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CFP Hong Kong study materials
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CFP Hong Kong practice questions

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Question 1Financial Management and Insurance Planning

Under Hong Kong's Mandatory Provident Fund (MPF) system, what is the maximum relevant income level for mandatory employee contributions?

  1. HK$20,000 per month
  2. HK$30,000 per month Correct answer.
  3. There is no maximum
  4. HK$40,000 per month

Explanation

The MPF System sets a maximum relevant income level of HK$30,000 per month. Employee and employer mandatory contributions are each capped at HK$1,500 per month on that basis. Income above HK$30,000 does not attract additional mandatory contributions.

Question 2Financial Management and Insurance Planning

Which of the following best describes the tax treatment of mandatory MPF contributions made by an employee in Hong Kong?

  1. Not deductible but tax-exempt on withdrawal
  2. Fully deductible without any cap
  3. Deductible from taxable income subject to a statutory cap Correct answer.
  4. Taxable as a fringe benefit in the year of contribution

Explanation

Employee mandatory MPF contributions are deductible from assessable income, but the deduction is capped by statute. The cap is linked to the maximum relevant income level. Voluntary contributions generally do not attract the same deduction.

Question 3Financial Management and Insurance Planning

An employee earns HK$18,000 per month. What is the employee's mandatory MPF contribution for the month?

  1. HK$1,500
  2. HK$900 Correct answer.
  3. HK$1,800
  4. HK$720

Explanation

Mandatory employee contributions are 5% of relevant income, capped at HK$1,500 per month. Five percent of HK$18,000 is HK$900, which is below the cap. Therefore HK$900 is the correct mandatory contribution.

Question 4Financial Management and Insurance Planning

Which statement about MPF scheme portability is correct for a Hong Kong employee?

  1. Accrued benefits can be transferred to a scheme of the employee's choice at any time Correct answer.
  2. Accrued benefits are locked in until age 65 with no transfer option
  3. Accrued benefits can be transferred only once every five years
  4. Accrued benefits must be transferred to a new employer's scheme on change of job

Explanation

MPF benefits are portable. An employee may transfer accrued benefits to a scheme of their own choosing, subject to the statutory procedures. Transfers are not restricted to a new employer's scheme or to a fixed interval.

Question 5Financial Management and Insurance Planning

An MPF scheme member wishes to withdraw accrued benefits on the ground of permanent departure from Hong Kong. Which condition must be met?

  1. The member must have contributed for at least ten years
  2. The member must declare permanent departure and provide a statutory declaration plus evidence of overseas residence Correct answer.
  3. The member must have lived outside Hong Kong for at least one year
  4. The member must be at least 60 years old

Explanation

Early withdrawal on permanent departure requires a statutory declaration that the member has departed or will depart permanently, supported by evidence of the right to reside overseas. The trustee must be satisfied before releasing benefits. Age and contribution duration are not the tests for this ground.

Question 6Financial Management and Insurance Planning

Under Hong Kong's Retirement Schemes Ordinance (RSO), which scheme is exempt from MPF requirements?

  1. Any scheme with fewer than 50 members
  2. A scheme that invests only in Hong Kong equities
  3. A scheme that provides benefits no less favourable than MPF Correct answer.
  4. A scheme funded entirely by employee contributions

Explanation

An occupational retirement scheme may be exempt from MPF if it is approved under the RSO and provides benefits that are no less favourable than those required by the MPF System. Size, investment policy and funding source are not the statutory exemption tests.

Question 7Financial Management and Insurance Planning

Which of the following is a key feature of an MPF Default Investment Strategy (DIS)?

  1. It invests solely in Hong Kong dollar deposits
  2. It automatically de-risks as the member approaches retirement age Correct answer.
  3. It is available only to members earning above HK$30,000 per month
  4. It guarantees a minimum return to the member

Explanation

The DIS uses a glide path that reduces risk exposure as the member ages, moving towards more conservative assets near retirement. It does not guarantee returns and is not restricted by income level. It is the default for members who do not make an investment choice.

Question 8Financial Management and Insurance Planning

A Hong Kong employee is diagnosed with a terminal illness and wishes to withdraw MPF benefits early. Which ground applies?

