CMFAS CACS – Client Advisor Competency Standards (CACS) ​Paper 2 Exam

Correct: Statement I is correct because the Treynor Ratio measures excess return relative to systematic risk (beta), which is the most relevant risk metric for a client who already holds a well-diversified portfolio. Statement II is correct because the Sortino Ratio is specifically designed to penalize only downside volatility, making it more appropriate than the Sharpe Ratio for clients who are primarily concerned about losses rather than general price fluctuations. Statement IV is correct because annualising returns allows an advisor to compare the performance of funds on a standardized basis even when they have different inception dates.

Incorrect: Statement III is incorrect because in fund performance measurement, an alpha of 1.0 represents an outperformance of 1% relative to the benchmark index. Therefore, an alpha of 2.0 would indicate a 2% outperformance, not a 20% outperformance.

Takeaway: When evaluating fund performance, advisors must select risk-adjusted metrics that align with the client’s existing portfolio diversification and their specific sensitivity to downside risk versus total volatility. Therefore, statements I, II and IV are correct.

Correct: Statement II is correct because in a discretionary mandate, the advisor retains the responsibility to ensure the investment strategy remains aligned with the client’s goals, despite the involvement of internal managers. Statement III is correct because the Dollar-Weighted Rate of Return is defined as the internal rate of return that equates the initial investment with all cash flows during the period.

Incorrect: Statement I is incorrect because yield only accounts for periodic income like interest and dividends, while total return includes capital gains or losses. Statement IV is incorrect because rebalancing is the process of restoring the portfolio to its original intended asset allocation rather than changing it to follow market fluctuations.

Takeaway: Effective portfolio management requires understanding that rebalancing restores target allocations and that total returns differ from yields by including capital appreciation. Therefore, statements II and III are correct.

Correct: Statement I is correct because lending values are tiered based on asset volatility; fixed income securities (typically 75-85%) have higher lending values than equities (30-70%) but lower values than highly liquid money-market instruments (up to 95%). Statement III is correct because property can be used to facilitate money laundering; therefore, advisors must scrutinize the source of funds used for the initial property purchase to mitigate reputational and regulatory risks.

Incorrect: Statement II is incorrect because mortgage loans provided by private banks are generally more flexible than retail housing loans, allowing clients to adjust the quantity of the loan draw-down during the investment period. Statement IV is incorrect because the primary risk in a carry-trade is the appreciation of the borrowed currency (the currency the client is ‘short’), which increases the cost of repayment and can lead to significant losses.

Takeaway: Lending values are determined by the risk and liquidity of the collateral, and credit advisors must remain vigilant regarding the source of funds in property-related financing to prevent money laundering. Therefore, statements I and III are correct.

Correct: The statement claiming historical pricing is the most common method is the right answer because it is false. In reality, forward pricing is the standard arrangement for most funds in the market. Historical pricing is less common and is generally only suitable for funds that hold less volatile securities where prices do not fluctuate significantly between the time of the order and the valuation.

Incorrect: The statement regarding NAV-to-NAV returns is true because sales charges are distribution costs that do not reflect the manager’s investment skill. The description of forward pricing is true as it correctly identifies that valuation occurs at a specific point after the transaction request is made. The statement about Offer-to-Bid returns is true because it factors in the initial sales charge, which represents the actual out-of-pocket cost and subsequent return for the investor.

Takeaway: While forward pricing is the market standard for fund transactions, investors must distinguish between NAV-to-NAV returns for assessing manager skill and Offer-to-Bid returns for assessing personal investment profit.

Correct: Statement I is correct because modified duration is a measure of the price sensitivity of a bond, indicating the approximate percentage change in price for a 1% change in yield. Statement II is correct because Macaulay duration calculates the weighted average time an investor must hold a bond until the present value of the bond’s cash flows equals the amount paid for the bond. Statement IV is correct because the price of a perpetual bond, which has no maturity date, is calculated by dividing the fixed annual coupon payment by the appropriate discount rate.

Incorrect: Statement III is incorrect because the dirty price represents the total price paid for a bond, which includes the clean price plus any accrued interest that has accumulated since the last coupon payment. Subtracting accrued interest from the clean price would result in an incorrect valuation.

Takeaway: Investors must distinguish between Macaulay duration (time-based) and modified duration (price-sensitivity) while remembering that the dirty price of a bond always includes accrued interest. Therefore, statements I, II and IV are correct.

