CIFC Canadian Investment Funds Course Exam Questions and Answers

 A fund of funds is a mutual fund that invests in other mutual funds. This means that there are two levels of management fees: one for the fund of funds itself and one for the underlying funds. Therefore, fund of funds have higher fees than traditional mutual funds that invest directly in securities. References: Canadian Investment Funds Course (CIFC) | IFSE Institute, Unit 6, Lesson 2

A defined contribution pension plan (DCPP) is a type of retirement savings plan where the employer and/or employee make contributions to an individual account for the employee. The retirement benefits depend on the amount of contributions and the investment returns. Contributions to a DCPP reduce the employee’s available registered retirement savings plan (RRSP) contribution room, which is the maximum amount that can be contributed to an RRSP each year without tax penalties. References: Canadian Investment Funds Course (CIFC) | IFSE Institute, Unit 9, Lesson 1

The current ratio is a liquidity ratio that measures a company’s ability to pay its short-term obligations with its current assets. A higher current ratio indicates that the company has more current assets than current liabilities, which means it can meet its short-term obligations more easily. A lower current ratio indicates that the company has less current assets than current liabilities, which means it may face liquidity problems or default risk. Therefore, the information given in the question indicates that Truesteel is better able to meet its short-term financial obligations than Strongco. The current ratio does not necessarily reflect the profitability, market outlook, or debt financing of the companies. References: Current Ratio Explained With Formula and Examples, Current Ratio Formula, Current ratio

Segregated funds offer some protection of the capital invested but there is an added cost for the protection. Segregated funds are contracts issued by life insurance companies that invest in underlying funds, similar to mutual funds. Segregated funds have a maturity guarantee and a death benefit guarantee, which ensure that the investor or their beneficiary will receive a certain percentage of their initial investment, regardless of market fluctuations. However, these guarantees come at a cost, which is reflected in higher management fees and insurance fees than mutual funds. Segregated funds do not have high returns, as they depend on the performance of the underlying funds. Segregated funds can be redeemed before the maturity date of the contract, but they may be subject to early redemption fees or market value adjustments. Segregated funds do not flow through capital losses to investors, as they are not considered owners of the underlying fund. Segregated funds are subject to insurance regulation, not securities regulation, because they are distributed by life insurance agents. References: Segregated Funds

The net asset value per unit (NAVPU) is the price at which mutual fund units are bought and sold. The NAVPU is calculated at the end of each business day, based on the closing market value of the fund’s assets and liabilities. When an investor submits an order to buy or sell mutual fund units, the order is processed at the NAVPU of the next valuation date, which is the next business day after the order is received by the fund company. This is called forward pricing. In this case, Derek submits his order to sell 300 units of the Evergreen Canadian Mortgage Fund at 8:00 p.m. EST on Friday, January 6. This is after the cut-off time for that day, which is usually 4:00 p.m. EST. Therefore, his order will be processed at the NAVPU of the next valuation date, which is Monday, January 9. However, since the Evergreen Canadian Mortgage Fund is a money market fund, it has a one-day settlement period, which means that Derek will receive his proceeds on the following business day after his order is processed. Therefore, his proceeds will be based on the NAVPU for Tuesday, January 10. References:

• Canadian Investment Funds Course (CIFC) Study Guide, Chapter 4: Mutual Funds, Section 4.4: Buying and Selling Mutual Funds, page 4-161
• Forward Pricing Definition - Investopedia2
• Money Market Fund Definition - Investopedia3

To calculate the federal tax liability from the investment income, we need to consider the following steps:

• Convert the foreign dividend to Canadian dollars using the exchange rate. In this case, $882.02 USD x 1.3605 = $1,200.00 CAD.
• Gross up the eligible dividend by the enhanced dividend gross-up rate of 38%. In this case, $1,800 x 1.38 = $2,484.
• Add the grossed-up eligible dividend and the foreign dividend to get the total taxable income from dividends. In this case, $2,484 + $1,200 = $3,684.
• Multiply the total taxable income from dividends by the federal marginal tax rate of 29% to get the gross federal tax payable. In this case, $3,684 x 0.29 = $1,068.36.
• Multiply the grossed-up eligible dividend by the federal dividend tax credit rate of 15% to get the federal dividend tax credit. In this case, $2,484 x 0.15 = $372.60.
• Subtract the federal dividend tax credit from the gross federal tax payable to get the net federal tax liability. In this case, $1,068.36 - $372.60 = $695.76.

Therefore, Firmansyah’s federal tax liability from his investment income is $695.76.

References: 1: Canadian Investment Funds Course - IFSE Institute 2 (Unit 9: Retirement)

According to the Closed-End Funds vs. Open-End Funds: What’s the Difference? - Investopedia, open-end funds are mutual funds that can issue an unlimited number of shares to investors. The number of units is not fixed, and varies with investor demand and redemption orders. Investors buy and sell open-end funds directly from the fund company at the net asset value (NAV) of the fund, which is calculated at the end of each trading day. Open-end funds are not traded on an exchange or in the secondary market.

