - 5% = -9%
• Cash deposit nominal return = 4%; real return ≈ 4% - 5% = -1%
• Commodity fund nominal return = 7%; real return ≈ 7% - 5% = 2%

So the commodity fund best preserved purchasing power, while the gilt was hurt most by the inflation and rate backdrop.

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Question 8

Topic: The Process of Giving Investment Advice

An adviser is assessing Mr Evans, who must keep £60,000 available in three years to repay an interest-only mortgage. He has a very low capacity for loss. Despite this, he insists that the adviser recommend a geared emerging-markets investment trust because he wants the highest possible growth. What is the single best response by the adviser?

• A. Recommend investing half in the trust and half in a money market fund
• B. Recommend the geared trust after he signs a disclaimer accepting the risks
• C. Treat the transaction as execution-only because he requested a specific investment
• D. Recommend a lower-risk, liquid solution and, if he rejects it, decline to recommend the trust

Best answer: D

Explanation: The adviser must act on suitability, not on the client’s preference alone. A geared emerging-markets investment trust is inconsistent with a three-year known liability and very low capacity for loss, so the adviser should recommend a lower-risk liquid option and refuse to recommend the trust if the client will not accept suitable advice. The core concept is the suitability requirement in personal investment advice. Here, Mr Evans has a defined need for capital in three years and a very low capacity for loss, so the adviser must prioritise capital preservation and liquidity over speculative growth. A geared emerging-markets investment trust carries high volatility and added gearing risk, making it unsuitable for money needed on a fixed date.

A suitable response is to:

• explain why the requested trust does not meet his needs
• recommend a lower-risk, liquid solution aligned to the liability
• avoid making a personal recommendation for the unsuitable trust

A signed risk disclaimer does not cure unsuitable advice, and an advised case cannot simply be relabelled as execution-only to avoid the firm’s responsibilities.

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Question 9

Topic: Taxation of Investors and Investments

A UK-resident client tells an adviser that £60,000 of cash to be invested is held in an overseas deposit account. The client admits the account interest has not been declared to HMRC and asks for a recommendation that will “keep future returns out of sight”. The client has an 8-year time horizon. What is the most appropriate response from the adviser?

• A. Transfer the money into an ISA immediately because future returns are tax-free.
• B. Refuse to help conceal it and tell the client the undeclared interest should be disclosed to HMRC before any legitimate tax planning is considered.
• C. Recommend an offshore bond because tax is deferred until encashment.
• D. Proceed if the client signs to accept full responsibility for tax reporting.

Best answer: B

Explanation: The key issue is not product choice but tax compliance. An adviser may assist with lawful tax mitigation, but must not help a client conceal undeclared income or use an investment purely to evade tax. This tests the distinction between legitimate tax planning and tax evasion. The client’s undeclared overseas interest is a past tax-compliance problem, and the request to keep returns “out of sight” shows an intention to conceal tax. An adviser must not recommend or arrange investments for that purpose.

The appropriate response is to stop short of facilitating the plan, explain that the undeclared interest should be disclosed to HMRC, and only consider compliant tax planning after that issue is addressed. Lawful wrappers and products can reduce or defer tax in the future, but they cannot be used to hide income that should have been reported.

The key takeaway is that tax-efficient advice is acceptable; helping a client avoid disclosure is not.

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Question 10

Topic: Principles of Investment Risk and Return

An investor can put £21,000 into a plan today. The plan’s expected cash flows are shown below. What is the plan’s net present value (NPV), rounded to the nearest pound?

Exhibit:

• Annual payment received at the end of each year: £6,000

• Term: 4 years

• Discount rate: 8%

• Present value annuity factor for 4 years at 8%: 3.312

• A. £19,872

• B. -£1,128

• C. £22,128

• D. £1,128

Best answer: B

Explanation: Net present value is the present value of the regular receipts minus the initial amount invested. Here, £6,000 multiplied by 3.312 gives £19,872, and £19,872 less £21,000 gives -£1,128. The negative result means the plan does not meet the required 8% return. The core concept is that NPV compares the discounted value of future cash inflows with the cash outflow made today. Because the plan pays the same amount at each year-end, the cash flows form an ordinary annuity, so the annuity factor can be used directly.

• Present value of inflows = £6,000 × 3.312 = £19,872
• NPV = £19,872 - £21,000 = -£1,128

A negative NPV means the future payments are worth less than the initial investment once discounted at 8%. The closest trap is the positive £1,128, which comes from reversing the subtraction.

