IMT 2 (2026): Equity Securities

Topic snapshot

Practice cases

These cases are original Securities Prep practice items aligned to this topic area. They are designed for self-assessment and are not official exam questions.

Case 1

Topic: Equity Securities

Chevrier Holdco equity implementation review

All amounts are in CAD.

Nadia and Marc Chevrier hold CAD 5.8 million of investable corporate surplus in Chevrier Holdco, managed on a discretionary basis by portfolio manager Elena Wong. Their IPS sets a 60% equity target, 35% fixed income, and 5% cash. Time horizon is 12+ years. The family wants growth but dislikes large surprises versus its policy benchmark and does not want to discuss individual holdings more than twice a year. Elena has no in-house global-equity analyst team; her direct research is limited to a small Canadian coverage list.

The IPS states:

• target tracking error below 2.5%
• no single security above 4% of total portfolio
• no more than 15% of the equity allocation in a customized satellite strategy
• prefer low ongoing costs unless a clear active edge exists

Exhibit: Equity sleeve review

Four legacy Canadian dividend stocks have combined unrealized capital gains of CAD 420,000. The family is comfortable trimming those positions gradually over 12 to 18 months, but it does not want a fully bespoke stock-picking process across multiple foreign markets.

Question 1

Which overall equity implementation is most suitable for the Holdco now?

• A. Direct-stock portfolio across Canada, the U.S., EAFE, and emerging markets
• B. Canadian direct-stock portfolio with foreign exposure deferred
• C. Immediate liquidation into only active global mutual funds
• D. Managed-product core with a capped Canadian direct-equity satellite

Best answer: D

What this tests: Equity Securities

Explanation: A managed-product core is the best fit because the case calls for broad global diversification, lower tracking error, and limited ongoing oversight. Keeping only a small Canadian direct-equity satellite respects the unrealized gains and the family’s desire to retain a few understandable domestic holdings.

This is a core-satellite implementation decision. The core should use managed products because the IPS emphasizes low cost, broad diversification, and closer benchmark alignment, while the current mostly direct-stock approach has produced home-country bias, zero EAFE/EM exposure, a 7% single-name position, and tracking error far above the ceiling.

A small Canadian direct-equity satellite can still be justified because Elena’s research edge is domestic and the legacy dividend names have meaningful embedded gains. That allows gradual, tax-aware trimming without forcing a full immediate liquidation. The best structure is therefore diversified managed products for the global core, plus a tightly capped Canadian satellite for limited customization. A fully direct global stock portfolio is too research-intensive, while an immediate all-fund conversion is less tax-sensitive than the case supports.

• Global stock picking burden Expanding direct security selection across foreign markets conflicts with Elena’s limited research coverage and the family’s low review tolerance.
• Home-country bias Keeping the portfolio mainly in Canadian names leaves the benchmark’s foreign allocation underimplemented and preserves the current mismatch.
• Tax versus cost balance Moving everything immediately into active funds addresses diversification, but it ignores embedded gains and overshoots the stated cost discipline.

This best fits the IPS by improving diversification and benchmark control while preserving limited tax-aware customization in Canadian names.

Question 2

Why are managed products the better vehicle for the EAFE and emerging-markets allocation in this case?

• A. They automatically eliminate currency and country risk
• B. They make IPS concentration and tracking limits irrelevant
• C. They efficiently add diversified benchmark exposure outside Elena’s research edge
• D. They guarantee higher returns than foreign stock selection

Best answer: C

What this tests: Equity Securities

Explanation: Managed products are better for the EAFE and emerging-markets sleeve because they deliver broad foreign diversification without demanding a bespoke international research process. That is especially important here because Elena’s direct coverage is mainly Canadian and the family wants minimal holding-by-holding review.

When choosing between individual securities and managed products, the strongest case for managed products appears where the desired exposure is broad, multi-market, and outside the manager’s research advantage. That describes the EAFE and emerging-markets benchmark in this vignette. The portfolio currently has no exposure there, yet the policy benchmark assigns 30% of equity to those regions.

Using managed products for that sleeve helps Elena:

• close the benchmark gap efficiently
• reduce single-country and single-security risk
• avoid building a high-maintenance foreign stock list
• keep implementation consistent with the family’s limited review appetite

Managed products do not promise outperformance or remove all currency risk, but they are the more suitable vehicle for obtaining diversified international exposure in this mandate.

• No guaranteed alpha The benefit of managed products here is efficient implementation, not certain excess return.
• Risk reduction, not risk elimination Diversification lowers idiosyncratic foreign-market risk, but currency and regional risks still remain.
• IPS still governs Managed products help meet policy limits; they do not exempt the portfolio from concentration or tracking-error discipline.

