Section 5 Quiz

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Question Results
1. What is the approximate Sharpe ratio for the T. North Mutual Fund based on the following information: three-month Treasury bill rate =
2.40%; T. North Fund one-year return = 5.40%; standard deviation of T. North Fund = 4.20%?
A. 1.29.
B. 1.86.
Good choice! C. 0.71.
D. 0.5.
Feedback: Applying the Sharpe ratio, the answer is calculated as (5.40 – 2.40) / 4.20 = 0.71
Reference | Chapter 14 – Understanding Mutual Fund Performance
2. Identify the correct term for the peer group with similar investment mandates that would be used for a mutual fund’s relative performance
evaluation.
A. Benchmark Index.
B. Standard lot.
Good choice! C. Comparison universe.
D. Survivorship bias.
Feedback: The most popular method of relative performance evaluation is to compare a mutual fund’s return with the performance of a peer
group, which is made up of mutual funds with similar investment mandates. The collection of mutual funds that form the basis for comparison
is also called a comparison universe or performance universe. For example, if you wanted to measure the performance of a Canadian large
cap equity fund you would compare this fund’s results with all other Canadian large cap equity funds.
3. Which index would investors use as a benchmark for the performance of their non-North American equity investments?
Good choice! A. MSCI EAFE Index.

B. FTSE Canada Universe Bond Index.
C. S&P 500 Index.
D. S&P/TSX 60.
Feedback: Key Canadian Mutual Fund Benchmarks

Index Description Performance Uses
The 60 largest companies that trade on the TSX as measured by

S&P/TSX 60 Canadian large-cap equity funds.
market capitalization.
S&P 500 The 500 largest publicly held companies that trade on U.S. markets. U.S. equity funds.
MSCI EAFE Index The MSCI Inc. index of European, Australasian, and Far East stocks. Non-North American equity funds.
FTSE Canada Universe Bond Broad measure of the Canadian government and corporate bond
Canadian bond funds.
Index market.
4. In the context of measuring mutual fund performance and making "apples to apples" comparisons, which refers to the segment of mutual
funds with similar investment mandates that would be used in the analysis?
A. Survivorship bias.
B. Standard lot.
Good choice! C. Peer group.
D. Investment policy statement.
Feedback: The most popular method of relative performance evaluation is to compare a mutual fund’s return with the performance of a peer
group, which is made up of mutual funds with similar investment mandates. The collection of mutual funds that form the basis for comparison
is also called a comparison universe or performance universe. For example, if you wanted to measure the performance of a Canadian large
cap equity fund you would compare this fund’s results with all other Canadian large cap equity funds.
5. Which statistical term categorizes a range of data into four defined intervals?
Good choice! A. Quartile.

B. Odd lot.
C. Peer group.
D. Standard lot.
Feedback: Quartile ranking is used to assess performance of a fund manager relative to its peer group. Like professional sports, where the
best performer is first among peers and the worst performer is last, mutual fund managers are ranked from best to worst within their peer
group.
A quartile sorts performance into four equal parts or blocks. For instance, if you are looking at a peer group of 100 Canadian equity funds,
there would be four quartiles made up of 25 funds each. The quartiles are given a rank—1, 2, 3, or 4—to show how well a certain fund
performed compared to all other funds in the peer group.
6. Survivorship bias has what direct impact on average and moderately good fund managers that survive in the comparison universe?
A. No impact on the funds that remain, just those that terminate.

B. An overestimation of past returns.
The correct answer is: C. Deteriorating performance.
You chose: D. Unknown impact on past returns.
Feedback: All comparison universes also exhibit some degree of survivorship bias no matter how carefully the universes are constructed.
Survivorship bias develops as defunct portfolios drop out and are excluded from rankings in subsequent quarters. A performance universe is
essentially a universe of survivors. Funds that are terminated or cease to exist are usually those who have been unsuccessful. An average or
moderately good manager will increasingly rank lower in the surviving universe in the 3-year, 5-year and 10-year return comparisons.
7. David sold his DEF Mutual Fund at a NAVPU of $8.54. His original purchase price was $10.67 per unit. He did not reinvest any distributions
while he owned the fund units. Calculate David’s percentage gain or loss.
A. 19.96%.
B. 24.94%.
The correct answer is: C. -19.96%.
You chose: D. -24.94%.
Feedback: To calculate the percentage gain or loss, use the following formula:
Gain or Loss = ((Ending NAVPU – Beginning NAVPU) / Beginning NAVPU) x 100
In this question: (($8.54 - $10.67) / $10.67) x 100 = -19.96%
8. Which index would Canadian investors typically use as a benchmark if they want to assess large cap U.S. equities?
A. S&P/TSX Composite Index.