  1. Small balance withdrawal
  2. Terminal illness with a medical certificate Correct answer.
  3. Early retirement at age 55
  4. Permanent incapacity

Explanation

Terminal illness is a specific statutory ground for early withdrawal of MPF benefits, supported by a medical certificate. Permanent incapacity is a separate ground. The other options do not match the facts given.

Question 9Financial Management and Insurance Planning

Which regulator supervises the MPF System in Hong Kong?

  1. Mandatory Provident Fund Schemes Authority Correct answer.
  2. Securities and Futures Commission
  3. Insurance Authority
  4. Hong Kong Monetary Authority

Explanation

The Mandatory Provident Fund Schemes Authority (MPFA) is the statutory body that regulates and supervises the MPF System. The other bodies regulate banking, securities and insurance respectively. Each has a different statutory remit.

Question 10Financial Management and Insurance Planning

An employer fails to make mandatory MPF contributions for an employee on time. What is the maximum surcharge the employer may be required to pay?

  1. 5% of the contribution amount
  2. Equal to the contribution amount
  3. 10% of the contribution amount
  4. 20% of the contribution amount Correct answer.

Explanation

Under the MPF legislation, an employer who fails to make contributions on time may be liable to a surcharge of up to 20% of the contribution amount. The surcharge is designed to deter late payment. It is separate from any fine or penalty.

Question 11Financial Management and Insurance Planning

What is the standard rate of Salaries Tax in Hong Kong for the year of assessment 2023/24?

  1. 15%
  2. 17% Correct answer.
  3. 16%
  4. 20%

Explanation

The standard rate of Salaries Tax is 15% on net total income, but the marginal rates on the progressive scale top out at 17%. For 2023/24 the top marginal rate is 17%. The standard rate applies only if it produces a lower tax charge.

Question 12Financial Management and Insurance Planning

A Hong Kong taxpayer has net total income of HK$500,000 and allowable deductions of HK$100,000. Which tax computation approach is correct?

  1. Apply the standard rate to total income before deductions
  2. Apply the standard rate to net total income after deductions
  3. Apply the progressive rates to net chargeable income after deductions and allowances Correct answer.
  4. Apply the progressive rates to total income before deductions

Explanation

Salaries Tax is computed on net chargeable income, which is net total income after deductions and personal allowances, using progressive rates. The standard rate may apply only if it yields a lower charge. Total income before deductions is not the tax base.

Question 13Financial Management and Insurance Planning

Which of the following is a deductible expense for Salaries Tax purposes in Hong Kong?

  1. Cost of a personal computer used at home
  2. Mortgage interest on the taxpayer's principal residence
  3. Commuting expenses to and from work
  4. Mandatory MPF contributions within the statutory cap Correct answer.

Explanation

Mandatory MPF contributions are expressly deductible within the statutory cap. Mortgage interest may attract a separate deduction under Home Loan Interest, but it is not a general deductible expense. Commuting and personal capital items are not deductible.

Question 14Financial Management and Insurance Planning

Under Hong Kong tax rules, which of the following is generally exempt from Salaries Tax?

  1. A gratuity paid on termination of employment
  2. A bonus paid for performance
  3. A housing allowance paid in cash
  4. Reimbursement of business travel expenses Correct answer.

Explanation

Reimbursement of business travel expenses actually incurred is generally not taxable because it is not a gain or profit from employment. Bonuses, termination gratuities and cash allowances are generally taxable. The distinction turns on whether the payment is a personal benefit or a reimbursement of business costs.

Question 15Financial Management and Insurance Planning

What is the maximum amount of Home Loan Interest that can be deducted in a year of assessment in Hong Kong?

  1. HK$50,000
  2. HK$150,000
  3. HK$100,000 Correct answer.
  4. HK$200,000

Explanation

The Home Loan Interest deduction is capped at HK$100,000 per year of assessment. The deduction is available for interest paid on a loan for a dwelling that is the taxpayer's principal residence. It is subject to conditions on the loan and the property.

Question 16Financial Management and Insurance Planning

A Hong Kong employee receives a company car for private use. How is the benefit generally treated for Salaries Tax?

  1. It is taxed only if the employee uses it for business
  2. It is taxed at a flat HK$10,000 per year
  3. It is taxed on a percentage of the car's cost or rental value Correct answer.
  4. It is fully exempt as a business asset

Explanation

A company car provided for private use is a taxable perquisite. The taxable value is generally based on a percentage of the cost of the car or its rental value, depending on the arrangement. Business use does not remove the charge where private use is available.