This matches the case facts because Elena lacks broad foreign-company coverage and the mandate needs scalable international diversification.

Question 3

What is the strongest justification for keeping any individual Canadian stocks in the revised equity structure?

• A. Broader diversification than a managed product
• B. Gradual, tax-aware reduction of appreciated legacy positions
• C. Lower tracking error than a Canadian index managed product
• D. Elimination of benchmark monitoring

Best answer: B

What this tests: Equity Securities

Explanation: A small direct Canadian sleeve is defensible only because it allows Elena to manage the embedded gains in the legacy dividend stocks more carefully. The case supports customization for tax-aware transition, not for better diversification or simpler monitoring.

Individual securities can be preferable to managed products when customization has real value and the scope stays controlled. In this case, that value is tax-aware transition management. Four legacy Canadian dividend holdings carry combined unrealized gains of CAD 420,000, and the family is comfortable trimming them over 12 to 18 months rather than selling immediately.

That makes a limited direct Canadian sleeve reasonable because Elena can:

• stage realizations over time
• reduce tax friction from a full immediate sale
• preserve some familiar domestic names during the transition

The case does not support direct Canadian stocks because they are more diversified or easier to monitor. In fact, the current direct-stock approach has already contributed to higher tracking error and concentration. So the justification is tax-aware customization, not superior portfolio efficiency.

• Tracking-error myth A handful of direct stocks usually increases active risk relative to a broad Canadian benchmark, not decreases it.
• Diversification tradeoff A managed product normally gives broader sector and issuer exposure than a small basket of direct names.
• Monitoring still matters Even a tax-motivated satellite must still be reviewed against IPS limits and benchmark objectives.

This is the key reason because the legacy Canadian names carry large unrealized gains and need not be sold all at once.

Question 4

Six months after a partial transition, the direct Canadian sleeve has drifted to 18% of the equity allocation. Two stocks are each 5% of total portfolio and expected tracking error is 2.9%. What is the best action?

• A. Add more single Canadian stocks to offset the two oversized names
• B. Keep the sleeve because benchmark deviations can mean-revert
• C. Trim or replace part of the sleeve with a Canadian equity managed product
• D. Increase foreign managed products and leave Canadian concentrations unchanged

Best answer: C

What this tests: Equity Securities

Explanation: Once the Canadian satellite breaches its size limit, the single-security cap, and the tracking-error ceiling, it is no longer serving as a controlled customization sleeve. The best response is to shrink it and move assets into a diversified Canadian managed product.

A direct-equity satellite is acceptable only while it remains small and policy-consistent. In the follow-up facts, the Canadian sleeve has drifted to 18% of the equity allocation, above the 15% satellite limit. Two stocks are each 5% of total portfolio, above the 4% single-security cap. Expected tracking error has also risen to 2.9%, above the IPS ceiling.

Those facts mean the direct sleeve is now driving policy risk rather than providing limited customization. The most appropriate response is to trim or replace enough of the direct holdings with a diversified Canadian managed product to bring the portfolio back within IPS constraints. Simply waiting, adding more names, or adjusting another region leaves the actual Canadian breaches unresolved.

• Mean reversion is not a policy override An explicit IPS breach should be corrected rather than tolerated on hope alone.
• More direct names are not a clean fix Adding stocks can dilute weights over time, but it does not directly solve current cap violations or the oversized satellite.
• Wrong lever Increasing foreign managed products changes regional mix, but it does not fix the Canadian single-name and satellite-limit problems.

This directly restores compliance with the satellite, concentration, and tracking-error limits while preserving Canadian equity exposure.

Case 2

Topic: Equity Securities

Maple Industrial Sensors Review

Meera Sood, CFA, manages the Canadian equity sleeve of a discretionary balanced mandate. Her investment committee requires security selection to be driven primarily by fundamental research, but it permits technical analysis to improve trade implementation and risk monitoring. The mandate seeks benchmark outperformance over rolling three-year periods, permits moderate active risk, caps single-name exposure at 4%, and does not require immediate deployment of cash.

Meera is reviewing Maple Industrial Sensors Inc. (MIS), a TSX-listed automation equipment exporter. The stock fell 19% in the last three months after investors worried that two U.S. customer orders could slip into the next quarter. The fundamental analyst argues the market reaction is excessive: backlog remains strong, service margins are expanding, the firm holds net cash, and the 12-month fair value range is 57 to 60 per share. MIS currently trades at 48. The portfolio already holds a 1.2% position, while Meera’s full desired weight would be 3.5%. The benchmark weight is 0.8%.

