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CME-4A · ICWIM

CME-4A (ICWIM) – International Certificate in Wealth & Investment Management: free practice test

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Practice test questions with answers and explanations

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01Noura is a busy surgeon with little investment experience. She wants a firm to buy and sell investments for her within agreed parameters, without contacting her before each deal. Which service suits her needs?

Practice question Unit: The Financial Services Sector

  1. AAn execution-only service

    Execution-only means the firm simply carries out the client's own instructions without advice, which suits an investor who already knows what she wants.

  2. BDealing with advice

    Dealing with advice gives advice on individual transactions, but Noura would still have to decide on and approve each deal herself.

  3. CDiscretionary portfolio management ✓ Correct answer

    Under a discretionary service the manager makes investment decisions within parameters agreed with the client and deals without referring to her first; it suits clients who are too busy or not experienced enough to manage their own investments.

  4. DAdvisory portfolio management

    In advisory portfolio management the firm advises on the portfolio on a continuing basis, but the client still makes the final decisions.

Reference: Workbook ed.7, ch.1 §1.3.3, p.15

02Ahmed converts a large sum of banknotes into an electronic currency such as Bitcoin through an exchange platform. If the cash came from criminal activity, this transaction is most likely an example of which stage of money laundering?

Practice question Unit: Industry Regulation

  1. APlacement ✓ Correct answer

    Placement introduces cash into the financial system by replacing cash in hand with a valuable claim on assets. The workbook says any transaction converting actual currency into an electronic currency could be an example of placement.

  2. BLayering

    Layering comes after the cash is in the system, when funds are moved between assets or owners to hide where they came from. Here the cash is only now entering the system.

  3. CIntegration

    Integration is the final stage, when the money already appears legitimate; converting cash in hand is the very first step.

  4. DNo stage, because no bank account is involved

    Placement typically involves a bank deposit, but it does not have to: any transaction that swaps cash for a claim on assets, including an electronic currency, can be placement.

Reference: Workbook ed.7, ch.2 §2.1.3, p.32

03A bond with a 6% coupon is trading at $96.50 per $100 nominal. What is its flat (running) yield, to two decimal places?

Practice question Unit: Asset Classes and Financial Markets

  1. A5.79%

    5.79% multiplies the coupon by the price (6 × 0.965) instead of dividing by it.

  2. B6.00%

    6.00% is the coupon rate, which relates to nominal value, not to the price paid.

  3. C6.22% ✓ Correct answer

    Flat yield = annual coupon ÷ clean price × 100 = $6 ÷ $96.50 × 100 = 6.22%. Buying below par lifts the flat yield above the coupon rate.

  4. D9.50%

    9.50% adds the whole $3.50 gain to redemption to the $6 coupon, (6 + 3.50) ÷ 100; the flat yield ignores any gain or loss to redemption.

Reference: Workbook ed.7, ch.3 §3.4.1, p.66

04Sara invests $20,000 in a five-year structured capital at risk product (SCaRP). It pays a fixed return of 25% if the index ends at or above its starting level. If the index ends below its start but not below 50% of it, the capital is returned in full; below 50%, the protection is lost. At maturity the index is 35% below its starting level. How much does Sara receive?

Practice question Unit: Collective Investments

  1. A$7,000

    This is the size of the fall (35% × $20,000), not what Sara receives.

  2. B$13,000

    This assumes full exposure to the index: $20,000 × 65% = $13,000. But the partial protection still holds because the index did not fall below 50%.

  3. C$20,000 ✓ Correct answer

    The index is at 65% of its start: below the start but above the 50% barrier, so no return is paid and the capital is returned in full = $20,000.

  4. D$25,000

    The fixed 25% return ($20,000 × 1.25 = $25,000) is paid only if the index ends at or above its starting level.

Reference: Workbook ed.7, ch.4 §2.1, p.130

05Country X has GDP of $800 billion. Its nationals and firms abroad earn $40 billion of wages, profits, interest and dividends that flow back to X, while foreign-owned firms operating in X send $55 billion of profits to their home countries. What is X's GNP?

Practice question Unit: Economics and Investment Analysis

  1. A$745 billion

    $800bn − $55bn = $745bn deducts the outflow but forgets to add the $40bn earned by X's nationals abroad.

  2. B$785 billion ✓ Correct answer

    GNP = GDP + income earned abroad by nationals − income sent abroad by foreign firms = $800bn + $40bn − $55bn = $785bn. Net property income is −$15bn, so GNP is below GDP.

  3. C$815 billion

    $800bn + $55bn − $40bn = $815bn reverses the two flows: profits sent out by foreign firms reduce GNP and income received from abroad increases it.

  4. D$895 billion

    $800bn + $40bn + $55bn = $895bn treats the profits leaving the country as an addition; they belong to foreign shareholders and must be subtracted.

