HKSI Paper 12 (Asset Management) English Free Trial Set Two
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An investment policy statement (“IPS”) should be the starting point for the investment process because of which of the following?
I. To state the goals of the investment plan.
II. To provide a benchmark and an evaluation system for performance.
III. To set the boundaries for strategies and products.
IV. To provide clear investment policy with investors’ funding.
Correct
An investment policy statement (“IPS”) should be the starting point for the investment process.
There are several major reasons for such statement:
(1) to state the goals of the investment plan;
(2) to provide a benchmark and an evaluation system for performance;
(3) to set the boundaries for strategies and products; and
(4) to provide clear communication and better understanding of the investment policy.
Incorrect
An investment policy statement (“IPS”) should be the starting point for the investment process.
There are several major reasons for such statement:
(1) to state the goals of the investment plan;
(2) to provide a benchmark and an evaluation system for performance;
(3) to set the boundaries for strategies and products; and
(4) to provide clear communication and better understanding of the investment policy.
Question 2 of 20
2. Question
Once the client has set his investment strategy, a decision will be made as to which of the following managers are most appropriate?
I. A specialist manager
II. A fund manager
III. A discretionary manager
IV. A financial manager
Correct
Once the client has set his investment strategy, a decision will be made as to whether a specialist manager or a discretionary manager (or a combination of both) is most appropriate.
Incorrect
Once the client has set his investment strategy, a decision will be made as to whether a specialist manager or a discretionary manager (or a combination of both) is most appropriate.
Question 3 of 20
3. Question
Which of the following is(are) true of active asset allocation?
I. It is the process of planning and implementing the optimal asset mix for a fund at a given point in time to maximise investment opportunities in the current market.
II.It aims to enhance value by rebalancing those assets which are expected to have better risk-return outlooks than the initial SAA weightings.
III. It involves a series of short-term decisions.
IV. It is structured to track an index such as the Hang Seng Index.
Correct
Active asset allocation is the process of planning and implementing the optimal asset mix for a fund at a given point in time to maximise investment opportunities in the current market. This involves a series of short-term decisions. Active asset allocation aims to enhance value by rebalancing those assets which are expected to have better risk-return outlooks than the initial SAA weightings.
Incorrect
Active asset allocation is the process of planning and implementing the optimal asset mix for a fund at a given point in time to maximise investment opportunities in the current market. This involves a series of short-term decisions. Active asset allocation aims to enhance value by rebalancing those assets which are expected to have better risk-return outlooks than the initial SAA weightings.
Question 4 of 20
4. Question
When purchasing debentures and bonds, fund managers must factor in their views of which of the following for the term of the security and factor this into the price paid for the debt security at the outset?
I. Economic growth
II. Inflation
III. Interest rates
IV. Market performance
Correct
. When purchasing debentures and bonds, fund managers must factor in their views of inflation for the term of the security and factor this into the price paid for the debt security at the outset.
Incorrect
. When purchasing debentures and bonds, fund managers must factor in their views of inflation for the term of the security and factor this into the price paid for the debt security at the outset.
Question 5 of 20
5. Question
If share prices vary greatly from one period to another and the information from past share prices cannot be used to predict future price movements, share prices would have what the market calls as a?
I. Random Walk
II. Jump Curve
III. Confused Bullish
IV. Sleeping Bearish
Correct
if share prices vary greatly from one period to another and the information from past share prices cannot be used to predict future price movements, share prices have a “random walk”.
Incorrect
if share prices vary greatly from one period to another and the information from past share prices cannot be used to predict future price movements, share prices have a “random walk”.
Question 6 of 20
6. Question
Which of the following statements is(are) not true in regards to compound interest?
I. It is that earned on the initial investment sum assuming that interest is reinvested.
II. It is that earned on the initial investment sum assuming that interest is not reinvested.
III. It is the rate of return on a per annum basis.
IV. It is the rate of return on a per quaterly basis.
Correct
Compound interest is that earned on the initial investment sum assuming that interest is reinvested.
