IMT Exam 2 Cheatsheet — Vignette Playbook, Formulas & Glossary

Last-mile IMT Exam 2 review: case workflow and decision tables plus high-yield formulas for allocation, equities, fixed income, managed products, international/tax, monitoring/performance—ending with a glossary.

IMT Exam 2 is vignette-style. Use this as your “best next step” playbook. Pair it with the Syllabus for coverage and Practice for speed.


Vignette workflow (do this every time)

    flowchart TD
	  A["Read the ask (last line)"] --> B["Extract constraints (horizon/liquidity/tax/risk capacity)"]
	  B --> C["Identify domain (allocation / equity / FI / products / monitoring)"]
	  C --> D["Eliminate constraint-violators"]
	  D --> E["Pick best next action (clarify → document → act within IPS)"]

Official exam snapshot (CSI)

ItemOfficial value
Question formatMultiple cases with multiple-choice questions
Questions per exam50
Exam duration3 Hours
Passing grade60%
Attempts allowed per exam3

Official exam weightings (IMT Exam 2)

Exam topicWeighting
Investment Policy and Understanding Risk Profile16%
Asset Allocation and Investment Management14%
Equity Securities14%
Debt Securities18%
Managed Products14%
International Investing, Investment Risk and Impediments to Wealth Accumulation16%
Portfolio Monitoring and Performance Evaluation8%

Best-answer patterns (what the exam rewards)

If you see…It’s probably testing…High-scoring move
Missing factsprocess disciplinegather facts, don’t guess; document
Constraint conflictsuitability/IPSresolve constraints first; adjust plan
Two “right” answersprioritizationchoose the one that protects client + improves process
Too complex productsuitability + disclosuresimplify; ensure understanding; document
Performance questionmeasurement/benchmarkpick correct return metric + benchmark

Formula essentials (high yield)

Holding period return:

\[ HPR = \frac{P_1 - P_0 + D}{P_0} \]

What it tells you: Total return over a period = price change plus distributions, relative to the starting price.

Symbols (what they mean):

  • \(P_0\): starting price/value.
  • \(P_1\): ending price/value.
  • \(D\): distributions (dividends/interest).

Vignette cue: If the case mentions distributions, include \(D\) (don’t compute “price-only” return by mistake).

Real return (inflation-adjusted):

\[ 1+r_{real} = \frac{1+r_{nom}}{1+\pi} \]

What it tells you: Return after inflation (purchasing-power return).

Exam shortcut: for small rates, \(r_{real} \approx r_{nom}-\pi\) (approximation).

Expected portfolio return:

\[ E[R_p]=\sum_{i=1}^{n} w_i E[R_i] \]

What it tells you: Expected portfolio return is the weighted average of component expected returns.

Vignette cue: If an answer violates constraints by “reaching for return,” check whether it assumes unrealistic \(E[R]\).

Covariance link:

\[ \sigma_{ij}=\rho_{ij}\,\sigma_i\,\sigma_j \]

What it tells you: Covariance equals correlation × the two volatilities.

Why it matters in cases: It explains why a “diversifier” stops diversifying when correlations rise.

Two-asset variance:

\[ \sigma_p^2 = w_1^2\sigma_1^2 + w_2^2\sigma_2^2 + 2w_1w_2\sigma_{12} \]

What it tells you: Portfolio risk depends on the covariance term \(\sigma_{12}\) (which is driven by correlation).

How to connect it: \(\sigma_{12}=\rho_{12}\sigma_1\sigma_2\).

CAPM:

\[ E[R_i] = R_f + \beta_i\,(E[R_m]-R_f) \]

What it tells you: Required/expected return increases with market exposure (beta).

Vignette cue: If a case mentions “higher risk than market,” expect higher required return and more drawdown risk.

Sharpe ratio:

\[ Sharpe = \frac{E[R_p]-R_f}{\sigma_p} \]

What it tells you: Risk-adjusted performance (excess return per unit of volatility).

