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CISI Certification
ICWIM Exam
CISI.ICWIM.v2025-08-09.q74 Dumps

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Question 21

It is impossible to diversify against:

A.Currency risk
B.Credit risk
C.Liquidity risk
D.Market risk

Correct Answer: D

Market risk, also known as systematic risk, affects the entire market and cannot be eliminated through diversification. Examples include economic recessions, geopolitical events, or market-wide changes in interest rates.
* Currency risk (A): Can be diversified through exposure to multiple currencies.
* Credit risk (B): Can be mitigated by spreading exposure across various credit profiles.
* Liquidity risk (C): Can be addressed by diversifying into liquid assets.
References:
* International Certificate in Wealth & Investment Management: Types of risk and strategies to mitigate them.
* Modern Portfolio Theory and the distinction between systematic and unsystematic risk.

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Question 22

ROCE can be used to establish which of the following?

A.The net profitability of the business
B.Impact of borrowing costs on company performance
C.Returns generated from capital invested in the business
D.Net profit in relation to the cost of sales

Correct Answer: C

* ROCE (Return on Capital Employed)
* Measures the efficiency and profitability of a company relative to the capital invested in the business.
* Formula: ROCE=Earnings Before Interest and Tax (EBIT)Capital Employed\text{ROCE} = \frac
{\text{Earnings Before Interest and Tax (EBIT)}}{\text{Capital Employed}} ROCE=Capital EmployedEarnings Before Interest and Tax (EBIT)
* Why the Answer is C
* ROCE specifically focuses on the returns generated from the capital base, providing insight into how effectively the business is using its resources.
* Why Other Options are Incorrect
* A. Net profitability: Refers to net profit margins, not ROCE.
* B. Borrowing costs: ROCE ignores borrowing costs as it considers EBIT.
* D. Net profit in relation to cost of sales: Refers to gross profit margin, not ROCE.
* ICWIM Study Guide, Chapter on Financial Ratios: Covers ROCE and its applications.
* Corporate Finance Texts: Defines ROCE as a key performance metric.
ReferencesThus, the correct answer isC. Returns generated from capital invested in the business.

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Question 23

How does a negative interest rate policy (NIRP) aim to boost lending?

A.Interest is not charged on loans
B.Consumers are paid to borrow money
C.By discounting the interest rate charged on loans
D.By penalising banks for holding surplus cash

Correct Answer: D

A Negative Interest Rate Policy (NIRP) is used by central banks to stimulate economic activity by penalising banks for holding excess reserves.
* How It Works:
* Instead of earning interest, banks pay to keep reserves with the central bank.
* To avoid losses, banks increase lending to businesses and consumers.
* This increases money supply, investment, and spending, boosting economic growth.
* Real-World Example: The European Central Bank (ECB) and Bank of Japan implemented NIRP to encourage lending.
# Reference: ECB Negative Interest Rate Policy, CISI Wealth & Investment Management.

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Question 24

The Arbitrage Pricing Theory (APT) assumes investors can sell short. This involves:

A.Not selling the whole of your shareholding in one trade
B.Selling something you do not own, intending to buy it back at a lower price later
C.Selling your shares and buying them back a short time later
D.Selling lots of securities over a short time frame

Correct Answer: B

Short selling is a trading strategy where an investor sells borrowed securities, expecting the price to decline, and then repurchases them at a lower price.
* Why is Option B Correct?
* Short sellers borrow shares, sell them at the current price, and later buy them back at a lower price to return to the lender, profiting from the price difference.
* APT assumes investors can sell short to exploit mispricings in multiple risk factors.
* Why Not Other Options?
* A (Not selling the whole shareholding) # Short selling does not involve owning shares.
* C (Selling & buying back shortly after) # Describes day trading, not short selling.
* D (Selling many securities quickly) # Short selling is not about trading speed, but betting on price declines.
# Reference: CFA Institute (Arbitrage Pricing Theory), CISI Wealth & Investment Management.

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Question 25

Which of the following elements would be included in a recommendation report to a client?

A.Previous arrangements
B.Restrictions
C.Cost of living
D.Rate of inflation

Correct Answer: A

A recommendation report for a client should contain comprehensive details of their existing financial arrangements. This ensures that advice aligns with the client's goals and existing commitments. The inclusion of previous arrangements helps provide a full financial picture and ensures the recommendations are appropriate.

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