This question assesses the understanding of the core principles, benefits, and risks associated with passive asset allocation, specifically through index funds. Statement I is correct because the passive approach is fundamentally based on the efficient market hypothesis, which posits that it is difficult to consistently outperform the market after costs. Statement II is correct as a key advantage of index funds is their lower portfolio turnover compared to actively managed funds, which results in lower transaction costs. Statement III is also correct; since an index fund’s objective is to track its benchmark, it will inevitably decline in value during a market crash, exposing the investor to market risk without any active management intervention to mitigate losses. Statement IV is incorrect because it misrepresents enhanced passive management. Enhanced indexing aims to slightly outperform the benchmark, not just replicate it perfectly to eliminate tracking error. It often involves strategic deviations or quantitative tilts, which inherently introduces a degree of tracking error, unlike a pure replication strategy. Therefore, statements I, II and III are correct.

The correct answer is that the portfolio plots above the Capital Market Line. The Sharpe ratio measures a portfolio’s excess return (return above the risk-free rate) per unit of total risk (standard deviation). The Capital Market Line (CML) represents the risk-return trade-off for efficient portfolios. Any portfolio that lies on the CML has a Sharpe ratio equal to that of the market portfolio. A portfolio that generates a higher excess return for its level of total risk will have a Sharpe ratio greater than the market’s and will therefore be positioned graphically above the CML, signifying superior performance. A portfolio with a lower Sharpe ratio would plot below the CML, indicating underperformance. The Security Market Line (SML) is a different concept that relates expected return to systematic risk (beta), not total risk, and is associated with the Treynor ratio, not the Sharpe ratio.

The correct answer is that the portfolio manager should purchase put options on the stock. A put option grants the holder the right, but not the obligation, to sell an underlying asset at a predetermined price (the strike price) on or before a specific date. By purchasing puts, the manager establishes a price floor for her stock holdings. If the stock price falls as she anticipates, the value of the put options will increase, offsetting the losses on her physical stock position. This strategy effectively acts as an insurance policy against a short-term price decline while allowing her to retain the shares to capture any long-term upside potential. The maximum loss from this hedging strategy is limited to the premium paid for the options. Selling call options (a covered call strategy) is primarily an income-generation strategy. It provides only limited downside protection, equal to the premium received, and it caps the potential upside profit if the stock price unexpectedly rises above the strike price, which is contrary to her long-term bullish view. Purchasing call options is a bullish strategy used when an investor expects the price of the underlying asset to rise. This would be counterproductive to her goal of hedging against a potential price drop and would result in additional losses if her forecast is correct. Entering into a futures contract to buy the stock is also a bullish position that would increase her exposure to a price decline. A futures contract creates an obligation to buy at a set price, which would lead to losses if the market price falls below the contract price.

Statement I is correct. The HKSI study manual explicitly states that the ‘Learning Outcomes’ section in each topic indicates the key areas of knowledge which candidates are expected to master and on which examination questions will be based. It serves as a primary guide for study focus. Statement II is also correct. The HKSI Institute advises candidates to regularly check its website and online portal to ensure they have the latest version of the eStudy Manual, as it is updated to reflect changes in laws, rules, and market practices. Using an outdated manual is a significant risk. Statement III is incorrect. The pass mark for the HKSI Paper 12 examination is 70%, not 65%. Statement IV is incorrect. The estimated 40-55 hours of study time is a guideline provided to help candidates plan their studies; it is not a mandatory requirement for exam eligibility. The actual time required will vary based on an individual’s background and experience. Therefore, statements I and II are correct.

Statement I describes a relative value or spread trade using futures, which is a form of directional trading. The manager is speculating on the direction of one sector’s performance relative to another. Statement II describes a covered call writing strategy. This is an income-enhancement strategy based on a view that the underlying asset’s price will exhibit low volatility and remain stable, making it a speculative play on volatility. Statement III describes buying a straddle (a combination of a call and a put option with the same strike price and expiry). This is a classic volatility trading strategy, designed to profit from a large price movement in either direction, representing a speculative bet on high volatility. Statement IV, however, describes a hedging strategy. The primary objective of hedging is to reduce or eliminate existing risk exposure, not to generate a speculative profit. While it involves taking a view on the market, its purpose is defensive risk management rather than speculative investment. Therefore, statements I, II and III are correct.