Incorrect
Compound interest is that earned on the initial investment sum assuming that interest is reinvested.
Question 7 of 20
7. Question
The general principles of a normal distribution curve are which of the following?
I. There is a 68 per cent probability of an investment producing a return at +1 standard deviation around the mean.
II. There is a 95 per cent probability of an investment producing a return at +2 standard deviation around the mean.
III. There is a 35 per cent probability of an investment producing a return at +3 standard deviation around the mean.
IV. There is a 75 per cent probability of an investment producing a return at +2 standard deviation around the mean.
Correct
The general principles of a normal distribution curve are:
• there is a 68 per cent probability of an investment producing a return at +1 standard deviation around the mean; and
• there is a 95 per cent probability of an investment producing a return at +2 standard deviation around the mean.
Incorrect
The general principles of a normal distribution curve are:
• there is a 68 per cent probability of an investment producing a return at +1 standard deviation around the mean; and
• there is a 95 per cent probability of an investment producing a return at +2 standard deviation around the mean.
Question 8 of 20
8. Question
A fund’s investment objectives must take account of the downside risk(s) such as?
I. The return requirement in the light of the risks of holding that portfolio of assets.
II. The client’s risk tolerance
III. The dividends and payment of fees to various parties involved
IV. The maximum loss of the investments under a worst-case scenario
Correct
• Downside risk: Fund managers should consider the client’s risk tolerance and understand the maximum loss of the investments under a worst-case scenario.
Incorrect
• Downside risk: Fund managers should consider the client’s risk tolerance and understand the maximum loss of the investments under a worst-case scenario.
Question 9 of 20
9. Question
Which of the following statements in regards to the time-weighted return is(are) true?
I. It is used to measure a fund’s performance.
II. It does not depend on any particular sub-division of the period.
III. It requires the precise number of times when any cash flows into or out of the fund to be known.
IV. It requires a clear distinction between “new” money being paid into the accounts and income and capital expenditure(where applicable) arising from the first investments.
Correct
the time-weighted return is used to measure a fund’s performance. It does not depend on any particular sub-division of the period, but requires the precise number of times when any cash flows into or out of the fund to be known. It also requires a clear distinction between “new” money being paid into the fund and income and capital gain (where applicable) arising from previous investments.
Incorrect
the time-weighted return is used to measure a fund’s performance. It does not depend on any particular sub-division of the period, but requires the precise number of times when any cash flows into or out of the fund to be known. It also requires a clear distinction between “new” money being paid into the fund and income and capital gain (where applicable) arising from previous investments.
Question 10 of 20
10. Question
Markowitz’s concepts are based on the belief that investors behave rationally, and prefer higher expected returns to lower returns, and lower expected risk to higher expected risk. This is known as the?
I. Dominance principle
II. Core return principle
III. Supremacy principle
IV. Dominant principle
Correct
Markowitz’s concepts are based on the belief that investors behave rationally, and prefer higher expected returns to lower returns, and lower expected risk to higher expected risk. This is known as the “dominance principle”.
Incorrect
Markowitz’s concepts are based on the belief that investors behave rationally, and prefer higher expected returns to lower returns, and lower expected risk to higher expected risk. This is known as the “dominance principle”.
Question 11 of 20
11. Question
Which of the following is(are) essentially the market-wide risk, making it impossible to eliminate or reduce through diversification?
I. Systematic risk
II. Unsystematic risk
III. The market dependant
IV. The market independent
Correct
Systematic risk is essentially the market-wide risk, making it impossible to eliminate or reduce through diversification.
Incorrect
Systematic risk is essentially the market-wide risk, making it impossible to eliminate or reduce through diversification.
Question 12 of 20
12. Question
Each security has its own beta value. However, there are certain relationships that emerge between the betas of different securities. These relationships stem from key factors influencing beta such as?
