LLQP Segregated Funds & Annuities · Component 2.1 · 30% of the exam
The risk classification of a segregated fund (low, low-to-medium, medium, medium-to-high, high) is based mainly on:
- AThe fund's size, since larger funds are more stable and therefore lower risk
- The historical volatility of the fund's returns, as a standardized measure
- CThe guarantee level attached to the contract, since a higher guarantee lowers the risk
- DThe manager's judgment about how risky the holdings are likely to be in the coming year
Correct answer: B) The historical volatility of the fund's returns, as a standardized measure
Standardized risk ratings support suitability. They are backward-looking and can understate risk in calm periods.
Why the other options are wrong
- ASize does not determine risk.
- CGuarantees are contractual and not part of the fund's risk rating.
- DThe measure is quantitative, not a matter of opinion.
Exam tip
Risk rating = historical volatility; match to profile.
Common mistake
Assuming a guarantee changes the fund's risk rating.
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.