CISI level 3 Certificate in Wealth & Investment Management ICWIM Release Date

Central Bank Actions with Foreign Reserves

Central banks use foreign reserves to intervene in currency markets to stabilize or influence their nation’s currency exchange rate.

This can involve buying or selling foreign currencies.

Why the Answer is C

Currency interventions aim to manage exchange rate volatility, maintain competitiveness, or stabilize the currency during economic shocks.

Why Other Options are Incorrect

A. Inflation: Not directly controlled through currency market interventions.

B. Money supply: Managed through monetary policy tools like open market operations.

D. Short-term interest rates: Controlled through domestic monetary policy, not foreign reserves.

ICWIM Study Guide, Chapter on Monetary Policy: Explains the use of foreign reserves for currency stabilization.

Central Banking Principles: Discusses currency interventions.

ReferencesThus, the correct answer isC. To influence the nation's currency.

Stocks with abeta of less than oneare less volatile than the overall market. Including such stocks in a portfolio helps reduce its overall volatility, aligning with the risk-averse nature of the client.

Easier to understand (A): Simplicity is not a factor in beta selection.

Moves in line with the market (B): A beta of less than one means the portfolio moves less than the market.

High-volatility portfolio (D): This would involve stocks with a beta greater than one, contrary to the client’s risk profile.

References:

International Certificate in Wealth & Investment Management: Beta as a measure of systematic risk and its implications for portfolio construction.

CAPM (Capital Asset Pricing Model) principles on beta and risk.

Global Currency Trading

The US dollar dominates the foreign exchange market due to its status as the global reserve currency.

It is heavily used in international trade, financial transactions, and as a benchmark currency.

Market Share

The US dollar is involved in approximately88% of all forex trades.

Other currencies like the euro, Japanese yen, and British pound have significant market shares but are far behind the US dollar.

ICWIM Study Guide, Chapter on Global Financial Markets: Highlights the US dollar as the most traded currency.

Bank for International Settlements (BIS)Forex Market Surveys: Confirms trading dominance of the US dollar.

References

Sharpe Ratio Defined

The Sharpe ratio measuresrisk-adjusted return, specifically the excess return over the risk-free rate per unit of volatility.

Formula: Sharpe Ratio=Portfolio Return - Risk-Free RateStandard Deviation of Portfolio Returns\text{Sharpe Ratio} = \frac{\text{Portfolio Return - Risk-Free Rate}}{\text{Standard Deviation of Portfolio Returns}}Sharpe Ratio=Standard Deviation of Portfolio ReturnsPortfolio Return - Risk-Free Rate​

Why the Answer is B

The ratio quantifies the return generated for each unit of risk taken, relative to the risk-free rate.

Why Other Options are Incorrect

A. Benchmark performance: The Sharpe ratio does not measure performance relative to a benchmark.

C. Annual charge effect: Unrelated to fund expenses.

D. Manager ability: Focuses on risk-adjusted returns, not managerial skill.

ICWIM Study Guide, Chapter on Risk-Adjusted Metrics: Explains the Sharpe ratio.

Portfolio Management Literature: Highlights its use in assessing performance.

ReferencesThus, the correct answer isB. Return above a risk-free rate.