Good choice! B. S&P 500 Index.
C. FTSE Canada Universe Bond Index.
D. S&P/TSX 60.
Feedback: Key Canadian Mutual Fund Benchmarks

Index Description Performance Uses
The largest listed equities that trade on the Toronto Stock Exchange
S&P/TSX Composite Canadian equity funds.
as measured by market capitalization.
The 60 largest companies that trade on the TSX as measured by

S&P/TSX 60 Canadian large-cap equity funds.
market capitalization.
S&P 500 The 500 largest publicly held companies that trade on U.S. markets. U.S. equity funds.
FTSE Canada Universe Bond Broad measure of the Canadian government and corporate bond
Canadian bond funds.
Index market.
9. The rate of return on portfolio DEF was 4.2%. The standard deviation of the portfolio was 2% while the risk-adjusted rate of return using the
Sharpe Ratio showed a return of 0%. What conclusion can be drawn from this data?
Good choice! A. The return must be equal to the risk-free rate.

B. The stock is a desirable investment because a Sharpe ratio close to zero signals superior
performance.
C. The risk-free rate must be 2.2%.
D. The risk-free rate must be equal to the standard deviation.
Feedback: In this question, the Sharpe ratio would be calculated as:

(4.2% - Risk-free rate) / 2% = 0
To produce a Sharpe ratio of 0, the risk-free rate must be equal to the rate of return.
10.A fixed-income manager who invests solely in Government of Canada bonds can mitigate what type of risk?
A. Exchange rate risk.

Good choice! B. Default risk.
C. Unique risk.
D. Market risk.
Feedback: Sources of Volatility in Mutual Funds

Type of risk Source of risk Ways to reduce risk
Unique risk
Sensitivity of a security’s price to new
(also called Diversify
information leading to changes in demand
Specific risk)
The unique risk that a bond coupon

Default risk Avoid specializing in corporate bonds
will not be paid
Market risk
Changes in the overall market affecting an
(also called None
entire class of securities
Systematic risk)
Changes in the relative value of the

Exchange rate risk Hedging
currencies of the countries of investment
Changes in interest rates leading to

Interest rate risk Avoid specializing in fixed-income securities
changes in fixed-income securities prices
Reference | Chapter 15 – Selecting a Mutual Fund
11. Aaron, a fund manager, has moved a significant portion of his portfolio out of bonds to cash in anticipation that the Bank of Canada is going
to raise its overnight lending rate by 50 basis points. This investment strategy helps alleviate what type of investment risk?
A. Exchange rate risk.

B. Market risk.
C. Unique risk.
Good choice! D. Interest rate risk.
Feedback: Sources of Volatility in Mutual Funds

Type of risk Source of risk Ways to reduce risk
Unique risk
Sensitivity of a security’s price to new
(also called Diversify
information leading to changes in demand
Specific risk)
The unique risk that a bond coupon

Default risk Avoid specializing in corporate bonds
will not be paid
Market risk
Changes in the overall market affecting an
(also called None
entire class of securities
Systematic risk)
Changes in the relative value of the

Exchange rate risk Hedging
currencies of the countries of investment
Changes in interest rates leading to

Interest rate risk Avoid specializing in fixed-income securities
changes in fixed-income securities prices
12.Which results in a mutual fund experiencing a negative Sharpe ratio?
Good choice! A. Riskless assets performed better than the mutual fund.
B. The mutual fund underperformed its peer group.
C. The S&P/TSX Composite Index performed better than the mutual fund.
D. The mutual fund underperformed its benchmark.
Feedback: When calculating the Sharpe Ratio, the numerator of the formula subtracts the risk-free rate of return (often the T-bill rate) from
the fund return. If the fund return is less than the risk-free rate of return, this indicates that the riskless asset outperformed the fund return. As
a result, the Sharpe Ratio would be a negative value. A negative Sharpe Ratio means the fund manager was not able to outperform the
return on the riskless asset. Investors could have invested in the riskless asset and achieved a higher return than what the fund manager
was able to produce.
13.What measure most directly captures the additional value a fund manager brings to a fund’s return?
A. Beta.
Good choice! B. Alpha.
C. Sharpe ratio.
D. Treynor ratio.
Feedback: One additional performance measure to consider is the alpha on a fund. Alpha is a measure of the manager’s performance. If
alpha is positive, the manager has produced more return than predicted by the manager’s beta and thus the manager has added value to the
portfolio. The greater the alpha, the better the manager has done. On the other hand, an alpha value of zero indicates the manager has
achieved only normal performance, meaning the manager has added nothing. If alpha is negative, the manager has underperformed for the
level of risk taken on.
14.What investment philosophy entails buying stocks of mature companies that are currently out of favour and trade at a discount to book
value?
A. Sector rotation.
The correct answer is: B. Value investing.
C. Momentum investing.
You chose: D. Growth investing.
Feedback: Philosophies of Equity Investing
A conservative approach to money management. Value investors want to