According to the MFDA Rules, a Dealing Representative must not accept any purchase orders from a client until the Branch Manager or other designated person has reviewed and approved the New Client Application Form (NCAF) for the client. This is to ensure that the Dealing Representative has obtained and verified all the necessary information about the client, such as identity, investment objectives, risk tolerance, financial situation, and suitability of investments. The review and approval of the NCAF must be completed before any trades are executed for the client, unless there are exceptional circumstances that justify a delay. In this case, Quintin should have waited for Lupita’s approval of the NCAF before placing the purchase order for Reginald.

References: 1: MFDA Rules as at December 31, 2021 - MFDA 2 (Rule 2.2.4)

 Moving the DEF Bond Fund to the RRSP would be more tax-efficient than moving any of the other funds. This is because bond funds generate interest income, which is fully taxable at the investor’s marginal tax rate in a non-registered account. By moving the bond fund to an RRSP, Darryl can defer paying taxes on the interest income until he withdraws it from the RRSP. Moving the GHI Global Equity Fund to the RRSP (B) would not be tax-efficient, as global equity funds generate foreign income and dividends, which are subject to foreign withholding taxes in an RRSP. Moving $20,000 from each of the three funds to the RRSP © would not be tax-efficient, as it would trigger capital gains taxes on all three funds in proportion to their returns. Moving the ABC Canadian Equity Fund to the RRSP (D) would not be tax-efficient, as Canadian equity funds generate Canadian dividends, which are eligible for a dividend tax credit in a non-registered account. By moving the Canadian equity fund to an RRSP, Darryl would lose this tax advantage and pay taxes on the dividends at his marginal tax rate when he withdraws them from the RRSP. References: Canadian Investment Funds Course (CIFC) | IFSE Institute

In a mutual fund dealer, the chief compliance officer (CCO) is the person responsible for establishing and maintaining compliance policies and procedures as well as monitoring and assessing compliance by the dealer and its representatives. The CCO must report to the board of directors or senior management of the dealer and must meet certain proficiency requirements, such as passing the Mutual Fund Dealers Compliance Exam. The CCO is also accountable to the securities regulators and self-regulatory organizations for any compliance issues or breaches. References: Guide to Broker-Dealer Registration

 A registered retirement savings plan (RRSP) is a retirement savings and investing vehicle for employees and the self-employed in Canada. Contributions to an RRSP are tax-deductible and grow tax-deferred until withdrawal. However, RRSPs have a maturity date of December 31st of the year in which the holder turns 71. By then, the holder must convert the RRSP to a registered retirement income fund (RRIF), purchase an annuity, or withdraw the funds in cash (subject to tax). Therefore, B is the correct answer. References: Registered Retirement Savings Plan (RRSP): Definition and Types, Registered Retirement Savings Plan (RRSP) - Canada.ca

A put option is a contract that gives the buyer the right, but not the obligation, to sell an underlying stock at a specified price (the strike price) within a specified time period (the expiration date). The seller of a put option is obligated to buy the stock if the buyer exercises the option. Patrick can purchase put options for the fund’s existing assets, which means he can lock in a minimum selling price for his stocks in case the market value drops below the strike price. This way, he can protect against potential losses and hedge his portfolio against market risk. References: What Is a Put Option and How to Use It With Example - Investopedia, How to Hedge With Stock Index Futures - Investopedia

According to the Personal Information Protection and Electronic Documents Act (PIPEDA), personal information is any factual or subjective information, recorded or not, about an identifiable individual. This includes information in any form, such as age, name, ID numbers, income, ethnic origin, or blood type. However, PIPEDA also specifies some exceptions to the definition of personal information, such as business contact information. Business contact information is any information that is used for the purpose of communicating or facilitating communication with an individual in relation to their employment, business or profession. This includes the employee’s name, position name or title, work address, work telephone number, work fax number or work electronic address. Therefore, an employee’s business address and business telephone number are not considered personal information under PIPEDA. An employee’s name could be considered personal information if it is not used for business purposes, but it is not clear from the question whether that is the case. An employee’s credit record is clearly personal information under PIPEDA, as it reveals sensitive information about the individual’s financial situation and history.

