The optimal portfolio for a specific investor is identified at the point of tangency between the efficient frontier and the investor’s highest possible indifference curve. This point represents the portfolio that offers the maximum utility (satisfaction) for that investor, balancing their personal preference for risk and return. Statement I is correct as it accurately describes this fundamental principle. Statement II is also correct; a more risk-averse (conservative) investor requires a significantly higher expected return to compensate for any additional unit of risk, resulting in a steeper indifference curve compared to a less risk-averse (aggressive) investor whose curve would be flatter. Statement IV correctly defines an indifference curve: any point along a single curve represents a combination of risk and return that provides the same level of utility to the investor, making them ‘indifferent’ between those specific portfolios. Statement III is incorrect because an investor would never rationally choose a portfolio below the efficient frontier. For any such portfolio, there is always another portfolio on the efficient frontier that offers either a higher return for the same risk or the same return for lower risk, which would place the investor on a higher, more desirable indifference curve. Therefore, statements I, II and IV are correct.

The explanation will clarify the different forms of the Efficient Market Hypothesis (EMH). The correct answer is that the scenario provides evidence against the strong-form EMH. The strong-form EMH asserts that all information, both public and private (insider), is fully and immediately reflected in stock prices. Therefore, under strong-form efficiency, it should be impossible for anyone, including insiders, to consistently earn abnormal returns. Since the portfolio manager successfully used private, non-public information about a takeover to generate substantial profits, this action directly contradicts the strong-form hypothesis. The other choices are incorrect for specific reasons. The weak-form EMH, which states that all past trading information (like price and volume data) is reflected in prices, is not challenged by this scenario as the trade was based on new, private information, not historical data analysis. The semi-strong-form EMH, which posits that all publicly available information is reflected in prices, is also not contradicted. In fact, the scenario supports the idea that one cannot profit from public news (as the price only moved after the announcement) but can profit from private information, which is what the semi-strong form implies is possible. The random walk hypothesis is a related concept suggesting that stock price changes are independent of each other and have the same probability distribution, making past movement an unreliable predictor of future movement; this is most closely associated with the weak-form and is not the central concept being tested by the use of insider information.

The correct answer is that it enhances his risk capacity because his ability to generate extra income can offset potential investment losses. This concept is known as labour supply flexibility. It refers to an individual’s ability to adjust their work hours or take on additional work to increase their income. For an investor, this flexibility acts as a form of human capital that can serve as a buffer against poor investment performance. If the high-risk portfolio underperforms, the investor can potentially work more to recoup the financial losses, thus providing a cushion that allows them to tolerate a higher level of investment risk. One incorrect option suggests that freelance instability decreases risk capacity. While freelance income can be volatile, the key factor here is the high demand for his skills, which grants him the flexibility to increase income, a positive factor for risk capacity. Another incorrect option claims that risk capacity is solely determined by financial capital and time horizon. This is too narrow; a holistic assessment of risk capacity must also include human capital, such as earning potential and labour flexibility. The final incorrect option incorrectly links this flexibility to a need for higher cash holdings, which is generally the opposite of its effect; a strong ability to generate income can reduce the need for a large emergency cash buffer, potentially freeing up more capital for investment.

The correct answer is 16.35%. Tracking error is a measure of the volatility of a portfolio’s excess returns relative to its benchmark; it is calculated as the sample standard deviation of these excess returns. The formula for sample standard deviation is the square root of the sum of squared differences from the mean, divided by the number of observations minus one (n-1). In this scenario, the sum of squared differences is given as 0.294, and the number of monthly observations (n) is 12. Therefore, the calculation is: sqrt[0.294 / (12 – 1)] = sqrt[0.294 / 11] = sqrt[0.026727] ≈ 0.1635, or 16.35%. An answer of 15.65% would be incorrect as it results from dividing by n (12) instead of n-1 (11), which is used for calculating population standard deviation, not sample standard deviation. An answer of 2.67% is incorrect because it represents the variance (0.294 / 11) but omits the final step of taking the square root to find the standard deviation. An answer of 54.22% is incorrect as it results from taking the square root of the sum of squared differences without first dividing by (n-1), which is a misunderstanding of the formula.

