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KASNEB CIFA Advanced study materials
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KASNEB CIFA Advanced practice questions

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Question 1Investment Analysis

An investor holds a bond with a modified duration of 6.5. If yields rise by 25 basis points, what is the approximate percentage change in the bond's price?

  1. +1.63%
  2. -1.63% Correct answer.
  3. -6.50%
  4. -0.38%

Explanation

Modified duration approximates the percentage price change for a 1% (100bp) change in yield: %ΔP ≈ −D_mod × Δy. Here −6.5 × 0.0025 = −0.01625, i.e. about −1.63%. Price moves inversely to yield, so the sign must be negative.

Question 2Investment Analysis

Which measure of risk is most appropriate for a diversified equity portfolio where the unsystematic component has been largely eliminated?

  1. Coefficient of variation
  2. Standard deviation of returns
  3. Beta Correct answer.
  4. Range of returns

Explanation

In a well-diversified portfolio only systematic risk remains relevant, and beta measures sensitivity to market movements. Total-variability measures become less meaningful once idiosyncratic risk is diversified away.

Question 3Investment Analysis

A stock is expected to pay a dividend of KES 4.00 next year, the dividend is expected to grow at 5% indefinitely, and investors require a 13% return. Using the Gordon growth model, the intrinsic value is:

  1. KES 50.00 Correct answer.
  2. KES 80.00
  3. KES 30.77
  4. KES 32.00

Explanation

The Gordon model values a share as D1/(r − g). Substituting gives 4.00/(0.13 − 0.05) = 4.00/0.08 = KES 50.00.

Question 4Investment Analysis

A portfolio has an expected return of 15%, the risk-free rate is 6%, and the portfolio's standard deviation is 20%. The Sharpe ratio is closest to:

  1. 1.50
  2. 0.75
  3. 0.45 Correct answer.
  4. 0.30

Explanation

The Sharpe ratio equals the excess return over the risk-free rate divided by standard deviation: (15 − 6)/20 = 0.45. It measures reward per unit of total risk.

Question 5Investment Analysis

Under the capital asset pricing model, a security with a beta of zero has an expected return equal to:

  1. Zero
  2. The market risk premium
  3. The risk-free rate Correct answer.
  4. The market return

Explanation

CAPM states E(R) = Rf + β(E(Rm) − Rf). With β = 0 the second term vanishes, leaving the risk-free rate; the asset carries no systematic risk.

Question 6Investment Analysis

A company has a beta of 1.4, the risk-free rate is 5% and the expected market return is 11%. Using CAPM, the required return on equity is:

  1. 13.4% Correct answer.
  2. 11.0%
  3. 8.4%
  4. 15.4%

Explanation

Required return = 5% + 1.4 × (11% − 5%) = 5% + 8.4% = 13.4%. The market risk premium of 6% is scaled by the beta.

Question 7Investment Analysis

An investor buys a share for KES 50, receives a dividend of KES 2 during the year, and sells for KES 57. The holding period return is:

  1. 18% Correct answer.
  2. 16%
  3. 12%
  4. 14%

Explanation

Holding period return = (ending price − beginning price + income)/beginning price = (57 − 50 + 2)/50 = 9/50 = 18%. Income and capital gain must both be included.

Question 8Investment Analysis

The yield to maturity of a bond is best described as:

  1. The discount rate that equates the present value of all future cash flows to the bond's price Correct answer.
  2. The rate at which the bond's price converges to par at maturity
  3. The coupon rate divided by the current market price
  4. The annual coupon income expressed as a percentage of par value

Explanation

YTM is the internal rate of return on the bond's promised cash flows, found by solving for the rate that makes their present value equal the observed price. It assumes coupons are reinvested at that same rate to maturity.

Question 9Investment Analysis

A firm has an expected dividend payout ratio of 40% and a return on equity of 15%. Using the sustainable growth approximation, its expected dividend growth rate is:

  1. 6.0%
  2. 2.5%
  3. 9.0% Correct answer.
  4. 15.0%

Explanation

Growth = retention ratio × ROE = (1 − 0.40) × 15% = 0.60 × 15% = 9%. The retention ratio is the proportion of earnings reinvested.

Question 10Investment Analysis

Which statement about the security market line is correct?

  1. It plots expected return against standard deviation for efficient portfolios
  2. It plots expected return against beta and has a slope equal to the market risk premium Correct answer.
  3. It applies only to portfolios and not to individual securities
  4. It is identical in slope to the capital market line

Explanation

The SML graphs the CAPM relationship, with beta on the horizontal axis, the risk-free rate as intercept and the market risk premium as slope. Individual securities and portfolios both plot on it in equilibrium.