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Question 11

Topic: Investment Products

Amira has relevant UK earnings of £32,000 this tax year. Her employer will pay £6,000 gross into her SIPP. The annual allowance is £60,000, with no tapering or carry forward. Amira’s own contributions use relief at source, and basic-rate tax relief is 20%. What is the maximum net personal contribution she can make this tax year without breaching either the tax-relievable personal limit or the annual allowance?

• A. £20,800
• B. £32,000
• C. £25,600
• D. £43,200

Best answer: C

Explanation: Two limits matter here: the annual allowance for total pension inputs and the earnings-based limit for Amira’s own tax-relieved contributions. Her employer’s payment uses part of the annual allowance, but her own gross limit is still capped at £32,000, so the maximum net payment under relief at source is £25,600. The key concept is that an individual’s own pension contributions can normally receive tax relief only up to 100% of relevant UK earnings, while total contributions from all sources must also stay within the annual allowance. Amira’s employer contribution of £6,000 counts towards the £60,000 annual allowance, leaving £54,000 of allowance, so the annual allowance is not the binding limit. Her own tax-relieved gross contribution is instead capped by her earnings at £32,000.

• Remaining annual allowance: £60,000 - £6,000 = £54,000
• Personal gross limit: lower of £32,000 earnings and £54,000 allowance = £32,000
• Net payment under relief at source: £32,000 × 80% = £25,600

The main trap is confusing the gross contribution credited to the pension with the lower net amount Amira actually pays.

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Question 12

Topic: Portfolio Performance and Review

A cautious client’s portfolio mandate requires at least 80% of total portfolio value to be in investment-grade fixed interest securities. Under the mandate, only BBB- and above count as investment grade. XYZ plc has just been downgraded from BBB to BB, and the client wants the £30,000 cash reserve unchanged.

Exhibit:

• UK gilts: £90,000
• ABC Utilities bond: £55,000, rated A
• XYZ plc bond: £25,000, now rated BB
• Cash: £30,000

What is the minimum switch from XYZ plc bond into gilts needed now to restore the mandate?

• A. Switch £10,000 of XYZ plc bond into gilts
• B. Switch £15,000 of XYZ plc bond into gilts
• C. Switch £20,000 of XYZ plc bond into gilts
• D. Switch £25,000 of XYZ plc bond into gilts

Best answer: B

Explanation: This is a portfolio maintenance calculation after a credit-rating downgrade. The portfolio is worth £200,000, so £160,000 must be investment grade; after the downgrade, only £145,000 still qualifies, so a £15,000 switch into gilts is enough. The core concept is restoring mandate compliance after an investment-related change. Once XYZ plc falls from BBB to BB, it no longer counts as investment grade, so the portfolio must be rebalanced while keeping the cash reserve unchanged.

• Total portfolio value = £90,000 + £55,000 + £25,000 + £30,000 = £200,000
• Required investment-grade amount = 80% × £200,000 = £160,000
• Current investment-grade amount = £90,000 + £55,000 = £145,000
• Shortfall = £160,000 - £145,000 = £15,000

So the minimum action is to switch £15,000 from the downgraded bond into gilts. Larger switches would also restore compliance, but they are more than the minimum required.

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Question 13

Topic: Portfolio Construction and Planning

A client wants to reduce both UK concentration and equity concentration in her £200,000 portfolio before adding one new £20,000 holding.

Which new holding would improve diversification the most?

• A. UK property fund
• B. UK gilt fund, 12-year maturity
• C. North American equity fund, unhedged
• D. Global government bond fund, unhedged, 10-year maturity

Best answer: D

Explanation: After the extra £20,000, the portfolio total becomes £220,000. A global government bond fund is the only choice that cuts UK exposure and also keeps equities down to 54.5% of the portfolio, while adding non-sterling and longer-maturity exposure. The core diversification test is whether the new holding reduces the portfolio’s biggest concentrations across more than one dimension. Here, the client is heavily concentrated in UK assets and already has 60% in equities.

• New portfolio total: £220,000
• To reduce UK concentration, the new holding must be non-UK.
• To reduce equity concentration, the new holding must be non-equity.
• The global government bond fund does both.

With that choice, UK assets fall to £200,000 out of £220,000, or 90.9%, and equities stay at £120,000 out of £220,000, or 54.5%. It also adds currency diversification because it is unhedged and maturity diversification because its average maturity is longer than the existing 4-year UK corporate bond fund. The closest distractor is the North American equity fund, which improves geography and currency diversification but increases equity concentration to 63.6%.