The explanation breaks down each statement’s validity. Tracking error is defined as the standard deviation of a portfolio’s excess returns (alpha) relative to its benchmark. To annualise this measure, the periodic tracking error is multiplied by the square root of the number of periods in a year, because variance scales linearly with time, and standard deviation is the square root of variance.

Statement I is correct. For data calculated on a monthly basis, there are 12 periods in a year. Therefore, the annualisation factor is the square root of 12 (√12).

Statement II is incorrect. Tracking error specifically measures the volatility of the difference between the portfolio’s return and the benchmark’s return (i.e., excess returns), not the portfolio’s total or absolute returns in isolation.

Statement III is incorrect. This is a common calculation error. To annualise a weekly tracking error, one must multiply by the square root of 52 (√52 ≈ 7.21), not by 52 itself. Multiplying by 52 would significantly overstate the annualised volatility.

Statement IV is correct. A higher tracking error indicates greater volatility in the fund’s performance relative to its benchmark. This implies that the fund’s returns have historically deviated more significantly, which is a direct result of the fund manager taking on more active risk (i.e., making bets that differ from the benchmark’s composition). Therefore, statements I and IV are correct.

This question assesses the understanding of the key characteristics and classifications of fixed income securities.

Statement I is correct. Preference shares are often treated as a hybrid security but are commonly classified within the fixed income universe because their primary feature is a fixed dividend payment, similar to the fixed coupon of a bond. This dividend has priority over dividends for ordinary shareholders, making its payment stream more predictable.

Statement II is correct. A floating rate note (FRN) is a debt instrument whose interest payments are not fixed but are periodically reset based on a reference or benchmark interest rate, such as the Hong Kong Interbank Offered Rate (HIBOR). This is a fundamental characteristic of this type of security.

Statement III is incorrect. This statement confuses Exchange Fund Notes with Exchange Fund Bills. In Hong Kong, Exchange Fund Bills have a maturity of one year or less and are considered money market instruments. Exchange Fund Notes, however, have a maturity of more than one year (e.g., two years) and are therefore not classified as short-term money market instruments.

Statement IV is incorrect. The range of bond issuers is much broader. In addition to sovereign governments and corporations, government agencies (like the Hong Kong Mortgage Corporation) and supranational organisations (like the World Bank and the Asian Development Bank) are also significant issuers of bonds. Therefore, statements I and II are correct.

The correct answer is that the manager is employing a top-down style, as it prioritizes macroeconomic analysis to determine asset and sector allocation before individual security selection. This approach involves analyzing the broad economic landscape first (macro factors like interest rates and inflation), then determining which sectors or regions are likely to perform well in that environment, and finally selecting specific securities within those favored areas. The scenario clearly shows the manager following this sequence: first analyzing global economic trends, then making sector allocation decisions, and lastly picking individual stocks. An approach focused on identifying undervalued companies regardless of prevailing economic conditions describes a bottom-up style. This method starts with the analysis of individual companies based on their fundamental merits, such as financial health, management quality, and competitive position. The overall portfolio’s sector and geographic weightings are a result of aggregating these individual stock selections, not a predetermined allocation. A quantitative style was not used, as this approach relies on computer-based models and algorithms to make investment decisions, which is not mentioned in the manager’s discretionary process. An income-focused style was also not the primary driver. This style would prioritize selecting securities based on their ability to generate a steady stream of income, typically through high and stable dividend yields. The manager’s decisions in the scenario were based on anticipated sector performance due to macroeconomic shifts, not on the dividend characteristics of the stocks.

The correct answer is that the fund is structured to outperform in a bear market with high volatility. The described strategies—using significant leverage and engaging in short-selling—are characteristic of hedge funds. Short-selling involves selling borrowed securities with the aim of repurchasing them later at a lower price, a strategy that is profitable when security prices fall. This makes the fund particularly well-suited for a declining or bear market, as it can generate positive returns from falling asset values, hedging against or even profiting from market downturns. High volatility creates numerous price discrepancies, providing more opportunities for such active strategies to generate alpha on both long and short positions. A steadily rising bull market would be challenging for the short-selling component of the strategy, which would incur losses and act as a drag on performance. While an environment of low interest rates can reduce the cost of leverage, it is not the primary market condition the fund’s trading strategy is designed to exploit; the direction of asset prices is more critical. Similarly, a market dominated by index funds describes the competitive landscape rather than the market cycle, and while it may create opportunities, it is not the specific environment where the short-selling and leverage combination is designed to excel.