References: 1: PIPEDA in brief - Office of the Privacy Commissioner of Canada 2

According to the Canadian Investment Funds Course, an investment objective is the goal or purpose of investing money. An investment objective reflects the investor’s desired return, risk tolerance, time horizon, and liquidity needs. An investment objective is one of the key components of the know-your-client (KYC) information that a mutual fund representative must obtain and update from a client. The KYC information helps the representative to assess the suitability of any investment recommendation or trade instruction for the client2

In this case, Sarah and Kyle are a married couple who want to save towards a purchase of a sailboat. They are able to save $800 each month and have a tax-free savings account (TFSA) in Kyle’s name with $5,000. They want you to recommend an investment for their monthly savings to help them achieve their goal faster. Before you can make any recommendation, you need to gather more information about their investment objective for these savings. You need to know how much return they expect, how much risk they are willing to take, how long they plan to invest, and how easily they want to access their money. These factors will help you to determine the most suitable investment option for them.

Therefore, the question you should ask them next is C. What is your investment objective for these savings?

References: 1: Canadian Investment Funds Course - IFSE Institute 3 (Unit 2: Know Your Client) 2: Canadian Investment Funds Course - IFSE Institute 4 (Unit 10: Portfolio Management)

To make a suitable recommendation, Solomon needs to identify how the proposed investment is in alignment with the investor’s profile and holdings. A suitable recommendation is one that meets the investor’s needs, goals, risk tolerance, time horizon, and personal circumstances. It also considers the investor’s existing portfolio and how the new investment would affect its diversification, performance, and risk. Therefore, option C is correct regarding what Solomon needs to do to make a suitable recommendation. The other options are not correct or sufficient to make a suitable recommendation. Option A is false because mutual fund costs are important regardless of the past fund performance, as they reduce the net returns and compound over time. Option B is false because relying on the risk rating of the mutual fund is not enough to offer an investment solution, as it does not reflect the investor’s return expectations, liquidity needs, tax situation, or personal preferences. Option D is false because matching the past rates of return of the mutual fund with what is the anticipated rate of return is not a reliable way to make a recommendation, as past performance does not guarantee future results and may not be consistent with the investor’s risk tolerance or time horizon. References: [Suitability | GetSmarterAboutMoney.ca], [Mutual Fund Fees | GetSmarterAboutMoney.ca], [Risk Rating | GetSmarterAboutMoney.ca]

Maureen is looking for investments that provide steady income with low to medium risk. Money market funds, mortgage funds, and bond funds are suitable for her because they invest in fixed-income securities that pay regular interest and have lower volatility than equity funds. Money market funds invest in short-term debt instruments such as treasury bills and commercial paper. Mortgage funds invest in mortgages or mortgage-backed securities that are secured by real estate properties. Bond funds invest in bonds issued by governments or corporations with varying maturities and credit ratings. References: 9 Best Retirement Income Funds Of 2023 – Forbes Advisor, 5 Best Income Funds for Retirement - U.S. News, 7 Best Funds for Retirement | Investing | U.S. News

A conflict of interest is a situation where an individual or a firm has competing or incompatible interests that may affect their ability to act fairly, honestly, and in the best interest of their clients. A material conflict of interest is a conflict of interest that a reasonable person would expect to know about and that may influence the client’s decision to enter into or maintain a business relationship with the individual or the firm. According to the MFDA rules, Barend has an obligation to identify and address material conflicts of interest in a manner that prioritizes the client’s interest over his own or the firm’s interest1. If a material conflict of interest cannot be addressed in the best interest of the client, Barend must disclose it to the client before opening an account, providing advice, or executing a transaction. The disclosure must be clear, meaningful, and timely, and it must explain the nature and extent of the conflict of interest and how it could affect the client’s interests2. Barend must also obtain the client’s written consent to proceed with the account opening, advice, or transaction despite the conflict of interest. Barend must avoid material conflicts of interest that are prohibited by law or that would result in a breach of his fiduciary duty to the client. Barend must also report any material conflicts of interest to his firm and comply with the firm’s policies and procedures for managing conflicts of interest3. References:

• MFDA Rule 2.1.4 - Conflicts of Interest1
• MFDA Policy No. 2 - Minimum Standards for Account Supervision2
• MFDA Policy No. 9 - Disclosure of Conflicts of Interest (Outside Business Activities)3

The purpose of holding money market instruments for non-money market mutual funds is to provide liquidity for the fund. If the portfolio manager has an immediate need for cash, such as to pay expenses or meet redemption requests, money market instruments are relatively easy to liquidate because they have short maturities and low credit risk. Money market instruments do not primarily generate investment income that provides investors with preferential tax treatment, as interest income from money market instruments is fully taxable at the investor’s marginal tax rate. Money market instruments are not purchased by non-money market funds to satisfy the regulatory requirement of fund diversification, as there is no such requirement for mutual funds. Money market instruments do not ensure that the fair market value of a mutual fund will not drop below a minimal market value, as money market instruments can also fluctuate in value depending on interest rate changes and supply and demand factors. References: Money Market Instruments

