LLQP Segregated Funds & Annuities · Component 2.1 · 30% of the exam
A client wants a fund holding shares of very small Canadian companies. The main additional risk the agent must disclose is that:
- small company shares can be hard to sell quickly and their prices move sharply
- Bsmall company shares are exempt from market risk because their prices are set by the insurer
- Csmall company shares pay no dividends, so the fund can never allocate income to holders
- Dsmall company shares are not permitted to be held inside a segregated fund contract
Correct answer: A) small company shares can be hard to sell quickly and their prices move sharply
Small capitalization shares trade in thinner markets, so selling a position can move the price. Combined with greater business risk, this makes returns more volatile than a large company fund, which matters if the client may need the money.
Why the other options are wrong
- BNo share is exempt from market risk, and insurers do not set share prices.
- CSome small companies do pay dividends, and capital gains can be allocated in any case.
- DSegregated funds may hold small company shares subject to the fund's stated objectives.
Exam tip
Small capitalization means both higher volatility and thinner liquidity, so match it to horizon.
Common mistake
Focusing only on the higher return potential of small companies and ignoring liquidity.
What this tests
CISRO competency component 2.1 — Analyze the available products that meet the client's needs — which is weighted at 30% of the Segregated Funds & Annuities module. Written against the published curriculum.
More from component 2
- A segregated fund's 'guaranteed amount' after a partial withdrawal under proportional reduction is:
- A distinctive estate advantage of a segregated fund over a non-registered mutual fund held jointly with a child is:
- Segregated fund guarantees are most valuable relative to their cost when:
- A segregated fund's annual statement reports:
- Compared with a segregated fund, an exchange-traded fund (ETF) generally offers:
- A segregated fund's 'automatic death benefit reset' feature:
Practice the whole Segregated Funds & Annuities module
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