Correct: Statement I is correct because the calculation of the Time Weighted Rate of Return (TWR) requires the portfolio to be valued immediately before any external cash flow occurs to accurately determine the return for each sub-period. Statement II is correct because TWR is the industry standard for evaluating investment managers as it neutralizes the impact of the timing and size of client-driven deposits and withdrawals. Statement III is correct because the TWR formula geometrically links the returns of these individual sub-periods by multiplying their growth factors to find the cumulative return over the entire period.

Incorrect: Statement IV is incorrect because TWR is specifically utilized when the manager does NOT have control over the timing or size of cash flows. If a manager had full control over when capital entered or exited the portfolio, a money-weighted return would be used instead to reflect the effectiveness of those timing decisions.

Takeaway: TWR is the preferred metric for assessing investment management skill because it requires valuations at each cash flow event to isolate the manager’s performance from the client’s external capital movements. Therefore, statements I, II and III are correct.

Correct: Open-ended funds are characterized by the ability to redeem units directly through the fund manager, who may sell underlying securities or use cash reserves to meet these requests. Closed-end funds, however, do not typically offer direct redemptions and must be sold to other investors on an exchange or secondary market.

Incorrect: The statement that open-ended funds are traded like stocks is incorrect because that describes the secondary market nature of closed-end funds. The claim that closed-end funds guarantee daily redemptions is false, as their liquidity depends on market demand and trading volume. The idea that open-ended funds have fixed capital is wrong, as they can issue and redeem units continuously based on investor demand.

Takeaway: Investors in open-ended funds look to the manager for liquidity, while closed-end fund investors rely on secondary market volume and the presence of other buyers to exit their positions.

Correct: Statement II is correct because the use of derivatives such as futures allows a fund to gain exposure to an asset class without paying the full price of the underlying assets, which creates leverage. Statement III is correct because bond fund statistics, including credit quality and coupon rates, are calculated as weighted averages based on the market value of each bond held within the portfolio.

Incorrect: Statement I is incorrect because while a currency hedged class uses strategies to minimize the impact of exchange rate movements, no hedging strategy can entirely eliminate currency risk. Statement IV is incorrect because Yield to Maturity is a comprehensive measure that must account for the length of time until the bonds mature, in addition to their market price and coupon rates.

Takeaway: Understanding that hedging only reduces rather than eliminates risk, and that Yield to Maturity incorporates time-based factors, is essential for correctly classifying the risk-return profile of fund products. Therefore, statements II and III are correct.

Correct: Recommending that the fund stop accepting new subscriptions is the most appropriate action because when a fund grows too large relative to its target market, it faces capacity issues. At this stage, the fund manager becomes less nimble and finds it increasingly difficult to add value or execute the investment strategy effectively without significantly impacting market prices.

Incorrect: Increasing the fixed expense budget is wrong because higher expenses, such as legal or research fees, directly increase the total expense ratio and detract from the fund’s net performance. Liquidating smaller holdings does not address the core issue of the fund’s overall size and may actually reduce the manager’s ability to find diverse alpha-generating opportunities. Shifting the mandate to global equities is an inappropriate response to capacity issues as it fundamentally changes the fund’s risk-return profile and original investment objective promised to existing investors.

Takeaway: When a fund reaches its optimal capacity and its size hinders the manager’s ability to generate outperformance, the fund will typically stop accepting fresh subscriptions to protect the interests of current shareholders.

Correct: Statement I is correct because the formula for estimating bond price changes must incorporate a negative sign to account for the inverse relationship between interest rates and bond prices; omitting this sign is a common error in calculating price sensitivity. Statement IV is correct because the Quick Ratio calculation requires the subtraction of inventory from current assets to measure immediate liquidity, making the addition of inventory a fundamental misunderstanding of the ratio’s purpose.

Incorrect: Statement II is incorrect because it provides a factually accurate description of the Price-to-Cash Flow ratio using EBITDA, and it is therefore not a correct answer for a question asking for incorrect statements. Statement III is incorrect because it correctly identifies that the Debt to Equity ratio is based on the relationship between long-term debt and total shareholder equity, which is the standard calculation for this leverage metric.

Takeaway: When evaluating financial metrics, it is essential to distinguish between liquidity ratios that exclude illiquid assets and valuation formulas that account for the inverse relationship between price and yield. Therefore, statements I and IV are correct.