Case use: Prefer the portfolio with higher Sharpe when constraints allow and assumptions are consistent (same horizon, same net/gross basis).

Bond price:

\[ P = \sum_{t=1}^{n} \frac{C}{(1+y)^t} + \frac{F}{(1+y)^n} \]

What it tells you: Bond price is the PV of coupons plus principal.

Vignette cue: Yield up → price down; longer maturity/lower coupon → more sensitivity.

Duration approximation:

\[ \frac{\Delta P}{P} \approx -D_{mod}\,\Delta y \]

What it tells you: Approximate % price move for a yield change.

Common trap: \(\Delta y\) is in decimals (1% = 0.01).

Convexity adjustment:

\[ \frac{\Delta P}{P} \approx -D_{mod}\,\Delta y + \frac{1}{2}Cvx(\Delta y)^2 \]

What it tells you: Adds curvature so large rate moves are estimated more accurately.

Vignette cue: Callable bonds can show reduced/negative convexity—upside may be capped when yields fall.

Equity valuation shapes:

\[ P_0 = \frac{D_1}{r-g} \]

What it tells you: Constant-growth dividend discount model (Gordon growth) for stable dividend growers.

Critical constraint: must have \(r>g\) or the model breaks.

\[ V_0 = \sum_{t=1}^{n} \frac{CF_t}{(1+r)^t} + \frac{TV_n}{(1+r)^n} \]

What it tells you: DCF valuation = PV of forecast cash flows + PV of terminal value.

Case use: Terminal value assumptions often dominate—focus on sensitivity and realism.

Time-weighted return:

\[ TWR = \prod_{k=1}^{m} (1+r_k) - 1 \]

What it tells you: Investment performance independent of external cash flows (manager skill measure).

Money-weighted return (IRR definition):

\[ 0 = \sum_{t=0}^{n} \frac{CF_t}{(1+r)^t} \]

What it tells you: Investor-experience return that depends on timing/size of contributions and withdrawals.

Vignette cue: If the case emphasizes “when the client added money,” IRR is the relevant concept.


IPS + constraints (the case anchor)

The fastest way to win vignette questions is to write a 1–2 line IPS summary from the case:

  • Objective: what the client is trying to achieve (income/growth/preservation + timeline)
  • Constraints: liquidity needs, tax status, legal/unique constraints, risk capacity

Then ask: does the proposed action fit, and is it allowed?


Fixed income (why it dominates cases)

You don’t need heavy math, but you must have directional certainty:

  • yields up → prices down
  • longer duration → bigger price move
  • callable bonds can behave differently (negative convexity intuition)

Strategy cues:

  • Ladder: smoother cash flows, reduces timing risk
  • Barbell: more convexity, more curve sensitivity
  • Bullet: maturity targeting / liability matching

Managed products + alternatives (case checklist)

In a vignette, eliminate options that ignore:

  • fees + turnover (net return matters)
  • liquidity terms (lockups, gates, pricing)
  • mandate/style fit (avoid style drift)
  • after-tax impact (distributions vs growth)

Monitoring + performance evaluation (case checklist)

If a case asks “what should you do now?” after performance moves:

  1. Check drift vs policy ranges
  2. Re-check constraints (horizon/liquidity/risk capacity changed?)
  3. Choose correct return metric (TWR vs MWR)
  4. Rebalance or adjust within IPS, then document

Glossary (vignette-friendly)

  • Constraint: limit affecting portfolio choices (liquidity, tax, legal, unique).
  • IPS: document defining objectives, constraints, policy weights/ranges, and monitoring rules.
  • Risk tolerance vs capacity: willingness versus ability to bear loss.
  • Rebalancing: trading to restore weights to targets/ranges.
  • Duration: interest-rate sensitivity measure for bonds.
  • Convexity: curvature of price-yield relationship; refines duration estimates.
  • Tracking error: volatility of active return relative to benchmark.
  • Time-weighted return: performance measure that neutralizes external cash flows.
  • Money-weighted return (IRR): return sensitive to timing/size of cash flows.
  • Fee drag: reduction in wealth due to ongoing fees.
  • Style drift: manager deviates from stated style/mandate.
  • Liquidity: ability to trade without large price impact.
  • Home bias: overweighting domestic assets relative to diversification logic.

