Friday Five Focus on Investments – 5 Questions in 5 Minutes – 5 Jun 2026

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. They do not relate to tax year 2026/27 which is only examinable by the CII from 1 September 2026.

1. Denise favours investing in tracker funds. The latest fund she has chosen purchases a sample of the shares that make up the index that it is tracking. This fund is therefore using
   1. screening.
   2. replication.
   3. contrarianism.
   4. stratification.

2. Doris is investing in a purchased life annuity (PLA). In terms of the taxation of this, you can tell her that the capital element of a PLA is
   1. tax free because it is deemed to be a return of her original capital.
   2. tax free in order for it to compete like for like with a pension annuity.
   3. taxable as savings but cannot be set off against her personal savings allowance.
   4. taxable as investment income which can be offset against her dividend allowance.

3. Which of the following is a technique of portfolio modelling that incorporates random variations to predict future returns?
   1. Pragmatic assessment.
   2. Stochastic modelling.
   3. Optimised assessment.
   4. Correlation modelling.

4. A retail client owns fixed interest securities. One of the bonds is trading below its par value. This is most likely due to
   1. interest rates having reduced sharply.
   2. the coupon being below current interest rates.
   3. the coupon being above current interest rates.
   4. the issuer having a strong credit rating.

5. Sarah is considering an investment in conventional gilts. She should be aware that the ‘dirty price’ refers to the
   1. ‘clean price’ plus an additional amount for junk or high yielding bonds.
   2. ‘clean price’ of the stock plus or minus any interest adjustments.
   3. mid-market price quoted in major newspapers.
   4. value of stock over the period until maturity as it moves above or below par.

Answers

1. D; See R02 Study Text, Chp 7; Rationale: Where an index-tracking fund does not replicate the component shares of an index exactly, a sample may be used instead; this is known as stratification.
2. A; See R02 Study Text, Chp 8; Rationale: The capital element of a purchased life annuity is tax-free as it is deemed to be a return of capital.
3. B; See R02 Study Text, Chp 10; Rationale: Stochastic modelling uses a mathematical technique that generates an assessment of returns and volatility using probability.
4. B; See R02 Study Text, Chp 1; Rationale: When interest rates rise, bond prices fall; so, if a bond price is trading below its par value, it may be because interest rates have risen, and the coupon offered by the bond is below current interest rates and therefore not attractive to investors.
5. B; See R02 Study Text, Chp 1; Rationale: The clean price is the price of a bond excluding any interest accrued since the last settlement date. The dirty price is the full price paid for a bond; it is the clean price adjusted for accrued interest.

Grab the resources you need!

Consistent exposure to exam-standard questions can make a big difference to how confidently you approach R02. Access the free R02 E-Mocks taster to preview the question style, layout and level of detail included in the full set.

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