Exhibit: Technical desk note

At the meeting, Meera says the valuation case is unchanged, but she does not want technical signals to become a substitute for business analysis.

Question 5

Which use of the technical evidence is most appropriate for Meera?

• A. Refine timing and sizing around the valuation thesis
• B. Treat RSI divergence as valuation evidence
• C. Reject the stock until trends are fully positive
• D. Replace fair value with support and resistance targets

Best answer: A

What this tests: Equity Securities

Explanation: Technical analysis should complement Meera’s existing fundamental thesis by helping with entry timing, position size, and near-term risk control. The fair value range comes from backlog, margins, and balance-sheet strength, so charts should guide implementation rather than replace valuation.

When a manager already has a defensible fundamental thesis, technical analysis adds the most value as an execution tool. In MIS, the valuation case rests on operating drivers such as backlog strength, margin expansion, and net cash. The technical picture is mixed: the trend remains weak, but RSI divergence and lighter downside volume suggest selling pressure may be easing.

That combination supports a complementary role for technical analysis:

• stage entries rather than buy all at once
• watch confirmation levels before adding aggressively
• use support levels for risk review

Fundamentals answer whether the stock is worth owning; technicals help decide when and how to own it.

• Execution, not valuation: Support and resistance can help with trade placement, but they should not replace a business-based fair value estimate.
• Trend purism: Waiting for every indicator to turn bullish can delay entry until much of the valuation gap has already narrowed.
• Momentum overreach: A rising RSI from oversold conditions can hint at stabilizing selling pressure, but it does not prove mispricing.

Technical analysis is best used here to improve execution of an intact fundamental view, not to generate the view itself.

Question 6

Given the mandate and current evidence, what is the best immediate action?

• A. Sell the current position on the death cross
• B. Add modestly now, then add more on confirmation
• C. Wait for a rising 200-day average before buying
• D. Move straight to the full target weight

Best answer: B

What this tests: Equity Securities

Explanation: A partial add is the most balanced response. It expresses Meera’s positive fundamental conviction while acknowledging that the stock’s trend is still weak and does not require immediate full-size commitment.

A staged purchase is the clearest example of technical analysis complementing, rather than replacing, a fundamental view. Meera has a positive valuation gap and no evidence that the business case has deteriorated, so doing nothing or selling outright would overreact to chart weakness. At the same time, a full-size purchase would ignore the still-bearish trend signals.

A practical blended approach is to:

• add some exposure now because valuation remains attractive
• keep room to add more if price closes above 50.50 on stronger volume
• avoid letting one technical signal fully dictate the decision

This respects both the mandate’s three-year horizon and the usefulness of technicals for better trade implementation.

• Too aggressive: Moving immediately to full weight assumes valuation should dominate implementation even when the trend is still weak.
• Too reactive: Selling because of a death cross treats a lagging chart signal as if it disproves the operating outlook.
• Too rigid: Waiting for a rising 200-day average may postpone action until after much of the upside has already been captured.

A staged entry reflects positive fundamentals while respecting the still-unconfirmed technical trend.

Question 7

Which new development would most justify changing the fundamental view rather than merely adjusting trade timing?

• A. The 50-day stays below the 200-day
• B. Price closes below 45 on heavy volume
• C. Relative strength stays weak for another month
• D. Backlog drops 20% after order cancellations

Best answer: D

What this tests: Equity Securities

Explanation: A fundamental thesis should be revised when the underlying business inputs change. Order cancellations that materially reduce backlog affect expected earnings and fair value, whereas the technical developments mainly affect timing and risk management.

The key to blending fundamental and technical analysis is keeping each tool in its proper lane. A 20% backlog decline from cancelled orders would directly weaken revenue visibility, operating leverage, and the assumptions supporting the 57 to 60 fair value range. That is the type of information that should force Meera to revisit forecasts and target weight.

By contrast, a support break, weak relative strength, or a continuing bearish moving-average pattern may justify slower buying, tighter monitoring, or smaller position size. Those are market-behaviour signals, not operating facts. Technical analysis can warn that the market has not embraced the thesis yet, but it should not overwrite intrinsic value when business fundamentals are unchanged.

• Price action alone: A decisive break below support matters for execution, but it does not automatically change cash-flow expectations.
• Relative weakness: Weak relative strength can persist even in successful value ideas, so it is not enough by itself to rewrite forecasts.
• Lagging averages: Moving-average signals describe past trading patterns and should rank below new operating information.

A material backlog decline directly changes revenue visibility and intrinsic value assumptions.

