CSI CSC2 Actual Questions

Beta is a measure of a stock ' s volatility compared to the overall market. Stocks with lower betas tend to experience smaller price fluctuations relative to the market.

Utilities : Utility companies generally have stable and predictable revenue streams because they provide essential services like electricity, water, and gas, which are always in demand regardless of economic cycles. As a result, utility stocks have lower betas, reflecting their lower sensitivity to market movements.

Why Other Options Are Incorrect :

A. Transportation : Stocks in this sector are more sensitive to economic changes and fuel prices, leading to higher betas.

B. Capital Goods : This sector involves investments in industrial equipment and machinery, which fluctuate with economic cycles and have higher betas.

D. Automobiles and Components : This industry is cyclical and highly dependent on economic trends, leading to higher betas.

Rules-based ETFs, also known as smart beta ETFs, use predetermined rules or algorithms to select and weight securities in their portfolios. These ETFs aim to outperform traditional market-capitalization-weighted ETFs by targeting specific factors such as value, momentum, quality, or volatility.

Strategic Factor Weighting: Securities are weighted based on fundamental or quantitative factors, not just market capitalization.

Higher Returns Potential: These ETFs are designed to capture excess returns (alpha) relative to a benchmark.

Lower Costs: Smart beta strategies often combine active and passive management elements at a lower cost than traditional active funds.

A. Rules-based: Correct answer. Smart beta ETFs are built on rule-based frameworks designed to achieve specific investment objectives.

B. Standard: Refers to traditional, market-cap-weighted ETFs, not smart beta.

C. Synthetic: Refers to ETFs that use derivatives to replicate returns of an underlying index, unrelated to smart beta.

D. Index-based: Includes standard ETFs tracking an index but does not apply specifically to smart beta.

The Energy sector is one of the highest-weighted sectors in the S & P/TSX Composite Index based on market capitalization. This reflects Canada ' s resource-rich economy, where energy companies, including oil, gas, and related services, make up a significant portion of the market.

Other options:

Health care : A relatively small portion of the index.

Utilities : Have a smaller weight compared to energy.

Information technology : While growing, it has not surpassed energy in weight within the Canadian market.

Mortgage-Backed Securities (MBS) are designed to address prepayment risk , which arises when borrowers pay off their mortgages earlier than expected. Prepayments reduce the interest income investors receive and can affect the expected return on the security.

Why Prepayment Risk is Addressed :

Prepayment often occurs when interest rates decline, as borrowers refinance their mortgages. This leaves MBS investors reinvesting at lower yields, which impacts returns.

Structuring MBS helps mitigate prepayment risk through mechanisms like tranches in Collateralized Mortgage Obligations (CMOs).

Explanation of Options :

A. Liquidity : Incorrect. MBS provides liquidity to lenders but is not designed to address liquidity risk directly.

B. Interest Rate : Incorrect. MBS investors are still exposed to interest rate risk as rates impact prepayment behavior.

C. Rollover : Incorrect. Rollover risk applies to short-term debt securities, not MBS.

D. Prepayment : Correct. MBS structures are specifically designed to mitigate the impact of prepayments on investors.