The correct answer is that the fund manager should purchase put options on a relevant index. A put option grants the holder the right, but not the obligation, to sell an underlying asset at a predetermined price (the strike price) before a specific date. This strategy directly addresses the manager’s objective: if the market falls as anticipated, the put options will increase in value, offsetting the losses in the equity portfolio. If the market unexpectedly rises, the manager’s maximum loss on the hedge is limited to the premium paid for the options, allowing the underlying portfolio to benefit from the rally. Selling index futures would also provide downside protection, but it creates an obligation to sell. If the market were to rise sharply, the losses on the short futures position could be substantial and are not capped, which violates the manager’s requirement to limit the loss on the hedging instrument itself. Buying call options is a strategy used when an investor expects the market to rise, which is the opposite of the manager’s stated view. Entering into an equity swap for a fixed return is a more complex strategy that might not be as efficient for a short-term hedge and involves counterparty risk; it doesn’t align as directly with the simple goal of low-cost, limited-risk downside protection as buying puts does.

A comprehensive performance evaluation of a fund manager requires understanding the limitations of standard comparison tools. Statement I is correct because a peer group average can be a blunt instrument. A fund might have a specific mandate, such as a focus on value stocks with high dividend yields, which could cause it to underperform a peer group dominated by growth-focused funds during a growth-led market rally, even if the manager is skillfully executing their stated strategy. Statement II is also correct. An appropriate benchmark is crucial. For instance, if a fund is mandated to invest in Asian ex-Japan small-cap equities, comparing its performance to a broad MSCI Asia index, which is heavily weighted towards large-cap Chinese and Korean stocks, would be an unfair and inaccurate assessment. Statement IV correctly identifies survivorship bias as a significant flaw in peer group analysis. Databases often exclude funds that have been liquidated or merged due to poor performance. This removal of the worst performers artificially inflates the average performance of the remaining peer group, making it a less challenging hurdle to beat. Statement III is incorrect because outperformance is not a definitive indicator of skill. It could be attributable to higher risk-taking (e.g., higher beta or leverage), a temporary market fad that aligns with the fund’s style, or simply luck. A robust evaluation must be risk-adjusted and consider performance consistency over a full market cycle. Therefore, statements I, II and IV are correct.

The correct answer is that the investment will double approximately 5.8 years faster with annual compounding compared to simple interest. This is calculated by finding the time required under each method and then determining the difference. For simple interest, the formula is Future Value = Principal × (1 + rate × time). To double HKD 100,000 to HKD 200,000 at 5%, the calculation is HKD 200,000 = HKD 100,000 × (1 + 0.05 × t), which simplifies to 2 = 1 + 0.05t. Solving for t gives 20 years. For interest compounded annually, the formula is Future Value = Principal × (1 + rate)^time. The calculation is HKD 200,000 = HKD 100,000 × (1.05)^t, which simplifies to 2 = (1.05)^t. Solving for t requires logarithms: t = log(2) / log(1.05), which is approximately 14.21 years. The difference is 20 – 14.21 = 5.79 years. An answer suggesting simple interest is faster fundamentally misunderstands the concept of compounding, where interest earned in one period generates further interest in subsequent periods. An answer claiming there is no difference in time fails to distinguish between the two calculation methods. A significantly different time saving, such as 10 years, would be the result of a major calculation error.

The correct answer is that the fundamental distinction between a unit trust and a mutual fund is their legal structure. A unit trust is established as a trust via a trust deed, creating a three-party relationship between the manager, the trustee (who holds the assets), and the unit holders (the beneficiaries). Conversely, a mutual fund is an incorporated legal entity, specifically an open-ended investment company (OEIC). In this structure, investors buy shares in the company, and the company itself owns the underlying investment assets. The other options are incorrect. The investment strategies and objectives are not determined by the fund’s legal structure; both unit trusts and mutual funds can pursue identical investment goals. The idea that one is for professional investors while the other is for retail is false, as both can be authorized by the SFC for public distribution. Finally, the frequency of Net Asset Value (NAV) calculation is specified in the fund’s offering documents and is not a defining difference between the two structures; most retail funds of both types calculate NAV on a daily basis.

The correct answer is that alternative investments tend to have a low correlation with traditional asset classes, which can enhance portfolio diversification. A key strategic reason for including alternative investments in a portfolio of traditional assets like stocks and bonds is their potential to act as a diversifier. Low correlation means that the returns of the alternative investment do not move in the same direction or at the same magnitude as the returns of traditional markets. This can help reduce overall portfolio volatility and improve risk-adjusted returns, especially during periods of market stress. One of the other statements is incorrect because many alternative investments, such as private equity or investments in physical real estate, are characterized by illiquidity, meaning they cannot be easily or quickly converted to cash without a significant loss in value. Another choice is incorrect because the fee structures for alternative investments are often more complex and potentially higher than for traditional funds; they frequently include performance-based incentive fees in addition to a management fee. Lastly, the suggestion that regulatory oversight is identical to that for retail products is false; alternative investments are typically offered in less regulated markets and are intended for institutional or high-net-worth investors who are considered sophisticated enough to understand the higher risks and reduced transparency involved.