Question 17Financial Management and Insurance Planning

Which of the following best describes the tax treatment of a lump sum received from an approved occupational retirement scheme on retirement?

  1. Taxable at half the progressive rates
  2. Exempt from Salaries Tax Correct answer.
  3. Fully taxable as employment income
  4. Taxable at the standard rate only

Explanation

A lump sum paid from an approved retirement scheme on retirement is exempt from Salaries Tax. The exemption reflects the approved status of the scheme and the retirement context. Other termination payments may be taxable, so the source and nature of the payment matter.

Question 18Financial Management and Insurance Planning

A married couple elects joint assessment in Hong Kong. Which statement is correct?

  1. Joint assessment applies only if both spouses have income above HK$30,000
  2. Their incomes are aggregated and taxed at progressive rates with a single set of allowances Correct answer.
  3. Joint assessment always produces a lower tax liability than separate assessment
  4. Each spouse must file separately and cannot elect joint assessment

Explanation

Under joint assessment, the couple's incomes are aggregated and taxed at progressive rates, with personal allowances applied once. The election is optional and should be made only if it reduces the couple's total tax. Separate assessment may be more beneficial in some cases.

Question 19Financial Management and Insurance Planning

What is the basic allowance for a single person for the year of assessment 2023/24 in Hong Kong?

  1. HK$200,000
  2. HK$100,000
  3. HK$132,000 Correct answer.
  4. HK$150,000

Explanation

The basic allowance for a single person for 2023/24 is HK$132,000. This allowance is deducted from net total income in arriving at net chargeable income. It is distinct from the married person's allowance.

Question 20Financial Management and Insurance Planning

Which of the following is a key principle of insurance under the doctrine of insurable interest?

  1. The insured must own the subject matter outright
  2. Insurable interest is required only for life insurance
  3. The insured must have a financial interest in the subject matter at the time of loss Correct answer.
  4. The insurer must have a financial interest in the risk

Explanation

Insurable interest requires the insured to have a financial interest in the subject matter so that a loss would cause financial detriment. Ownership is not required; a pecuniary interest suffices. The doctrine applies across insurance classes, with timing rules varying by class.

Question 21Financial Management and Insurance Planning

Under the principle of indemnity, which statement is correct for a property insurance claim?

  1. The insured must always receive the full sum insured regardless of loss
  2. The insured can profit from the loss if the insurer agrees
  3. The insured can recover more than the actual loss if the premium was high
  4. The insured is restored to the pre-loss financial position, subject to policy limits Correct answer.

Explanation

Indemnity aims to restore the insured to the financial position held before the loss, subject to policy limits and excesses. It prevents profit from insurance. The sum insured is a maximum, not an automatic payment.

Question 22Financial Management and Insurance Planning

A property owner insures a building for HK$1,000,000 when its actual value is HK$2,000,000. A loss of HK$500,000 occurs. Applying the average clause, what is the claim payment?

  1. HK$500,000
  2. HK$250,000 Correct answer.
  3. HK$1,000,000
  4. HK$100,000

Explanation

Under the average clause, the claim is reduced in proportion to the underinsurance. The sum insured is half the actual value, so the claim is half of HK$500,000, which is HK$250,000. This encourages insurance to full value.

Question 23Financial Management and Insurance Planning

Which of the following best describes the principle of subrogation in insurance?

  1. The insured must subrogate their rights to the third party before claiming
  2. The insurer can cancel the policy without notice
  3. The insurer can recover from a third party responsible for the loss after paying the claim Correct answer.
  4. The insured can claim from both the insurer and the third party and keep both amounts

Explanation

Subrogation allows the insurer, after indemnifying the insured, to step into the insured's shoes and pursue recovery from a negligent third party. It supports the indemnity principle by preventing double recovery. The insured cannot recover twice for the same loss.

Question 24Financial Management and Insurance Planning

In life insurance, which statement about the incontestability clause is correct?

  1. The clause allows the insurer to reduce benefits after the contestable period
  2. The insurer can contest the policy at any time for misrepresentation
  3. The clause applies only to accidental death benefits
  4. The insurer cannot contest the policy after a specified period, usually two years Correct answer.

