Free CISI IRT Practice Questions: Portfolio Construction and Planning

Use this focused CISI IRT page as a short practice test for Portfolio Construction and Planning. 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: Portfolio Construction and Planning

Which statement best describes a wrap platform used in retail investment advice?

• A. A tax wrapper that makes all investments held on it free of income tax and capital gains tax, usually in return for a single annual charge.
• B. A pooled investment fund where one manager makes all asset-allocation decisions and investors pay only the fund’s ongoing charges.
• C. An execution-only dealing account that removes the need for suitability reviews because clients choose and switch investments themselves.
• D. An administration service that lets an adviser and client hold and view several investments and tax wrappers in one place, usually with separate platform, fund and adviser charges.

Best answer: D

What this tests: Portfolio Construction and Planning

Explanation: A wrap platform is not normally an investment product or a tax shelter in its own right. It is an advisory administration platform that can hold different assets and wrappers, such as ISAs, pensions and collectives, under one consolidated service. Common benefits include easier valuation, reporting, switching, rebalancing and adviser oversight. The main risks and drawbacks are that convenience can add cost, platform functionality may influence product choice, and clients remain exposed to the risks of the underlying investments. Charges may include a platform charge as well as adviser charges, fund ongoing charges, dealing costs and wrapper-specific costs.

• A tax wrapper describes products such as ISAs or pensions; the platform may host wrappers but does not itself create universal tax exemption.
• A pooled fund describes an investment vehicle such as an OEIC or unit trust; a platform can hold funds but is not the fund manager.
• Execution-only dealing is different from an advised platform relationship; suitability responsibilities are not removed merely because investments are accessed through a platform.

A wrap platform is mainly an administrative and reporting hub for multiple investments and wrappers, with its own charges layered alongside other costs.

Question 2

Topic: Portfolio Construction and Planning

An adviser has completed the fact-find, confirmed a client’s 10-year objective, agreed a medium risk profile, assessed capacity for loss, and identified the tax wrapper to be used. The client asks whether the portfolio should now be invested in sectors the adviser expects to outperform over the next year. What is the best next step in the portfolio construction process?

• A. Allocate mainly to the lowest-volatility asset class, because reducing risk should take priority over the client’s required return.
• B. Apply the adviser’s short-term market view first, because tactical allocation determines the client’s main long-term risk exposure.
• C. Set a strategic asset allocation across asset classes that matches the client’s objectives and risk-return profile, then consider any tactical tilts within that framework.
• D. Select the funds with the strongest one-year performance record and then check whether the overall asset mix is suitable.

Best answer: C

What this tests: Portfolio Construction and Planning

Explanation: Asset allocation is usually the main driver of a portfolio’s risk and return. After fact-finding, risk profiling, capacity for loss assessment, and wrapper selection, the adviser should establish a strategic asset allocation. This is the long-term mix of asset classes intended to meet the client’s objectives within an acceptable level of risk, using diversification and imperfect correlation between asset classes. Tactical allocation is different: it is a shorter-term adjustment around the strategic mix, normally based on market views or valuation opportunities. Tactical tilts should not replace the agreed long-term framework or cause the portfolio to move outside the client’s suitable risk range.

• Starting with recent fund performance skips the main portfolio decision and risks building an unsuitable asset mix.
• Treating tactical allocation as the main long-term risk exposure reverses the correct order.
• Focusing only on low volatility ignores the required return and the client’s agreed medium risk profile.

Strategic allocation should establish the long-term risk-return structure before shorter-term tactical views are considered.

Question 3

Topic: Portfolio Construction and Planning

An adviser reviews a client portfolio described as “well diversified” because it contains eight collective funds. The holdings are:

• four FTSE 100 tracker funds
• two UK equity income funds with similar large-company, value/income styles
• one long-dated gilt fund
• one long-dated sterling corporate bond fund

All funds are sterling-denominated and UK-focused. Which broad diversification principle is most relevant to the assessment?

• A. Prioritise short-term sector rotation because tactical allocation normally removes concentration risk.
• B. Classify the portfolio by its equity/bond split because diversification is complete once two asset classes are held.
• C. Look through each holding to assess the spread of underlying risk drivers, not just the number of funds held.
• D. Count the number of separate funds because each fund mandate normally provides independent diversification.