Correct: Analyzing the weighted average duration of the funds is the right answer because duration is the specific metric used to measure a bond fund’s sensitivity to interest rate changes. It provides a weighted average of the maturity of income streams, indicating that for every 1% change in interest rates, the fund’s value will change by approximately the percentage of its duration.

Incorrect: Evaluating the Total Expense Ratio is wrong because while expenses impact long-term performance, they do not provide information about how a fund’s price will react to interest rate movements. Examining the concentration of the top 10 holdings is wrong because this measures diversification and portfolio focus rather than interest rate sensitivity. Comparing Sharpe and Treynor ratios is wrong because these are risk-adjusted performance measures used to evaluate historical returns relative to risk, not the specific price sensitivity to interest rate fluctuations.

Takeaway: Duration is the key indicator of a bond fund’s interest rate risk, representing the approximate percentage change in value for every 1% change in interest rates.

Correct: Statement I is correct because the gross rental yield is a basic metric that compares the total annual rental income to the transacted price without accounting for any operating costs or taxes. Statement II is correct because the capitalization rate (Cap Rate) provides a more accurate picture of property performance by using Net Operating Income, which subtracts property-level expenses from the gross rent. Statement IV is correct because Return on Investment (ROI) is a comprehensive measure that includes the total amount generated from the investment, including the property’s current valuation and the impact of the remaining loan balance.

Incorrect: Statement III is incorrect because the equity yield specifically measures the return on the actual cash committed by the investor. Therefore, the denominator must be the total amount invested (purchase price minus the loan amount plus transaction costs), rather than the total property transacted price.

Takeaway: When evaluating real estate, it is vital to distinguish between property-level metrics like Cap Rate and investor-level metrics like Equity Yield, which account for the effects of leverage and financing costs. Therefore, statements I, II and IV are correct.

Correct: Statement II is correct because the portfolio risk formula incorporates the correlation coefficient; a lower correlation between assets reduces the overall portfolio standard deviation. Statement III is correct because beta is a relative risk measure that tracks how a portfolio moves in relation to a market index, unlike standard deviation which measures absolute risk. Statement IV is correct because when a portfolio contains assets in different currencies, all returns must be converted to the portfolio’s base currency to ensure an accurate and consistent calculation of the total return.

Incorrect: Statement I is incorrect because portfolio risk is not a simple weighted average of the individual assets’ risks. While portfolio return is a weighted average, portfolio risk (standard deviation) is affected by the correlation between assets, meaning the combined risk is typically different from the sum of its parts.

Takeaway: Portfolio returns are calculated as a simple weighted average, but portfolio risk depends on the correlation between assets and is measured using absolute (standard deviation) or relative (beta) metrics. Therefore, statements II, III and IV are correct.

Correct: Using the Time-Weighted Rate of Return (TWR) is the right approach because it measures the performance of an investment independent of external cash flows. Since investment managers typically do not control when a client decides to inject or withdraw capital, TWR provides a fairer assessment of the manager’s investment decisions by neutralizing the timing and size of those flows.

Incorrect: The suggestion that it reflects actual dollar growth is incorrect because that describes the Dollar-Weighted Rate of Return, which is specifically designed to show how the timing of flows affected the total money earned. The claim that it does not require valuation data at the time of cash flows is false; TWR specifically requires the portfolio’s value immediately before each external flow occurs. The idea that it adjusts for volatility is wrong because TWR is a measure of return only and does not incorporate risk-adjustment or volatility measures.

Takeaway: TWR is the preferred metric for evaluating investment managers because it isolates the manager’s investment results from the impact of client-driven cash flow decisions.

Correct: The deduction of the outstanding loan balance and transaction costs is the right answer because the Return on Investment (ROI) formula for real estate specifically subtracts the remaining loan and sale-related costs from the sum of cash inflows and current property valuation to determine the net amount generated. This ensures the measure reflects the actual cash the investor would receive if the property were liquidated at the point of calculation.

Incorrect: The option regarding initial down payments and capital expenditures is wrong because these figures represent the total amount invested, which is the denominator in the ROI formula, not part of the amount generated. The option focusing on future potential rental yields is incorrect because the ROI calculation uses actual annual cash inflows and current valuation to assess performance, rather than future projections. The option concerning interest expenses and property taxes is wrong because while these impact net cash flow, the specific ROI formula provided focuses on subtracting the remaining principal loan balance and transaction costs from the valuation.