Contributed funds grow tax-free within the plan3. This means that any income or capital gains earned by the investments in an RESP are not taxed until they are withdrawn3. This allows the plan to grow faster than a taxable account with the same investments and contributions3. The other statements are incorrect. Contributions to RESPs are not tax deductible3. This means that you cannot deduct the amount you contribute to an RESP from your taxable income3. However, you do not have to pay tax on the contributions when they are withdrawn from the plan3. There is no yearly contribution limit per beneficiary, but there is a lifetime contribution limit of $50,000 per beneficiary3. This means that you can contribute any amount to an RESP in any given year, as long as you do not exceed the lifetime limit for each beneficiary3. RESPs must be collapsed by the end of the 35th year of its starting date3. This means that you have up to 35 years to use the funds in an RESP for educational purposes or transfer them to another plan3. If you do not use or transfer the funds by then, you have to close the plan and pay tax on the accumulated income portion3. References: Unit 8: Retirement

Sean’s distribution is reinvested at a NAVPU of $19.75 and he receives approximately 31.65 additional units. When a mutual fund declares a distribution, it reduces its NAVPU by the amount of the distribution per unit. In this case, the NAVPU drops from $21 to $19.75 after the distribution of $1.25 per unit. Sean’s distribution is $625 ($1.25 x 500 units), which he reinvests in the mutual fund at the new NAVPU of $19.75. He receives

additional units. The total value of Sean’s mutual fund holdings after the distribution and reinvestment is

(500+31.65)×19.75=$10,500

, not $9,875. The NAVPU of the mutual fund does change after the distribution, regardless of whether Sean reinvests his distribution or not. References: [Unit 7: Mutual Funds Administration]

ETFs can be purchased continuously throughout the trading day while index funds can only be bought or sold at the end of the day. This is because ETFs are traded on a stock exchange like stocks, while index funds are traded directly with the fund company like mutual funds. This difference gives ETFs more liquidity and flexibility than index funds, as investors can buy and sell ETFs at any time during market hours at the prevailing market price. Index funds, on the other hand, are priced only once a day at the end of the day based on the net asset value per unit (NAVPU) of the fund. Both ETFs and index funds are prone to tracking errors (A), which are the differences between the performance of the fund and the performance of the underlying index. Tracking errors can be caused by various factors, such as fees, expenses, dividends, rebalancing, and market conditions. The market price of ETFs does not always match the underlying basket of securities ©, as it is determined by supply and demand in the market. There can be a discrepancy between the market price and the NAVPU of an ETF, which is called the premium or discount. Index funds, on the other hand, are priced based on the NAVPU of the fund, which reflects the value of the underlying securities. Both ETFs and index funds have management fees (D), as they are both types of mutual funds that incur costs for managing and operating the fund. However, ETFs usually have lower management fees than index funds, as they are more passive and have lower turnover and distribution costs. References: Canadian Investment Funds Course (CIFC) | IFSE Institute

A pension adjustment (PA) is the amount that the Canada Revenue Agency (CRA) assigns to your pension plan each year to reflect the value of the pension benefits that you earned. The PA reduces your registered retirement savings plan (RRSP) contribution room for the following year by the same amount. The PA ensures that all taxpayers have access to comparable tax assistance, regardless of the type of pension plan they participate in. You will receive a PA whether you are in a defined contribution or a defined benefit pension plan, but the calculation of the PA will differ depending on the type of plan. (Canadian Investment Funds Course, Chapter 8, Section 8.2)

References:

• Canadian Investment Funds Course, Chapter 8, Section 8.2: Retirement Savings Plans and Pension Plans
• Investopedia: Pension Adjustment: Definition and Types of Plans1
• PlanEasy: What Is A Pension Adjustment?2

Implied needs of your clients are needs reflected by statements made by clients regarding problems and dissatisfactions1. For example, a client may say “I’m worried about outliving my savings” or “I don’t understand how this investment works”. These statements imply that the client has a need for retirement planning or financial education, respectively. Implied needs are different from explicit needs, which are statements of wants and needs made by clients1. For example, a client may say “I want to save for my child’s education” or “I need a low-risk investment”. These statements express the client’s goals and preferences clearly. Statements made by you showing readiness to solve a client’s problem are not implied needs, but rather responses to implied needs1. For example, you may say “I can help you create a retirement plan that suits your lifestyle” or “I can explain how this investment works and what are the benefits and risks”. Statements made by clients expressing the desire for lower commissions are not implied needs, but rather objections or concerns that may arise during the sales process2. For example, a client may say “Your fees are too high” or “I can get a better deal elsewhere”. These statements may indicate that the client is not convinced of the value of your service or product, or that they are trying to negotiate a lower price. References: Unit 2: Know Your Client, Unit 10: Sales Process