I. The nature of the company’s activities.
II. The level of leverage (gearing) undertaken.
III. The value of securities in a company’s year end assessment.
IV. The cyclical nature of a company’s income earnings.
Correct
Each security has its own beta value. However, there are certain relationships that emerge between the betas of different securities. These relationships stem from key factors influencing beta:
• The nature of the company’s activities. (Generally, the riskier the activity, the higher the beta,
e.g. mining companies have higher betas than retail companies.)
• The level of leverage (gearing) undertaken. (Generally, the more highly geared the company, the higher its beta. During a boom period, high-geared companies can generally earn returns exceeding their interest costs and as a result, outperform the low-geared companies.)
• The cyclical nature of a company’s income earnings. (Generally, the more sensitive a company’s income is to the business cycle, the greater its beta.)
Incorrect
Each security has its own beta value. However, there are certain relationships that emerge between the betas of different securities. These relationships stem from key factors influencing beta:
• The nature of the company’s activities. (Generally, the riskier the activity, the higher the beta,
e.g. mining companies have higher betas than retail companies.)
• The level of leverage (gearing) undertaken. (Generally, the more highly geared the company, the higher its beta. During a boom period, high-geared companies can generally earn returns exceeding their interest costs and as a result, outperform the low-geared companies.)
• The cyclical nature of a company’s income earnings. (Generally, the more sensitive a company’s income is to the business cycle, the greater its beta.)
Question 13 of 20
13. Question
Which of the following ratio is the ratio of the stock price to the book value of equity per share?
I. The book-to-price ratio
II. The price-to-book ratio
III. The risk-to-return ratio
IV. The Investment-to-Capital ratio
Correct
The price-to-book (“P/B”) ratio is the ratio of the stock price to the book value of equity per share, or in the same way the market value of equity to its book value. It is a price or value multiple indicating how many times the book value of equity an investor is willing to pay to acquire a stock.
Incorrect
The price-to-book (“P/B”) ratio is the ratio of the stock price to the book value of equity per share, or in the same way the market value of equity to its book value. It is a price or value multiple indicating how many times the book value of equity an investor is willing to pay to acquire a stock.
Question 14 of 20
14. Question
A hedge fund manager may estimate that a security is overvalued. However, there are restrictions on selling it short in the market. To capitalise on his market view and overcome the barriers to short-selling, the manager can do which of the following?
I. Sell the futures on the security
II. Buy a put option on the futures
III. Buy regulatory restrictions securities
IV. Sell tax codes and accounting rules
Correct
A hedge fund manager may estimate that a security is overvalued. However, there are restrictions on selling it short in the market. To capitalise on his market view and overcome the barriers to short-selling, the manager can sell the futures on the security or buy a put option on it instead. The same argument can be applied in the case of regulatory restrictions, tax codes and accounting rules.
Incorrect
A hedge fund manager may estimate that a security is overvalued. However, there are restrictions on selling it short in the market. To capitalise on his market view and overcome the barriers to short-selling, the manager can sell the futures on the security or buy a put option on it instead. The same argument can be applied in the case of regulatory restrictions, tax codes and accounting rules.
Question 15 of 20
15. Question
In a contango market, an asset manager can buy short-date futures contracts on the underlying asset and sell long-dated futures contracts if he expects the spread between futures prices of the two contracts to narrow in the future. This strategy is known as?
I. Buying a straddle
II. Buying the spread
III. Covered call
IV. Hedging
Correct
In a contango market, an asset manager can buy short-date futures contracts on the underlying asset and sell long-dated futures contracts if he expects the spread between futures prices of the two contracts to narrow in the future. This strategy is known as buying the spread.
Incorrect
In a contango market, an asset manager can buy short-date futures contracts on the underlying asset and sell long-dated futures contracts if he expects the spread between futures prices of the two contracts to narrow in the future. This strategy is known as buying the spread.
Question 16 of 20
16. Question
The objective of arbitrage is to generate profit with minimal risk. However, a number of factors may compromise the use of this strategy, including which of the following?
