LLQP Segregated Funds & Annuities · Component 2.1 · 30% of the exam
A segregated fund that invests in foreign equities exposes the client to:
- ANo additional risk, since the fund's diversification across countries cancels out any local effects
- BGuaranteed foreign returns, since the insurer hedges every foreign holding back to Canadian dollars
- COnly interest-rate risk, since foreign equities respond mainly to changes in foreign rates
- Currency risk and foreign political and economic risk, in exchange for diversification
Correct answer: D) Currency risk and foreign political and economic risk, in exchange for diversification
Some funds hedge currency; the information folder states whether they do. Diversification benefits outweigh the added risks for most long-term investors.
Why the other options are wrong
- ACurrency and foreign-market risks are real.
- BNo return is guaranteed, and hedging is not universal.
- CInterest-rate risk is a bond fund issue.
Exam tip
Foreign funds: currency and country risk; check hedging.
Common mistake
Failing to mention currency risk on a US equity fund.
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
Timed sets weighted like the exam, and review of every question you miss. Free to start.