Statement I is correct as the fundamental goal of growth investing is to seek capital appreciation from stocks of companies whose earnings are projected to grow faster than the overall market. Statement III is also correct because this strategy’s success is contingent on earnings forecasts, which are speculative and subject to significant uncertainty and potential error. Statement II is incorrect because the risk is not that the P/E ratio remains constant, but rather that it declines. If the P/E ratio remains constant while earnings grow, the share price should rise accordingly, which is the desired outcome for a growth investor. The risk materialises when the market assigns a lower P/E multiple to the stock (P/E compression), which can negate the positive effect of earnings growth on the share price. Statement IV describes income investing, not growth investing. Growth companies typically reinvest their profits to fuel further expansion and often pay low or no dividends, whereas income investing specifically targets stocks with high and stable dividend yields. Therefore, statements I and III are correct.

The explanation for this question revolves around the three forms of the Efficient Market Hypothesis (EMH). Weak-form efficiency states that all historical price and volume data is already reflected in current prices, making technical analysis ineffective. Semi-strong form efficiency posits that all publicly available information (including historical data, financial statements, news, and economic reports) is fully incorporated into prices, rendering fundamental analysis useless for generating abnormal returns. Strong-form efficiency asserts that all information, both public and private (insider information), is reflected in prices. In the scenario, the portfolio manager uses publicly available information like earnings announcements and economic forecasts to inform his strategy. His belief that this method can consistently outperform the market is a direct contradiction of the semi-strong form efficiency hypothesis. Therefore, the correct answer is that his philosophy is inconsistent with semi-strong form efficiency. His strategy implicitly rejects weak-form efficiency as well, since semi-strong is a broader category, but the core of his fundamental analysis directly challenges the semi-strong hypothesis. The scenario provides no information about his use of private information, so it does not directly address his views on strong-form efficiency. Operational efficiency is a different concept related to the speed and cost-effectiveness of market transactions, not the incorporation of information into prices.

The correct answer is that the manager is seeking to minimize unsystematic risk. In the context of Modern Portfolio Theory, unsystematic risk, also known as specific risk or diversifiable risk, pertains to the uncertainties affecting a single asset or a small group of assets. Examples include company-specific news like a new product launch, a management change, or an industry-specific regulatory update. By constructing a portfolio with assets from various unrelated sectors, the negative impact of an event affecting one company is offset by the performance of others, thus reducing the overall portfolio’s volatility. This diversification is the primary tool for managing unsystematic risk. On the other hand, systematic risk, or market risk, stems from broad market factors like interest rate changes, economic cycles, and geopolitical events that affect all securities in the market. This type of risk cannot be eliminated through diversification. Inflation risk is a form of systematic risk that erodes the real return of an investment and affects the entire economy, not just specific companies. Liquidity risk relates to the ability to buy or sell an asset quickly without causing a significant price change; while important, it is not the risk being addressed by diversifying across different industries.

The correct answer is that Hong Kong’s strategic role as the principal conduit for international investment into and out of Mainland China is a fundamental reason for its development as a major international fund management centre. This unique position is facilitated by various cross-boundary schemes such as the Stock Connect, Bond Connect, and the Wealth Management Connect, which provide unparalleled access for global capital to the vast and growing markets of Mainland China. This ‘super-connector’ role is a core competitive advantage that attracts global asset managers to establish a significant presence in the city. The other options are incorrect for several reasons. The assertion that all Mandatory Provident Fund (MPF) scheme assets must be managed by firms headquartered in Hong Kong is false; MPF trustees can and do appoint investment managers from various international locations. While Hong Kong has a favourable tax regime, it is not a completely tax-free environment for all investment returns and corporate profits; asset management companies are subject to profits tax, and this is a supporting factor rather than the primary driver. Lastly, while the retail sector is important, Hong Kong’s status as an international hub is significantly driven by institutional capital and its role in managing regional portfolios, not by the dominance of retail investors.

