LLQP Segregated Funds & Annuities · Component 2.1 · 30% of the exam
Two equity segregated funds report the same average annual return over ten years, but one swung far more from year to year. The client should understand that:
- the fund with the wider swings carries more risk for the same average return
- Bthe fund with the wider swings is managed more actively and will therefore outperform it in future
- Cthe two funds must be identical in risk because their long-term averages ended up the same
- Dthe average return is the only figure that matters once a period of ten years has passed
Correct answer: A) the fund with the wider swings carries more risk for the same average return
Standard deviation measures how widely returns vary around the average. Two funds with the same mean can differ sharply in the ride they gave investors, and the more volatile one exposes the client to a far worse outcome if the money is needed at the wrong moment.
Why the other options are wrong
- BVolatility is not evidence of skill; a more volatile fund can swing widely and still lag.
- CEqual averages say nothing about the dispersion of the returns that produced them.
- DA ten-year average hides the year-to-year experience the client actually has to live through.
Exam tip
When two funds share a return figure, the question is testing dispersion, not performance.
Common mistake
Treating average return as a complete description of a fund and ignoring its volatility.
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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