Taline’s risk profile should be “low” because her risk capacity is low and she cannot afford large investment losses. Risk capacity is the degree of risk that an investor must take in order to achieve their financial goals, while risk tolerance is the degree of risk that an investor is willing to take. Risk capacity is more important than risk tolerance in determining an investor’s risk profile1. Taline has a low risk capacity because she lives on a low, fixed income and cannot afford to lose money. Her risk tolerance may be high, but that does not mean she should take more risk than she can handle. Faruq should not override Taline’s risk capacity or assess her risk profile based on the higher of her risk tolerance and risk capacity, as that would be unsuitable and unethical. References: Unit 3: Suitability

The “Client’s Interest First” standard requires that Dealing Representatives act in the best interest of their clients and place their clients’ interests before their own or their employer’s interests. This means that they must provide clear, accurate, and complete information to their clients about the mutual funds they recommend, including the costs and fees associated with them and how they affect the investment performance. Presenting a fund’s historical performance to anticipate its future return is misleading and does not serve the client’s interest. Using a risk-based approach to select a mutual fund is part of the suitability assessment, but it does not necessarily put the client’s interest first. Accurately documenting the KYC information is important for compliance purposes, but it does not ensure that the recommendation is in the client’s best interest.

References: Canadian Investment Funds Course, Chapter 8: Suitability and Know Your Client1

According to the Canadian Investment Funds Course, inflation is the general increase in the prices of goods and services over time. Inflation reduces the purchasing power of money, meaning that a dollar can buy less in the future than it can today. Inflation also affects the returns of fixed income investments, such as bonds, which pay a fixed amount of interest and principal. If inflation is higher than expected, the real rate of return (the nominal rate minus inflation) of a bond will be lower than anticipated.

In this case, Pippa purchased a 15-year bond with a 7% coupon rate at the time of issuance. The bond is due to mature later this year. The general interest rate climate remained stable for the first 13 years of the bond’s term. However, especially over the past 18 months, both inflation and general interest rates have increased more than expected. This means that Pippa will receive less purchasing power from her bond’s interest and principal payments than she expected when she bought the bond. She will not experience a capital loss, as she will receive the full face value of $5,000 at maturity. She will also not benefit from a higher real rate of return, as inflation erodes the value of her fixed payments. She will not receive any capital appreciation, as the bond’s price does not change once it is held to maturity.

Therefore, the correct answer is C. The return of investment capital will have lower purchasing power than prior to investing.

References: 1: Canadian Investment Funds Course - IFSE Institute 2 (Unit 4: Fixed Income Securities)

The management expense ratio (MER) is the percentage of a fund’s assets that is paid to the fund manager for operating and managing the fund. A higher MER means that more of the fund’s returns are eaten up by fees, leaving less for the investors. Therefore, Fontaine Equity Fund’s higher MER of 2.99% contributes to its lower 5-year annualized return of 11.25%, compared to Chamberlain Equity Fund’s MER of 2.57% and 5-year annualized return of 13.42%. Therefore, D is the correct answer. References: Canadian Investment Funds Course (CIFC) | IFSE Institute, Management Expense Ratio (MER): Definition and How It Works - Investopedia

 A portfolio with a beta less than 1 would be suitable for Gregory, who is a conservative investor and wants to reduce his exposure to market risk. A beta less than 1 means that the portfolio is less volatile than the market index and tends to dampen its movements. This implies that the portfolio would fall less than the market in a downturn, but also rise less than the market in an upturn. A portfolio with a beta equal to 1 would move in the same direction and magnitude as the market, while a portfolio with a beta greater than 1 would be more volatile than the market and amplify its movements.

References: Canadian Investment Funds Course, Chapter 3: Risk and Return1

A is correct because a stock exchange listing would provide Underground with greater market exposure and public confidence than listing on the OTC market. A stock exchange is a regulated and organized market where securities are traded through intermediaries such as brokers. A stock exchange listing can enhance the reputation, visibility, and liquidity of a company’s shares, as well as attract more investors and analysts. An OTC market is a decentralized and less regulated market where securities are traded directly between buyers and sellers, usually through dealers or market makers. An OTC listing may have lower costs and fewer requirements than a stock exchange listing, but it also has less transparency, liquidity, and investor protection. Underground would not be directly involved in the trading of their shares on either market (B), as they would only issue new shares through an IPO and then let the secondary market determine the price and volume of their shares. Underground would be subject to more stringent listing requirements if they chose the stock exchange as compared to the OTC market ©, as they would have to meet higher standards of financial reporting, disclosure, governance, and compliance. If Underground chose to list on the OTC market, there would still be a secondary market available for investors (D), but it would be less liquid and efficient than a stock exchange. References: Investment Funds in Canada (IFC) | Canadian Securities Institute

This is because a target date fund is designed to reduce the risk and volatility of the portfolio as the investor gets closer to their retirement or other savings goal. Equities tend to have higher returns but also higher risk than fixed income, so a target date fund gradually reduces the exposure to equities and increases the exposure to fixed income over time. This way, the investor can benefit from the growth potential of equities in the early years and preserve their capital with the stability of fixed income in the later years. 

