CISI Investment, Risk and Taxation Practice Test

Start with the free CISI Investment, Risk and Taxation diagnostic or the 24 public sample questions. See how the questions test asset classes, macro conditions, risk and return, investor taxation, investment products, portfolio construction, advice process, suitability, and portfolio review before you subscribe; Finance Prep then gives you a stable, syllabus-mapped practice bank with 1,100 questions, timed mocks, topic drills, progress tracking, and detailed explanations across web and mobile.

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

Quick review: use the CISI Investment, Risk and Taxation cheat sheet when you want a compact asset-class, risk-return, tax, product, suitability, advice-process, and review checklist before another mixed set.

What this page gives you

• a direct route into Finance 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 Finance 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.

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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 Finance Prep practice before returning to mixed sets and timed mocks.

• Free CISI IRT Full-Length Practice Exam
• CISI Investment, Risk and Taxation Cheat Sheet
• 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 Finance Prep.

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

Free samples and full practice

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

Question 1

Topic: Taxation of Investors and Investments

A UK-resident investor receives dividends from shares in another country. An agreement between the UK and that country sets which state may tax the income, limits the foreign withholding tax rate, and may allow a reclaim if too much tax was deducted. The UK can then give credit for the foreign tax suffered against UK tax on the same income. Which option matches this arrangement?

• A. A double-taxation treaty
• B. UK unilateral tax relief
• C. A remittance basis claim
• D. An ISA tax exemption

Best answer: A

Explanation: A double-taxation treaty is designed to stop the same income being taxed twice in full by two different countries. In a cross-border investment context, the treaty usually states whether the source country, the residence country, or both may tax the income, and it often limits the rate of withholding tax the source country can deduct from dividends or interest.

If too much withholding tax is taken, the investor may be able to reclaim the excess under the treaty. The UK then normally taxes the income under its own rules but may allow a credit for the foreign tax actually suffered on that same income. By contrast, unilateral relief can help with double taxation where no treaty applies, but it does not itself create bilateral taxing rules or cap source-country withholding.

Question 2

Topic: Principles of Investment Risk and Return

A client is comparing two one-year investments and wants the one that produced the higher real total return. The figures are after fund charges and before tax; CPI inflation for the year was 4.0%. Use the exact adjustment: (1 + nominal total return) / (1 + inflation) - 1.

Which statement correctly identifies the better match?

• A. The short-dated gilt fund, because its income yield of 4.25% is higher than the equity fund’s income yield of 3.0%.
• B. The UK equity income fund, because its capital-only return of 4.5% is higher than inflation.
• C. The UK equity income fund, with a nominal total return of 7.5% and a real total return of about 3.4%.
• D. The short-dated gilt fund, with a nominal total return of 6.75% and a real total return of about 2.6%.

Best answer: C

Explanation: Total return includes both capital movement and income. The UK equity income fund gained £900 in capital value and paid £600 income, so its nominal total return is £1,500 / £20,000 = 7.5%. Its real total return is (1.075 / 1.04) - 1, which is about 3.4%. The short-dated gilt fund gained £500 in capital value and paid £850 income, so its nominal total return is £1,350 / £20,000 = 6.75%. Its real total return is (1.0675 / 1.04) - 1, or about 2.6%. The equity fund therefore better matches the client’s stated focus on higher real total return.

Question 3

Topic: Investment Products

An adviser is comparing an equity index future with an equity index put option for a client who holds a £200,000 UK equity tracker fund. The client wants short-term protection against a sharp market fall, but also wants to keep most of the benefit if the market rises. The client is willing to pay a known upfront cost for this flexibility. Which derivative best matches the required risk/reward profile?

• A. Buy an equity index put option
• B. Sell an equity index future
• C. Sell an equity index call option
• D. Buy an equity index future

Best answer: A

Explanation: A put option gives the buyer the right, but not the obligation, to benefit from a fall in the underlying market. For an investor already holding equities, buying a put can act like insurance: if the market falls, the put should increase in value; if the market rises, the investor can let the option lapse and still participate in the equity gains, less the option premium paid. A futures contract is different because it creates an obligation and gives broadly symmetric exposure to market movements. Selling an index future would hedge a fall, but it would also offset gains if the market rose. The decisive feature here is the asymmetric payoff of the bought put.

Question 4

Topic: Portfolio Performance and Review

A client’s portfolio returned -4% over the year and its benchmark returned -7%. The client asks, “Did I make or lose money?” and “Did I do better than the benchmark?” Which pairing best matches these review questions?