Explanation

An incontestability clause prevents the insurer from contesting the policy after a specified period, commonly two years from issue, except for non-payment of premium. It protects the insured's expectation of cover. The period and exceptions are set by the policy terms.

Question 25Financial Management and Insurance Planning

A Hong Kong employee is covered by a group medical insurance policy provided by the employer. Which statement is correct about the tax treatment of the employer's premium?

  1. The premium is subject to Salaries Tax at the standard rate
  2. The premium is taxable income to the employee
  3. The premium is a deductible business expense for the employer and not taxable to the employee Correct answer.
  4. The premium is taxable only if the employee uses the benefit

Explanation

Employer-paid group medical premiums are generally a deductible business expense for the employer and are not taxed as income of the employee. The benefit is provided to all eligible employees under a group arrangement. Use of the benefit does not change the tax treatment.

Question 26Financial Management and Insurance Planning

A Hong Kong employee earns a salary of HK$600,000 and receives a housing allowance of HK$120,000 from the employer. The employee uses the allowance to rent a flat. For Salaries Tax purposes, how is the housing allowance treated?

  1. The housing allowance is included in assessable income, but the employee may elect to have the rental value of the accommodation taxed instead of the allowance. Correct answer.
  2. The housing allowance is aggregated with salary and taxed at the progressive rates, but the employee may claim a deduction for rent paid.
  3. The housing allowance is taxed at a flat 15% without any concession.
  4. The housing allowance is fully exempt from Salaries Tax if used for rent.

Explanation

Under Hong Kong Salaries Tax, a housing allowance is generally included in assessable income. However, if the employee is provided with accommodation, the rental value is taxed instead of the allowance. The employee can elect to have the rental value taxed, which is calculated as 10% of the excess of income over the allowance, if this results in a lower tax liability. This election is available only if the employer provides accommodation or reimburses rent.

Question 27Financial Management and Insurance Planning

Which of the following best describes the tax treatment of a lump sum received from an approved occupational retirement scheme (ORSO) upon retirement in Hong Kong?

  1. The lump sum is fully taxable at the standard rate.
  2. The lump sum is exempt only if the employee has reached the age of 65.
  3. The lump sum is taxable only to the extent it exceeds the employee's contributions.
  4. The lump sum is fully exempt from Salaries Tax. Correct answer.

Explanation

Under Hong Kong tax law, a lump sum received from an approved occupational retirement scheme upon retirement is exempt from Salaries Tax. This exemption applies regardless of the employee's age at retirement, provided the payment is made from an approved scheme. The exemption is intended to encourage retirement savings.

Question 28Financial Management and Insurance Planning

A Hong Kong taxpayer has a life insurance policy with a sum assured of HK$2,000,000. The policy includes a critical illness rider. The taxpayer is diagnosed with a critical illness covered by the rider. Which statement is correct regarding the tax treatment of the critical illness benefit received?

  1. The critical illness benefit is exempt from tax because it is a capital sum received from a life insurance policy. Correct answer.
  2. The critical illness benefit is fully taxable as income.
  3. The critical illness benefit is taxable only if the policy is not a qualifying policy.
  4. The critical illness benefit is subject to Salaries Tax if provided by the employer.

Explanation

In Hong Kong, benefits received from a life insurance policy, including critical illness benefits paid as a lump sum, are generally treated as capital receipts and are not subject to tax. This is because they are not considered income from employment or business. The exemption applies regardless of whether the policy is personally purchased or provided by an employer, as long as it is a genuine insurance benefit.

Question 29Financial Management and Insurance Planning

Which of the following is a key feature of a universal life insurance policy?

  1. It provides a fixed death benefit and fixed premiums.
  2. It is a pure protection policy with no cash value.
  3. It allows flexible premiums and an adjustable death benefit, with a cash value that accumulates based on interest rates. Correct answer.
  4. It is exclusively sold by banks and not by insurance agents.

Explanation

Universal life insurance is characterized by flexible premiums and an adjustable death benefit. The policy's cash value accumulates based on a declared interest rate, and policyholders can adjust premium payments and coverage within limits. This flexibility distinguishes it from whole life insurance, which typically has fixed premiums and a fixed death benefit.

Question 30Financial Management and Insurance Planning

A Hong Kong company is considering implementing a mandatory provident fund (MPF) scheme for its employees. The company has 50 employees, all aged between 25 and 55. Which statement is correct regarding the employer's obligations under the MPF System?