Question 11Investment Analysis

In an efficient market where semi-strong form efficiency holds, which strategy is most likely to generate abnormal returns?

  1. Trading on publicly released financial statements
  2. Trading on private information not yet made public Correct answer.
  3. Trading on published analyst recommendations
  4. Trading on past price patterns

Explanation

Semi-strong efficiency implies prices rapidly absorb all publicly available information, so only information that is not public can yield abnormal profits. That is the definition of the strong-form test.

Question 12Investment Analysis

A portfolio consists of 60% invested in Asset X with an expected return of 10% and 40% in Asset Y with an expected return of 20%. The portfolio's expected return is:

  1. 12%
  2. 15%
  3. 14% Correct answer.
  4. 16%

Explanation

Portfolio expected return is the weighted average: 0.6 × 10% + 0.4 × 20% = 6% + 8% = 14%. No covariance term enters the expected return calculation.

Question 13Investment Analysis

Adding a security with a low correlation to an existing portfolio will most likely:

  1. Have no effect on portfolio risk if the new asset has high volatility
  2. Increase portfolio risk proportionally to the new asset's volatility
  3. Eliminate all portfolio risk if correlation is below zero
  4. Reduce portfolio risk below the weighted average of component risks Correct answer.

Explanation

Diversification benefit arises from imperfect correlation, which makes portfolio standard deviation less than the weighted average of individual standard deviations. The lower the correlation, the larger the benefit.

Question 14Investment Analysis

A Treasury bill with 91 days to maturity is quoted at a discount rate of 10%. The actual price per KES 100 of face value using the discount basis is closest to:

  1. KES 97.53
  2. KES 97.47 Correct answer.
  3. KES 90.00
  4. KES 92.50

Explanation

Discount-basis pricing gives price = face value × (1 − discount rate × days/360) = 100 × (1 − 0.10 × 91/360) = 100 × 0.97472 ≈ 97.47. The discount rate is applied to face value, not to price.

Question 15Investment Analysis

The intrinsic value of a call option at expiry equals:

  1. The strike price minus the share price
  2. The greater of zero and the share price minus the strike price Correct answer.
  3. The share price plus the strike price
  4. The option premium paid

Explanation

A call gives the right to buy at the strike, so it is worth the excess of the underlying price over the strike, floored at zero. Time value disappears at expiry, leaving intrinsic value only.

Question 16Investment Analysis

An investor expects interest rates to fall sharply. To profit from this view on a bond portfolio, the most appropriate action is to:

  1. Shorten portfolio duration
  2. Lengthen portfolio duration Correct answer.
  3. Shift into floating-rate notes
  4. Hold cash until rates stabilise

Explanation

Bond prices move inversely to yields and longer duration magnifies that price response. Extending duration positions the portfolio to gain the most from a rate decline.

Question 17Investment Analysis

A bond trading at a premium to par has a yield to maturity that is:

  1. Unrelated to its coupon rate
  2. Equal to its coupon rate
  3. Lower than its coupon rate Correct answer.
  4. Higher than its coupon rate

Explanation

When price exceeds par, the yield must be below the coupon so that the investor's total return reflects the capital loss to redemption. Coupon, current yield and YTM coincide only at par.

Question 18Investment Analysis

The weighted average cost of capital is best used as the discount rate for:

  1. Projects with above-average risk
  2. Equity-financed projects only
  3. All projects regardless of risk
  4. Projects whose risk is similar to the firm's existing business Correct answer.

Explanation

WACC reflects the firm's overall risk profile and financing mix, so it is appropriate for marginal projects of comparable risk. Different-risk projects require an adjusted discount rate.

Question 19Investment Analysis

A share currently trades at KES 40 and the company declares a 25% stock dividend. Immediately after the issue, the theoretical share price is closest to:

  1. KES 50.00
  2. KES 32.00 Correct answer.
  3. KES 30.00
  4. KES 40.00

Explanation

A 25% stock dividend raises the share count by a factor of 1.25 while total market value is unchanged, so price falls to 40/1.25 = KES 32.00. No wealth is created by the issue itself.

Question 20Investment Analysis

Which of the following is a characteristic of preferred stock relative to ordinary shares?

  1. Preferred dividends are a legal obligation of the issuer
  2. Preferred shares typically carry a fixed dividend and priority over ordinary dividends Correct answer.
  3. Preferred dividends grow with company earnings
  4. Preferred shareholders normally hold voting control of the company

Explanation

Preferred shares usually pay a stated dividend that must be met before ordinary dividends and rank ahead of ordinary equity on liquidation. They generally carry no obligation to pay and limited voting rights.