• A. Real return for gain or loss; volatility for benchmark comparison
• B. Income yield for gain or loss; tracking error for benchmark comparison
• C. Absolute return for gain or loss; relative return for benchmark comparison
• D. Relative return for gain or loss; absolute return for benchmark comparison

Best answer: C

Explanation: The core distinction is that absolute return measures the portfolio’s own performance over the review period, while relative return measures performance against a benchmark. In this case, the absolute return is -4%, so the portfolio made a loss. The relative return is the difference versus the benchmark:

• Portfolio return: -4%
• Benchmark return: -7%
• Relative return: +3 percentage points

So the portfolio had a negative absolute return but a positive relative return. That can happen when both the portfolio and benchmark fall, but the portfolio falls by less. The key takeaway is that absolute return answers “what happened to the client’s money?” whereas relative return answers “how did it perform against the benchmark?”

Question 5

Topic: Portfolio Construction and Planning

A retail client holds an ISA, a general investment account and a personal pension with three providers. After fact finding and risk profiling, the adviser identifies that the client values consolidated reporting, easier rebalancing and online access. The adviser is considering whether to recommend a wrap platform rather than leaving the accounts with separate providers. What is the best next step in the advice process?

• A. Ask the platform operator to determine whether the client should hold assets in an ISA, pension or general investment account.
• B. Move the investments to the platform first so future review reports can show whether consolidation was worthwhile.
• C. Recommend the platform with the widest fund range, then decide after transfer which wrappers and investments to use.
• D. Compare the existing arrangements with suitable platform alternatives, including total charges, wrapper availability, tax effects, exit penalties and service functionality.

Best answer: D

Explanation: Wrap platforms can help clients and advisers administer multiple investments and tax wrappers in one place, with consolidated valuations, reporting, switching and rebalancing tools. Those benefits do not make a transfer suitable automatically. Before recommending a platform, the adviser should compare the client’s existing arrangements with suitable platform alternatives. The comparison should cover platform charges, adviser charges, wrapper and fund charges, dealing costs, exit penalties, investment range, available wrappers, service features and any tax consequences of moving assets. The adviser remains responsible for suitability; the platform operator provides administration and access, not personalised advice. A review cycle is useful after implementation, but it cannot replace the initial suitability assessment.

Question 6

Topic: Asset Classes

Exhibit: All shares are £1 nominal and issued at par.

• Ordinary: one vote per share; dividend varies with profits.
• Non-voting: no vote; dividend varies with profits.
• Preference: fixed 5% dividend, paid before ordinary dividends.
• Redeemable: fixed 5% dividend, paid before ordinary dividends, redeemed at £1 on 30 June 2029.
• Convertible preference: fixed 6% dividend, paid before ordinary dividends, no vote, convertible into 4 ordinary shares.

A client subscribes £2,500 and wants priority income of £150 a year plus the right to move into ordinary shares later. Which share class best fits?

• A. Redeemable shares
• B. Convertible-preference shares
• C. Ordinary shares
• D. Preference shares

Best answer: B

Explanation: The key is to match both the cash flow and the rights attached to the share. A 6% dividend on a £2,500 subscription equals £150 per year, so the class must be the 6% issue. It must also pay before ordinary dividends and allow the holder to switch into ordinary shares later.

Ordinary shares have voting rights and variable, residual dividends, so they do not meet the income requirement. Plain preference shares give fixed priority income, but no conversion right. Redeemable shares add a repayment date at par, not a right to exchange into ordinary shares, and at 5% would pay only £125. Convertible-preference shares uniquely meet both conditions.

The main distinction here is conversion versus redemption.

Question 7

Topic: Macro-Economic Environment

Which long-term global trend is best defined as increasing competition for finite inputs such as energy, water and arable land?

• A. Natural-resource pressure
• B. Demographic change
• C. Technological advancement
• D. Developing-economy growth

Best answer: A

Explanation: The core concept is natural-resource pressure: the strain created when population growth, higher consumption and industrial development increase demand for limited resources such as energy, water, metals and farmland. This is a structural macro-economic trend rather than a short-term market event. Investors track it because scarcity or supply constraints can raise input costs, change inflation expectations and benefit or harm different industries over time.

It is distinct from other major long-term themes:

• demographic change: shifts in age structure, population size and dependency ratios
• developing-economy growth: rising output, incomes and consumption in emerging markets
• technological advancement: innovation that changes productivity, business models and disruption risk

The key clue is the focus on finite physical inputs, which points directly to resource pressure rather than population, growth geography or innovation.