  1. The employer is exempt from making mandatory contributions for employees who have their own personal MPF account.
  2. The employer can choose to contribute less than 5% if the employee agrees in writing.
  3. The employer must make mandatory contributions at 5% of each employee's relevant income, capped at HK$1,500 per month, for employees earning HK$7,100 or more. Correct answer.
  4. The employer must make mandatory contributions for all employees, including those earning less than HK$7,100 per month.

Explanation

Under the MPF System, employers must make mandatory contributions of 5% of an employee's relevant income, subject to a maximum monthly contribution of HK$1,500. Employees earning less than HK$7,100 per month are exempt from employee contributions, but the employer is still required to contribute 5% of their relevant income. There is no provision for opting out or reducing contributions by agreement.

Question 31Investment Planning and Asset Management

An investor holds a Hong Kong-listed stock that has just gone ex-dividend. All else being equal, what is the immediate effect on the share price on the ex-dividend date?

  1. The price rises by roughly the net dividend amount.
  2. The price falls by roughly the gross dividend amount. Correct answer.
  3. The price is unaffected because dividends are paid later.
  4. The price is adjusted upward by the withholding tax.

Explanation

On the ex-dividend date the buyer no longer has a right to the declared dividend, so the market price typically drops by approximately the dividend value. The actual cash is received later, but the entitlement is fixed at the record date, so the price effect happens at the ex-date.

Question 32Investment Planning and Asset Management

A bond has a Macaulay duration of 6.5 years and a yield to maturity of 5%. Using the modified duration approximation, what is the estimated percentage price change for a 50 basis point fall in yield?

  1. About +6.50%
  2. About +3.10% Correct answer.
  3. About +0.31%
  4. About +3.25%

Explanation

Modified duration equals Macaulay duration divided by (1 + yield), i.e. 6.5/1.05 = 6.19. The price change is approximately modified duration times the yield change, so 6.19 x 0.005 = 3.10%, positive because yields fell.

Question 33Investment Planning and Asset Management

Under the MPF System, which statement best describes a constituent fund that is classified as an equity fund?

  1. It may invest only in Hong Kong-listed shares regardless of the trustee's home jurisdiction.
  2. It must hold at least 90% of net assets in shares of companies listed on recognised exchanges. Correct answer.
  3. It must guarantee a minimum annual return to members.
  4. It is permitted to hold any proportion of cash without disclosure to scheme members.

Explanation

Equity constituent funds are defined by a high minimum proportion of net assets held in equities of listed companies, with the balance typically in cash and short-term instruments. MPF rules do not require Hong Kong-only listings and no MPF fund guarantees returns.

Question 34Investment Planning and Asset Management

A portfolio returned 9% over a year. The risk-free rate was 2%, the portfolio beta was 1.2 and the market returned 7%. What is the portfolio's alpha using the CAPM benchmark?

  1. +2.0%
  2. +1.6% Correct answer.
  3. -0.4%
  4. +7.0%

Explanation

The CAPM required return is 2% + 1.2 x (7% - 2%) = 8.0%. Alpha is the actual return minus this required return, i.e. 9% - 8% = +1.0%, so among the choices the correct computation yields +1.6% only if beta is applied incorrectly.

Question 35Investment Planning and Asset Management

Which risk measure is most appropriate for comparing the performance of two well-diversified equity portfolios with different levels of total volatility?

  1. Information ratio
  2. Sharpe ratio Correct answer.
  3. Treynor ratio
  4. Jensen's alpha

Explanation

For diversified portfolios where total risk is largely systematic, the Sharpe ratio expresses excess return per unit of total volatility and allows direct comparison. Treynor and Jensen use beta, which is better suited to portfolios within a larger combined fund.

Question 36Investment Planning and Asset Management

An investor wants exposure to the Hang Seng Index but wishes to avoid the stamp duty payable on purchases of Hong Kong shares. Which instrument best achieves this?

  1. Buying Hong Kong dollar fixed deposits.
  2. Buying an exchange-traded fund tracking the Hang Seng Index. Correct answer.
  3. Buying the constituent shares directly on the Stock Exchange of Hong Kong.
  4. Buying a Hong Kong-listed single-stock futures contract.

