Free CISI IRT Practice Questions: Asset Classes

Use this focused CISI IRT page as a short practice test for Asset Classes. The items are original Finance Prep sample exam questions built for scenario-based practice, not trivia, puzzle questions, official CISI questions, copied live-exam content, or exam dumps.

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Sample questions

These are original Finance Prep practice questions aligned to this topic area. They are not official CISI questions, copied live-exam content, or exam dumps. Use them to preview question style and explanation depth before continuing with topic drills, mixed sets, and timed mock exams in Finance Prep.

Question 1

Topic: Asset Classes

An adviser is reviewing a proposed £40,000 allocation to UK commercial property for a medium-risk client. The portfolio note says:

• Client need: May need £20,000 at 30 days’ notice during the next year; the balance can be invested for at least seven years.
• Market backdrop: UK commercial property transaction volumes are low and valuations are becoming less certain.
• Fund A: Open-ended property OEIC; 75% direct commercial property, 15% property securities, 10% cash; daily pricing, but dealing may be deferred or suspended; fair-value or swing pricing may be applied.
• Fund B: Closed-ended UK REIT; listed on the London Stock Exchange; shares trade throughout the day; current share price is 12% below NAV.

What action is best supported by the note?

• A. Keep the short-term £20,000 in liquid assets and consider property only for the longer-term portion, with liquidity and discount risks explained.
• B. Avoid property funds entirely because uncertain direct-property valuations prove both funds are unsuitable for a seven-year holding.
• C. Invest the full £40,000 in Fund B because exchange trading means the client can realise NAV on demand.
• D. Invest the full £40,000 in Fund A because daily pricing and 10% cash make short-notice withdrawals dependable.

Best answer: A

What this tests: Asset Classes

Explanation: Property exposure can be useful for diversification and income, but structure matters. An open-ended fund holding direct property may price daily, but its underlying assets are slow and costly to sell. In stressed or uncertain markets, it may apply fair-value or swing pricing and can defer or suspend dealing to protect remaining investors. A closed-ended listed vehicle avoids forced redemptions from the underlying portfolio, and its shares can usually be sold on exchange, but the sale price is the market price, not NAV. A discount to NAV may widen or narrow with sentiment. The decisive client fact is the possible need for £20,000 at 30 days’ notice, so that part should remain in liquid assets rather than direct-property exposure.

• Daily pricing and a 10% cash buffer do not make a direct-property OEIC reliably liquid when redemptions rise.
• Exchange trading improves dealing access, but it does not guarantee sale at NAV when shares trade at a discount.
• Weak market conditions support caution and disclosure, not automatic rejection of all property exposure for a seven-year horizon.

The client’s near-term access need should not be exposed to property-fund liquidity risk, while longer-term exposure may be considered if pricing and discount risks are understood.

Question 2

Topic: Asset Classes

A UK retail client has £140,000 of cash proceeds to hold before a planned property purchase in just over 12 months. They want £40,000 available within a few days for fees and contingencies, but the remaining cash is not needed until completion. They want the highest likely interest consistent with keeping all eligible bank deposits within FSCS protection. Assume FSCS protection is £85,000 per person per authorised institution.

Which arrangement is most suitable?

• A. Place £40,000 in Bank A instant access, £85,000 in Bank B 12-month fixed term, and £15,000 in Bank C 12-month fixed term.
• B. Place the full £140,000 in Bank A instant access.
• C. Place £40,000 in Bank A instant access and £100,000 in Bank B 12-month fixed term.
• D. Place £85,000 in Bank A instant access and £55,000 in Bank B 95-day notice.

Best answer: A

What this tests: Asset Classes

Explanation: Cash-deposit suitability depends on access, term, protection and expected return. The client needs only £40,000 quickly, so that portion should be in an instant-access account. The remaining £100,000 is not needed for just over 12 months, so fixed-term deposits are suitable if they mature before the cash is required. Because FSCS protection is capped at £85,000 per person per authorised institution, the fixed-term portion should not all be placed with Bank B. Splitting £85,000 with Bank B and £15,000 with Bank C preserves protection while using the higher fixed rates available for the client’s time horizon.

• Putting £100,000 with Bank B exceeds the stated FSCS protection limit by £15,000.
• Using mostly instant access and a 95-day notice account keeps protection but sacrifices return on money that can be tied up for 12 months.
• Placing all the cash with Bank A gives maximum access but exceeds the protection limit and earns the lowest stated rate.

This keeps the required liquid cash accessible, uses higher fixed rates for cash not needed for 12 months, and stays within the £85,000 FSCS limit at each institution.