buy a firm or equity fund for less than what the assets in place are worth.
They avoid paying large premiums for growth companies and seek
Value Investing
bargains in mature companies that are out of favour. Value investors
have a better chance of succeeding if given a long time horizon (at least
five years).
A style concerned more about the future prospects of a firm than its
present price. A firm might be trading for more than its intrinsic value, but
growing earnings are expected to increase the value beyond its current
price. Growth investors seek companies in sectors entering a period of
Growth Investing expansion. Growth sectors have limited competition, high-quality
research and development programs, relatively low labour costs, and
strong returns on invested capital. Growth investors usually estimate
earnings growth and buying on high expected future rates or high
historical rates.
Sector rotation is a portfolio manager’s attempt to profit through timing. It

is based on the belief that different industries will perform well during
Sector Rotation certain stages of the economic cycle. Industries expected to outperform
would be overweighted. More emphasis is placed on industry weighting
than on security selection.
Momentum managers believe that strong gains in earnings or stock price

will translate into stronger gains in earnings or stock price. They tend to
use technical or quantitative stock selection models with some
Momentum Investing fundamental variables to smooth out the volatile nature of the style. It is a
high-risk, high-return strategy. Momentum portfolios typically have high
turnover rates as failing stocks are sold. Portfolios also tend to be more
concentrated in certain areas of the economy than other funds.
Price (GARP) GARP is a value approach to buying earnings growth.

GARP managers, like growth managers, seek companies with
Growth at a Reasonable projections of growing earnings and high and increasing ROEs (return on
equity) relative to the industry average. Unlike growth managers, GARP
managers avoid stocks with high P/Es (price/earnings ratios).
15.A portfolio manager who has shifted investment assets from technology stocks to consumer staples securities in anticipation of a market
downturn is using what type of investment ideology?
A. Momentum investing.
B. Value investing.
C. Growth investing.
Good choice! D. Sector rotation.

Value Investing
five years).
historical rates.



16.What type of investment strategy uses technical analysis and aims to capitalize on the existing market trends?
A. Sector rotation.
Good choice! B. Momentum investing.
C. Growth investing.
D. Value investing.

Value Investing
five years).
historical rates.



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17.What fixed income investment approach involves moving between long-term bonds and short-term treasury bills in advance of foreseen
monetary policy changes?
Good choice! A. Interest rate anticipation.

B. Growth at a Reasonable Price (GARP).
C. Security selection.
D. Sector trading.
Feedback: Philosophies of Fixed-Income Investing
This strategy involves moving between long-term government bonds and

very short-term T-bills, based on a forecast of interest rates over a certain
Interest Rate Anticipation
time horizon. Price sensitivity to interest rate movements increases as
the term to maturity increases and the coupon decreases.
Selecting bonds involves fundamental and credit analysis and

quantitative valuation of individual securities. Fundamental analysis of a
bond considers the nature of the security and the potential cash flow.
Security Selection Credit analysis evaluates the likelihood that the payments will be
received as contracted. Credit analysis also considers the issuer's
industry conditions, the economy and other macroeconomic factors, as
well as factors specific to the issuer.
Sector traders vary the weights of different types of bonds held within a
portfolio. A portfolio manager forms an opinion on the valuation of a
specific sector of the bond market based on its credit fundamentals and
Sector Trading on relative valuations compared to historical norms and technical factors,
such as supply and demand. Investors willing to assume interest rate risk
can add return to their portfolios by holding high-yielding securities from a
specific sector.
18.Which report captures the changes in a money manager’s investment patterns over a measurement period?
A. Investor profile statement.

You chose: B. High water mark.
C. Portfolio opportunity set.
The correct answer is: D. Style analysis.
Feedback: Style analysis is the study of style drift (change in a manager’s investment style over a period of time) in a fund’s holdings or
returns over time. Style drift is given important consideration in performance analysis for several reasons (performance analysis was
discussed in Chapter 15).
19.Which one of the following statements best describes the reward-to-risk ratio?
A. The fund’s return divided by the fund’s beta.