Question 21Investment Analysis

A portfolio manager achieved a return of 18% when the market returned 12%. The risk-free rate is 5% and the portfolio beta is 1.2. The portfolio's alpha is:

  1. 6.0%
  2. 4.6% Correct answer.
  3. 2.4%
  4. 13.4%

Explanation

CAPM required return is 5% + 1.2 × (12% - 5%) = 13.4%. Jensen’s alpha is actual return minus that risk-adjusted benchmark: 18% - 13.4% = 4.6%.

Question 22Investment Analysis

The main purpose of a stock market index is to:

  1. Provide a single measure of the aggregate price movement of a selected group of shares Correct answer.
  2. Set the maximum price at which shares may trade
  3. Determine the dividend policy of listed firms
  4. Guarantee a minimum return to index investors

Explanation

An index aggregates the prices of a defined basket of securities into a single series that tracks overall market direction. It also serves as a benchmark and as the underlying for derivative contracts.

Question 23Investment Analysis

An investor expects the Shilling to depreciate against the US dollar. To benefit, the investor should:

  1. Purchase a forward contract to sell dollars
  2. Invest in domestic fixed deposits yielding the local rate
  3. Sell all foreign currency holdings for shillings
  4. Hold assets denominated in the foreign currency Correct answer.

Explanation

If the shilling falls, the shilling value of dollar-denominated assets rises, so holding foreign-currency assets preserves and increases local-currency wealth. A forward sale of dollars locks in the weaker future value.

Question 24Investment Analysis

Which of the following best describes the relationship between risk and return in modern portfolio theory?

  1. Risk can be eliminated entirely through diversification
  2. Expected return is independent of the risk taken
  3. Risk and expected return are inversely related
  4. Higher expected returns are available only by accepting higher risk Correct answer.

Explanation

Modern portfolio theory assumes investors are risk-averse, so they demand higher expected returns as compensation for bearing additional risk. Only unsystematic risk can be diversified away; systematic risk remains.

Question 25Investment Analysis

A company's earnings per share are expected to be KES 12 next year and comparable firms trade at a price-earnings multiple of 9. The estimated value per share using the P/E multiplier approach is:

  1. KES 21
  2. KES 12
  3. KES 90
  4. KES 108 Correct answer.

Explanation

The multiplier approach values the share as expected EPS × P/E ratio = 12 × 9 = KES 108. The multiple is applied to anticipated earnings, not historical ones.

Question 26Investment Analysis

An investor expects to receive KES 15,000 at the end of every year indefinitely. If the required rate of return is 12% per year, the present value of this stream is closest to:

  1. KES 13,393
  2. KES 132,000
  3. KES 180,000
  4. KES 125,000 Correct answer.

Explanation

The cash flows form a perpetuity, and the present value of a perpetuity is the annual cash flow divided by the discount rate. Here KES 15,000 divided by 0.12 equals KES 125,000.

Question 27Investment Analysis

A project has a positive net present value when its cash flows are discounted at the firm's required rate of return. The most appropriate decision is to:

  1. accept the project because it adds value for shareholders Correct answer.
  2. reject the project because it has not yet recovered its initial outlay
  3. accept the project only if its payback period is shorter than its life
  4. reject the project because its internal rate of return is below the required rate

Explanation

A positive NPV means the present value of the inflows exceeds the initial outlay, so shareholder wealth increases. The decision rule is therefore to accept the project.

Question 28Investment Analysis

An investment returned 10%, -5% and 15% over three consecutive years. The geometric mean annual return is closest to:

  1. 5.00%
  2. 6.67%
  3. 6.32% Correct answer.
  4. 7.50%

Explanation

The geometric mean compounds the annual growth factors: 1.10 x 0.95 x 1.15 = 1.20175. Taking the cube root gives about 1.0632, so the annual return is approximately 6.32%.

Question 29Investment Analysis

Which of the following bonds will most likely have the longest duration?

  1. A 30-year bond with a 10% coupon
  2. A 5-year zero-coupon bond
  3. A 30-year zero-coupon bond Correct answer.
  4. A 10-year bond with a 6% coupon

Explanation

Duration rises with maturity and falls as the coupon increases, because earlier cash flows reduce the average waiting time. A zero-coupon bond pays nothing before maturity, so its duration equals its maturity of 30 years.