This question tests the understanding of haircut percentages applied to different asset classes under the Securities and Futures (Financial Resources) Rules (FRR) for calculating a licensed corporation’s liquid capital.

Statement I is correct. According to the FRR, qualifying government securities, such as Exchange Fund Bills and Notes issued by the Hong Kong government, are considered highly liquid and low-risk. Therefore, they are subject to a 0% haircut.

Statement II is correct. The FRR imposes a higher haircut for concentration risk. For a position in a single security that is a constituent stock of a specified index (like the Hang Seng Index), if its value exceeds 25% of the licensed corporation’s required liquid capital, a 150% haircut is applied to the entire value of that position.

Statement III is incorrect. Unsecured loans or advances made to related parties, including directors of the licensed corporation, are treated stringently under the FRR. They are subject to a 200% haircut, not 100%. This means the amount of the loan is deducted from liquid capital, and an additional equivalent amount is also deducted, effectively penalizing the firm for such exposures.

Statement IV is correct. Securities that are not readily realizable, such as shares of a company whose listing has been suspended for a prolonged period (e.g., more than 30 days), are considered illiquid. The FRR requires such assets to be valued at nil for liquid capital purposes, which is equivalent to applying a 100% haircut. Therefore, statements I, II and IV are correct.

This question assesses understanding of the Efficient Market Hypothesis (EMH), particularly the semi-strong form. The correct answer is that the analysis is unlikely to yield abnormal returns as the stock price has already fully incorporated all the publicly available information from the earnings report. The semi-strong form of the EMH posits that all publicly available information—including earnings reports, financial statements, news announcements, and economic data—is immediately and fully reflected in a security’s market price. Therefore, once the positive earnings are announced, the price adjustment happens almost instantaneously, leaving no room for an investor to profit from analyzing that same public information after the fact. One incorrect option suggests that the manager can achieve significant abnormal returns through fundamental analysis of public data. This would only be possible in a market that is not semi-strong form efficient. In a semi-strong efficient market, such analysis is futile for generating abnormal returns because the information is already priced in. Another incorrect option suggests that only an analysis of past price trends would be useful. This describes the weak-form of market efficiency, where current prices reflect all past price and volume data. While a semi-strong efficient market is also weak-form efficient, the scenario specifically involves new public information (the earnings report), which is the domain of the semi-strong form. The final incorrect option, which suggests the price has overreacted and will correct, relates more to behavioral finance theories. The EMH, in its pure form, assumes rational investors and that the new price is the fair, unbiased reflection of the new information, not an overreaction.

The correct answer is that purchasing put options on the stock is the most suitable strategy. A put option grants the holder the right, but not the obligation, to sell an underlying asset at a predetermined price (the strike price) within a specific timeframe. By buying puts, the fund manager effectively sets a price floor for her stock holdings. If the stock’s market price falls, the value of the put option increases, offsetting the loss on her shares. This allows her to hedge against short-term downside risk while retaining ownership of the stock to benefit from any long-term appreciation. Writing covered call options is incorrect because this strategy is primarily for generating income from the premium received. While the premium offers a small cushion against a price drop, it provides very limited downside protection and caps the potential upside if the stock price were to rise unexpectedly. Purchasing call options is an inappropriate strategy in this scenario. Call options are used when an investor anticipates a price increase, as they provide the right to buy the stock at a fixed price. This would amplify losses if the stock price were to fall as anticipated. Entering into a short futures contract, while a hedging tool, is less suitable because it creates an obligation to sell the stock (or its cash equivalent) at a future date. This conflicts with the manager’s desire to hold onto her shares for the long term. Options provide greater flexibility by offering the right without the obligation, which aligns better with her objective.

The correct answer is calculated by annualising the weekly tracking error. Tracking error, which measures the volatility of a fund’s excess returns relative to its benchmark, is annualised by multiplying the period’s tracking error by the square root of the number of such periods in a year. Since the provided data is the standard deviation of weekly excess returns (0.50%), the annualisation factor is the square root of 52 (the number of weeks in a year). The calculation is: 0.50% × √52 ≈ 0.50% × 7.211 ≈ 3.61%. One incorrect option arises from mistakenly using the annualisation factor for monthly data (√12), which would be appropriate if the input was monthly tracking error. Another incorrect choice results from multiplying by 52 directly, failing to take the square root, which is a common error that misunderstands how volatility scales with time. A further incorrect option uses the annualisation factor for daily data (approximately √252), which is not applicable to the weekly data provided in the scenario.