Expanded glossary (high-yield IMT terms)

  • Active management: deviating from a benchmark to seek excess return.
  • Alpha: return above what a risk model/benchmark would predict.
  • Asset allocation: choosing weights across asset classes.
  • Asset class: group of securities with similar risk/return drivers.
  • Asset location: placing assets in accounts to optimize after-tax outcome.
  • Benchmark: reference portfolio used to evaluate performance.
  • Beta: sensitivity to market movements.
  • Business cycle: expansion/peak/contraction/trough pattern in economic activity.
  • Capital preservation: objective to limit loss of principal.
  • Compounding: earning returns on prior returns over time.
  • Correlation (\(\rho\)): co-movement measure between returns.
  • Covariance: scale-dependent co-movement between returns.
  • Credit spread: yield difference between risky and risk-free debt.
  • Currency risk: variability due to exchange rate changes.
  • Discount rate: rate used to convert future cash flows to present value.
  • Diversification: spreading exposure to reduce unsystematic risk.
  • Drawdown: peak-to-trough decline in portfolio value.
  • Duration: interest-rate sensitivity measure for bonds.
  • Efficient frontier: set of portfolios with highest return for given risk (concept).
  • Expected return: probability-weighted average return.
  • Fee drag: reduction in wealth due to ongoing fees.
  • Fundamental analysis: valuing a security using economic/financial data.
  • Geometric mean: compound growth rate over multiple periods.
  • Growth investing: style emphasizing high expected growth.
  • Hedge: position intended to reduce risk exposure.
  • Holding period return (HPR): total return over a period.
  • Home bias: preference for domestic assets beyond what diversification suggests.
  • Immunization: matching duration to liabilities to reduce rate risk (concept).
  • Index: rules-based measure of a market segment.
  • Inflation risk: loss of purchasing power.
  • Information ratio: active return per unit active risk.
  • IPS (Investment Policy Statement): document defining objectives, constraints, and rules.
  • IRR / Money-weighted return: return that equates PV of cash flows to zero.
  • Liquidity: ability to trade without large price impact.
  • Market risk: risk driven by broad market movements.
  • Modified duration: duration used for price sensitivity approximation.
  • Momentum: tendency for winners/losers to continue short-term (concept).
  • Policy range: allowed deviation bands around target weights.
  • Portfolio drift: movement away from target weights due to market moves.
  • Present value (PV): value today of future cash flows discounted.
  • Real return: return after inflation.
  • Rebalancing: trading to restore weights to targets/ranges.
  • Reinvestment risk: risk that cash flows reinvest at lower yields.
  • Risk capacity: financial ability to bear loss.
  • Risk tolerance: willingness to bear volatility.
  • Robo-advisor: algorithm-driven portfolio service with automated allocation/rebalancing.
  • Sharpe ratio: excess return per unit total risk.
  • Style drift: manager deviates from stated style/mandate.
  • Suitability: recommendation must fit client objectives/constraints and risk profile.
  • Technical analysis: price/volume-based analysis approach.
  • Term structure: relationship between yields and maturities.
  • Time-weighted return: return measure that neutralizes external cash flows.
  • Tracking error: volatility of active return relative to benchmark.
  • Turnover: rate at which holdings change (trading frequency).
  • Value investing: style emphasizing low price relative to fundamentals.
  • Volatility (\(\sigma\)): dispersion of returns; commonly standard deviation.

Sources: https://www.csi.ca/en/learning/courses/imt/curriculum and https://www.csi.ca/en/learning/courses/imt/exam-credits