Question 8

Topic: The Process of Giving Investment Advice

A paraplanner is reviewing a draft recommendation pack before it is issued to a retail client. Which action on the presentation of the recommendation is best supported by the file note?

• Client: Recently retired and describes herself as cautious; previous investments have been cash ISAs only.

• Objective: Generate about £4,000 a year of additional income without committing all capital to a fixed term.

• Proposal: Move £100,000 from a cash ISA into a diversified income portfolio using OEIC funds; capital value and income are not guaranteed, and ongoing charges apply.

• Draft wording: “The strategy optimises risk-adjusted income by adding duration and equity beta exposure within a multi-asset allocation.”

• A. Conclude that the proposal should not be issued because a cautious client must remain wholly in cash.

• B. Present only the income target and omit capital-risk wording, as detailed risk discussion may deter a cautious client.

• C. Retain the technical wording but add a past-performance chart, as previous returns are the main factor for a retired client.

• D. Rewrite the client-facing summary in plain English, linking the portfolio to her income objective and clearly stating the main risks and charges.

Best answer: D

Explanation: The way a recommendation is presented should reflect the client’s knowledge, experience, objectives, concerns, and the complexity of the proposal. Here, the client is cautious and has only held cash ISAs, so unexplained technical language such as duration and equity beta is unlikely to help her make an informed decision. A suitable presentation would use plain English, explain how the proposed portfolio is intended to meet the income objective, and disclose key risks, uncertainty of income and capital value, and costs. The file note does not prove that the investment recommendation is unsuitable, but it does show that the current wording is not well matched to the client’s likely understanding.

Question 9

Topic: Taxation of Investors and Investments

An individual makes a chargeable lifetime transfer of £340,000 into a discretionary trust. There have been no earlier chargeable transfers in the previous seven years, the annual exemption of £3,000 is fully available, and the trustees will pay any lifetime tax. If the nil-rate band is £325,000 and the lifetime IHT rate is 20% on the excess, what IHT is due immediately?

• A. £68,000
• B. £2,400
• C. £4,800
• D. £3,000

Best answer: B

Explanation: The core concept is that lifetime IHT on a chargeable lifetime transfer is charged only on the value above the available nil-rate band, after applying any stated exemptions. Here, the £3,000 annual exemption reduces the transfer from £340,000 to £337,000. With no earlier chargeable transfers, the full nil-rate band of £325,000 is available, so the taxable excess is £12,000.

• Chargeable transfer after exemption: £337,000
• Less nil-rate band: £325,000
• Taxable excess: £12,000
• Lifetime IHT at 20%: £2,400

A common trap is to ignore the exemption or to use the 40% death rate instead of the stated lifetime rate.

Question 10

Topic: Principles of Investment Risk and Return

An adviser is comparing two fixed-term income contracts for a client.

Each plan pays at the end of each year for five years, with no separate maturity value. Ignore tax and charges. The client’s required discount rate is 4%, and the 5-year annuity factor for annual payments in arrears at 4% is 4.4518. Which plan best meets the criterion of the higher net present value?

• A. Plan A, because its NPV is approximately £511
• B. Plan B, because its NPV is approximately £953
• C. Plan A, because its NPV is approximately £5,500
• D. Plan B, because its NPV is approximately £5,750

Best answer: B

Explanation: For fixed payments made at the end of each year, the present value is found by multiplying the annual payment by the relevant annuity factor. Net present value is then the present value of the payments minus the initial outlay. Plan A has a present value of £9,100 × 4.4518 = £40,511, giving an NPV of about £511. Plan B has a present value of £8,750 × 4.4518 = £38,953, giving an NPV of about £953. Although Plan A pays a higher annual amount, Plan B requires a lower initial outlay and therefore has the higher NPV.

Question 11

Topic: Investment Products

Amir is a 40% taxpayer and can fully use any available income tax relief. He is considering a £20,000 subscription into one qualifying tax-advantaged private equity product.

Exhibit:

• VCT: 30% upfront income tax relief; no loss relief if shares become worthless
• EIS: 30% upfront income tax relief; loss relief against income at 40% on the amount lost after upfront relief
• SEIS: 50% upfront income tax relief; loss relief against income at 40% on the amount lost after upfront relief

Ignoring charges and any CGT effects, if the investment later becomes worthless, which option leaves him with the smallest net loss?