The correct answer is that the point of tangency signifies the optimal portfolio for the client, offering the maximum utility for their individual risk-return preference among all achievable portfolios. In modern portfolio theory, the efficient frontier represents the set of all portfolios that offer the highest expected return for a given level of risk. An investor’s indifference curves represent their personal preferences and trade-offs between risk and return; higher curves indicate greater satisfaction or utility. The optimal portfolio for any given investor is found at the point where their highest possible indifference curve just touches (is tangent to) the efficient frontier. This point represents the best possible combination of risk and return that the market can offer, which also perfectly aligns with the investor’s unique risk tolerance, thereby maximizing their utility. The option suggesting the portfolio eliminates all unsystematic risk and is composed of the risk-free asset and the market portfolio describes a portfolio on the Capital Market Line (CML), not necessarily the tangency point of an individual’s indifference curve with the efficient frontier of risky assets. The choice identifying the global minimum variance portfolio is incorrect because this specific portfolio has the lowest possible risk on the efficient frontier but is only optimal for the most risk-averse investors, not for every client. The statement that the portfolio’s return is perfectly correlated with the market index is a misapplication of the Capital Asset Pricing Model (CAPM); while CAPM deals with market risk, the tangency point is fundamentally about matching an investor’s personal utility with market opportunities.

The correct answer is that the firm must be licensed by the SFC for Type 9 (Asset Management). According to the Securities and Futures Ordinance (SFO), managing a portfolio of securities or futures contracts on a discretionary basis for a client constitutes the regulated activity of ‘asset management’. Therefore, the firm must hold a Type 9 license to legally offer this service. The firm’s existing Type 1 (Dealing in Securities) license is insufficient because it only covers the execution of trades, not the management of assets with discretionary authority. While classifying the client as a Professional Investor is an important procedural step related to client onboarding and suitability, it does not grant the firm the regulatory permission to conduct a regulated activity for which it is not licensed. Similarly, while individual representatives must be competent, personal certifications from industry bodies do not replace the fundamental requirement for the firm itself to be licensed by the SFC for the specific regulated activity.

The SFC’s Code of Conduct for Persons Licensed by or Registered with the Securities and Futures Commission establishes comprehensive Know Your Client (KYC) requirements. These requirements serve two primary functions. First, as stated in statement I, they enable a licensed corporation to understand a client’s financial situation, investment experience, and objectives to ensure that any recommended products are suitable. Second, as stated in statement II, they are a critical component of Anti-Money Laundering and Counter-Terrorist Financing (AML/CTF) measures, requiring the firm to establish the client’s true and full identity. Statement III correctly addresses the specific procedure for non-face-to-face account opening, where the client’s signature on key documents must be properly certified by a specified professional (e.g., a justice of the peace, a professional accountant, or a notary public) to validate their identity. Statement IV is incorrect; while a referral from a trusted source is a positive factor, it does not permit a licensed corporation to waive its fundamental regulatory obligation to independently verify a new client’s identity. Each client must be subject to the firm’s full onboarding and due diligence procedures. Therefore, statements I, II and III are correct.

Statement I is correct because the 95% confidence interval for the annualized return has a lower bound of 1.5%, which is significantly below the stated target of 6%. This indicates a material risk that the fund will not meet its return objective. Statement II is correct as the asset modelling shows a less than 1% probability of capital loss over the 3-year period, which strongly suggests that the capital preservation objective is likely to be achieved. Statement III presents a valid course of action. When there is a potential mismatch between projected returns and the fund’s objective, a fund manager should review the strategic asset allocation. Adjusting the asset mix to include assets with higher expected returns is a standard approach to address such a shortfall, although this would also require a review of the fund’s risk profile. Statement IV is incorrect because adopting a passive strategy is a change in investment style, not a direct solution to the current problem of insufficient projected returns. A passive strategy tracking a market benchmark might not align with the fund’s specific dual objectives of a 6% return and capital preservation, and is not necessarily the most appropriate immediate action. The core issue is the asset allocation, not the management style. Therefore, statements I, II and III are correct.

