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CISI INVESTMENT, RISK & TAXATION -
KNOWLEDGE ASSESSMENT – COMPREHENSIVE
STUDY QUESTIONS & ANSWERS
ALL SECTIONS
(CORRECT ANSWERS IN BOLD WITH EXPLAINED RATIONALES)
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Section 1: Investment Vehicles & Structures
1. What is a key characteristic of an Investment Trust?
a) It is an open-ended fund.
b) It can use gearing to enhance returns.
c) Its unit price is directly tied to its Net Asset Value (NAV).
d) It is required to be structured as a unit trust.
Answer: B
Rationale: Investment Trusts are closed-ended companies listed on the stock exchange. A key
feature is their ability to use gearing (borrowing money) to invest, which can amplify returns but
also increases risk. Unlike OEICs and Unit Trusts, their share price can trade at a discount or
premium to NAV.
2. A Real Estate Investment Trust (REIT) must meet certain conditions. Which of the
following is a key requirement?
a) At least 60% of the fund must be invested in government bonds.
b) It must distribute at least 90% of its property rental profits to investors.
c) It can be a closely-held company with fewer than 5 shareholders.
d) The value of any single property can exceed 60% of the fund's total assets.
Answer: B
Rationale: To qualify for its special tax status (exemption from corporation tax on property
, profits), a REIT must distribute at least 90% of its tax-exempt rental profits as dividends, known
as Property Income Distributions (PIDs).
3. What is the primary tax advantage for an investor in a Venture Capital Trust (VCT)?
a) Capital gains within the VCT are exempt from CGT.
b) Dividends received from the VCT are tax-free for eligible investors.
c) Investments in a VCT are exempt from Inheritance Tax.
d) The initial investment reduces the investor's income tax liability indefinitely.
Answer: B
Rationale: A major benefit of VCTs is that dividends paid on the ordinary shares are free from
income tax, provided the shares are held for the required period. This is in addition to the 30%
income tax relief on the initial investment.
4. How do Physical ETFs typically generate additional revenue to increase their margins?
a) By using derivatives to synthetically replicate an index.
b) Through securities lending.
c) By charging high performance fees.
d) By investing a portion of assets in high-risk bonds.
Answer: B
Rationale: Physical ETFs hold the actual securities in the index they track. They can lend these
securities to other parties (like short-sellers) for a fee, which generates extra income that can be
used to reduce the fund's Total Expense Ratio (TER) or enhance returns.
5. What is a key risk associated with Synthetic ETFs that is not present in Physical ETFs?
a) Market risk
b) Counterparty risk
c) Liquidity risk
d) Currency risk
Answer: B
Rationale: Synthetic ETFs use derivatives (swaps) to replicate index performance. This
introduces counterparty risk, which is the risk that the bank providing the swap (the
counterparty) defaults and cannot fulfill its obligation, potentially leading to investor losses.
CISI INVESTMENT, RISK & TAXATION -
KNOWLEDGE ASSESSMENT – COMPREHENSIVE
STUDY QUESTIONS & ANSWERS
ALL SECTIONS
(CORRECT ANSWERS IN BOLD WITH EXPLAINED RATIONALES)
───────────────────────────────────────────────
Section 1: Investment Vehicles & Structures
1. What is a key characteristic of an Investment Trust?
a) It is an open-ended fund.
b) It can use gearing to enhance returns.
c) Its unit price is directly tied to its Net Asset Value (NAV).
d) It is required to be structured as a unit trust.
Answer: B
Rationale: Investment Trusts are closed-ended companies listed on the stock exchange. A key
feature is their ability to use gearing (borrowing money) to invest, which can amplify returns but
also increases risk. Unlike OEICs and Unit Trusts, their share price can trade at a discount or
premium to NAV.
2. A Real Estate Investment Trust (REIT) must meet certain conditions. Which of the
following is a key requirement?
a) At least 60% of the fund must be invested in government bonds.
b) It must distribute at least 90% of its property rental profits to investors.
c) It can be a closely-held company with fewer than 5 shareholders.
d) The value of any single property can exceed 60% of the fund's total assets.
Answer: B
Rationale: To qualify for its special tax status (exemption from corporation tax on property
, profits), a REIT must distribute at least 90% of its tax-exempt rental profits as dividends, known
as Property Income Distributions (PIDs).
3. What is the primary tax advantage for an investor in a Venture Capital Trust (VCT)?
a) Capital gains within the VCT are exempt from CGT.
b) Dividends received from the VCT are tax-free for eligible investors.
c) Investments in a VCT are exempt from Inheritance Tax.
d) The initial investment reduces the investor's income tax liability indefinitely.
Answer: B
Rationale: A major benefit of VCTs is that dividends paid on the ordinary shares are free from
income tax, provided the shares are held for the required period. This is in addition to the 30%
income tax relief on the initial investment.
4. How do Physical ETFs typically generate additional revenue to increase their margins?
a) By using derivatives to synthetically replicate an index.
b) Through securities lending.
c) By charging high performance fees.
d) By investing a portion of assets in high-risk bonds.
Answer: B
Rationale: Physical ETFs hold the actual securities in the index they track. They can lend these
securities to other parties (like short-sellers) for a fee, which generates extra income that can be
used to reduce the fund's Total Expense Ratio (TER) or enhance returns.
5. What is a key risk associated with Synthetic ETFs that is not present in Physical ETFs?
a) Market risk
b) Counterparty risk
c) Liquidity risk
d) Currency risk
Answer: B
Rationale: Synthetic ETFs use derivatives (swaps) to replicate index performance. This
introduces counterparty risk, which is the risk that the bank providing the swap (the
counterparty) defaults and cannot fulfill its obligation, potentially leading to investor losses.