• A. SEIS, net loss £10,000
• B. VCT, net loss £14,000
• C. SEIS, net loss £6,000
• D. EIS, net loss £5,600

Best answer: C

Explanation: The core concept is comparing how upfront income tax relief and loss relief affect the investor’s final amount at risk. VCT gives 30% upfront relief but no loss relief, while EIS and SEIS also allow loss relief on the net amount lost after the initial income tax relief.

• VCT: £20,000 - £6,000 = £14,000 net cost; no further relief, so net loss = £14,000
• EIS: £20,000 - £6,000 = £14,000 net cost; loss relief = 40% of £14,000 = £5,600; net loss = £8,400
• SEIS: £20,000 - £10,000 = £10,000 net cost; loss relief = 40% of £10,000 = £4,000; net loss = £6,000

So SEIS produces the smallest final loss because it combines the highest upfront relief with additional loss relief.

Question 12

Topic: Portfolio Performance and Review

A UK equity manager is measured against the FTSE All-Share. The portfolio kept the same sector weightings as the benchmark, but outperformed because the individual shares chosen within sectors produced better returns than the benchmark shares in those same sectors. Which source of return attribution does this describe?

• A. Asset allocation effect
• B. Stock selection effect
• C. Currency movement effect
• D. Timing effect

Best answer: B

Explanation: Performance attribution breaks excess return into different sources, including allocation, selection, currency and timing. In this case, the manager did not change sector weightings relative to the FTSE All-Share, so asset allocation was not the driver. The outperformance came from the specific shares held within each sector doing better than the benchmark constituents in those same sectors, which is the stock selection effect. Currency movements would matter if exchange rates changed the sterling return on overseas assets, and timing would relate to when exposures were added or reduced. The key clue is unchanged sector weights combined with better share choices.

Question 13

Topic: Portfolio Construction and Planning

Which implementation approach is most suitable for an investor who wants low-cost, benchmark-like returns in core holdings, but also wants selective active exposure in less efficient markets?

• A. A pure active manager approach
• B. An enhanced index strategy only
• C. A pure passive index-tracking approach
• D. A blended core-satellite structure

Best answer: D

Explanation: The core concept is blended implementation, often called a core-satellite approach. A passive core is used for broad or relatively efficient markets, where beating the benchmark consistently is difficult and fees matter greatly. Active satellite holdings are then added in areas where markets may be less efficient or specialist skill may add value. This keeps overall portfolio costs lower than a fully active strategy while still allowing selective active risk. A fully passive approach would not provide the desired active exposure, and a fully active approach would usually increase fees and manager risk across the whole portfolio.

Question 14

Topic: Asset Classes

A client will invest £80,000 in one equity fund. She needs at least £2,800 a year of natural income and wants, among the funds that can meet this, the one with the lowest 5-year annualised volatility. Charges are deducted from income.

Which fund is most suitable?

• A. FTSE 100 Tracker Fund
• B. Asia Pacific Growth OEIC
• C. UK Equity Income OEIC
• D. Global Equity Income OEIC

Best answer: D

Explanation: This tests matching an equity-fund exposure to an income need and a risk constraint using net yield. Because charges are deducted from income, the relevant comparison is distribution yield minus ongoing charge, then the client’s volatility preference is applied.

• Required net yield: £2,800 / £80,000 = 3.5%
• UK Equity Income OEIC: 4.4% - 0.7% = 3.7%
• Global Equity Income OEIC: 4.0% - 0.4% = 3.6%
• FTSE 100 Tracker Fund: 3.5% - 0.1% = 3.4%

The Asia Pacific Growth OEIC gives 1.6% - 0.8% = 0.8%, so it is well below target. Only the UK Equity Income OEIC and the Global Equity Income OEIC meet the required income level, and the global income fund has the lower volatility at 11% versus 13%.

Question 15

Topic: Macro-Economic Environment

An adviser is preparing a market update for clients. Latest UK labour-market data show:

• Employed: 32.3 million
• Unemployed: 1.7 million
• Working-age population: 44.0 million

Using the standard definition of the unemployment rate, what is the unemployment rate?

• A. 5.3%
• B. 73.4%
• C. 3.9%
• D. 5.0%

Best answer: D

Explanation: The core concept is that the unemployment rate measures unemployed people as a proportion of the labour force. The labour force includes those who are employed plus those who are unemployed but actively seeking work.