Beta is a relative measure that compares how an investment reacts to movements in a specific index. A beta of 1 means that the investment moves in sync with the index. A beta greater than 1 means that the investment is more volatile than the index. A beta less than 1 means that the investment is less volatile than the index. References: Investment Funds in Canada (IFC) | Canadian Securities Institute

 C is correct because bond funds receive fixed interest payments from most of their investments, as they invest mainly in bonds and other fixed-income securities that pay a regular coupon rate. Dividend funds receive variable dividend payments from most of their investments, as they invest mainly in stocks and other equity securities that pay dividends based on the company’s earnings and policies. The return of dividend funds does not rely only on interest rates (A), but also on other factors such as stock prices, earnings growth, dividend yield, and dividend payout ratio. The return of bond funds also depends on interest rates, as well as other factors such as credit quality, maturity, duration, and yield curve. When interest rates rise, the NAVPU of both bond funds and dividend funds decreases (B), not rises, as it lowers the present value of their future cash flows. Bond fund distributions do not receive more favorable tax treatment than that of dividend funds (D), but rather less favorable, as interest income is fully taxable at the investor’s marginal tax rate while eligible dividends receive a dividend tax credit that reduces their taxable amount. References: Canadian Investment Funds Course (CIFC) | IFSE Institute

Kiri has correctly fulfilled his suitability obligation by matching the risk-return profile of the fund with the personal circumstances of his client. The Conservative Bond Fund is a low-risk, low-return fund that pays regular interest income to investors. Myrtle’s investment objective is “income”, which means she wants to receive steady income from her investments and preserve her capital. Therefore, Kiri’s recommendation is reasonably suitable for Myrtle in all the circumstances. (Canadian Investment Funds Course, Chapter 2, Section 2.3)

References:

• Canadian Investment Funds Course, Chapter 2, Section 2.3: Conflicts of Interest
• IFSE Institute: Suitability Obligations1
• SFC: Frequently Asked Questions on Compliance with Suitability Obligations2

Gerard’s investment time horizon is the length of time he plans to hold his investment until he needs to use the money for his specific goal. In this case, Gerard’s goal is to use his mutual fund portfolio to meet the 20% down payment requirement to buy a house for $650,000. Therefore, his investment time horizon is determined by how long it will take him to accumulate enough money in his portfolio to cover the down payment amount. Assuming that Gerard does not withdraw any money from his portfolio and that his portfolio earns a constant annual rate of return of 6%, we can use the following formula to calculate how long it will take him to reach his goal:

FV=PV×(1+r)n+PMT×r(1+r)n−1​

where:

• FV is the future value of the portfolio
• PV is the present value of the portfolio
• r is the annual interest rate
• n is the number of years
• PMT is the monthly payment

We can rearrange the formula to solve for n:

n=log(1+r)logPV+PMT×r1​FV−PMT×r1​​​

Plugging in the given values, we get:

n=log(1+0.06)log40,000+1,500×0.061​130,000−1,500×0.061​​​

n=4.98

Therefore, Gerard’s investment time horizon is approximately 5 years, not considering market fluctuations. This means that he will need to invest his money in a way that matches his risk tolerance and expected return for this time period.

References:

• Canadian Investment Funds Course (CIFC) Study Guide, Chapter 4: Mutual Funds, Section 4.6: Asset Allocation and Diversification, page 4-271
• Future Value of an Annuity Definition - Investopedia2

A group RRSP is a retirement savings plan sponsored by an employer that allows employees to contribute through regular payroll deductions and benefit from tax advantages and possible employer matching. The employer is responsible for choosing the plan provider, which is the financial institution that administers the group RRSP and offers a range of investment options for the employees to choose from. The employer may also negotiate lower fees and better services with the plan provider than what individual RRSPs can offer. Therefore, statement D is correct.

The other statements are incorrect for the following reasons:

• Statement A: A group RRSP is less costly and time consuming to administer than traditional pension plans, as it does not require actuarial valuations, funding requirements, or regulatory filings.
• Statement B: If you leave your employer, your group RRSP does not stay with the employer. You can transfer your group RRSP to an individual RRSP or another registered plan without tax consequences, as long as there are no locked-in provisions.
• Statement C: You do not need to wait until you file your taxes to receive your contribution tax deduction. Your contributions are deducted from your gross income before tax is calculated, so you receive an immediate tax benefit on your paycheque.