Question 8

Which monitoring plan best uses technical analysis as a complement to fundamentals over the next several weeks?

• A. Wait for all indicators to turn bullish
• B. Ignore charts because the mandate is long term
• C. Use 50.50 for adds and 45 for risk review
• D. Trade the stock only from chart levels

Best answer: C

What this tests: Equity Securities

Explanation: The best monitoring plan keeps Meera’s fair value estimate intact while using technical thresholds to govern pace and risk review. That is exactly how technical analysis should complement a fundamentally driven process.

A disciplined combined process separates what to own from how to own it. Meera’s fair value range remains anchored in business fundamentals, so the stock should not become a purely chart-driven trade. Still, the technical note provides useful implementation markers: a strong close above 50.50 on improving volume would support adding toward target weight, while a decisive failure of the 45 to 46 support area would justify re-examining sizing and entry pace.

This approach uses technical analysis to improve sequencing and risk awareness without surrendering the original valuation framework. Ignoring charts completely or demanding perfect technical alignment misses the point of a complementary process.

• Ignore-all-charts: Long-term mandates can still benefit from better execution and more disciplined monitoring.
• Purely tactical: Trading only support and resistance turns a fundamentally selected stock into a chart-only position.
• Perfection standard: Requiring every indicator to turn bullish gives technicals too much authority over an intact valuation case.

This preserves the fundamental fair value view while using technical levels to pace additions and monitor downside risk.

Case 3

Topic: Equity Securities

Alder Basin Copper Corp.

Maya Chen, a discretionary portfolio manager for a Canadian equity mandate, is reviewing TSX-listed Alder Basin Copper Corp. (ABC). ABC owns two operating mines and no meaningful downstream businesses. Recent investor interest reflects stronger copper prices, modest leverage, and management guidance for 18% production growth next year.

Chen’s analyst notes that ABC’s value is highly concentrated in the Santa Rosa copper mine in northern Chile. Santa Rosa accounts for about 85% of EBITDA and 78% of internal net asset value (NAV). Current proven and probable reserves support 6.5 years of production at the planned rate. The growth plan assumes both renewal of the mine’s tailings-storage permit within 12 months and conversion of adjacent Norte measured and indicated resources into proven and probable reserves after additional drilling and an updated feasibility study. If either step fails, production is expected to remain flat and Santa Rosa’s mine life could fall to about 4.8 years. ABC’s smaller Caribou zinc mine in New Brunswick generates stable cash flow but only 15% of EBITDA.

ABC hedges 10% of next year’s copper output. Net debt is 0.8x EBITDA, and no material debt matures for four years. Several sell-side analysts justify a higher target price by applying a peer multiple of 6.5x next year’s EBITDA to consolidated results.

Exhibit: Selected operating facts

Question 9

Which company-specific issue should most influence Chen’s analysis of ABC?

• A. Santa Rosa reserve-life and permitting risk
• B. The absence of near-term debt maturities
• C. ABC’s limited copper hedging program
• D. The stock’s discount to peer EBITDA multiples

Best answer: A

What this tests: Equity Securities

Explanation: The dominant analytical issue is whether Santa Rosa can sustain and extend its cash flows. Because most EBITDA and NAV come from one mine whose expansion depends on a permit and reserve conversion, reserve-backed mine life matters more than hedging or balance-sheet details.

For a resource issuer, the key company-specific question is not just next year’s EBITDA but the durability of economically mineable reserves. ABC is concentrated in a single mine that contributes 85% of EBITDA, yet current proven and probable reserves cover only 6.5 years and planned growth requires both permit renewal and conversion of resources into reserves. That combination directly affects mine life, production profile, and NAV. Low leverage and limited hedging matter, but they are secondary if the main asset cannot legally or technically support the modeled output. In resource analysis, asset concentration plus reserve replacement and permitting often dominate conventional corporate metrics.

• Commodity exposure: Limited hedging affects near-term earnings volatility, but it does not determine whether the mine’s longer-dated cash flows exist.
• Balance-sheet comfort: Lack of near-term maturities reduces financing stress, yet the flagship mine’s reserve-backed life remains the main driver.
• Relative valuation trap: A peer-multiple discount is an output of analysis, not the underlying issue that must be solved first.

Santa Rosa drives most EBITDA and NAV, and its growth depends on permit renewal and reserve conversion, so its sustainable mine life is the key issue.

Question 10

Which valuation approach should Chen emphasize as the primary framework for ABC?