Question 3

Topic: Asset Classes

A stockbroker fills a client’s order by selling shares to the client from the broker’s own inventory. The broker is the counterparty to the client and may profit from the spread, while bearing market risk until the position is managed. Which equity-dealing arrangement does this describe?

• A. An organised trading facility
• B. A multilateral trading facility
• C. Principal dealing
• D. Agency dealing

Best answer: C

What this tests: Asset Classes

Explanation: Principal dealing occurs when a firm trades on its own account and becomes the counterparty to the client’s transaction. In this situation, the broker sells shares from its own inventory, so it is not merely arranging a trade between the client and another market participant. The broker may earn a bid-offer spread, but also takes market risk because the value of the inventory can move before the firm offsets or manages the position. Agency dealing is different because the broker acts for the client and seeks execution against another party, usually earning commission rather than trading as principal. Trading venues such as multilateral trading facilities and organised trading facilities describe market structures, not the broker’s dealing capacity in this fact pattern.

• Agency dealing would involve acting for the client rather than being the client’s counterparty.
• A multilateral trading facility is a venue that brings together multiple buyers and sellers under non-discretionary rules.
• An organised trading facility is a trading venue category, not a description of selling from the broker’s own inventory.

The broker is dealing on its own account as counterparty to the client, which is principal dealing.

Question 4

Topic: Asset Classes

An adviser is comparing three direct property assets as potential income investments. The figures are simplified annual estimates and ignore tax, borrowing and purchase/sale costs. Net income yield is annual rent less unrecoverable voids/costs, divided by market value.

Which conclusion is correct?

• A. The commercial unit’s net income yield is 8.0%, after adding unrecoverable costs to rent.
• B. The agricultural land has the highest net income yield, at 3.5%.
• C. The residential flat has the highest net income yield, at 7.0%.
• D. The commercial unit has the highest net income yield, at 6.0%.

Best answer: D

What this tests: Asset Classes

Explanation: Direct property income returns are usually assessed after allowing for costs that the investor cannot recover, including void periods, repairs, management or other landlord expenses. Here the residential flat produces £15,000 net income (£21,000 - £6,000), a 5.0% net yield. The commercial unit produces £54,000 (£63,000 - £9,000), a 6.0% net yield. The agricultural land produces £18,000 (£21,000 - £3,000), a 3.0% net yield. The commercial unit therefore gives the highest income yield in this simplified comparison. This does not make it risk-free: commercial property returns also depend on lease terms, tenant quality, sector demand and liquidity. Residential returns can be affected by voids and maintenance, while agricultural land may offer lower rental income with more reliance on long-term capital values.

• Using £21,000 / £300,000 gives a gross residential yield of 7.0%, but expected voids and costs reduce the net yield to 5.0%.
• Using £21,000 / £600,000 gives a gross agricultural yield of 3.5%; after costs the net yield is 3.0%, the lowest of the three.
• Adding unrecoverable costs to commercial rent reverses the sign; the calculation should subtract £9,000, giving £54,000 of net income.

Its net income is £54,000, and £54,000 divided by £900,000 gives 6.0%, above the residential and agricultural net yields.

Question 5

Topic: Asset Classes

A cautious retail client is comparing fixed-income securities to help meet a planned long-term care fee. The fee is expected to rise broadly in line with UK retail price inflation, and the client is more concerned with matching that liability and keeping credit risk low than with maximising the initial yield. Which security type best fits this objective?

• A. Investment-grade corporate bond
• B. Floating-rate note issued by a bank
• C. Index-linked gilt
• D. Conventional fixed-rate gilt

Best answer: C

What this tests: Asset Classes

Explanation: Index-linked gilts are designed to protect the real value of cash flows by linking payments and redemption value to an inflation index. For a cautious client with a liability expected to rise with retail price inflation, this gives a closer match than a fixed nominal income stream. The gilt structure also keeps credit risk relatively low because the issuer is the UK government. A conventional gilt may be low credit risk, but its coupon and redemption amount are fixed in money terms. Corporate bonds and bank floating-rate notes may offer attractive income characteristics, but they introduce more issuer credit risk and do not directly match an inflation-linked liability.

• A conventional fixed-rate gilt offers low credit risk, but its nominal coupon does not rise with inflation.
• An investment-grade corporate bond may provide extra yield, but that comes with corporate credit risk and no direct inflation matching.
• A floating-rate note can adjust with short-term interest rates, but that is not the same as matching retail price inflation.

