Defined Benefit Pension Scheme:

This scheme provides a fixed, pre-determined income in retirement based on factors like years of service and final salary.

The employer assumes the investment and longevity risks, ensuring predictability for the employee.

Elimination of Other Options:

A: Contributions may be required from the employee, depending on the plan.

B: Index-linking to inflation is a feature of some schemes but not universal.

D: Investment performance is not guaranteed but managed by the employer.

References:

ICWIM Module 5: Discussion on pension types and benefits.

Yield to Maturity (YTM)

YTM is the total return an investor can expect from a bond if held to maturity, consideringannual coupon paymentsand any difference between the purchase price and the bond's face value.

Why the Answer is D

YTM incorporates all cash flows, providing a comprehensive measure of total return.

Why Other Options are Incorrect

A. Running Yield: Considers only current income relative to price, not total return.

B. Annual Coupon: Ignores price changes and reinvestment potential.

C. Price-to-Book Ratio: Unrelated to bonds, applies to equities.

ICWIM Study Guide, Chapter on Fixed Income: Details YTM and its role in total return calculations.

Bond Investment Literature: Highlights the comprehensive nature of YTM.

References

Active Fund Management

Active fund managers aim to outperform or avoid underperforming their peers by dynamically managing asset allocation.

Asset allocation by consensusensures alignment with the strategies and expectations of the broader investment community, minimizing the risk of significant divergence from the peer group.

Why the Answer is A

Using consensus-driven allocation avoids extreme deviations in performance relative to peers, which is key for managers seeking to maintain competitive performance.

Why Other Options are Incorrect

B. Assessing prospects: This involves market analysis but does not specifically address peer performance.

C. Hedging risks: Focuses on risk management, not peer alignment.

D. Quantitative models: Useful for analysis but not tailored to peer group considerations.

ICWIM Study Guide, Chapter on Portfolio Management: Discusses consensus-driven asset allocation.

Active Fund Management Literature: Highlights peer-relative performance strategies.

ReferencesThus, the correct answer isA. Through the use of asset allocation by consensus.

Why Affordability is the Major Constraint

A client’s ability to mitigate risks is directly limited by their financial resources.

Even the most sophisticated risk strategies, such as diversification, derivatives, or insurance, require financial capacity.

Other Options Analyzed

Age: Impacts risk tolerance but does not constrain the financial ability to manage risks.

Risk aversion: A behavioral factor, not a financial constraint.

Tax implications: Important but secondary compared to affordability.

ICWIM Textbook, Chapter on Investment Constraints: Highlights affordability as the top financial constraint.

Wealth Planning Principles: Discusses practical limitations of risk mitigation strategies.

ReferencesThus, the answer isB. Affordability.

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.

Fundamental analysis involves evaluating a security to determine its intrinsic value by examining factors such as financial statements, economic conditions, and industry trends. The goal is to identify whether the security is undervalued or overvalued compared to its current market price.

Expansionary Fiscal Policy and Inflation:

Expansionary fiscal policy increases aggregate demand by boosting public spending or reducing taxes.

This raises employment, leading to higher wage demands as workers negotiate for their share of economic growth.

Higher wages increase production costs, causing inflationary pressures.

Elimination of Other Options:

A: Higher interest rates are associated with contractionary, not expansionary, policy.

C: Private sector investment typically rises, not falls.

D: Time lag affects the policy's impact but is not a direct cause of inflation.

References:

ICWIM Module 1: Discussion on fiscal policy and its effects on inflation.