• Labour force = 32.3 + 1.7 = 34.0 million
• Unemployment rate = 1.7 ÷ 34.0 = 0.05 = 5.0%

The 44.0 million working-age population is not the correct base for this indicator, because it also includes people outside the labour force. The key takeaway is that economic indicators often depend on using the right denominator, not just the right numerator.

Question 16

Topic: The Process of Giving Investment Advice

Daniel has already used his ISA allowance for the tax year. He is considering investing £30,000 in a corporate bond fund outside a wrapper and says the written recommendation should focus on the income he can actually spend. The fund is expected to pay 5.0% gross interest a year, and Daniel will pay 20% tax on that interest. What annual income figure should the adviser present?

• A. £1,200
• B. £1,500
• C. £1,440
• D. £300

Best answer: A

Explanation: The key factor here is the client’s personal circumstance and what he wants the recommendation to emphasise. Daniel has asked for the income he can actually spend, and the investment will be held outside a tax wrapper, so the adviser should present the after-tax income rather than the headline gross figure.

• Gross annual interest: £30,000 × 5.0% = £1,500
• Tax at 20%: £1,500 × 20% = £300
• Net annual income: £1,500 − £300 = £1,200

Using the net figure makes the recommendation more meaningful and suitable for Daniel. Showing £1,500 would ignore tax, while £1,440 wrongly treats 20% tax as a 0.2 percentage-point deduction from the yield.

Question 17

Topic: Taxation of Investors and Investments

Which class of National Insurance contribution is normally levied on a self-employed individual’s trading profits?

• A. Class 1 primary contributions
• B. Class 3 voluntary contributions
• C. Class 1 secondary contributions
• D. Class 4 contributions

Best answer: D

Explanation: The key test is the basis on which the contribution is charged. For employees and employers, NICs are generally charged under Class 1 on earnings from employment: primary contributions are the employee’s liability and secondary contributions are the employer’s liability. Voluntary contributors use Class 3, usually to protect or improve benefit entitlement where there are gaps in the contribution record. A self-employed person’s trading profits are matched with Class 4, so that is the correct choice here. The closest distractor is Class 3, but that is voluntary rather than profit-based.

Question 18

Topic: Principles of Investment Risk and Return

A client wants capital certainty and can tie money up for two years. An ISA-based guaranteed investment costs £8,500 today and will pay a single £10,000 lump sum at maturity; the adviser uses a 4% annual discount rate after charges. What is the investment’s net present value, rounded to the nearest pound?

• A. About £746
• B. About £1,115
• C. About £1,500
• D. About -£746

Best answer: A

Explanation: The core concept is discounting a future lump sum back to today and then comparing it with the current cost. Here, the future cash flow is £10,000 in two years, and the required return is 4% a year after charges.

NPV = 10,000 / (1.04^2) - 8,500

First, the present value of £10,000 is about £9,245.56. Then subtract the £8,500 purchase price:

NPV ≈ £9,245.56 - £8,500 = £745.56

Rounded to the nearest pound, that is about £746. The key takeaway is that a positive NPV means the investment exceeds the client’s required return on a time-value basis.

Question 19

Topic: Investment Products

An investment trust starts the year with:

• Portfolio assets: £150 million
• Long-term borrowing: £50 million at 4% annual interest
• Ordinary shareholders’ funds: £100 million

Over the year, the portfolio assets rise by 8%. Ignore all other charges. What is the return to ordinary shareholders for the year?

• A. 8.0%
• B. 6.0%
• C. 10.0%
• D. 12.0%

Best answer: C

Explanation: The core concept is gearing in a closed-ended fund such as an investment trust. Stable capital allows the fund to borrow and invest more than shareholders’ capital alone would support. Here, total assets of £150 million rise by 8% to £162 million. The borrowing remains £50 million, and the annual interest cost is £2 million.

So the year-end value for ordinary shareholders is:

• £162 million assets
• less £50 million borrowing
• less £2 million interest
• equals £110 million shareholders’ funds

Compared with the starting £100 million, that is a 10.0% return. This is why managers may use gearing when they expect investment returns to exceed borrowing costs, although the same mechanism would magnify losses if asset values fell.

Question 20

Topic: Portfolio Performance and Review

During an ISA review, a client with a passive US equity holding asks why some quoted US indices can be driven more by high share-price stocks than by the largest companies. She wants to know which major US benchmark has this construction method. Which index is the best answer?