This question tests the understanding of simple versus compound interest calculations, a fundamental concept in financial mathematics relevant to advising clients on investment growth.

Statement I is correct. The formula for the future value (FV) with simple interest is FV = P(1 + rt), where P is the principal, r is the annual interest rate, and t is the time in years. To find the time it takes to double the investment (FV = 2P), we set up the equation: 2P = P(1 + 0.06t). Dividing by P gives 2 = 1 + 0.06t. Solving for t: 1 = 0.06t, so t = 1 / 0.06 ≈ 16.67 years.

Statement II is correct. The formula for the future value with annual compounding is FV = P(1 + r)^t. To find the time it takes to double, we have: 2P = P(1 + 0.06)^t. Dividing by P gives 2 = (1.06)^t. To solve for t, we use logarithms: t = log(2) / log(1.06) ≈ 11.90 years.

Statement III is correct. The difference in time is the time taken under simple interest minus the time taken under compound interest: 16.67 years – 11.90 years = 4.77 years. The compounding effect indeed shortens the time required to reach the goal by this amount.

Statement IV is incorrect. Increasing the frequency of compounding (e.g., from annually to semi-annually) means that interest is calculated and added to the principal more often. This leads to faster growth, and therefore, it would take a shorter, not longer, period to double the investment. Therefore, statements I, II and III are correct.

The correct answer is a conservative fund. This type of fund is specifically designed for capital preservation, aiming to generate returns comparable to Hong Kong dollar savings deposit rates. Its portfolio consists almost entirely of low-risk, short-term bank deposits and money market instruments, making it the most suitable choice for an individual with extremely low risk tolerance who prioritizes protecting their principal above all else. A guaranteed fund, while sounding secure, often has specific conditions and charges attached to the guarantee, which may not be unconditional. The Age 65 Plus Fund, part of the Default Investment Strategy, is a mixed-asset fund that still allocates approximately 20% to higher-risk assets like equities, which contradicts the client’s desire to completely avoid market risk. A bond fund, while less volatile than an equity fund, is still subject to interest rate risk and credit risk, meaning its value can fluctuate and is not focused purely on capital security in the same way a conservative fund is.

The correct answer is that this represents an indirect distribution channel where the insurance company acts as an intermediary. A distribution channel is the path through which a product reaches the end customer. In the context of managed funds, a ‘direct’ channel is when the investor deals directly with the fund management company. An ‘indirect’ channel involves one or more intermediaries, such as banks, independent financial advisers, or insurance companies. In the scenario described, the client is purchasing an Investment-Linked Assurance Scheme (ILAS) from an insurer. The insurer, in turn, invests the client’s premiums into underlying mutual funds. The client’s relationship is with the insurance company, not the fund managers. Therefore, the insurer is acting as an intermediary, making this an indirect distribution channel from the fund manager’s perspective. The suggestion that it is a direct channel because premiums are invested directly is incorrect. This confuses the flow of money with the client relationship; the contractual relationship that defines the channel is between the client and the insurer, not the client and the fund manager. The idea that it is an institutional channel because the insurer is an institution is also flawed. The classification of the channel is determined by the nature of the end-investor, who in this case is a retail client, not the nature of the intermediary. Finally, describing it as a collateralised channel is irrelevant to the distribution model. While some financial products can be used as collateral, this does not define the method by which they are sold or distributed to investors.

The correct answer is that the slope of this line represents the beta of the technology stock. In the context of the Capital Asset Pricing Model (CAPM), the characteristic line is a regression line that plots the excess returns of a security against the excess returns of the market portfolio. The slope of this line is, by definition, the security’s beta (β). Beta measures the systematic risk of the security, indicating how sensitive its returns are to movements in the overall market. A steeper slope (beta > 1) suggests the stock is more volatile than the market, while a flatter slope (beta < 1) indicates it is less volatile. The alpha of the stock is represented by the y-intercept of the characteristic line, not its slope. Alpha measures the excess return of the stock when the market's excess return is zero, indicating performance unrelated to market movements. The standard deviation of the stock's returns measures the total risk (both systematic and unsystematic) of the stock, which is reflected in the dispersion or scatter of the data points around the regression line, not the slope of the line itself. The correlation coefficient between the stock and the market measures the strength and direction of the linear relationship between their returns. While related to beta, it is not the same as the slope. The square of the correlation coefficient (R-squared) indicates the proportion of the stock's variance that is explained by the market's variance.