Takeaway: Real estate ROI provides a comprehensive performance view by accounting for both income and capital appreciation while netting out exit costs and outstanding liabilities.

Correct: Equity Yield is the most appropriate metric because it specifically measures the return on the investor’s actual cash outlay. It is calculated by taking the annual cash flow (which subtracts interest costs, taxes, and expenses from rental income) and dividing it by the total amount invested (which is the property price minus the loan amount, plus transaction costs).

Incorrect: Gross Rental Yield is wrong because it only considers gross rental income against the property price, ignoring all expenses, taxes, and the impact of leverage. Cap Rate is wrong because, while it uses net operating income by subtracting property-level expenses, it does not account for the investor’s financing costs or the actual cash-on-cash outlay. Property Valuation is wrong because it is a method for estimating the current market value of the asset rather than a yield metric that measures periodic cash returns on invested capital.

Takeaway: Equity Yield provides the most accurate reflection of an investor’s personal return by incorporating the effects of financial leverage, transaction costs, and all operating expenses.

Correct: Statement I is correct because equity long/short funds allow managers to profit from both rising and falling prices, providing more return opportunities than traditional long-only strategies. Statement II is correct because market neutral funds aim to remove the impact of broad market movements to focus on the specific performance of selected securities. Statement III is correct because hedge fund managers create leverage by using the cash proceeds generated from short-selling a security to purchase additional long positions, increasing total market exposure.

Incorrect: Statement IV is incorrect because market neutral strategies do not guarantee a profit; the strategy’s success is entirely dependent on the manager’s assumptions regarding the relative performance of the long and short positions being correct.

Takeaway: Equity hedge funds utilize short-selling to either hedge market risk or amplify returns through leverage, but their ultimate performance depends on the accuracy of the manager’s relative stock selection. Therefore, statements I, II and III are correct.

Correct: Statement II is correct because hedge funds frequently use leverage to increase potential returns, which can be achieved through short-selling securities or borrowing via brokerage margin accounts. Statement III is correct because for a REIT to qualify for tax exemption in Singapore, it must comply with mandatory distribution rules (at least 90% of profits) and maintain a debt ratio within the prescribed limit of 45% of property value.

Incorrect: Statement I is incorrect because the primary objective of a REIT is to generate recurring rental income for distribution as dividends, rather than focusing on capital appreciation through property trading. Statement IV is incorrect because legal title to the properties is held by a trustee, not the investors; investors own shares in the trust and do not have the right to decide on the purchase, sale, or enhancement of underlying assets.

Takeaway: REITs are income-focused, regulated structures with strict distribution and leverage requirements, while hedge funds are flexible vehicles that prioritize absolute returns through strategies like leverage and short-selling. Therefore, statements II and III are correct.

Correct: The statement regarding perfectly positively correlated securities is the right answer because it is false. When two securities have a correlation coefficient of +1.0, they move in the same direction with the same magnitude. Combining them does not provide any diversification benefits, and the resulting portfolio risk is simply the weighted average of the individual risks, not lower than it.

Incorrect: The statement about unsystematic risk is true because this risk is specific to individual firms and can be diversified away if security returns are not correlated. The statement about systematic risk is true because it is caused by external factors like interest rates and inflation that affect the entire market and cannot be eliminated. The statement about zero correlation is true because while it offers significant risk reduction, it cannot totally eliminate risk in the way perfect negative correlation can.

Takeaway: Diversification benefits only occur when securities are not perfectly positively correlated, and the potential for risk reduction increases as the correlation coefficient moves from +1.0 toward -1.0.

Correct: Statement II is correct because a bogey portfolio serves as a benchmark reflecting a passive strategy where no active deviations in asset allocation or security selection are made. Statement IV is correct because attribution analysis decomposes total performance into specific components like asset allocation and sector selection to explain the reasons for outperformance or underperformance.

Incorrect: Statement I is incorrect because the Sharpe Ratio adjusts for total risk, represented by standard deviation, rather than systematic risk. Statement III is incorrect because the Treynor Ratio relates excess return to the portfolio’s beta (systematic risk), whereas the use of standard deviation is the defining characteristic of the Sharpe Ratio.