Statement I is correct because the concept of an effective annual return being higher than a nominal annual return is based on the principle of compounding. When interest is paid more than once a year (e.g., quarterly), the interest earned in earlier periods is added to the principal and subsequently earns interest itself, leading to a higher overall return for the year. Statement II is correct. When compounding occurs only once per year, there is no intra-year compounding effect, so the nominal rate is equal to the effective rate. Statement III is also correct. The primary utility of the effective annual return (EAR) is to create a standardized measure that allows investors and advisors to accurately compare different investment products that may have the same nominal rate but different compounding periods. Statement IV is incorrect. To verify this, one must calculate the effective annual return for the client’s investment. The formula is EAR = (1 + i/t)^t – 1. For the client’s investment: EAR = (1 + 0.06/4)^4 – 1 = (1.015)^4 – 1 ≈ 6.136%. The alternative investment has an effective annual return of 6.1% (since it compounds annually). As 6.136% is greater than 6.1%, the client’s current investment actually provides a slightly higher return. Therefore, statements I, II and III are correct.

The correct answer is that the scheme must be structured to distribute a high percentage of its annual net income after tax to its unitholders. A fundamental requirement under the SFC’s Code on Real Estate Investment Trusts is the high dividend payout ratio. Hong Kong-authorised REITs are generally required to distribute at least 90% of their audited annual net income after tax to investors. This ensures a steady income stream for unitholders, which is a core objective of a REIT. The assertion that a REIT’s portfolio must consist exclusively of prime office buildings and shopping malls is incorrect; REITs can invest in a diverse range of income-generating properties, including hotels, industrial warehouses, and serviced apartments. The requirement to be structured as a hybrid REIT is also false, as a REIT can be an equity REIT, a mortgage REIT, or a hybrid REIT, depending on its investment strategy. Finally, the statement that a REIT is strictly prohibited from any property development is an oversimplification; the REIT Code permits limited engagement in property development activities, subject to specific conditions and caps, to allow for portfolio growth and enhancement.

The correct answer is that the investment with quarterly compounding provides a higher real return because its more frequent compounding results in a greater effective annual rate. The nominal rate is the stated interest rate, but the effective annual rate (EAR) reflects the actual return after accounting for the effect of compounding. For the investment compounding annually, the EAR is the same as the nominal rate (12%). For the investment compounding quarterly, the periodic rate is 12% / 4 = 3%. The EAR is calculated as (1 + 0.03)^4 – 1, which equals 12.55%. Since this EAR is higher than the 12% EAR of the annually compounded investment, it will yield a higher return. The real return is then found by adjusting this EAR for inflation using the Fisher equation. A higher EAR will always result in a higher real return, assuming the same inflation rate. It is incorrect to state that both products offer the same real return; this ignores the significant impact of compounding frequency. It is also a common mistake to simply subtract the inflation rate from the nominal rate to find the real return; this is only an approximation and is not precise, especially when comparing investments with different compounding periods. The correct approach is to first calculate the EAR for each investment and then adjust for inflation.

The real return on an investment is its return after adjusting for the effects of inflation and taxes. Statement I is correct because inflation reduces the purchasing power of money; therefore, the nominal return must be adjusted downwards by the inflation rate to determine the real increase in purchasing power. Statement III is also correct. In Hong Kong and many other jurisdictions, capital gains tax (where applicable) is calculated on the nominal gain (selling price minus purchase price), not the inflation-adjusted gain. This means an investor pays tax on gains that may be partially or wholly attributable to inflation, which further reduces the real, after-tax return. Statement II is incorrect; the effective annual return is higher than the nominal annual return when interest is compounded more than once a year because it accounts for the earning of ‘interest on interest’. Statement IV is incorrect because a negative real return is possible if the rate of inflation is higher than the nominal rate of return. For example, a 3% nominal return during a period of 5% inflation results in a real return of approximately -2%. Therefore, statements I and III are correct.

