CSC Level 2 Exam Prep
Practice Test

A. It automatically sells the ETF if the price falls to a predetermined level ✓

B. It allows the investor to buy more shares at a lower price

C. It guarantees execution at a specified price

D. It eliminates all market risk associated with the ETF

Correct — A. A stop-loss order is designed to limit an investor's loss by triggering a sell order once the ETF price drops to a specified level. Unlike a limit order, it does not guarantee the exact execution price but does provide downside protection. It does not eliminate market risk entirely.

A. Open-end funds issue a fixed number of units at inception

B. Open-end funds can sell short to profit from declining markets

C. Open-end funds continuously issue and redeem shares at NAVPS ✓

D. Open-end funds trade on a stock exchange throughout the day

Correct — C. Open-end mutual funds continuously create new units when investors buy in and redeem units when investors sell out, always at the fund's net asset value per share (NAVPS). Closed-end funds, by contrast, issue a fixed number of shares that then trade on an exchange at prices that may differ from NAVPS.

A. Investment-grade corporate bonds

B. Guaranteed Investment Certificates

C. Government treasury bills

D. Common equities ✓

Correct — D. Common equities offer the highest long-term growth potential, making them appropriate for investors who can tolerate volatility and have a long time horizon to recover from downturns. Treasury bills and GICs prioritize capital preservation with lower returns, while bonds offer moderate risk and income.

A. The impact of management fees on portfolio performance

B. The influence of market volatility on reported returns

C. The effect of the portfolio manager's security selection decisions

D. The distortion caused by the timing and size of external cash flows ✓

Correct — D. The time-weighted rate of return (TWRR) eliminates the distorting effect of external cash flows (client deposits and withdrawals) that are outside the manager's control. This makes it the preferred method for evaluating investment manager performance. The dollar-weighted return, by contrast, reflects both manager skill and the timing of investor cash flows.

A. Adding new capital to the portfolio to increase its size

B. Adjusting the portfolio to restore the target asset allocation after market movements ✓

C. Switching from a passive to an active management strategy

D. Selling all underperforming assets and buying top performers

Correct — B. Rebalancing involves realigning the portfolio's weightings back to the original or desired asset allocation after market movements have caused drift. For example, if equities outperform and now exceed the target weight, the manager sells some equities and buys underweight assets. It maintains the intended risk profile over time.

A. MER is added to returns and increases the investor's overall gain

B. MER is deducted from the fund's assets, reducing the investor's net return ✓

C. MER only applies when the fund achieves a return above the benchmark

D. MER is a one-time entry fee paid at the time of purchase

Correct — B. The MER represents the total annual cost of operating the fund expressed as a percentage of average net assets. It is deducted from the fund's assets continuously, which directly reduces the net return delivered to investors. A higher MER means the fund must generate a greater gross return just to match a lower-MER fund's net return.

A. To provide full, plain, and true disclosure of material facts to prospective investors ✓

B. To set the management expense ratio for the fund

C. To guarantee a minimum return for investors

D. To register the fund with the Investment Industry Regulatory Organization of Canada

Correct — A. A prospectus is a legal document that provides investors with all material facts about a mutual fund, enabling them to make an informed investment decision. It discloses objectives, risks, fees, and management. It does not guarantee returns or set fees by itself.

A. Commission-based fee

B. Fee-based (wrap) account ✓

C. Performance fee

D. Deferred sales charge

Correct — B. A fee-based or wrap account charges clients an annual fee calculated as a percentage of assets under management, covering advice, trading, and sometimes custody. This aligns the advisor's compensation with the client's portfolio growth, unlike commission-based models where compensation depends on transaction volume, which may incentivize excessive trading.