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Question 14

Topic: Asset Classes

A client will use £15,000 as a house deposit in about eight months, but the purchase could complete sooner. She says she cannot accept any loss of capital on this money. Which recommendation best applies the suitability principle?

• A. Split £15,000 equally between a deposit and peer-to-peer loans
• B. Put all £15,000 into a money market fund
• C. Put all £15,000 into diversified peer-to-peer loans
• D. Keep all £15,000 in an instant-access deposit account

Best answer: D

Explanation: The key suitability issue is matching the investment to a short-term, known need for capital. Because the client may need the money sooner and cannot accept loss, an instant-access deposit is more suitable than peer-to-peer lending or a collective cash vehicle. This is a suitability judgement based on time horizon, liquidity and capacity for loss. Money needed for a house purchase within months should usually prioritise capital security and ready access over extra yield. An instant-access deposit best fits those facts because the value is stable and the funds are available when required.

Peer-to-peer lending can offer higher expected returns, but it introduces borrower default risk and access may depend on repayments or secondary-market demand. A money market fund is diversified and generally lower risk than many other investments, but it is still an investment fund rather than a guaranteed deposit, so it does not provide the same level of capital certainty for a near-term liability.

Splitting with peer-to-peer lending still exposes part of the house deposit to inappropriate risk.

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Question 15

Topic: Macro-Economic Environment

An adviser reviews this one-year market snapshot:

• FTSE broad market index: 4,000 to 5,000
• Aggregate earnings per index share: 200p to 208p
• Private-sector credit growth: 16% p.a.

Which interpretation is most appropriate?

• A. Recession caused by a recent negative supply shock
• B. Early recovery led by rapidly improving company profits
• C. Mid-cycle expansion with broadly unchanged valuations
• D. Late-cycle exuberance with bubble risk; turning points remain hard to time

Best answer: D

Explanation: The data suggest valuations are expanding faster than fundamentals. A 25% rise in the market against only a 4% rise in earnings, combined with strong credit growth, is more consistent with late-cycle exuberance or bubble risk than with early recovery or recession. A common sign of a late-cycle boom or possible bubble is when asset prices and credit grow much faster than underlying earnings. Here, the market index rises from 4,000 to 5,000, a 25% increase, while aggregate earnings rise from 200p to 208p, only 4%.

• Start P/E = 4,000 / 200 = 20.0
• End P/E = 5,000 / 208 ≈ 24.0
• Credit growth of 16% adds to the picture of strong financial expansion

That combination points to stretched valuations and late-cycle exuberance. It may indicate bubble risk, but it still does not allow the turning point to be forecast with precision.

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Question 16

Topic: The Process of Giving Investment Advice

An adviser arranges a £90,000 ISA investment and a pure protection policy with a monthly premium of £30 for the same client. The client selects the Enhanced ongoing service.

Charging schedule

• Initial adviser charge on investment: 1.5% of amount invested
• Ongoing service: Essential £25 a month, Enhanced £45 a month, Premium £80 a month
• Commission on pure protection: 150% of the first monthly premium, paid once

Ignoring any change in investment value, what is the firm’s total remuneration in the first year?

• A. £1,935
• B. £1,395
• C. £2,355
• D. £1,890

Best answer: A

Explanation: The first-year total must include all three payment sources: the initial adviser charge on the investment, the monthly fee for the chosen ongoing service, and the one-off commission on the pure protection policy. Using the Enhanced service and the stated commission basis gives £1,935. This question tests how different advice payments can coexist. The investment uses adviser charging, the ongoing review uses a service-frequency fee model, and the protection policy pays commission.

\[ \begin{aligned} \text{Initial adviser charge} &= 1.5\% \times £90,000 = £1,350 \\ \text{Enhanced service fee} &= £45 \times 12 = £540 \\ \text{Protection commission} &= 150\% \times £30 = £45 \\ \text{Total first-year remuneration} &= £1,350 + £540 + £45 = £1,935 \end{aligned} \]

The key is to use the selected service level and the stated commission base of the first monthly premium, not a different package or the annual premium.

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Question 17

Topic: Taxation of Investors and Investments

A paraplanner is checking Mr Evans’s tax position before recommending a taxable deposit account. In the tax year, he has salary of £33,000 and bank interest of £1,500. Assume a personal allowance of £12,570, a basic-rate band of £37,700, a 20% basic rate on both non-savings and savings income, and a £1,000 Personal Savings Allowance for a basic-rate taxpayer. Ignoring National Insurance, what is his total income tax liability for the year?