The correct answer is that the theory suggests share price movements are statistically independent from one period to the next, making historical price patterns unreliable for predicting future performance. The ‘random walk’ theory is a cornerstone of the weak-form efficient market hypothesis. It posits that all historical price and volume data is already fully reflected in the current share price. Consequently, future price movements are independent of past movements, making it impossible to consistently earn abnormal returns using technical analysis, which is precisely what the proposed strategy attempts to do. The other options are incorrect. The issue of overlooking non-public, insider information relates to the strong-form of market efficiency, not the random walk theory’s specific focus on historical price data. While market anomalies like the ‘small firm effect’ do exist and challenge the efficient market hypothesis, they are exceptions rather than the fundamental reason why a strategy based on price patterns would fail according to the random walk theory itself. Lastly, the concept of an identical distribution of returns means the probability of a gain or loss is the same in each period, which reinforces the idea of randomness and unpredictability, rather than creating a predictable trend that could be exploited.

The correct answer is that the primary role of an asset consultant is to provide independent advice on asset allocation, assist in selecting investment managers, and monitor their performance. Asset consultants are specialists who advise institutional investors, such as pension funds and endowments, on their investment strategies. Their key functions include helping to formulate the Investment Policy Statement (IPS), determining the appropriate strategic asset allocation, conducting searches for suitable fund managers (‘manager selection’), and providing ongoing performance monitoring and evaluation. They act as independent advisors, not as direct managers of the assets. The role of executing the buying and selling of securities belongs to the appointed fund manager or broker. Offering and promoting specific investment products, such as insurance schemes, is the function of a distributor or an insurance company. Providing custodial services, which involves the safekeeping of assets and transaction settlement, is the responsibility of a custodian bank.

This question assesses the understanding of how an investor’s optimal portfolio is determined by combining the efficient frontier with their individual risk preferences, as represented by indifference curves.

Statement I is correct. The optimal portfolio for any given investor is located at the single point where their highest possible indifference curve is tangent to the efficient frontier. This point represents the highest level of utility (satisfaction) the investor can achieve given the available set of risky portfolios.

Statement II is also correct. An indifference curve represents all combinations of risk (standard deviation) and expected return that provide an investor with the same level of utility. Therefore, an investor is indifferent between any two portfolios that lie on the same curve.

Statement III is incorrect. The optimal point is one of tangency, not intersection. If an indifference curve intersects the efficient frontier at two points, it means there is a higher indifference curve that can be reached which will be tangent to the frontier between those two intersection points, offering a higher level of utility.

Statement IV is incorrect. A more risk-averse investor has steeper indifference curves. This is because they require a significantly higher increase in expected return to compensate them for taking on an additional unit of risk, reflecting their strong aversion to risk. Therefore, statements I and II are correct.

The correct answer is that an external rating should be used as a supplementary tool that contributes to, but does not replace, the firm’s own comprehensive and independent assessment of the fund’s risks and features. Under the SFC’s Code of Conduct and related circulars on product due diligence, licensed intermediaries retain the ultimate responsibility for assessing the products they recommend. While reports from reputable fund research houses or rating agencies can be a valuable input in this process, they cannot be the sole basis for a recommendation. The intermediary must conduct its own independent analysis of the product’s structure, risks, features, and costs. Relying entirely on an external rating would be an improper delegation of the firm’s regulatory duties. Furthermore, a high rating does not guarantee future performance or low volatility, as ratings are typically based on historical data and qualitative assessments of the fund manager’s process, which are not predictive of future outcomes. Lastly, product due diligence is distinct from the client-specific suitability assessment; even if a product passes the firm’s due diligence, it does not mean it is suitable for all clients.