This question assesses the understanding of the three forms of the Efficient Market Hypothesis (EMH) and their practical implications for investment professionals in Hong Kong. Statement I is correct because weak-form efficiency posits that all historical price and volume data are already reflected in current stock prices. Consequently, technical analysis, which relies on identifying patterns in such historical data, cannot be used to consistently generate abnormal profits. Statement II is correct as semi-strong form efficiency extends this to include all publicly available information, such as financial statements and economic news. Therefore, fundamental analysis based on a newly released annual report would not provide a sustainable edge, as the information is quickly incorporated into the price. Statement III is also correct. The existence and enforcement of regulations against insider dealing, such as those under the Securities and Futures Ordinance (SFO), are predicated on the belief that non-public, price-sensitive information can be used to make abnormal profits. This implies that the market is not perfectly strong-form efficient, because if it were, even inside information would be instantly reflected in prices and thus be useless. Statement IV is incorrect. The work of investment analysts is what drives market efficiency. By constantly searching for mispriced securities and trading on them, they cause prices to adjust and reflect new information, thereby making the market more efficient. Their role is essential to the process, not made redundant by it. Therefore, statements I, II and III are correct.

The correct answer is a currency forward contract. This is an over-the-counter (OTC) derivative that allows two parties to agree on an exchange rate for a future date. It perfectly suits the treasurer’s need to lock in a price for a future payment and her preference for a customized agreement directly with a financial institution, thereby transferring the risk of adverse currency movements. A Hang Seng Index futures contract is incorrect because it is an exchange-traded product designed to hedge against movements in the Hong Kong stock market, not a specific currency pair. A standardized option contract listed on a derivatives exchange is also incorrect; while it relates to currency, its standardized and exchange-listed nature contradicts the treasurer’s preference for a customized OTC product. An interest rate swap is an OTC instrument, but it is used to exchange interest rate payment streams (e.g., fixed for floating) and does not directly address the need to fix an exchange rate for a single future transaction.

Statement I is correct. Beta measures a stock’s volatility relative to the overall market (systematic risk). Companies in high-growth, speculative sectors like biotechnology are inherently riskier and more sensitive to market changes, thus they are expected to have a higher beta (often > 1). Conversely, established utility companies provide essential services, have stable cash flows, and are less sensitive to economic cycles, typically resulting in a lower beta (often < 1).

Statement II is correct. Alpha represents the excess return of an investment relative to the return suggested by its beta. A positive alpha indicates that the security has outperformed its expected benchmark on a risk-adjusted basis. It is a measure of the value that a portfolio manager adds or subtracts from a fund's return.

Statement III is incorrect. A beta of zero indicates that a security's price movement is completely uncorrelated with the market's movement. While a risk-free asset (like a government T-bill) has a beta of zero, a zero-beta asset is not necessarily risk-free. It can still possess significant unsystematic (specific) risk that is not correlated with the market.

Statement IV is correct. In the regression formula Ri,t = αi + βiRm,t + ei, the alpha (αi) is the intercept term. It represents the expected return of the security when the market return (Rm,t) is zero. Therefore, statements I, II and IV are correct.

The correct answer is that the Hang Seng TECH Index is the most suitable benchmark. According to the principles of performance measurement, a benchmark index must be representative of the fund’s specific investment objectives, including its geographical focus and sector concentration. The ‘Innovate Hong Kong Equity Fund’ is mandated to invest in technology companies listed in Hong Kong. The Hang Seng TECH Index specifically tracks the 30 largest technology companies listed in Hong Kong, making it a highly relevant and fair standard against which to measure the fund manager’s performance. Using a benchmark that does not align with the fund’s mandate would lead to a misleading evaluation. For instance, the S&P 500 Index tracks large-cap U.S. equities, which is geographically incorrect. The MSCI World Equity Index is far too broad, covering developed markets globally, and would not accurately reflect the specific risks and opportunities of the Hong Kong tech sector. The Nikkei 225 Index is also inappropriate as it represents the Japanese stock market. An effective benchmark allows for a meaningful comparison by isolating the manager’s skill from broad market movements unrelated to their investment universe.

According to the Fund Manager Code of Conduct (FMCC), when a licensed corporation (such as a Type 9 asset manager) relies on third-party research, including reports from fund research houses or rating agencies, it must exercise due skill, care, and diligence. This involves conducting proper due diligence on the third-party provider. Statement I is correct because understanding the research house’s methodology is fundamental to assessing the quality, objectivity, and relevance of its ratings and analysis. Statement II is also correct as the competence, experience, and expertise of the research analysts directly impact the credibility of their output. Statement IV is critical; the licensed corporation must assess potential conflicts of interest, such as whether the research house receives compensation from the fund companies it rates, as this could compromise the objectivity of the research. Statement III is incorrect because a rating is merely one input into the investment decision-making process. The licensed corporation retains the ultimate responsibility for its investment decisions and cannot simply delegate this to a rating agency by exclusively picking the highest-rated funds. It must exercise its own professional judgment to ensure the selected fund is suitable for the specific portfolio’s strategy and the client’s objectives. Therefore, statements I, II and IV are correct.