Question 30Investment Analysis

For a given change in yield to maturity, the percentage change in a bond's price will be larger when the bond's:

  1. credit rating is higher
  2. duration is higher Correct answer.
  3. maturity is shorter
  4. coupon is higher

Explanation

Price sensitivity to yield changes is proportional to duration. Higher duration means a larger percentage price movement for the same shift in yield.

Question 31Investment Analysis

The nominal rate of return on an investment is 9% and the inflation rate is 3%. The real rate of return is closest to:

  1. 6.0%
  2. 3.0%
  3. 12.0%
  4. 5.8% Correct answer.

Explanation

The Fisher relation gives the real rate as (1 + nominal)/(1 + inflation) minus 1. Computing 1.09/1.03 - 1 gives approximately 5.8%.

Question 32Investment Analysis

Which risk is most likely to be eliminated by holding a diversified portfolio of shares?

  1. The risk that a recession reduces all corporate earnings
  2. The risk that inflation accelerates unexpectedly
  3. The risk that a single company's new product fails Correct answer.
  4. The risk that interest rates rise across the whole economy

Explanation

Company-specific or unsystematic risk can be diversified away because its effects are offset across many holdings. Market-wide risks such as interest rates, recessions and inflation affect all shares and remain.

Question 33Investment Analysis

A share has a beta of 0.6. This share is best described as:

  1. Having an expected return equal to the risk-free rate
  2. Being less volatile than the market Correct answer.
  3. Having the same systematic risk as the market
  4. Being more volatile than the market

Explanation

Beta measures sensitivity to market movements, and a value below 1 indicates less systematic risk than the market. The share is expected to move less than the market and to earn a smaller risk premium.

Question 34Investment Analysis

Two assets are combined in a portfolio and their returns are perfectly negatively correlated. With appropriate weights, the portfolio will most likely:

  1. have risk equal to the weighted average of the two assets' risks
  2. have zero risk Correct answer.
  3. have risk greater than the risk of either asset
  4. have the same risk as the riskier asset

Explanation

With a correlation of -1, the returns offset each other, and there are weights at which the portfolio standard deviation falls to zero. This is the maximum possible diversification benefit.

Question 35Investment Analysis

Which statement best distinguishes the capital market line (CML) from the security market line (SML)?

  1. The CML is curved, while the SML is a straight line
  2. The CML uses standard deviation, while the SML uses beta Correct answer.
  3. The CML uses beta, while the SML uses standard deviation
  4. The CML applies to individual shares, while the SML applies to portfolios

Explanation

The CML plots expected return against total risk as measured by standard deviation for efficient portfolios. The SML plots expected return against systematic risk as measured by beta and applies to individual assets as well as portfolios.

Question 36Investment Analysis

A portfolio earned a return of 14% with a standard deviation of 16%. The risk-free rate is 6%. The Sharpe ratio is closest to:

  1. 0.38
  2. 1.25
  3. 0.88
  4. 0.50 Correct answer.

Explanation

The Sharpe ratio is the excess return over the risk-free rate divided by the standard deviation. Computing (14% - 6%) divided by 16% gives 0.50.

Question 37Investment Analysis

Jensen's alpha measures:

  1. The return per unit of total risk taken
  2. The raw return minus the market return
  3. The return above that predicted by the CAPM Correct answer.
  4. The return per unit of systematic risk taken

Explanation

Jensen's alpha is the difference between a portfolio's actual return and the return required for its beta under the CAPM. A positive alpha indicates superior risk-adjusted performance.

Question 38Investment Analysis

In a market that is weak-form efficient, which statement is correct?

  1. Past price data cannot yield consistent abnormal returns Correct answer.
  2. Fundamental analysis cannot yield abnormal returns
  3. All shares must earn the same expected return
  4. Private information cannot yield abnormal returns

Explanation

Weak-form efficiency means current prices already reflect all historical price and volume information. Trading rules based only on past prices therefore cannot produce consistent abnormal returns.

Question 39Investment Analysis

A preference share pays a fixed annual dividend of KES 8 indefinitely. Investors require a return of 10%. The value of the share is closest to:

  1. KES 72
  2. KES 80 Correct answer.
  3. KES 88
  4. KES 8

Explanation

A perpetual fixed dividend is valued as a perpetuity, that is, the dividend divided by the required return. KES 8 divided by 0.10 equals KES 80.

Question 40Investment Analysis

A company has just paid a dividend of KES 4 per share. Dividends are expected to grow at 5% per year indefinitely and investors require 13%. The value of the share is closest to:

  1. KES 32.31
  2. KES 50.00
  3. KES 52.50 Correct answer.
  4. KES 40.00

Explanation

The Gordon growth model values the share as next year's dividend divided by the required return minus growth. Next year's dividend is 4 x 1.05 = 4.20, and 4.20 divided by 0.08 equals 52.50.