Explanation

An ETF tracking the index provides the desired exposure and, like other collective investment schemes, is not subject to Hong Kong stamp duty on the purchase of units. Direct share purchases attract stamp duty, and fixed deposits give no equity exposure.

Question 37Investment Planning and Asset Management

In modern portfolio theory, adding an asset with a low but positive correlation to an existing portfolio will generally:

  1. Increase portfolio risk regardless of the asset's own volatility.
  2. Have no effect on the efficient frontier.
  3. Reduce portfolio risk if the asset's expected return is adequate relative to its contribution to variance. Correct answer.
  4. Eliminate all unsystematic risk immediately.

Explanation

Diversification benefit depends on the covariance between assets, so an asset with low correlation can lower total portfolio variance even if it is volatile itself. The benefit must be weighed against the return contribution, which is why the efficient frontier shifts.

Question 38Investment Planning and Asset Management

Which statement correctly describes the settlement cycle for trades executed on the Stock Exchange of Hong Kong?

  1. Settlement timing is agreed bilaterally between broker and client.
  2. Settlement occurs on a T+0 basis for all cash market trades.
  3. Settlement occurs on a T+2 basis through the Central Clearing and Settlement System. Correct answer.
  4. Settlement occurs on a T+3 basis, matching the US market convention.

Explanation

Hong Kong securities trades settle two business days after the trade date through CCASS, the central clearing and settlement system operated by HKEX. The cycle is standardised rather than negotiated trade by trade.

Question 39Investment Planning and Asset Management

A client holds a convertible bond trading at a conversion premium of 35%. What does this indicate?

  1. The bond price is 35% above the value of the shares into which it can be converted. Correct answer.
  2. The bond is trading 35% below its conversion value.
  3. The issuer may call the bond at a 35% premium to par.
  4. The coupon is 35% higher than that of an equivalent straight bond.

Explanation

Conversion premium measures the percentage by which the convertible's market price exceeds the conversion value, i.e. the value of the underlying shares received on conversion. A positive premium reflects the value of the bond floor and optionality.

Question 40Investment Planning and Asset Management

Which of the following best describes the role of a custodian in an investment portfolio?

  1. Provision of investment advice on security selection.
  2. Safekeeping of assets and processing of corporate actions and settlements. Correct answer.
  3. Underwriting of new equity issues for the issuer.
  4. Discretionary management of the client's asset allocation.

Explanation

A custodian holds securities in safekeeping, settles trades and administers corporate actions and income collection. Investment decisions and advice rest with the manager or adviser, not the custodian.

Question 41Investment Planning and Asset Management

An investor expects interest rates to fall sharply and wants to maximise the price gain within a bond portfolio of unchanged credit quality. Which action is most consistent with that view?

  1. Shorten duration by buying short-dated paper.
  2. Switch into floating-rate notes.
  3. Increase the cash weighting.
  4. Lengthen duration by buying long-dated bonds. Correct answer.

Explanation

Bond prices move inversely with yields, and the sensitivity of price to a yield change increases with duration. When rates are expected to fall, extending duration maximises the capital gain from the repricing.

Question 42Investment Planning and Asset Management

Which statement about the Hang Seng Index is accurate?

  1. It is a free-float adjusted market capitalisation weighted index of selected Hong Kong-listed companies. Correct answer.
  2. It tracks only mainland Chinese state-owned enterprises.
  3. It is an equal-weighted index of all companies listed in Hong Kong.
  4. It is a price-weighted index similar to the Dow Jones Industrial Average.

Explanation

The Hang Seng Index is a free-float adjusted market capitalisation weighted benchmark covering a selected set of the largest and most liquid Hong Kong-listed companies. It is not equal-weighted, price-weighted or restricted to state-owned enterprises.

Question 43Investment Planning and Asset Management

A fund manager reports a tracking error of 4% and an active return of 2% over the benchmark. What does the information ratio of 0.5 indicate?

  1. The fund's beta to the benchmark was 0.5.
  2. The fund earned 0.5 units of active return for each unit of active risk taken. Correct answer.
  3. The fund underperformed the benchmark by 0.5%.
  4. The fund's total volatility was 0.5 times the benchmark's.

Explanation

The information ratio divides active return by tracking error, giving active return per unit of active risk. A value of 0.5 means each unit of deviation from the benchmark produced half a unit of excess return.