Statement I is correct. A key feature of the dual counter model for ETFs is that the units traded on the RMB and HKD counters are of the same class and confer identical rights upon the unitholder. The primary difference is the currency of trading and settlement.

Statement II is incorrect. This statement incorrectly defines a panda bond. An RMB-denominated bond issued in Mainland China by a non-Chinese (foreign) entity is known as a ‘panda bond’. An RMB bond issued in Hong Kong is referred to as a ‘dim sum bond’.

Statement III is correct. RQFII A-share ETFs are specifically designed to provide offshore investors with direct access to the Mainland A-share market. They utilise the Renminbi Qualified Foreign Institutional Investor (RQFII) quota to purchase a portfolio of A-shares that tracks a specific index, with the ETF units being denominated and traded in RMB on the SEHK.

Statement IV is incorrect. Under the Mutual Recognition of Funds (MRF) scheme, while a fund must be authorised in its home jurisdiction (e.g., by the CSRC in Mainland China), its sale and distribution activities in the host jurisdiction (Hong Kong) are governed by the laws and regulations of that host jurisdiction. Therefore, statements I and III are correct.

The correct answer is that the contribution from tactical asset allocation is calculated by taking the difference between the portfolio’s and the benchmark’s weight in the asset class, and multiplying it by the benchmark’s return for that asset class. This method isolates the impact of the manager’s decision to overweight or underweight a specific asset class. By using the benchmark’s return, the calculation neutralizes the effect of security selection, thereby measuring only the value added (or subtracted) by the allocation decision itself. In this scenario, the calculation would be (60% – 50%) × 10%. Calculating the difference between the portfolio’s and the benchmark’s return and multiplying it by the portfolio’s weight measures the contribution from security selection, not asset allocation. This formula assesses the manager’s skill in choosing securities within that asset class that outperformed the asset class benchmark. Using the portfolio’s return instead of the benchmark’s return in the asset allocation calculation is incorrect because it conflates the effect of the allocation decision with the effect of the security selection decision. Similarly, using the benchmark’s weight instead of the portfolio’s weight in the security selection calculation is incorrect because the impact of outperforming the benchmark within an asset class should be scaled by the actual capital allocated to it in the portfolio.

Statement I is correct because dividend yield is a key metric for investors seeking regular income. Company A, with its 5% yield, directly meets this objective, whereas Company B, which pays no dividend, does not. Statement II is incorrect. A market-wide downturn is a classic example of systematic risk, as it affects all securities in the market, not just specific ones. Unsystematic risk is company-specific or industry-specific. Statement III is correct. A negative regulatory ruling affecting a single industry is a form of unsystematic risk, specifically market sector or industry risk, which can be mitigated through diversification across different sectors. Statement IV is incorrect. Publicly traded shares are highly divisible (one can buy a small number of shares) and generally offer much greater liquidity compared to illiquid, indivisible direct investments like physical property. Therefore, statements I and III are correct.

This question assesses the understanding of the different client segments within Hong Kong’s asset management industry.

Statement I is incorrect. Retail investors are characterized by having generally less sophisticated needs compared to institutional investors. They typically invest in standardized products like unit trusts and mutual funds and do not require complex, bespoke investment mandates, which are more common for institutional or high-net-worth private clients.

Statement II is correct. Institutional investors, including significant entities like Mandatory Provident Fund (MPF) and Occupational Retirement Schemes Ordinance (ORSO) schemes, form a substantial part of the asset management market. Due to the scale and complexity of their portfolios, they commonly delegate the management of their assets to professional fund managers on a discretionary basis.

Statement III is correct. Private clients are typically high-net-worth individuals or families whose financial needs are more complex than those of average retail investors but may not be on the same scale as large institutions. Multi-family offices are a key service structure for this segment, providing sophisticated wealth management services to several families, thereby achieving economies of scale.

Statement IV is incorrect. Hong Kong’s low and simple tax system is a key structural advantage that benefits all categories of investors, not just institutional ones. It enhances the attractiveness of Hong Kong as an investment hub for retail investors, private clients, and institutions alike by improving potential after-tax returns. Therefore, statements II and III are correct.