Good choice! B. The fund’s return divided by the fund’s standard deviation.
C. The fund’s return minus the T-bill rate divided by the fund’s beta.
D. The fund’s return minus the T-bill rate divided by the fund’s standard deviation.
Feedback: The reward-to-risk ratio is calculated by taking the fund’s return and dividing it by the fund’s standard deviation.
20.Carla pays a fee per unit when she first purchases a mutual fund. Identify the type of fee that Carla has been charged.
A. Transfer fee.
Good choice! B. Front-end load.
C. Management fee.
D. Set-up fee.
Feedback: A sales fee that is paid upon redemption is called a back-end load or a deferred sales charge. Mutual funds that do not charge
sales fees are known as no-load funds.
Reference | Chapter 16 – Mutual Fund Fees and Services
21.Identify the charges paid by a mutual fund to a fund’s service providers.
A. Sales commissions.
The correct answer is: B. Management fees.
You chose: C. Trailer fees.
D. Trustee fees.
Feedback: Management fees are the fees payable by the fund to the fund’s service providers and are charged out as expenses against the
entire fund’s earnings and are disclosed in the fund facts document and simplified prospectus.
22.Identify the arrangement between an insurance company and an individual in which an investor gives a specific amount of money to an
insurance company in return for regular payments.
A. Fixed period withdrawal plan.

B. Ratio withdrawal plan.
C. Dollar cost averaging.
Good choice! D. Annuity.
Feedback: An annuity is generally a contract between an individual and a life insurance company in which the individual, called the
annuitant, gives a certain amount of money to the insurance company. In exchange, the insurance company agrees to make regular
payments to the individual. These payments might be over a guaranteed term whether or not the individual lives to the end of the term. If the
individual dies before the end of the guaranteed term, payments would continue to be made to the surviving spouse or other named
beneficiary.
23.Identify the calculation used to determine the Management Expense Ratio.
A. Implicit expenses divided by increase in assets over year.

You chose: B. Total management fees divided by average net assets.
C. Operating expenses divided by year end assets.
The correct answer is: D. Annual total of all fees and expenses divided by average net assets.
Feedback: The management fees and operating expenses are usually bundled into a single amount known as the management expense
ratio (MER). The MER is the total of management fees and operating costs paid by a fund and is expressed as a percentage of its average
net assets.
24.Identify the fee that may be charged to investors who hold mutual funds in an RRSP or RESP.
Good choice! A. Trustee fee.

B. Set-up fee.
C. Safekeeping fee.
D. Management fee.
Feedback: If your clients hold mutual fund investments within RRSPs, RRIFs or RESPs they may have to pay annual trustee fees and
administration fees for these plans. These fees typically range from $20 to $100 or more per year. Many firms waive such fees if the plan
value exceeds a certain amount, such as $25,000.
25.Calculate the purchasing price per unit for an investor purchasing a fund with a NAVPU of $14 and an acquisition fee of 2.5%.
Good choice! A. $14.35.

B. $13.98.
C. $14.00.
D. $13.36.
Feedback: Offering or Purchase Price = NAVPS / (100% − Sales Charge)

$14/0.975 = $14.35
26.Rebecca receives $6 per share of capital gains distribution from her mutual fund. Assuming she is in a 30% marginal tax bracket, calculate
her income taxes payable.
A. $1.80.
B. $3.00.
Good choice! C. $0.90.
D. $0.54.
Feedback: $6 x 50% x 30% = $0.90

27.Before a $0.20 distribution, XYZ had a NAVPU of $12.00. Calculate the number of units an investor would hold after the distribution if he
held 2,000 units prior to the distribution.
A. 2,000.000.
B. 2,033.333.
C. 2,045.897.
Good choice! D. 2,033.898.
Feedback: $12.00 x 2,000 = $24,000 investment

$12.00 - $0.20 = $11.80 NAVPS
$24,000 / $ 11.80 = 2,033.898 units
28.Doug's daughter is planning on spending 3 years travelling in Europe. He has asked for advice on a systematic withdrawal plan that will
allow his daughter to have periodic payments from an investment fund with a goal of exhausting the entire fund by the end of the 3 years.
Recommend a plan to Doug.
A. Ratio withdrawal plan.

B. Fixed dollar withdrawal plan.
C. Annuity.
Good choice! D. Fixed period withdrawal plan.
Feedback: Under a fixed-period withdrawal plan, your client will receive money over a period of time until the mutual fund investment is
completely paid out. In this type of plan, the client chooses a period over which payments will be received. In each year, the client receives
an amount equal to whatever value there is in the fund investment divided by the number of years remaining until the end of the period.
29.A client has accumulated $100,000 in a mortgage fund. The client has indicated that she requires a fixed amount of $1,500 to be withdrawn
from her fund on a monthly basis. Which of the following systematic withdrawal plans is most suitable for this investor?
A. A fixed ratio withdrawal plan.