• A. Asset-level sum-of-the-parts NAV
• B. Dividend discount model
• C. Consolidated EV/EBITDA peer multiple
• D. One-year forward P/E multiple

Best answer: A

What this tests: Equity Securities

Explanation: A resource producer with finite-life assets is usually analyzed from the mine up. An asset-level NAV framework best captures ABC’s reserve life, permitting contingency, and the fact that Santa Rosa and Caribou have very different risk and duration profiles.

The core valuation issue is that ABC’s cash flows are asset-specific and finite, not perpetual or smoothly growing. A sum-of-the-parts NAV models each mine separately using reserve-backed production, costs, capex, taxes, and an appropriate discount rate. That lets Chen test how Santa Rosa’s value changes if the permit is delayed or if measured and indicated resources fail to become reserves. Forward P/E and consolidated EV/EBITDA can still serve as market checks, but they compress very different mine lives and risk profiles into one short-horizon multiple. A dividend discount model is weakest here because dividends are not the primary cash-flow anchor for a cyclical, reserve-depleting producer.

• Short-horizon multiples: One-year earnings or EBITDA can overstate value when a large portion of production lacks long reserve backing.
• Peer comparison: A consolidated peer multiple is useful only after the asset-level reserve and permit risks are understood.
• Dividend focus: Dividends are discretionary and do not solve the finite-life asset problem.

Asset-level NAV best captures each mine’s finite life, concentration, and scenario sensitivity.

Question 11

If the tailings permit is delayed and Norte resources are not converted to reserves, what is the most appropriate analytical response?

• A. Raise the terminal growth assumption
• B. Shorten Santa Rosa cash-flow life in NAV
• C. Treat the lost growth as temporary only
• D. Increase the weight on peer multiples

Best answer: B

What this tests: Equity Securities

Explanation: If the permit is delayed and resources are not upgraded to reserves, the analyst should remove or defer the cash flows that depended on those assumptions. For a mining issuer, the direct effect is a shorter modeled mine life and a lower NAV for the flagship asset.

Mine valuation must be tied to reserve-backed, legally operable production. A delayed tailings permit can constrain throughput, and failure to convert resources into reserves means those tonnes should not be treated as dependable cash flows in the base case. The clean analytical response is to cut or defer Santa Rosa’s production profile, shorten the modeled cash-flow horizon, and recalculate NAV. Raising a terminal growth rate is inappropriate because mines do not justify standard perpetual-growth assumptions. Shifting toward peer multiples or calling the setback temporary would blur the economic effect instead of re-estimating the asset’s cash-generating life.

• Perpetuity thinking: Increasing terminal growth misapplies industrial-company logic to a depleting asset.
• Multiple substitution: Leaning harder on peer multiples does not fix an overstated mine plan.
• Temporary framing: Lost reserve backing is not just a timing issue when future production itself becomes less certain.

Those failed assumptions remove or delay reserve-backed production, so Santa Rosa’s modeled cash-flow horizon should be cut.

Question 12

Which additional disclosure would be most useful for monitoring the investment thesis on ABC?

• A. The CEO’s next option grant price
• B. A breakdown of head-office travel expenses
• C. The timing of quarterly tax instalments
• D. An updated reserve statement and permit schedule

Best answer: D

What this tests: Equity Securities

Explanation: The investment thesis hinges on whether Santa Rosa can keep operating at the planned scale and extend its reserve base. Updated reserve data and a concrete permit timeline are therefore the most decision-useful monitoring items.

Resource-company monitoring should focus on the variables that change the life and legality of future production. For ABC, Santa Rosa drives most EBITDA and NAV, so the highest-value disclosure is anything that clarifies two questions: how many economically mineable reserves remain, and whether the tailings permit will support planned throughput. Updated reserve statements, technical reports, drilling results that support reserve conversion, and a permit timetable directly affect modeled cash flows. Head-office expenses, executive compensation details, or tax-payment timing may matter for governance or housekeeping, but they are not the central thesis drivers in this case. Good monitoring follows the dominant asset risk, not the easiest data to collect.

• Minor corporate details: Travel, option-grant, and tax-payment items do not materially change asset value here.
• Thesis linkage: Monitoring should track reserve quality and operating permits because those inputs determine the cash-flow base.
• Concentration effect: When one mine dominates NAV, asset-specific disclosure matters more than general corporate updates.

This disclosure directly updates the two variables that dominate ABC’s mine life and valuation.

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Related focused pages

• Free IMT 2 (2026) Full-Length Case Practice Exam
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• IMT 2 (2026): Asset Allocation and Investment Management
• IMT 2 (2026): Debt Securities
• IMT 2 (2026): Managed Products
• IMT 2 (2026): International Investing and Wealth Risks
• IMT 2 (2026): Portfolio Monitoring and Performance Evaluation

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