Statement I is correct. A ‘technical breach’ is the specific term used when a portfolio’s asset allocation moves outside its prescribed ranges due to market movements rather than an active investment decision by the fund manager. Statement II is also correct. The investment mandate is the governing document that outlines the agreement between the client and the fund manager. It specifies the manager’s obligations, including the required actions and timelines for rectifying any breaches of the investment guidelines, such as rebalancing. Statement III is incorrect. Tactical Asset Allocation (TAA) refers to short-term, discretionary shifts in asset weighting based on market outlooks, but these decisions must be made within the established Strategic Asset Allocation (SAA) ranges. A breach of the SAA range cannot be justified as a TAA decision. The manager is bound by the limits set in the mandate. Statement IV is correct. According to the Fund Manager Code of Conduct (FMCC), fund managers have a duty to ensure the continuing suitability of the fund’s strategy. Frequent technical breaches may indicate that the approved ranges are too narrow for current market volatility or that the SAA is no longer aligned with the fund’s objectives, necessitating a formal review. Therefore, statements I, II and IV are correct.

Growth investing focuses on capital appreciation driven by strong future earnings growth. Statement I correctly identifies this as the primary source of returns, where the share price is expected to rise in line with increasing earnings. Statement II accurately describes a major risk inherent in this strategy: even if a company’s earnings grow as forecast, its stock price can still fall or stagnate if its price-to-earnings (P/E) multiple contracts due to broader market sentiment or a re-evaluation of its growth prospects. Statement III is incorrect as it describes the objective of income investing, which prioritizes dividends; growth companies often reinvest most of their earnings for expansion rather than paying them out. Statement IV is also incorrect as it describes the typical timing for value investing, which seeks to buy assets at depressed prices, often during a recessionary trough. Growth investors, in contrast, tend to become more active as an economy recovers and corporate earnings prospects improve. Therefore, statements I and II are correct.

The correct answer is that the situation represents a technical breach, and the manager is obligated to rebalance the portfolio. A technical breach occurs when asset allocation ranges, as defined by the Strategic Asset Allocation (SAA), are exceeded due to market movements rather than a deliberate investment decision. The fund’s mandate, which is a binding agreement with the client, requires the manager to take prompt action to bring the portfolio back into compliance with the agreed-upon risk parameters. One incorrect option suggests this is a successful application of Tactical Asset Allocation (TAA). This is wrong because TAA involves intentional, short-term deviations from the SAA’s target weighting, but these deviations must remain within the pre-approved ranges. A breach of the range is not TAA. Another incorrect choice is to immediately review the SAA. An SAA review is a periodic, strategic process to ensure the long-term strategy still aligns with the fund’s objectives; it is not an immediate reaction to short-term market volatility. The final incorrect option, waiting for a market correction, is a violation of the manager’s duty, as the mandate explicitly requires prompt rectification to manage the fund’s risk exposure.

This question assesses the understanding of foreign exchange risk for a Hong Kong-based investor under the Linked Exchange Rate System (LERS). Statement I is correct because the Hong Kong Dollar (HKD) is pegged to the US Dollar (USD). Therefore, the exchange rate between the HKD and a third currency, like the Euro (EUR), is primarily determined by the exchange rate between the USD and that third currency (USD/EUR). Any fluctuation in the USD/EUR rate directly translates into a similar fluctuation in the HKD/EUR rate, representing the main source of risk. Statement II is correct as using forward contracts to sell the foreign currency (EUR) and buy the domestic currency (HKD) is a standard and effective method to hedge against the risk of the foreign currency depreciating. Statement III is also correct; foreign exchange risk is a two-way street. While there is a risk of loss if the EUR depreciates against the HKD, there is a corresponding potential for gain if the EUR appreciates. Statement IV is incorrect because the LERS only provides stability between the HKD and the USD. It offers no protection or insulation against fluctuations in other foreign currencies like the Euro, British Pound, or Japanese Yen. Therefore, statements I, II and III are correct.

This question assesses the fundamental understanding of simple and compound interest, a core concept in evaluating investment returns.

Statement I is correct. The future value using simple interest is calculated as S = P × (1 + rt). In this scenario, S = HKD 500,000 × (1 + 0.06 × 5) = HKD 500,000 × (1 + 0.30) = HKD 650,000.

Statement II is correct. The core principle of compound interest is the reinvestment of earned interest, which then earns interest itself. This ‘interest on interest’ effect means that for any given positive interest rate and a term longer than one period, the future value of a compounded investment will always be greater than that of a simple interest investment.