Best answer: C

What this tests: Portfolio Construction and Planning

Explanation: A diversified portfolio is not created merely by holding several funds. The adviser should look through each fund to the main sources of risk and return: asset class, geography, sector, currency, company size, management style and, for fixed-interest assets, maturity and duration. Here, the equity exposure is heavily UK, sterling, large-company and partly tilted to similar income/value holdings. The bond exposure is also sterling and long-duration, so both fixed-interest funds may react similarly to interest-rate changes. The fund count gives an appearance of spread, but several holdings may move together because they share the same drivers.

• Counting funds can be misleading when the funds own similar assets or follow similar mandates.
• Focusing only on the equity/bond split ignores concentration within each asset class.
• Tactical sector rotation is separate from assessing whether the underlying strategic exposures are genuinely diversified.

The portfolio has several funds, but its exposures remain concentrated by geography, currency, company size, management style and long-duration sterling bond risk.

Question 4

Topic: Portfolio Construction and Planning

An adviser is selecting an implementation approach for a client’s equity allocation. The client wants the bulk of the portfolio to track broad developed-market indices at low cost, but is willing to pay for selective management in less efficient smaller-company and emerging-market areas where outperformance may be more achievable. Which approach best matches these requirements?

• A. A cash-led approach using short-dated deposits until markets become cheaper
• B. A blended approach using passive core holdings with selected active satellite funds
• C. A fully passive approach tracking indices in every equity market
• D. A fully active approach using stock-picking funds across all equity markets

Best answer: B

What this tests: Portfolio Construction and Planning

Explanation: A blended implementation combines passive and active management within the same portfolio. It is often used when a client wants cost control and reliable benchmark exposure in markets where active outperformance may be harder to achieve, while still allowing active managers in areas believed to be less efficient. In this case, broad developed-market exposure can be implemented passively to help control charges and tracking differences from the benchmark. Smaller-company and emerging-market allocations can use selected active funds if the adviser believes manager skill has a better chance of adding value after costs.

• Fully passive implementation would meet the low-cost benchmark-tracking aim, but it would not use active management in the less efficient areas identified.
• Fully active implementation could seek outperformance, but it conflicts with the client’s wish to keep the bulk of the portfolio low cost and close to broad indices.
• A cash-led approach is a market-timing or defensive allocation decision, not an active, passive, or blended implementation of the stated equity allocation.

It combines low-cost market exposure for efficient core markets with active management where the client accepts higher costs for potential added value.

Question 5

Topic: Portfolio Construction and Planning

An adviser has completed fact-finding, risk profiling and asset allocation for a retail client. Before issuing a recommendation, the adviser reviews a fund the client has described as “like a passive tracker because it is rules-based.” The fund literature says it uses a quantitative model to trade daily, follows short-term price trends, can take long and short positions in equity index futures, and may use borrowing to increase exposure.

What is the best next step in the recommendation process?

• A. Select it as a passive fund because investment decisions are rules-based rather than made by a named fund manager.
• B. Treat the short positions as reducing risk by definition and focus the review on charges and platform availability.
• C. Choose the most tax-efficient wrapper first, because wrapper selection determines whether trading and gearing risks are acceptable.
• D. Explain that the fund is a quantitative trend/trading strategy with long, short and geared exposures, then reassess suitability against the agreed risk profile.

Best answer: D

What this tests: Portfolio Construction and Planning

Explanation: A rules-based process is not the same as passive management. Passive funds normally aim to replicate or track a benchmark, with tracking error and market exposure as key risks. The fund described here is using quantitative signals, short-term trend following and frequent trading, so model risk, timing risk and turnover are important. It also uses long and short positions and may be geared, which can magnify losses as well as gains. In an advice workflow, the adviser should correct the client’s misunderstanding and reassess whether these risk sources fit the client’s risk profile, capacity for loss and agreed asset allocation before any product recommendation is made.

• Rules-based management can still be active if it seeks returns from model-driven decisions rather than simply tracking an index.
• Tax wrapper choice matters, but it does not override the need to understand and assess the investment strategy first.
• Short positions and gearing do not automatically reduce risk; they can introduce additional loss, leverage and complexity risks.

The fund’s main risks come from model signals, timing, short exposure, gearing and turnover, so the adviser must test those risks against suitability before recommending it.

