Friday Five Focus on Investments – 5 Questions in 5 Minutes – 12 Dec 2025

Friday Five Focus on Investments – 5 Questions in 5 Minutes Every Friday

What’s this all about?

Each week, we ask questions relating to one of these topics: Investments, Taxation, Pensions, Protection, or Regulation. This week, our Friday Five is relevant to Investments; this is useful as you prepare for any of the CII’s R02, AF4, or J10 exams. The challenge is for you to answer them in 5 minutes. Answers at the bottom of the page.

Questions

IMPORTANT! These questions relate to examinable tax year 2025/26, examinable by the CII until 31 August 2026.

1. Adam regularly invests in derivatives; Paul holds most of his assets in cash; David has a portfolio of buy-to-let properties; and Lucinda prefers to invest in fixed-interest investments. Which of these investors is most likely to suffer liquidity risk?
   1. Adam.
   2. Paul.
   3. David.
   4. Lucinda.

2. Within a split capital investment trust, the “hurdle rate” is an indication of the
   1. capital and income return on a particular share until wind-up.
   2. annual growth rate investments must achieve to pay the current purchase price, the pre-determined redemption value, or the value at wind-up.
   3. ratio by which the predetermined redemption value for a class of shares is currently covered by those assets of the company that are available for them.
   4. annual percentage rate required to cover each share class at wind-up but based on growing only the equity portion of the portfolio.

3. Soni is an additional-rate taxpayer who requires a tax efficient strategy for his investment portfolio valued at £150,000. Which of the following would offer him optimum tax efficiency?
   1. Cash deposit held directly.
   2. Property held within an onshore bond.
   3. Fixed-interest investments held within a pension.
   4. Equities held within an offshore investment bond.

4. Carol has an investment which has been described to her as a synthetic passive fund. The investment is most likely to be
   1. an exchange traded fund that uses derivatives to match an index.
   2. an index-tracking fund that tracks a specialist index.
   3. an exchange traded fund that holds stocks to replicate an index.
   4. a socially responsible index-tracking fund.

5. What effect did the financial crisis have on optimised portfolios created under Modern Portfolio Theory (MPT)?
   1. Portfolios did not deliver the expected diversification benefit as the rules of correlation were not maintained.
   2. Optimised portfolios created under MPT fared better than those created under the Pragmatist approach.
   3. It established that MPT is acceptable only under ‘normal conditions’.
   4. It increased the attention paid to assessing volatility in the overall level of risk within a portfolio.

Answers

1. C; See R02 Study Text, Chp 6; Rationale: Liquidity risk is the risk that an asset cannot be traded quickly. Property is normally associated with liquidity risk as it can take a long time to sell a property, and it may have to be sold at a lower price to achieve a quick sell.
2. B; See R02 Study Text, Chp 7; Rationale: Within a split capital investment trust, the hurdle rate indicates the annual growth rate the investment must achieve to pay the current purchase price, the pre-determined redemption value, or the value at wind-up.
3. C; See R02 Study Text, Chp 9; Rationale: A pension scheme would offer tax relief on contributions and any fixed interest investments held within the pension scheme are not taxed. None of the other investments would offer Soni tax relief on contributions and also gains and income from cash deposits and property held within onshore bonds are both taxable.
4. A; See R02 Study Text, Chp 10; Rationale: A ‘synthetic’ passive fund is an exchange-traded fund (ETF) that uses derivatives to match an index. A ‘physical’ passive fund is an ETF that holds stocks to replicate the index.
5. A; See R02 Study Text, Chp 10; Rationale: After the financial crisis, optimised portfolios created under MPT were criticised, because during that time, virtually all asset classes produced negative returns; hence, the MPT portfolios did not deliver the expected diversification benefits as the underlying rules of correlation were not maintained. It is now considered that MPT works well in normal conditions but not in crises, so it is still a generally accepted model (not only in ‘normal conditions’), but it should be understood by clients that it has its limitations.

Grab the resources you need!

If you worked through these investment questions with confidence, our CII R02 E-Mocks will help you build on that momentum. They mirror the format and style of the real exam, allowing you to check your understanding and pinpoint any areas that need attention. Start with the free taster to see how the questions compare to the actual exam.

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