Question 41Investment Analysis

A European call and a European put have the same underlying share, strike price and expiry. According to put-call parity, the call price minus the put price equals:

  1. Strike price less the share price
  2. Zero at all times
  3. Share price less the present value of the strike Correct answer.
  4. Present value of the strike less the share price

Explanation

Put-call parity states that the call plus the present value of the strike equals the put plus the share price. Rearranging gives the call minus the put as the share price minus the present value of the strike.

Question 42Investment Analysis

The time value component of an option premium is generally greatest when the option is:

  1. at the money with a long time to expiry Correct answer.
  2. deep out of the money with a short time to expiry
  3. deep in the money with a short time to expiry
  4. at the money with one day to expiry

Explanation

Time value reflects the chance that the option will become more valuable before expiry, and uncertainty is greatest when the option is at the money. A long time to expiry increases that chance.

Question 43Investment Analysis

An investor who owns a share and writes a call option on that share has:

  1. doubled the downside risk of holding the share
  2. unlimited upside potential
  3. limited upside and receives premium income Correct answer.
  4. created the same payoff as buying a put

Explanation

Writing a call against a held share creates a covered call, which generates premium income but caps gains at the strike price. Downside risk remains that of the share, reduced by the premium received.

Question 44Investment Analysis

In futures markets, marking to market means that:

  1. the futures price is fixed for the life of the contract
  2. the contract can only be settled at expiry
  3. gains and losses are settled in cash daily Correct answer.
  4. the initial margin is returned to the trader each day

Explanation

Futures contracts are marked to market daily, meaning the profit or loss since the previous day is credited to or debited from the margin account. This reduces counterparty credit risk.

Question 45Investment Analysis

A price-weighted share index is most influenced by:

  1. a large percentage change in a high-priced share Correct answer.
  2. a large percentage change in a low-priced constituent
  3. the total market value of the constituent companies
  4. the number of shares outstanding of each company

Explanation

In a price-weighted index, each constituent is weighted by its price, so high-priced shares dominate movements. A given percentage change in a high-priced share therefore moves the index more than the same change in a low-priced share.

Question 46Investment Analysis

A unit trust has assets of KES 500 million and liabilities of KES 20 million. It has 24 million units outstanding. The net asset value per unit is closest to:

  1. KES 20.00 Correct answer.
  2. KES 21.00
  3. KES 20.83
  4. KES 19.17

Explanation

Net asset value equals assets minus liabilities, divided by units outstanding. Computing (500 - 20) divided by 24 gives 20.00.

Question 47Investment Analysis

Investors who feel the pain of a loss more strongly than the pleasure of an equivalent gain are displaying:

  1. loss aversion Correct answer.
  2. anchoring
  3. overconfidence
  4. herding

Explanation

Loss aversion is the tendency to weight losses more heavily than gains of the same size. It can lead investors to hold losing positions too long or sell winners too early.

Question 48Investment Analysis

The one-year interest rate is 10% in Kenya and 2% in the United States. According to interest rate parity, the one-year forward rate for the US dollar against the Kenyan shilling should show the dollar at:

  1. a forward premium reflecting the interest differential Correct answer.
  2. a forward premium equal to the inflation differential only
  3. no change, because forward rates ignore interest rates
  4. a forward discount reflecting the interest differential

Explanation

Interest rate parity links the forward premium or discount to the interest rate differential between the two currencies. The currency of the country with the lower interest rate trades at a forward premium.

Question 49Investment Analysis

A property generates net operating income of KES 1.2 million per year. Comparable properties are valued at a capitalization rate of 8%. The estimated market value is closest to:

  1. KES 1.2 million
  2. KES 12.0 million
  3. KES 15.0 million Correct answer.
  4. KES 9.6 million

Explanation

The capitalisation approach values the property as net operating income divided by the capitalisation rate. Computing 1.2 million divided by 0.08 gives 15.0 million.

Question 50Investment Analysis

The time-weighted rate of return is preferred for evaluating a portfolio manager because it:

  1. is simpler to calculate than the money-weighted return
  2. reflects the actual money earned by the investor
  3. ignores the level of risk taken by the manager
  4. removes the effect of investor cash flow timing Correct answer.

Explanation

The time-weighted return measures the compound growth of a unit of money and neutralises the effect of deposits and withdrawals. This isolates the manager's investment decisions from investor-driven cash flows.