Reference: Workbook ed.7, ch.5 §1.2.2, p.146

06When the price of coffee rises by 12%, demand for a brand of tea rises by 3%, other things being equal. What is the cross elasticity of demand (XED) of the tea with respect to the price of coffee, and how are the two goods related?

Practice question Unit: Economics and Investment Analysis

  1. A−4.00; complements

    This divides the price change by the demand change (12 ÷ 3) and adds a minus sign; XED puts the % change in quantity demanded on top.

  2. B−0.25; complements

    The size is right but the sign is wrong: demand for tea rose when the coffee price rose, so XED is positive. A negative XED would point to complements.

  3. C+0.25; complements

    The figure is right, but a positive XED indicates substitutes. Complements have a negative XED: a higher price for one reduces demand for the other.

  4. D+0.25; substitutes ✓ Correct answer

    XED = % change in quantity demanded ÷ % change in the price of the other good = +3% ÷ +12% = +0.25. It is positive, so tea and coffee are substitutes: dearer coffee pushes some buyers towards tea.

Reference: Workbook ed.7, ch.5 §3.2.2, p.177

07An investor has a liability with a duration of 9 years and wants to build a barbell from two bonds: one with a 2-year duration and one with a 12-year duration. What proportion should be invested in the 12-year bond so that the portfolio's duration matches the liability?

Practice question Unit: Investment Management

  1. A30%

    30% is the weight needed in the 2-year bond, not the 12-year bond; the weights have been reversed.

  2. B50%

    Equal weights give (0.5 × 2) + (0.5 × 12) = 7 years, short of the 9-year liability.

  3. C70% ✓ Correct answer

    Portfolio duration is the weighted average: w × 12 + (1 − w) × 2 = 9, so 10w = 7 and w = 70% in the 12-year bond, with 30% in the 2-year bond. Check: (0.7 × 12) + (0.3 × 2) = 9 years.

  4. D75%

    75% comes from simply dividing 9 by 12, ignoring the 2-year bond's contribution; the resulting duration is (0.75 × 12) + (0.25 × 2) = 9.5 years.

Reference: Workbook ed.7, ch.6 §2.3, p.248

08Maha's essential monthly expenses are SAR 18,000. Using the general rule of thumb for reserve funds, how much should her adviser consider she holds in reserve before investing?

Practice question Unit: Investment Advice

  1. ASAR 54,000

    This is three months of expenses (18,000 × 3), only half the usual guideline.

  2. BSAR 108,000 ✓ Correct answer

    The rule of thumb is six months' expenses held in reserve so short-term needs do not force sales from the portfolio: 18,000 × 6 = SAR 108,000.

  3. CSAR 162,000

    This is nine months of expenses (18,000 × 9), more than the usual guideline.

  4. DSAR 216,000

    This is a full year of expenses (18,000 × 12), double the usual guideline.

Reference: Workbook ed.7, ch.7 §1.3.4, p.292

09A country charges a share transaction tax of 0.5% on purchases only, in the same way as the UK's stamp duty reserve tax (SDRT). On the same day, Ahmed buys shares costing $50,800 and sells other shares for $30,000. How much transaction tax is due on the two trades?

Practice question Unit: Investment Advice

  1. A$150

    This is 0.5% of the $30,000 sale; in this example the tax applies to purchases, not sales.

  2. B$254 ✓ Correct answer

    Only the purchase is taxed: $50,800 × 0.5% = $254. The sale attracts no charge.

  3. C$404

    This applies 0.5% to both trades ($254 + $150), but sales are not taxed here.

  4. D$508

    This uses 1% instead of 0.5% on the purchase ($50,800 × 1%).

Reference: Workbook ed.7, ch.7 §7.2, p.322

10Noura estimates she will need income of $50,000 a year in retirement. Her existing pension arrangements and other guaranteed income will provide $40,000 a year. She plans to retire in 25 years, expects to earn 5% a year, and inflation is forecast to average 2% a year. She also expects a protection policy to pay her a lump sum worth $50,000 in today's money at retirement. Allowing for inflation, what net capital does she still need to build up (to the nearest dollar)?

Practice question Unit: Lifetime Financial Provision

  1. A$150,000

    This is the net capital in today's money (200,000 − 50,000), without inflating it over the 25 years.

  2. B$246,091 ✓ Correct answer

    Shortfall = 50,000 − 40,000 = 10,000. Capital in today's money = 10,000 ÷ 5% = 200,000. Less the expected lump sum: 200,000 − 50,000 = 150,000. Allowing for inflation: 150,000 × 1.02^25 = 150,000 × 1.64061 = 246,091.

  3. C$278,121

    This inflates the full 200,000 (giving 328,121) and then deducts the 50,000 policy payout without inflating it; both amounts are in today's money, so the deduction must be made before adjusting for inflation.

  4. D$328,121

    This is the inflation-adjusted capital for the income shortfall alone (200,000 × 1.64061) and ignores the lump sum she expects to receive.

Reference: Workbook ed.7, ch.8 §1.4.2, pp.341–342

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