Takeaway: Investors should use the Sharpe Ratio to evaluate total risk and the Treynor Ratio for systematic risk, while employing attribution analysis to identify the specific drivers of portfolio returns. Therefore, statements II and IV are correct.

Correct: Recommending a Turnaround Capital fund is the right answer because this specific form of private equity is designed for companies in financial distress. The strategy involves investing in these troubled firms with the objective of generating high returns once the company recovers or through a planned takeover.

Incorrect: Suggesting a Venture Capital fund is wrong because this strategy is intended for less mature companies at their launch or early development stages, typically involving new technologies. Proposing a Growth Capital fund is incorrect as these funds are meant for healthy companies seeking capital to expand or launch new business initiatives. Advising on Mezzanine Finance is wrong because it is a hybrid debt-equity instrument used to finance the expansion of companies, where debt may convert to equity if not repaid, rather than a rescue strategy for distressed firms.

Takeaway: Private equity strategies are distinguished by the target company’s lifecycle stage and financial health, with Turnaround Capital specifically addressing firms in financial distress.

Correct: Explaining the impact of currency movements on returns in the home currency and disclosing all fee adjustments is the right action because a professional review must address how exchange rates affected the portfolio value and include all changes to fees and portfolio decisions made during the period.

Incorrect: Excluding currency translation effects is wrong because advisors are specifically required to explain how currency movements have affected the return of the portfolio when translated to the home currency. Waiting until the end of the year to disclose fee changes is wrong because the review must include any changes in fees made to the portfolio between review periods. Using technical terminology is wrong because presentations should avoid technical jargon and be pitched at an appropriate level to ensure the client remains engaged.

Takeaway: A comprehensive portfolio review must include a comparison of actual versus planned asset allocation, clear disclosure of all fee changes, and an explanation of how currency fluctuations impacted returns.

Correct: Providing physical securities to investors is a legitimate method for hedge funds to handle redemptions when the underlying assets are illiquid. This occurs when selling the assets would result in significant losses or is impossible due to market conditions, allowing the fund to meet redemption requests without forcing a fire sale of its holdings.

Incorrect: Requiring a one-week cash reserve is incorrect because hedge funds typically have much longer redemption windows, often ranging from several months to over a year, to align with the liquidity of their investments. The requirement for a manager’s personal guarantee is false, as managerial risk refers to the manager’s skill, focus, and potential strategy drift rather than personal financial backing of the fund’s liquidity. The idea of an automatic shift to government bonds is wrong because it would fundamentally change the fund’s investment strategy and mandate, which is to profit from distressed asset turnarounds.

Takeaway: Investors in hedge funds with illiquid strategies must be prepared for non-cash redemptions and significant restrictions on when they can withdraw their capital.

Correct: Statement I is correct because portfolio risk actually increases as the correlation coefficient moves toward +1.0, as the assets move more in tandem; risk reduction through diversification is only achieved when correlation is less than perfect. Statement IV is correct because the frequency of portfolio reviews is primarily dictated by the specific terms and timelines agreed upon in the Investment Policy Statement rather than being determined solely by prevailing market conditions.

Incorrect: Statement II is incorrect because it is a true statement; a holistic review must consider the interconnectedness of portfolios, including how credit facilities and cross-pledging might lead to forced liquidations that disrupt the intended strategy. Statement III is incorrect because it is also a true statement; advisors have a professional obligation to be transparent about counterparty risks and the specific risks introduced by financial derivatives that may amplify the portfolio’s risk profile.

Takeaway: Diversification is most effective when asset correlation is low, and the portfolio review process must be a holistic exercise guided by the Investment Policy Statement and the client’s total financial structure. Therefore, statements I and IV are correct.

Correct: Statement I is correct because the Comparable Approach relies on industry benchmarks like P/E ratios, which are most effective when a company’s earnings are stable and have reached a steady state. Statement IV is correct because the lack of active trading for private shares makes it difficult to determine market value, leading to inherent pricing risks.

Incorrect: Statement II is incorrect because the Cost Approach is specifically noted as being difficult to apply to companies where value is derived from intangible assets like intellectual property or human capital. Statement III is incorrect because private equity transactions are direct contracts between parties without a formalized clearing market or independent third-party oversight to ensure delivery.

Takeaway: Private equity investments lack centralized trading platforms and standardized valuation, requiring investors to rely on specific methodologies and legal contracts to manage pricing and counterparty risks. Therefore, statements I and IV are correct.