References: Canadian Investment Funds Course, Unit 9, Section 9.1

 An exchange-traded fund (ETF) is a type of pooled investment security that operates much like a mutual fund. Typically, ETFs will track a particular index, sector, commodity, or other assets, but unlike mutual funds, ETFs can be purchased or sold on a stock exchange the same way that a regular stock can. ETFs have lower management expense ratios (MERs) compared to mutual funds because they are passively managed and do not incur high costs for research, analysis, and portfolio rebalancing. Therefore, this statement is true about ETFs. References: Exchange-Traded Fund (ETF) Explanation With Pros and Cons - Investopedia, The Best ETFs - Exchange Traded Funds Rankings | US News Investing

Adele has a high-risk profile and an excellent understanding of equities. Therefore, it would be appropriate for Danny to recommend growth funds. However, since Adele has $1,000,000 to invest, it would be prudent to diversify her investments and invest equally in all 3 funds. This way, she can benefit from the exposure to different regions and sectors, and reduce the impact of market fluctuations on her portfolio. Based on the table, all 3 funds have the same 5-year annualized returns net of MER, which is 15%. However, they have different MERs and Sharpe ratios. The MER is the fee charged by the fund manager for managing the fund, and the Sharpe ratio is a measure of risk-adjusted return. A lower MER means a lower cost for the investor, and a higher Sharpe ratio means a higher return per unit of risk. Therefore, investing equally in all 3 funds would allow Adele to achieve a balanced trade-off between cost and performance. References:

• Canadian Investment Funds Course (CIFC) Study Guide, Chapter 4: Mutual Funds, Section 4.2: Types of Mutual Funds, page 4-6
• Canadian Investment Funds Course (CIFC) Study Guide, Chapter 5: Fixed-Income Securities, Section 5.5: Risk-Return Trade-Offs, page 5-14
• Sharpe Ratio Definition - Investopedia

 A Fund Facts document is a summary disclosure document that provides key information about a mutual fund, such as its investment objectives, risks, past performance, and fees. One of the information items that a Fund Facts document provides to potential investors is what the mutual fund is currently investing in, such as its top 10 holdings, asset mix, geographic allocation, and sector allocation. A Fund Facts document does not provide information on how to calculate taxes, portfolio management strategy, or remuneration of the Independent Review Committee. References: Fund facts guide | Sun Life Global Investments, Mutual Funds - Fund Facts | ScotiaFunds

The question that you should ask Sarah and Kyle next is what is their investment objective for these savings. An investment objective is a statement that defines the purpose and goals of an investment. It helps investors and advisors select suitable investment products and strategies that match the investor’s needs and expectations. An investment objective typically considers factors such as risk tolerance, return expectations, time horizon, liquidity needs, tax situation, and personal preferences. Therefore, option B is the correct question to ask Sarah and Kyle next. The other options are not relevant or sufficient to determine their investment objective. Option A is related to their risk tolerance, but it is not the only factor that affects their investment objective. Option C is related to their net worth, but it does not indicate their purpose and goals for their savings. Option D is related to their income, but it does not reflect their return expectations or liquidity needs for their savings. References: [Investment Objective Definition], [Investment Objectives: What They Are and How to Use Them], [Investment Objectives | GetSmarterAboutMoney.ca]

An asset allocation fund is a type of mutual fund that invests in a combination of cash, fixed income, and equity securities, but has the flexibility to adjust the portfolio according to market conditions and the fund manager’s outlook. The fund manager can change the asset mix to take advantage of opportunities or reduce risks in different asset classes and markets. The fund’s objective is to achieve a balanced risk-return profile by diversifying across different assets and investment styles. Quattro Fund is an example of an asset allocation fund, as it can invest in cash, fixed income, and equity securities, and Louis can adjust the portfolio according to his views on interest rates and the market.

References: Canadian Investment Funds Course, Unit 6, Section 6.2; 4; 5; 6

A mutual fund trust is a type of unit trust that meets certain conditions under the Canadian Income Tax Act and is eligible for favourable tax treatment. A unit trust is a collective investment vehicle that holds assets and distributes profits to individual unit owners, also called unitholders, instead of reinvesting them in the fund. A mutual fund trust is not a corporation and does not have a board of directors or shareholders. It is also not a closed-end fund, which has a fixed number of shares that trade on an exchange. A mutual fund trust is an open-end fund, which can issue and redeem units at any time based on the net asset value of the fund.