Good choice! B. A fixed dollar withdrawal plan.
C. A life withdrawal plan.
D. A fixed period withdrawal plan.
Feedback: With a fixed-dollar (or constant) withdrawal plan, investors request to receive a periodic fixed amount of money through the
redemption of units of their mutual fund. The investor decides exactly how much money is to be paid out. Typically, there is a minimum
account size and dollar amount required for this type of plan.
30.In comparison to a universe of 200 funds, a particular manager is ranked in the first quartile over the evaluation period. What does this
ranking indicate?
A. Fund performance ranked at the bottom against all other funds.

B. Fund performance ranked average against all competing funds.
Good choice! C. Fund performance was better than 75% of all competing funds.
D. Fund performance was better than 25% of all competing funds.
Feedback: The quartile classifies the yield into four groups or equal blocks. For example, if you analyze a group of 100 comparable
Canadian equity funds, there will be four quartiles, each consisting of 25 funds. These quartiles are associated with a ranking (1, 2, 3 or 4) to
show how the performance of some funds compares to that of all other funds in the peer group, as follows:
1st quartile - the 25 funds with the highest return;
2nd quartile - the following 25 funds in terms of performance;
3rd quartile - the following 25 funds;
4th quartile - the 25 funds in the peer group had the worst return.

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12/14/23, 9:18 PM Section Quiz

Check: Section 5 Quiz

You have passed the test.

Good choice! A. MSCI EAFE Index.

Feedback: Key Canadian Mutual Fund Benchmarks

The 60 largest companies that trade on the TSX as measured by

Reference | Chapter 14 – Understanding Mutual Fund Performance

Good choice! A. Quartile.

A. No impact on the funds that remain, just those that terminate.

A. S&P/TSX Composite Index.

Feedback: Key Canadian Mutual Fund Benchmarks

The 60 largest companies that trade on the TSX as measured by

Reference | Chapter 14 – Understanding Mutual Fund Performance

Good choice! A. The return must be equal to the risk-free rate.

Feedback: In this question, the Sharpe ratio would be calculated as:

A. Exchange rate risk.

Feedback: Sources of Volatility in Mutual Funds

The unique risk that a bond coupon

Changes in the relative value of the

Changes in interest rates leading to

Reference | Chapter 15 – Selecting a Mutual Fund

A. Exchange rate risk.

Feedback: Sources of Volatility in Mutual Funds

The unique risk that a bond coupon

Changes in the relative value of the

Changes in interest rates leading to

Reference | Chapter 15 – Selecting a Mutual Fund

Feedback: Philosophies of Equity Investing

A conservative approach to money management. Value investors want to

Sector rotation is a portfolio manager’s attempt to profit through timing. It

Momentum managers believe that strong gains in earnings or stock price

Price (GARP) GARP is a value approach to buying earnings growth.

Reference | Chapter 15 – Selecting a Mutual Fund

Feedback: Philosophies of Equity Investing

A conservative approach to money management. Value investors want to

Sector rotation is a portfolio manager’s attempt to profit through timing. It

Momentum managers believe that strong gains in earnings or stock price

Price (GARP) GARP is a value approach to buying earnings growth.

Reference | Chapter 15 – Selecting a Mutual Fund

Feedback: Philosophies of Equity Investing

A conservative approach to money management. Value investors want to

Sector rotation is a portfolio manager’s attempt to profit through timing. It

Momentum managers believe that strong gains in earnings or stock price

Price (GARP) GARP is a value approach to buying earnings growth.

Reference | Chapter 15 – Selecting a Mutual Fund

Good choice! A. Interest rate anticipation.

Feedback: Philosophies of Fixed-Income Investing

This strategy involves moving between long-term government bonds and

Selecting bonds involves fundamental and credit analysis and

Reference | Chapter 15 – Selecting a Mutual Fund

A. Investor profile statement.

A. The fund’s return divided by the fund’s beta.

21.Identify the charges paid by a mutual fund to a fund’s service providers.

A. Fixed period withdrawal plan.

23.Identify the calculation used to determine the Management Expense Ratio.

A. Implicit expenses divided by increase in assets over year.

Good choice! A. Trustee fee.

Good choice! A. $14.35.

Feedback: Offering or Purchase Price = NAVPS / (100% − Sales Charge)

Feedback: $6 x 50% x 30% = $0.90

Feedback: $12.00 x 2,000 = $24,000 investment

A. Ratio withdrawal plan.

A. A fixed ratio withdrawal plan.

A. Fund performance ranked at the bottom against all other funds.