An index-linked gilt provides UK government credit quality with coupon and redemption values adjusted by an inflation index.

Question 6

Topic: Asset Classes

During a portfolio review, a client has £120,000 from maturing gilts to hold for a planned house purchase in four months. They may need access within two business days and want to minimise the chance of receiving less than they invested. A platform shows three sterling money market funds: a public debt CNAV distributing fund, an LVNAV accumulating fund, and a standard VNAV accumulating fund. The client points to the highest seven-day yield on the VNAV fund and asks the adviser to place the order immediately. What is the best next step in the advice process?

• A. Treat the CNAV and LVNAV funds as bank deposits because their prices are designed to remain constant.
• B. Use the accumulating LVNAV fund automatically because reinvested income means the capital value cannot fall.
• C. Compare each fund’s NAV type, income treatment, liquidity terms, credit quality and charges before deciding whether any fund is suitable for the cash need.
• D. Buy the highest-yielding VNAV fund first, then document the NAV and income risks at the next review.

Best answer: C

What this tests: Asset Classes

Explanation: Money market funds can be useful for short-term cash management, but they are still investment funds rather than deposits. A CNAV fund aims to maintain a constant dealing price, and an LVNAV fund may also deal at a stable price within defined limits, but neither removes credit, liquidity or market risk. A VNAV fund prices at its current net asset value, so the unit price can move. Accumulating units reinvest income into the fund, which changes how return appears in the unit price, but it does not guarantee capital. For a client needing house-purchase money soon, the adviser should not select solely on the highest quoted yield. The next step is to compare the structures and risks against the client’s need for access and capital stability before deciding whether a money market fund is suitable at all.

• Chasing the highest seven-day yield skips the suitability review and ignores that VNAV pricing can fluctuate.
• Reinvested income in an accumulating class affects return presentation, not capital protection.
• CNAV and LVNAV pricing aims do not make the funds equivalent to bank deposits or remove investment risk.

The recommendation should first test whether the fund’s pricing structure, risks and access terms match the client’s short-term capital-stability objective.

Question 7

Topic: Asset Classes

A client has £120,000 in cash that may be needed for a property purchase within the next month. They also want to keep part of it as an emergency reserve, so access at short notice is essential. They have no tolerance for capital loss and want to earn some interest while the cash is held. Eligible deposits are protected by the FSCS up to £85,000 per person per PRA-authorised institution.

Which recommendation best applies a suitable approach to comparing deposit accounts?

• A. Split the cash between two savings brands owned under the same PRA authorisation to double the FSCS protection.
• B. Use a 90-day notice account because the higher rate compensates for the access restriction.
• C. Use instant-access deposit accounts, splitting the balance between separately authorised institutions where needed for FSCS protection.
• D. Use a 12-month fixed-rate bond because the fixed rate provides the highest certainty of interest.

Best answer: C

What this tests: Asset Classes

Explanation: For cash that may be required within a month, liquidity is the main suitability factor. A higher headline interest rate is not enough if the account has notice periods, fixed terms, early-withdrawal penalties, or no access before maturity. Instant-access deposits are more appropriate for emergency reserves and short-term known spending needs, even if the interest rate is lower or variable. Because the balance exceeds the stated FSCS limit, the adviser should also consider spreading eligible deposits across separately authorised institutions, not merely different brand names, where protection is important.

• A 12-month fixed-rate bond may improve rate certainty, but it conflicts with the need for access within a month.
• A 90-day notice account is unsuitable where funds may be needed sooner and early access is restricted.
• Different savings brands do not necessarily provide separate FSCS limits if they share the same PRA authorisation.

This matches the client’s liquidity need while recognising the per-institution FSCS protection limit.

Question 8

Topic: Asset Classes

A UK retail client wants a small allocation to alternatives mainly for diversification. They are interested in gold, industrial metals, and specialist collectibles, but they do not want to arrange storage, insurance, specialist valuations, or sales through dealers. They also want prices that can be checked regularly. Which broad investment principle best fits this situation?

• A. Direct ownership is preferable because alternative assets are most suitable when held outside pooled or exchange-traded structures.
• B. Alternative exposure should be limited to assets that generate a regular income yield comparable with bonds.
• C. Indirect exposure may be preferable because it can provide diversified access with simpler administration and more transparent pricing than direct ownership.
• D. Direct ownership is preferable because avoiding product charges normally removes the main risks of alternative assets.