• A. Dow Jones Industrial Average
• B. FTSE 100
• C. MSCI World
• D. S&P 500

Best answer: A

Explanation: The core concept is index weighting. In a price-weighted index, a company with a higher quoted share price moves the index more than a lower-priced stock, even if the higher-priced company is smaller overall. That is how the Dow Jones Industrial Average is constructed. By contrast, the S&P 500, FTSE 100 and MSCI World are market-capitalisation-weighted benchmarks, so larger companies by value carry more weight. In portfolio review, this matters because the benchmark should reflect how the underlying fund or market exposure is built. For a passive US large-company holding, confusing a price-weighted index with a cap-weighted one can lead to misleading performance comparisons. The key distinction is the weighting method, not simply the market being measured.

Question 21

Topic: Portfolio Construction and Planning

When comparing an active fund and an index tracker offered on different platforms, which measure most directly shows the effect of total charges on the client’s long-term annual return?

• A. Sharpe ratio
• B. Gross redemption yield
• C. Reduction in yield
• D. Tracking error

Best answer: C

Explanation: The core concept is reduction in yield: a measure showing how much an investment’s annualised return is lowered by charges over the illustrated period. This is particularly useful when comparing active and passive funds across different platforms, because it focuses directly on the cost drag that affects the client’s eventual outcome.

• It reflects the impact of charges on net return.
• It helps compare otherwise similar investments on a like-for-like basis.
• A higher reduction in yield usually means the client keeps less of the gross return over time.

The key point is that charges affect what the client actually receives, whereas the other measures describe benchmark deviation, bond yield, or risk-adjusted performance.

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 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.

Question 23

Topic: Macro-Economic Environment

Priya has £30,000 in a Stocks and Shares ISA to help fund a house purchase in about four years. She has limited capacity for loss, but wants better protection against sticky UK inflation than cash, and expects interest rates to edge down from current levels. Which holding is the single best fit for this money?

• A. A diversified commodities ETF
• B. A long-dated conventional gilt fund
• C. A short-dated index-linked gilt fund
• D. A short-dated cash fund

Best answer: C

Explanation: The key concept is that macro-economic conditions affect asset classes differently. Sticky inflation tends to damage the real value of cash and the fixed coupons paid by conventional bonds. If interest rates fall, bond prices can rise, but long-dated conventional gilts are much more sensitive to yield changes, so their prices can move sharply. For a client with limited capacity for loss and a four-year time horizon, that extra duration risk is a poor fit.

A short-dated index-linked gilt fund is better because it links returns to inflation while reducing interest-rate sensitivity compared with long-dated bonds. A commodities allocation may sometimes benefit from inflation or supply shocks, but it is usually too volatile and unpredictable for money earmarked for a house purchase. The best choice is the one that protects real value without taking unnecessary risk.

Question 24

Topic: The Process of Giving Investment Advice

An adviser is recommending a stocks and shares ISA to a first-time investor. The client says, “I do not really understand percentages and I am worried about hidden costs.” Which response best applies the FCA’s Treating Customers Fairly approach?

• A. Emphasise expected returns first and confirm charges after application
• B. Explain all charges in pounds and percentages, discuss access, and check understanding
• C. Provide generic literature and let the client compare charges alone
• D. Recommend the most popular ISA used by similar first-time investors

Best answer: B

Explanation: The core TCF principle here is clear, fair client communication linked to suitable advice. The client has explicitly said that percentages are hard to follow and that hidden costs are a concern, so the adviser should adapt the explanation to the client’s needs rather than rely on standard disclosure alone. Explaining charges in both pounds and percentages makes the cost more understandable, while discussing access helps the client understand how the investment works in practice. Checking understanding is important because fair treatment is not just about giving information; it is about giving it in a form and at a time that supports an informed decision. Generic documents, popularity with other clients, or delaying charge disclosure all fall short of that standard.

In this section

• CISI IRT: Asset Classes
  Try 10 focused CISI IRT questions on Asset Classes, with answers and explanations, then continue with Finance Prep.
• CISI IRT: Macro-Economic Environment
  Try 10 focused CISI IRT questions on Macro-Economic Environment, with answers and explanations, then continue with Finance 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 Finance 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 Finance Prep.
• CISI IRT: Investment Products
  Try 10 focused CISI IRT questions on Investment Products, with answers and explanations, then continue with Finance 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 Finance 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 Finance 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 Finance 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 Finance Prep.
• CISI Investment, Risk and Taxation Cheat Sheet
  Review a compact CISI Investment, Risk and Taxation cheat sheet for asset classes, risk-return, investor taxation, products, suitability, portfolio construction, advice process, and review traps before Finance Prep practice.