• A. £4,086
• B. £4,386
• C. £6,600
• D. £4,186

Best answer: D

Explanation: Mr Evans’s personal allowance is set against his salary first, leaving £20,430 of salary taxable at 20%. His total income still keeps him within the basic-rate band, so £1,000 of his interest is covered by the Personal Savings Allowance and only the remaining £500 is taxed. The key principle is to calculate income tax by applying the personal allowance first, then taxing each type of income at the relevant rate while using any specific allowance that applies. Here, salary of £33,000 less the £12,570 personal allowance leaves £20,430 taxable at 20%, giving £4,086 of tax. Adding £1,500 of bank interest does not push total taxable income above the £37,700 basic-rate band, so Mr Evans remains a basic-rate taxpayer. That means he can use the £1,000 Personal Savings Allowance. Only £500 of the interest is therefore taxable, and at 20% this adds £100. Total income tax is £4,186. A common error is to tax all the interest and forget the savings allowance.

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Question 18

Topic: Principles of Investment Risk and Return

Three years ago, Ms Patel invested £150,000 in a Stocks and Shares ISA. Her agreed objective was CPI +2% a year over at least five years, with a cautious-to-moderate risk profile and a stated capacity for loss of no more than a 10% fall. Over the last three years, the portfolio returned 6.4% a year, CPI averaged 3.1%, the portfolio’s largest peak-to-trough fall was 17%, and its composite benchmark returned 5.9% a year. Which is the best evaluation of the portfolio’s performance?

• A. Unsuccessful overall because returns were met, but risk taken was too high.
• B. Unsuccessful overall because a cautious-to-moderate investor should only hold cash.
• C. Successful overall because a five-year objective makes a 17% fall acceptable.
• D. Successful overall because it beat both the benchmark and the return target.

Best answer: A

Explanation: Portfolio review must assess return and risk against the agreed mandate. Here, the portfolio exceeded both CPI +2% and its benchmark, but the 17% fall was outside the client’s stated 10% capacity for loss, so it cannot be judged successful overall. The core concept is that portfolio performance should be judged against the client’s full agreed mandate, not return alone. Ms Patel’s return objective was achieved because 6.4% a year exceeded CPI +2% a year, and the portfolio also outperformed its 5.9% benchmark. However, she had a cautious-to-moderate risk profile and explicitly stated she could tolerate no more than a 10% fall. A 17% peak-to-trough decline means the portfolio delivered those returns by taking more risk than she had agreed and was able to bear.

In a retail-advice review, exceeding the benchmark does not compensate for breaching capacity for loss. The key takeaway is that good returns are not enough if they were achieved outside the client’s risk limits.

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Question 19

Topic: Investment Products

A UK-resident client will be a basic-rate taxpayer when she fully encashes one investment bond in six years. Ignore personal allowances, withdrawals and top slicing relief.

Assume gains on the offshore bond are taxed at 20% on encashment, while the onshore bond has no further tax for a basic-rate taxpayer. Which option is correct?

• A. The onshore bond gives £7,000 more after tax.
• B. The offshore bond gives £7,000 more after tax.
• C. The offshore bond gives £1,400 more after tax.
• D. The onshore bond gives £1,400 more after tax.

Best answer: C

Explanation: The decision should be based on after-tax encashment values, not the gross surrender figures alone. The onshore bond pays out £121,000 with no further tax, while the offshore bond’s £28,000 gain suffers 20% tax, leaving £122,400, so the offshore bond is better by £1,400. This compares the relative merits of onshore and offshore life-assurance bonds using net proceeds. An onshore bond is taxed within the fund, so a basic-rate taxpayer usually has no further UK tax to pay on encashment. An offshore bond benefits from gross roll-up, but the full chargeable event gain is taxed when it is encashed.

Here, the offshore gain is £28,000, so tax is £28,000 × 20% = £5,600. Net offshore proceeds are therefore £128,000 - £5,600 = £122,400. The onshore bond simply pays £121,000 because no further tax is due at basic rate.

So, even after tax, the offshore bond produces the higher net outcome. The key takeaway is to compare after-tax proceeds, not just the presence or absence of an immediate tax charge.