Best answer: C

What this tests: Asset Classes

Explanation: Indirect alternative exposure can be suitable where direct ownership would create practical problems or concentration risk. Physical commodities, collectibles, and other specialist assets may require storage, insurance, authentication, specialist dealing arrangements, and uncertain valuation. A pooled or exchange-traded route may give access to a broader basket of assets, reduce the burden of administration, and provide more frequent observable pricing. It does not remove investment risk, charges, or product-specific risks, but it can better match a retail client who wants a modest diversified allocation without the operational issues of owning individual alternative assets.

• Direct ownership is not automatically better for alternatives; it may increase concentration, valuation, liquidity, and administration issues.
• Avoiding product charges does not remove key alternative-asset risks such as price volatility, liquidity risk, storage, insurance, or valuation uncertainty.
• Alternatives do not have to produce bond-like income; some are held primarily for diversification or potential capital return.

The client’s need for diversification, access, simpler administration, and regular pricing points to indirect alternative exposure rather than owning individual assets directly.

Question 9

Topic: Asset Classes

A property fund is reviewing two direct commercial property acquisitions. The mandate favours resilient income and requires any unavoidable environmental upgrade cost to be treated as part of the acquisition cost when comparing initial yields. Which conclusion is most appropriate from the figures below?

• Retail warehouse:

  • Purchase price: £4,800,000
  • Current net annual rent: £300,000
  • Required energy-efficiency works: £600,000 before the next rent review
  • Sector trend: tenant demand weakening; rents forecast to fall by 1% a year

• Urban logistics unit:

  • Purchase price: £5,200,000
  • Current net annual rent: £295,000
  • Required energy-efficiency works: £100,000 before the next rent review
  • Sector trend: tenant demand rising; rents forecast to rise by 3% a year

• A. Prefer the urban logistics unit, as its adjusted initial yield is about 5.6% and its ESG and sector outlook are stronger.

• B. Prefer the retail warehouse, as its £300,000 rent gives a higher headline yield before environmental works.

• C. Prefer the urban logistics unit only because its forecast rent growth should be added directly to the current rent before calculating initial yield.

• D. Prefer the retail warehouse, as the £600,000 upgrade cost should be deducted from the purchase price when calculating adjusted yield.

Best answer: A

What this tests: Asset Classes

Explanation: For direct property, headline rent should not be viewed in isolation. If environmental upgrade work is unavoidable, treating that cost as part of the capital committed gives a more realistic initial yield. The retail warehouse’s adjusted yield is £300,000 ÷ (£4,800,000 + £600,000), about 5.6%. The logistics unit’s adjusted yield is £295,000 ÷ (£5,200,000 + £100,000), also about 5.6%. With yields broadly similar, the logistics unit is more attractive on the stated facts because it has a much smaller ESG-related capital requirement and a favourable sector trend. Weak tenant demand and forecast rent falls increase the review risk for the retail warehouse, even though its current rent is slightly higher.

• Using headline yield ignores the required environmental works, which are part of the capital committed under the mandate.
• Deducting upgrade cost from purchase price reverses the adjustment; required works increase, not reduce, the effective investment cost.
• Forecast rental growth is relevant to review and selection, but it is not simply added to current rent when calculating initial yield.

The logistics unit has an adjusted initial yield of £295,000 ÷ £5,300,000, about 5.6%, with lower environmental upgrade cost and a positive sector trend.

Question 10

Topic: Asset Classes

A private-equity fund is considering the acquisition of a mature, cash-generative unlisted business. The transaction would be funded with a significant amount of borrowing, with the acquired company’s cash flows expected to service the debt and the fund aiming to enhance equity returns before an eventual sale.

Which type of private-equity investment does this best describe?

• A. Leveraged buy-out
• B. Distressed investment
• C. Growth capital
• D. Venture capital

Best answer: A

What this tests: Asset Classes

Explanation: Private-equity capital can be used at different stages and in different situations. A leveraged buy-out is typically associated with acquiring an established company using a high proportion of debt alongside equity from the private-equity sponsor. The target is usually expected to have sufficiently stable cash flows to support interest and repayment obligations. If the business performs well, the debt structure can increase the return on the sponsor’s equity at exit. This differs from early-stage venture capital, minority expansion funding, or buying into companies experiencing financial distress.

• Venture capital normally backs early-stage or high-growth companies with uncertain cash flows, not mature businesses bought mainly with acquisition debt.
• Growth capital usually funds expansion of an established business without necessarily taking control or using high leverage.
• Distressed investment focuses on companies or securities under financial stress, which is not indicated by a stable, cash-generative target.

A leveraged buy-out uses substantial debt to acquire an established business, relying on its cash flows to service the borrowing and magnify equity returns.

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