Question 6

Topic: Portfolio Construction and Planning

An advice firm is creating a shortlist of investment-product providers for use in client portfolios. The products under review can all meet the same broad asset-allocation need, but the providers differ in financial strength, service standards, platform availability, fund range, charges, and transfer administration. Which principle should guide the shortlist decision?

• A. Assess provider suitability across financial strength, charges, range, platform fit, service quality, and administrative support.
• B. Select the provider with the widest fund range, because platform and administration issues can be corrected later.
• C. Select the provider with the lowest headline charge, provided the underlying investment objective is suitable.
• D. Select the provider with the strongest recent fund performance, as provider service factors are secondary.

Best answer: A

What this tests: Portfolio Construction and Planning

Explanation: Selecting an investment-product provider is a due-diligence decision, not just a product comparison. Charges matter because they reduce client returns, but they should be assessed alongside whether the provider is financially sound, offers the required investment range, works efficiently with the adviser’s chosen platform, and provides reliable administration and service. Weak transfer handling, poor reporting, or limited platform compatibility can create client detriment even where the product itself appears suitable. The best provider is therefore the one that offers a robust overall fit for the client proposition and advice process.

• Lowest headline charge is too narrow; poor service or administration can outweigh a small cost saving.
• Widest fund range may be useful, but it does not override platform compatibility or operational reliability.
• Recent fund performance is relevant to fund research, but it is not a substitute for provider due diligence.

Provider selection should balance investment access, cost, operational reliability, and provider robustness rather than relying on a single feature.

Question 7

Topic: Portfolio Construction and Planning

A UK adviser is reviewing a client’s portfolio, currently invested entirely in a FTSE All-Share tracker. The client wants lower volatility than UK equities over a seven-year horizon, but still wants some potential for real capital growth. The adviser has the following 10-year index data:

Which approach best applies the asset-allocation principle?

• A. Build a strategic mix using relevant asset-class indices as a blended benchmark, using lower correlations to manage risk while warning that past returns and correlations may not persist.
• B. Move fully into UK gilts because the negative historical correlation removes equity risk and guarantees capital protection over seven years.
• C. Retain the FTSE All-Share tracker and assess the whole portfolio only against the FTSE All-Share because it is the client’s existing benchmark.
• D. Switch fully to MSCI World ex-UK because it had the highest historical return and a high correlation with UK equities shows it is a reliable substitute.

Best answer: A

What this tests: Portfolio Construction and Planning

Explanation: Asset allocation should be based on the combined behaviour of assets, not simply the highest historical return. Correlation is important because assets that do not move closely together can reduce overall portfolio volatility. A benchmark should also be relevant to the recommended allocation; a mixed portfolio is better reviewed against a blended benchmark than against a single equity index. Historical index returns and correlations are useful evidence, but they are not promises. The adviser should test the proposed mix against the client’s time horizon, risk tolerance and capacity for loss, and explain that future market conditions may differ from the 10-year period shown.

• Selecting MSCI World ex-UK solely for its past return ignores the client’s aim of reducing volatility and treats history as predictive.
• Using only the FTSE All-Share benchmark would be unsuitable for a portfolio containing gilts, property or overseas equities.
• Holding only gilts overstates the value of negative correlation; gilt prices can still fall and may not meet a real-growth objective.

A diversified allocation should consider return, correlation, benchmark relevance and the limits of historical data rather than relying on a single past performance figure.

Question 8

Topic: Portfolio Construction and Planning

An adviser has completed fact-finding, risk profiling and capacity-for-loss work for a client investing £160,000 for a retirement objective around 15 years away. The client holds ISA and general investment account assets on a legacy platform. The adviser is considering either an actively managed multi-asset fund range on the existing platform or a lower-cost passive model portfolio on a new platform. The new platform would involve transfer dealing costs and sales from the general investment account may create a CGT position.

What is the best next step before making a recommendation?

• A. Keep the client on the legacy platform and review charges only at the next annual suitability review.
• B. Transfer the assets first, then ask the new platform to determine whether active or passive management is more suitable.
• C. Recommend the passive model portfolio because lower ongoing charges should automatically produce the best long-term result.
• D. Prepare a like-for-like net-outcome comparison, including platform, fund, advice and transaction charges, transfer costs, tax and wrapper effects, and active-versus-passive suitability.