References: Canadian Investment Funds Course, Unit 5, Section 5.1

A business cycle is a cycle of fluctuations in the aggregate economic activity of a nation around its long-term natural growth rate. It consists of four phases: expansion, peak, contraction, and trough. A period of economic expansion is followed by a period of economic contraction, which is also called a recession. A recession is defined as a significant decline in economic activity spread across the economy, lasting more than a few months, normally visible in real GDP, real income, employment, industrial production, and wholesale-retail sales1. The other statements are not true about the movement of business cycles in the Canadian economy. The length of each phase and cycle varies depending on various factors, such as fiscal and monetary policies, external shocks, consumer confidence, and technological changes. There is no fixed rule that a period of economic expansion or contraction must last for a certain number of months or quarters. A period of at least 3 consecutive months of contraction is not sufficient to define a recession; it must also be significant and widespread across the economy. References: Business Cycle: What It Is, How to Measure It, the 4 Phases, Business Cycle - Definition, How to Measure and 6 Different Stages, Business Cycle - Definition, Phases, Graphs, Economics Examples

Diversification is the mutual fund benefit that would address Jasmine’s concern about volatility. Diversification means spreading investments across different asset classes, sectors, regions, and companies to reduce risk and volatility. A mutual fund provides diversification by pooling money from many investors and investing in a portfolio of securities that meet the fund’s investment objective and strategy. By investing in a mutual fund, Jasmine can gain exposure to the energy sector without putting all her money in one company. She can also benefit from the professional management and research of the fund manager, who can select and monitor the best securities for the fund. References: Mutual Funds, Diversification

According to the Canadian Investment Funds Course, capital gains distributions are the portion of the mutual fund trust’s net realized capital gains that are paid out to the unitholders. Capital gains distributions are not the same as capital gains from selling or redeeming units of the mutual fund trust, which are reported on a T5008 slip. Capital gains distributions are taxable in the year they are received, even if they are reinvested in additional units of the fund. The mutual fund trust will issue a T3 slip to report the amount and type of income that is allocated to each unitholder, including capital gains distributions. The unitholder must report this income on their tax return and pay tax on 50% of the capital gains distributions at their marginal tax rate.

References: 1: Canadian Investment Funds Course - IFSE Institute 2 (Unit 9: Retirement)

A Canadian equity index fund is a type of mutual fund that invests in a portfolio of stocks that track the performance of a Canadian stock market index, such as the S&P/TSX Composite Index. This fund would be the most tax-efficient option for Xerxes, because it has low turnover and generates mostly capital gains, which are taxed at a lower rate than interest income or dividends. A bond fund would generate interest income, which is taxed at the highest marginal rate. An asset allocation fund would have a mix of different types of investments, which may not be optimal for Xerxes’ tax situation. A target date fund would adjust its asset mix over time based on a predetermined retirement date, which may not match Xerxes’ goals or risk tolerance. (Canadian Investment Funds Course, Chapter 9, Section 9.2)

References:

• Canadian Investment Funds Course, Chapter 9, Section 9.2: Tax-Efficient Investing
• IFSE Institute: Tax-Efficient Investing1
• Investopedia: Tax-Efficient Investing2

A put option is a contract that gives the buyer the right, but not the obligation, to sell a certain amount of an underlying security at a specified price within a specified time frame. A put option increases in value as the price of the underlying security decreases, and vice versa. Therefore, buying a put option can be used as a hedging strategy to protect against downside risk or loss in the value of the underlying security. In this case, Maxine is using a put option to hedge against the potential drop in the market value of Never2Tacky due to the regulatory changes. If the price of Never2Tacky falls below $95, she can exercise the put option and sell her shares at $95, limiting her loss. If the price of Never2Tacky stays above $95, she can let the put option expire and keep her shares, paying only the premium for the option. Buying a put option is not speculating, as it does not involve taking a high-risk position in anticipation of a favorable outcome. It is also not related to modern portfolio theory or passive management, which are different concepts in investment analysis. References: Put Option: What It Is, How It Works, and How to Trade Them, Put Options: What They Are and How They Work, Put: What It Is and How It Works in Investing, With Examples

To convert the proceeds from USD to CAD, Frederic needs to divide the amount in USD by the exchange rate. The exchange rate is $1 CAD for $0.99 USD, which means that $0.99 USD is equivalent to $1 CAD. Therefore, Frederic will receive

CAD in Canadian dollars. References: Canadian Investment Funds Course (CIFC) | IFSE Institute, Unit 8, Lesson 2

Avoidance is a method of addressing conflict of interest by preventing it from occurring in the first place. Ethical Financial’s policies and procedures manual (PPM) require that Catarina decline the gift from Darlene, which is a potential source of conflict of interest. By doing so, Catarina avoids any appearance of favouritism or bias towards Darlene’s mutual fund family. (Canadian Investment Funds Course, Chapter 2, Section 2.3)

References:

• Canadian Investment Funds Course, Chapter 2, Section 2.3: Conflicts of Interest
• IFSE Institute: Conflicts of Interest1

Technical analysis is the method of evaluating securities by analyzing the statistics generated by market activity, such as past prices and volume. Technical analysts do not attempt to measure a security’s intrinsic value, but instead use charts and other tools to identify patterns that can suggest future activity. Xian-Li is using technical analysis to evaluate the companies in her portfolio. References: Canadian Investment Funds Course (CIFC) | IFSE Institute