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Question 20

Topic: Portfolio Performance and Review

A UK client’s medium-risk portfolio is managed to a strategic mix of about 40% equities and 60% bonds. Over 12 months, the portfolio returned -3% with annualised volatility of 7%. Over the same period, the FTSE All-Share returned -8% with volatility of 14%, while the agreed 40/60 composite benchmark returned -1%.

Which review comment best applies performance and risk principles?

• A. It had lower absolute risk than equities, but it lagged its relevant 40/60 benchmark.
• B. The negative return alone shows the portfolio took too much risk.
• C. Beating the FTSE All-Share means the portfolio performed satisfactorily overall.
• D. Its lower volatility means cash should be the main benchmark in future.

Best answer: A

Explanation: Absolute performance was negative because the portfolio fell by 3%, and its absolute risk was lower than an all-equity market because volatility was 7% versus 14%. But relative performance should be judged mainly against the agreed 40/60 benchmark, not a pure equity index, and the portfolio lagged that benchmark. This question turns on the difference between absolute and relative assessment. In absolute terms, the client had a loss of 3%, so performance was negative, and the portfolio still carried investment risk. In risk terms, its 7% volatility shows lower absolute risk than the FTSE All-Share’s 14%, which is consistent with a mixed equity-bond mandate rather than an all-equity approach.

Relative performance depends on the benchmark chosen. Against the FTSE All-Share, the portfolio looks strong because it fell less. However, the agreed 40/60 composite benchmark better matches the portfolio’s asset mix and intended risk level, so it is the more relevant comparison. Since that benchmark returned -1%, the portfolio underperformed its proper benchmark by 2 percentage points.

The key point is that benchmark context can change interpretation, so the most relevant benchmark should reflect mandate and risk profile.

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Question 21

Topic: Portfolio Construction and Planning

A retail client wants long-term equity growth but is cost-sensitive. She will only use active management where the expected outperformance after charges is positive.

Exhibit:

• UK large-cap equities (70%, highly researched): expected active alpha before charges 0.40%; active charge 0.80%; passive charge 0.10%
• Asian smaller companies (30%, less researched): expected active alpha before charges 1.80%; active charge 1.00%; passive charge 0.25%

Which implementation is most suitable?

• A. Fully passive in both segments
• B. Fully active in both segments
• C. Passive UK large cap, active Asian smaller companies
• D. Active UK large cap, passive Asian smaller companies

Best answer: C

Explanation: Compare expected active alpha with the extra cost over passive in each segment. UK large-cap active is worse by 0.30% after allowing for higher charges, while Asian smaller-companies active is better by 1.05%, so a blended implementation is most suitable. The core test is whether expected active alpha exceeds the additional charge versus passive in each market segment. In UK large caps, the extra charge for active is 0.70% (0.80% minus 0.10%), which is more than the expected alpha of 0.40%, so passive is preferable there. In Asian smaller companies, the extra charge is 0.75% (1.00% minus 0.25%), which is less than the expected alpha of 1.80%, so active is justified there.

• UK large-cap net active advantage versus passive: 0.40% - 0.70% = -0.30%
• Asian smaller-companies net active advantage versus passive: 1.80% - 0.75% = +1.05%

This supports using passive in the more efficient market and active in the less researched market.

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Question 22

Topic: Asset Classes

A UK client needs £50,000 in sterling in eight months for a house purchase and cannot afford a shortfall. Her bank offers both a sterling instant-access deposit and a US dollar instant-access deposit, with the dollar account paying a higher rate. If she switches the money to the dollar deposit at the same bank, which is the main additional risk?

• A. Institutional risk
• B. Foreign-currency risk
• C. Inflation risk
• D. Interest-rate risk

Best answer: B

Explanation: The client has a known sterling need on a short time horizon, so the cash should broadly match that currency. Moving the deposit into US dollars introduces exchange-rate uncertainty, which could reduce the sterling amount available when the house purchase completes. The key concept is currency matching for short-term cash holdings. Here, the client needs a fixed amount in sterling within eight months and has little capacity for loss. Although the US dollar deposit offers a higher interest rate, its sterling value will change with the GBP/USD exchange rate. If sterling strengthens against the dollar, the client could end up with fewer pounds than needed.

Institutional risk is not the main change because both deposits are with the same bank. Interest-rate risk exists for cash if deposit rates change, but that applies to both cash accounts and is not the new exposure created by switching currencies. Inflation risk affects the real value of cash over time, but for a short-term, fixed sterling liability the more immediate and material issue is exchange-rate movement. The best match for a known sterling outlay is usually sterling cash.