I. Transaction costs
II. Mark-to-market loss
III. Regulatory and market restrictions on trading
IV. Liquidity of the market
Correct
The objective of arbitrage is to generate profit with minimal risk. However, a number of factors may compromise the use of this strategy, including transaction costs, mark-to-market loss as the arbitrage profit takes a long time to materialise, regulatory and market restrictions on trading, liquidity of the market, actions of the noise and/or uninformed traders, etc..
Incorrect
The objective of arbitrage is to generate profit with minimal risk. However, a number of factors may compromise the use of this strategy, including transaction costs, mark-to-market loss as the arbitrage profit takes a long time to materialise, regulatory and market restrictions on trading, liquidity of the market, actions of the noise and/or uninformed traders, etc..
Question 17 of 20
17. Question
Defining the investment management style is important for which of the following?
I. Clients
II. Fund managers
III. Fund promoters
IV. Risk analyst
Correct
Defining the investment management style is important for:
• clients seeking diversification through different investment management styles to increase the likelihood of outperforming their SAA at each stage of the business cycle;
• fund managers/promoters who, when selecting specialist managers or asset allocation managers, need to assess how “true to label” the investment management style is in various market conditions; and
• fund promoters explaining the philosophies and characteristics to attract and retain investors.
Incorrect
Defining the investment management style is important for:
• clients seeking diversification through different investment management styles to increase the likelihood of outperforming their SAA at each stage of the business cycle;
• fund managers/promoters who, when selecting specialist managers or asset allocation managers, need to assess how “true to label” the investment management style is in various market conditions; and
• fund promoters explaining the philosophies and characteristics to attract and retain investors.
Question 18 of 20
18. Question
Which of the following is(are) the risk(s) of value investing?
I. The stock is cheap because the price correctly reflects a poor future earnings stream.
II. The fund manager’s opinion of what is driving stock performance may affect the overall outcome.
III. The market may take longer than expected to bring the “undervalued” price back to fair value.
IV. The securities including behavioural finance and technical analysis may not have potential in future investments
Correct
Value investors typically believe that the market overreacts to bad news and that share prices will revert to fair value. As a result, the value investor relies on returns from capital gains.
The risks of value investing are that:
• the stock is cheap because the price correctly reflects a poor future earnings stream; and
• the market may take longer than expected to bring the “undervalued” price back to fair value.
Incorrect
Value investors typically believe that the market overreacts to bad news and that share prices will revert to fair value. As a result, the value investor relies on returns from capital gains.
The risks of value investing are that:
• the stock is cheap because the price correctly reflects a poor future earnings stream; and
• the market may take longer than expected to bring the “undervalued” price back to fair value.
Question 19 of 20
19. Question
A top-down style analyses macro-economic factors, such as the following to determine the optimal asset allocation except?
I. Foreign exchange rates
II. Inflation rates
III. Interest rates
IV. Consumer confidence
Correct
A top-down style analyses macro-economic factors, such as foreign exchange rates, interest rates and consumer confidence, to determine the optimal asset allocation.
Incorrect
A top-down style analyses macro-economic factors, such as foreign exchange rates, interest rates and consumer confidence, to determine the optimal asset allocation.
Question 20 of 20
20. Question
Some possible investment strategies arising from behavioural financial studies include which of the following?
I. Momentum strategy
II. Quantitative strategy
III. Contrarian strategy
IV. Technical strategy
Correct
Some possible investment strategies arising from behavioural financial studies include:
• Momentum strategy. The underlying rationale for this strategy is that a past price trend will continue in the future.
• Contrarian strategy. The underlying rationale for this strategy is that the market involves a herd mentality and that the collective action of the crowd is wrong in the long term.
Incorrect
Some possible investment strategies arising from behavioural financial studies include:
• Momentum strategy. The underlying rationale for this strategy is that a past price trend will continue in the future.
• Contrarian strategy. The underlying rationale for this strategy is that the market involves a herd mentality and that the collective action of the crowd is wrong in the long term.
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