Statement III is incorrect. Because Product B benefits from compounding, the interest earned in later years is calculated on a larger base (principal + accumulated interest). This results in a higher total interest amount over the 5-year period compared to Product A, where interest is only ever calculated on the original principal.

Statement IV is correct. For simple interest, the interest is calculated solely on the initial principal amount. Therefore, the amount of interest earned each year is constant. For Product A, this amount is HKD 500,000 × 6% = HKD 30,000 per year. Therefore, statements I, II and IV are correct.

The Efficient Market Hypothesis (EMH) exists in three primary forms concerning informational efficiency. The correct answer is that the success of this model challenges weak-form efficiency. This form specifically states that all historical trading information, such as past prices and trading volumes, is already fully reflected in current stock prices. Therefore, technical analysis, which relies on this historical data to predict future movements, should not be able to consistently generate abnormal returns. If the analyst’s model succeeds, it directly refutes this principle. Semi-strong form efficiency is a broader concept, suggesting that all publicly available information (including historical data, financial reports, and news) is priced in. While a violation of weak-form efficiency implies a violation of semi-strong form, the analyst’s strategy specifically uses only the data set relevant to the weak form, making it the most direct and precise answer. Strong-form efficiency is the most comprehensive, positing that all information, both public and private (insider information), is reflected in prices. The scenario does not involve private information, so this is not the most directly challenged hypothesis. Allocational efficiency refers to the market’s ability to direct capital to its most productive uses within an economy. This is a different concept from how information is incorporated into security prices and is therefore an incorrect choice.

Systemic risk refers to the risk of a widespread breakdown of a financial system, triggered by an event that causes a cascading series of failures (a domino effect). Statement I correctly defines this concept, highlighting the chain reaction aspect. Statement III provides a classic, real-world example of systemic risk materializing during the 2008 global financial crisis. In contrast, Statements II and IV describe systematic risk (also known as market risk), which is a different concept. Systematic risk is the risk inherent to the entire market, which cannot be diversified away. It is measured by beta (as mentioned in Statement II), and the Capital Asset Pricing Model (CAPM) proposes that investors are compensated with a risk premium for bearing this specific type of risk (as mentioned in Statement IV). Confusing systemic risk with systematic risk is a common error. Therefore, statements I and III are correct.

Statement I is correct because Strategic Asset Allocation (SAA) is fundamentally a long-term investment strategy. It establishes a target asset mix based on the client’s long-term goals (like retirement in 15 years), risk tolerance, and investment horizon, rather than short-term market movements. Statement II is incorrect as it describes tactical or dynamic asset allocation, which involves frequent adjustments based on market timing and short-term forecasts. SAA, by contrast, maintains a relatively constant policy mix. Statement III is correct because portfolio rebalancing is a key discipline within an SAA framework. It ensures the portfolio returns to its original target weights when market movements cause a significant deviation (e.g., 5%), thereby controlling risk and maintaining the intended strategy. Statement IV is incorrect because Mr. Chan’s life stage, characterized by significant and relatively near-term financial obligations (university fees), makes an aggressive growth strategy unsuitable. A more balanced or moderate-risk SAA would be appropriate to manage the risk of capital loss before the funds are needed. Therefore, statements I and III are correct.

When establishing the investment objectives for a new collective investment scheme, a fund manager must consider a wide range of factors and constraints to ensure the fund is managed properly, complies with regulations, and meets the expectations of its target investors. Statement I is correct as adherence to the SFC’s Code on Unit Trusts and Mutual Funds is a fundamental legal requirement that dictates operational and investment restrictions. Statement II is correct because forecasting cash flows, including potential redemptions, is crucial for managing the fund’s liquidity and ability to meet its obligations. Statement III is also correct; the investment mandate is a key document that sets specific limits on factors like gearing and asset allocation, which must be incorporated into the fund’s objectives. Statement IV is incorrect. While the tax implications for the fund itself are a valid consideration, the personal tax situations of the fund’s directors are irrelevant to setting the investment objectives for the collective scheme. The focus must be on the fund as an entity and its investors collectively. Therefore, statements I, II and III are correct.