Correct: Clarifying that returns are only realized upon the sale of the asset is the right answer because commodities do not have the ability to generate yield. Unlike financial assets like stocks that pay dividends or real estate that generates rental income, commodities do not produce any periodic cash flows or returns during the period they are held. Any profit is derived solely from the realization of value through price appreciation.

Incorrect: The suggestion regarding agricultural products is wrong because commodities, including agricultural ones, do not provide seasonal cash distributions or dividends to investors. The proposal regarding rental yields is incorrect because rental income is a specific feature of real estate investments and does not apply to raw materials or commodity-linked instruments. The recommendation to earn lending fees from physical gold is wrong because holding physical commodities typically involves storage costs and ‘hassle’ rather than providing a steady stream of income from other market participants.

Takeaway: Commodities are non-yield-bearing assets, meaning they do not produce dividends, interest, or rent; therefore, all investment returns must come from changes in the market price.

Correct: The statement that fiscal policy is preferred for smoothing business cycles due to its speed is NOT correct. While both policies are significant, monetary policy is typically relied upon for managing the business cycle because it can be decided and implemented quickly by a central bank, whereas fiscal policy often faces delays due to the need for political agreement and public support.

Incorrect: The statement regarding inflation and price signals is true; high inflation creates noise that makes it difficult for market participants to distinguish between changes in specific product demand and general price increases. The description of expansionary fiscal policy is accurate, as it aims to spur growth through increased spending or lower taxes. The relationship between interest rates and money demand is also correct, as higher interest rates increase the cost of holding money, thereby reducing demand.

Takeaway: Monetary policy is the primary tool for smoothing business cycles because it can be implemented more rapidly than fiscal policy, which is often slowed by political processes.

Correct: The statement claiming the Treynor Ratio uses standard deviation is incorrect because the Treynor Ratio is calculated by dividing the excess return of a portfolio by its Beta, which represents systematic risk, rather than its total volatility.

Incorrect: The description of standard deviation is correct as it is the square root of the variance and serves as a measure of how much returns fluctuate around the average. The comparison between the Sharpe and Treynor ratios is correct because the Sharpe Ratio utilizes standard deviation (total risk) while the Treynor Ratio utilizes Beta (market risk). The method for calculating portfolio returns is correct as it involves taking the sum of each asset’s return multiplied by its specific weight in the total portfolio.

Takeaway: While both ratios measure excess return per unit of risk, the Sharpe Ratio is based on total volatility (standard deviation) and the Treynor Ratio is based on systematic risk (Beta).

Correct: Relinquishing control over domestic interest rates is the necessary consequence because, under the impossible trinity framework, a country that chooses to maintain a fixed exchange rate and allow free capital mobility cannot simultaneously set its own interest rates. If domestic rates deviate from the anchor country’s rates, capital will flow toward the higher return, creating market pressure that would break the exchange rate peg.

Incorrect: The option regarding the implementation of strict capital controls is wrong because the scenario specifically states the country allows for free capital mobility. The option suggesting the exchange rate be determined by market forces is incorrect because the country has already committed to a fixed exchange rate policy. The suggestion to use leading indicators to adjust rates independently is wrong because the country has lost its monetary autonomy by choosing the other two pillars of the trinity.

Takeaway: The impossible trinity principle dictates that a nation can only sustainably achieve two out of three policy goals: a fixed exchange rate, free capital movement, and an independent monetary policy.

Correct: Statement I is correct because the FOMC voting body is composed of the seven members of the Board of Governors, the President of the Federal Reserve Bank of New York, and four other regional Reserve Bank presidents who serve on a rotating basis. Statement III is correct because the Federal Reserve’s mandate involves managing inflation by raising interest rates to increase the cost of borrowing, which helps cool an economy that is growing too rapidly.

Incorrect: Statement II is incorrect because while the FOMC meets eight times a year, the Summary of Economic Projections (SEP) containing quantitative forecasts for GDP and unemployment is only released during the four “live” meetings in March, June, September, and December. Statement IV is incorrect because the Fed funds target rate is specifically the interest rate that banks charge one another for overnight loans in the inter-bank market, rather than a rate for long-term capital loans.

Takeaway: The FOMC uses the Fed funds target rate to influence economic activity, with key quantitative forecasts and policy explanations primarily provided during four specific “live” meetings each year. Therefore, statements I and III are correct.