Best answer: D

What this tests: Portfolio Construction and Planning

Explanation: Charges compound over time and can materially reduce long-term outcomes, but the lowest headline charge is not automatically the most suitable route. The adviser should compare total cost of ownership and likely net outcome over the client’s expected holding period. That includes platform charges, fund OCFs, advice charges, dealing costs, transfer or exit costs, and any tax consequences from selling assets in the general investment account. The analysis also needs to consider whether active or passive management is appropriate for the client’s objectives, risk profile, capacity for loss and service needs. Only after this like-for-like comparison can the adviser justify the platform and investment selection as suitable and in the client’s best interests.

• Choosing the passive model solely for lower ongoing charges skips tax, transfer costs, service needs and suitability.
• Deferring the charge review would leave a material suitability factor unassessed before implementation.
• Letting the platform decide management style gives the decision to the wrong party and reverses the advice process.

A recommendation should compare the expected long-term client outcome after all relevant costs, tax effects, wrapper issues and management-style suitability have been assessed.

Question 9

Topic: Portfolio Construction and Planning

A client is investing for retirement in 18 years, wants capital growth, accepts equity-market volatility, and does not need regular withdrawals. The adviser wants an approach that sets a long-term mix of equities, bonds, property and cash consistent with the client’s risk profile and objective, with periodic review rather than frequent short-term market calls. Which approach matches these facts?

• A. Strategic asset allocation with periodic rebalancing
• B. Tactical asset allocation based mainly on short-term market forecasts
• C. Income-focused allocation designed to maximise current yield
• D. Defensive cash-led allocation designed to minimise capital fluctuation

Best answer: A

What this tests: Portfolio Construction and Planning

Explanation: Strategic asset allocation sets the broad long-term proportions held in major asset classes, such as equities, fixed interest, property and cash. It should reflect the client’s objective, investment horizon, tolerance for risk and capacity for loss. In this case, the long horizon, capital-growth objective and willingness to accept volatility support a growth-oriented long-term mix, with periodic review and rebalancing to keep the portfolio aligned. Tactical asset allocation may adjust exposures around that long-term position, but it is driven by shorter-term market views and is not the main approach described here.

• Tactical allocation is more about temporary deviations from the long-term mix based on market outlook.
• A cash-led defensive allocation would not fit a long-term capital-growth objective with tolerance for volatility.
• A current-yield focus is more relevant where income need is the main objective, which is not the case here.

A long-term target mix aligned to objectives, time horizon and risk profile is the role of strategic asset allocation.

Question 10

Topic: Portfolio Construction and Planning

An adviser is reviewing two UK equity funds for a client who wants a low-cost core holding that broadly follows the FTSE All-Share, and who accepts normal equity-market volatility. The platform report shows:

Which action is best supported by the report?

• A. Use Fund B as the better-supported core holding because its reduction in yield and ongoing costs are lower, with the same risk indicator and closer benchmark fit.
• B. Treat Fund B as cost-free benchmark exposure because an R-squared of 0.99 removes tracking error and fund charges.
• C. Use Fund A because its higher Sharpe ratio alone outweighs its higher reduction in yield for a client seeking low-cost market exposure.
• D. Reject Fund B because a synthetic risk indicator of 5 shows it carries more risk than Fund A.

Best answer: A

What this tests: Portfolio Construction and Planning

Explanation: A reduction in yield figure is designed to show the overall effect of charges on the investment return. Here, Fund B has a much lower reduction in yield, lower annual management charge, lower ongoing charges figure and lower transaction costs. The synthetic risk indicator is the same for both funds, so the lower-cost choice is not shown as taking extra synthetic risk. Fund B’s R-squared of 0.99 also supports the client’s aim of close exposure to the FTSE All-Share. Fund A’s Sharpe ratio is slightly higher, but that does not override the client’s stated priority for low-cost core benchmark exposure, especially given Fund A’s higher cost drag and weaker benchmark fit.

• A slightly higher Sharpe ratio can be relevant, but it should not be read in isolation from the client objective and the cost impact.
• The synthetic risk indicator is identical for both funds, so it does not support rejecting Fund B as higher risk.
• A high R-squared suggests close benchmark movement, but it does not mean tracking error, charges or performance differences disappear.

Fund B best matches the low-cost benchmark-exposure objective while showing materially lower cost impact and no higher synthetic risk indicator.

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