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Question 23

Topic: Macro-Economic Environment

A UK adviser notes that over the past month domestically focused retailers and housebuilders have fallen, while medium-dated gilts have risen. She tells a client that markets are now pricing in weaker UK growth and a greater chance of Bank of England rate cuts. Which indicator would most strongly support her explanation?

• A. A rise in UK house prices of 1.2% month on month
• B. An increase in average weekly earnings growth from 5.0% to 6.0%
• C. A fall in the UK composite PMI from 52.4 to 48.7
• D. A rise in UK CPI inflation from 2.8% to 3.4%

Best answer: C

Explanation: The composite PMI is a timely business indicator of current economic momentum. A move from above 50 to below 50 suggests contraction, which fits weaker growth expectations, rising gilt prices, and weaker performance from domestic cyclical shares such as retailers and housebuilders. The key concept is choosing the indicator most directly linked to the market story in the stem. The composite PMI is a broad survey of private-sector activity, and a reading below 50 signals contraction. That would support expectations of slower UK growth and increase the chance that markets price in future Bank of England rate cuts. In turn, gilts can rise because expected future rates and yields fall, while domestically sensitive equities such as retailers and housebuilders may weaken on lower earnings expectations.

By contrast, higher CPI inflation or faster wage growth would usually suggest more persistent inflation pressure, which is less consistent with a gilt rally driven by rate-cut hopes. Stronger house prices would also point to resilience rather than slowdown. The best fit is therefore the sharp drop in the composite PMI.

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Question 24

Topic: The Process of Giving Investment Advice

A conservation charity is investing £500,000. Its policy requires:

• annual income of at least £19,000
• no more than 5% of assets in fossil-fuel extraction companies
• if more than one option meets both rules, choose the one most aligned with the charity’s environmental purpose

Exhibit:

Which approach is most suitable?

• A. Stewardship equity income fund
• B. Environmental impact fund
• C. Unconstrained income fund
• D. Negative-screened equity income fund

Best answer: B

Explanation: The environmental impact fund meets the charity’s income target because £500,000 × 3.9% = £19,500, and its 1% fossil-fuel exposure is within the 5% limit. Among the compliant choices, it best reflects the charity’s purpose because it positively invests in environmental solutions. The core decision is to apply the charity’s hard constraints first, then choose the option that best matches its purpose. The minimum yield required is £19,000 / £500,000 = 3.8%, so any suitable option must produce at least that level of income and also stay within the 5% fossil-fuel limit.

• Negative-screened equity income fund: meets income (£19,000) and the fossil-fuel limit (4%).
• Environmental impact fund: meets income (£19,500) and the fossil-fuel limit (1%).
• Stewardship equity income fund: fails the fossil-fuel limit at 9%.
• Unconstrained income fund: fails the fossil-fuel limit at 7%.

Between the two compliant choices, the environmental impact fund is the better fit because it actively supports renewables and resource efficiency, which aligns more closely with the charity’s environmental mandate than simple exclusion screening.

In this section

• CISI IRT: Asset Classes
  Try 10 focused CISI IRT questions on Asset Classes, with answers and explanations, then continue with Securities Prep.
• CISI IRT: Macro-Economic Environment
  Try 10 focused CISI IRT questions on Macro-Economic Environment, with answers and explanations, then continue with Securities Prep.
• CISI IRT: Principles of Investment Risk and Return
  Try 10 focused CISI IRT questions on Principles of Investment Risk and Return, with answers and explanations, then continue with Securities Prep.
• CISI IRT: Taxation of Investors and Investments
  Try 10 focused CISI IRT questions on Taxation of Investors and Investments, with answers and explanations, then continue with Securities Prep.
• CISI IRT: Investment Products
  Try 10 focused CISI IRT questions on Investment Products, with answers and explanations, then continue with Securities Prep.
• CISI IRT: Portfolio Construction and Planning
  Try 10 focused CISI IRT questions on Portfolio Construction and Planning, with answers and explanations, then continue with Securities Prep.
• CISI IRT: The Process of Giving Investment Advice
  Try 10 focused CISI IRT questions on The Process of Giving Investment Advice, with answers and explanations, then continue with Securities Prep.
• CISI IRT: Portfolio Performance and Review
  Try 10 focused CISI IRT questions on Portfolio Performance and Review, with answers and explanations, then continue with Securities Prep.
• Free CISI IRT Full-Length Practice Exam: 80 Questions
  Try 80 free CISI IRT questions across the exam domains, with answers and explanations, then continue in Securities Prep.