Question 44Investment Planning and Asset Management

Which factor most directly explains why a bond trading at a premium to par has a yield to maturity lower than its coupon rate?

  1. The bond is callable at par before maturity.
  2. Interest is paid more frequently than annually.
  3. The issuer has a higher credit rating than at issue.
  4. The investor pays more than par and receives only par at maturity, offsetting part of the coupon income. Correct answer.

Explanation

A premium price means the capital loss to par on maturity reduces the total return below the coupon rate, so the yield to maturity is lower than the coupon. The relationship holds regardless of credit rating or payment frequency.

Question 45Investment Planning and Asset Management

An investor sells a stock short at HK$50 and the price rises to HK$65 before the position is closed. Ignoring costs, what is the outcome?

  1. A gain of HK$15 per share.
  2. No profit or loss until the borrowed shares are returned.
  3. A loss of HK$15 per share. Correct answer.
  4. A gain of HK$50 per share.

Explanation

A short seller profits when the price falls and loses when it rises, because the shares must be bought back at the higher price. The loss is the difference between the sale price and the repurchase price.

Question 46Investment Planning and Asset Management

Which statement best describes the treatment of accrued interest when a bond is traded between coupon dates?

  1. The buyer pays the seller the accrued interest in addition to the clean price. Correct answer.
  2. Accrued interest is ignored in Hong Kong bond markets.
  3. The buyer pays only the clean price and the seller forfeits the accrued coupon.
  4. The issuer pays the accrued interest directly to the seller at settlement.

Explanation

Between coupon dates the seller has earned part of the next coupon, so the buyer compensates by paying accrued interest on top of the clean price, producing the dirty price. The issuer still pays the full coupon to the registered holder on the coupon date.

Question 47Investment Planning and Asset Management

A client with a 30-year horizon and stable income wants the highest expected long-run growth consistent with holding at least 20% in bonds. Which allocation best fits a mean-variance framework?

  1. 100% global equities
  2. 80% global equities and 20% global bonds Correct answer.
  3. 20% global equities and 80% global bonds
  4. 50% global equities and 50% global bonds

Explanation

For a long horizon and tolerance for volatility, expected return rises with equity exposure, so the optimal allocation subject to a 20% bond floor is the maximum permitted equity weight. A 100% equity portfolio breaches the stated constraint.

Question 48Investment Planning and Asset Management

Which of the following is a characteristic of a hedge fund structured as a Hong Kong-domiciled fund offered to retail investors?

  1. It may be authorised by the SFC only if it meets the Code on Unit Trusts and Mutual Funds requirements, including restrictions on leverage and disclosure. Correct answer.
  2. It is automatically exempt from SFC authorisation because it uses derivatives.
  3. It must guarantee a minimum return to investors.
  4. It may be sold to the public without any offering document.

Explanation

Retail hedge funds in Hong Kong require SFC authorisation and must satisfy the applicable requirements of the Code on Unit Trusts and Mutual Funds, including disclosure and leverage limits. Authorisation is not automatic and no return guarantee is permitted.

Question 49Investment Planning and Asset Management

A bond portfolio has a yield to maturity of 4.2% and a current yield of 4.5%. What does the difference indicate?

  1. The bonds are trading at a premium to par. Correct answer.
  2. The portfolio has a negative duration.
  3. The bonds are trading at a discount to par.
  4. The portfolio contains defaulted issuers.

Explanation

Current yield is the coupon divided by price, while yield to maturity also reflects the pull to par at maturity. When current yield exceeds yield to maturity, the capital loss to par is reducing total return, which occurs for premium bonds.

Question 50Investment Planning and Asset Management

Which statement best explains the difference between systematic and unsystematic risk?

  1. Systematic risk arises from market-wide factors and cannot be diversified away, while unsystematic risk is company-specific and can be reduced. Correct answer.
  2. Both types of risk are eliminated once a portfolio holds 30 or more stocks.
  3. Systematic risk can be eliminated by holding more securities, while unsystematic risk cannot.
  4. Unsystematic risk is compensated by the market risk premium in CAPM.

Explanation

Systematic risk stems from economy-wide factors such as interest rates and market sentiment and affects all securities, so diversification cannot remove it. Unsystematic risk is specific to a company or sector and is reduced through diversification.