Managed funds, also known as collective investment schemes, operate on the principle of pooling capital from numerous investors who share similar financial goals. This aggregated capital is then managed by a professional fund manager. A defining characteristic of this arrangement is that the investment management is discretionary, meaning the investor delegates the day-to-day decisions of buying and selling assets to the fund manager. The manager makes these decisions in accordance with the fund’s stated investment objective and strategy. This contrasts with direct investing, where the investor maintains full control over every transaction. While regulatory frameworks like the SFC’s Code on Unit Trusts and Mutual Funds establish standards for authorisation and operation to protect investors, they do not insulate the investment from inherent market risks or guarantee returns. The value of an investment in a managed fund is subject to market fluctuations.

This question assesses the candidate’s ability to distinguish between different types of financial risk, particularly systemic and systematic risk. Systemic risk refers to the risk of a widespread collapse of an entire financial system or market, as opposed to the risk associated with any one individual entity, group or component of a system. It is often characterized by a ‘domino effect’ or contagion, where the failure of one large, interconnected institution triggers a cascade of failures throughout the system. This is distinct from systematic risk (or market risk), which is the inherent risk associated with the entire market or market segment. Systematic risk is undiversifiable and is measured by beta in the Capital Asset Pricing Model (CAPM). It describes the volatility of an asset or portfolio in relation to the overall market, not the risk of the system’s collapse. Unsystematic risk is specific to a company or industry and can be mitigated through diversification. Concentration risk arises from excessive exposure to a single counterparty, sector, or asset class, which could be a trigger for a larger event, but the risk described in the scenario is the resulting system-wide failure itself.

Statement I is correct. A mature, profitable utility company is more likely to distribute a portion of its earnings as dividends compared to a high-growth startup that typically reinvests all profits for expansion. Therefore, the utility stock would likely have a higher dividend yield, aligning with an income-seeking investor’s objective. Statement II is correct. Specific risk, a key component of unsystematic risk, pertains to factors unique to a particular company or industry. Concentrating a portfolio in a single, speculative stock like a tech startup exposes the investor to a high degree of this risk, which can be mitigated through diversification. Statement III is correct. Systematic risk, also known as market risk, stems from broad market factors like interest rate changes, economic recessions, or geopolitical events. This type of risk affects all securities in the market and cannot be eliminated by diversifying a portfolio with different stocks. Statement IV is incorrect. While equities are generally more liquid and divisible than direct property investments, this does not eliminate market risk. Liquidity refers to the ease of buying or selling an asset without significantly affecting its price. Market risk (systematic risk) is inherent to the asset class and is related to overall market movements, irrespective of the asset’s liquidity. Therefore, statements I, II and III are correct.

A Responsible Officer of a Type 9 licensed corporation has a fiduciary duty to act with due skill, care, and diligence in the best interests of the fund and its investors, as stipulated by the Fund Manager Code of Conduct (FMCC). When asset modelling indicates a high probability of failing to meet a key investment objective (the 5% p.a. return), the manager must take proactive steps. Statement I is a prudent action; aligning the fund’s stated objectives with realistic, model-based expectations ensures that marketing materials and offering documents are not misleading. Statement II is also a valid strategic response; the fund manager can adjust the underlying asset mix to target higher returns, although this would require a careful re-assessment of the risk profile and its potential impact on the capital protection objective. Statement III is incorrect because a passive strategy is not an automatic solution; the core issue is the current asset allocation’s expected return, not necessarily the management style. A passive strategy tracking a benchmark with a similar low expected return would not solve the problem. Statement IV represents a failure of professional diligence; a 95% confidence interval is a standard statistical measure of potential outcomes and must be taken seriously in risk management and strategic planning. Ignoring it would be irresponsible. Therefore, statements I and II are correct.

The Securities and Futures Ordinance (SFO) provides a specific definition for the regulated activity of ‘asset management’. This definition encompasses two main areas: the management of portfolios consisting of securities and/or futures contracts, and the management of real estate investment schemes. When a firm or individual manages a client’s portfolio of financial instruments on a discretionary basis, this action falls directly under the SFO’s definition and requires a Type 9 (Asset Management) licence from the Securities and Futures Commission (SFC). In contrast, providing advice on the direct acquisition of physical real estate does not, by itself, constitute ‘asset management’ under the SFO. The regulated activity related to property is specifically about managing a ‘real estate investment scheme’ (e.g., a REIT), which is a collective investment vehicle, not advising on the purchase of individual properties by a client for their own direct ownership. Therefore, it is crucial to distinguish between managing a collective scheme and providing advice on direct asset purchases.

To determine the valuation of each company, one must first calculate the expected Price-to-Book (P/B) ratio using the provided regression model for each company’s given Return on Equity (ROE). The formula is: Expected P/B = 1.1 + (12.5 × ROE). For InnovateTech Ltd., with an ROE of 16% (or 0.16), the expected P/B is 1.1 + (12.5 × 0.16) = 1.1 + 2.0 = 3.1. Since its actual P/B of 3.5 is higher than the expected P/B of 3.1, the stock is considered overvalued relative to its peers in the sector. For Quantum Solutions Inc., with an ROE of 20% (or 0.20), the expected P/B is 1.1 + (12.5 × 0.20) = 1.1 + 2.5 = 3.6. Since its actual P/B of 3.2 is lower than the expected P/B of 3.6, the stock is considered undervalued. This P/B-ROE model is a tool used in fundamental analysis to identify potential mispricing based on the relationship between profitability (ROE) and market valuation (P/B).

A licensed representative must consider all relevant client circumstances when providing investment advice, as mandated by the SFC’s Code of Conduct. Statement I is correct because the client’s religious beliefs are a unique preference that must be respected, making Sharia-compliant investments a suitable consideration. Statement II is correct as the client, being a director of a listed company, is subject to legal restrictions such as the Model Code for Securities Transactions by Directors of Listed Issuers (Appendix 10 of the Listing Rules), which includes blackout periods around results announcements. Statement III is incorrect; a five-year investment horizon is generally considered medium-term, not long-term. A high-risk strategy is likely unsuitable for a client nearing retirement who may need to preserve capital. Statement IV is incorrect because Hong Kong does not impose a capital gains tax on the disposal of securities for the vast majority of investors. Therefore, statements I and II are correct.

Statement I is correct because the returns of a sunglasses company and a rain gear company are expected to be negatively correlated; one performs well in sunny weather while the other performs well in rainy weather. Combining them reduces weather-dependent risk. Statement II is also correct. The fundamental principle of diversification is that risk reduction benefits (i.e., portfolio standard deviation being less than the weighted average of individual asset standard deviations) are realized as long as the correlation coefficient is less than perfect positive correlation (+1). Statement III is incorrect; a correlation coefficient of 0 indicates that the assets’ returns are independent, which provides significant diversification benefits. The risk is reduced because the assets do not move in tandem. Statement IV is incorrect because a correlation coefficient of -1 provides the maximum possible risk reduction, not the maximum risk. The maximum portfolio risk occurs when the correlation is +1, as there is no diversification benefit. Therefore, statements I and II are correct.

This question assesses the understanding of the inherent limitations in evaluating a fund manager’s performance using standard tools like benchmarks and peer group analysis. Statement I is correct because creating a perfect peer group is practically impossible; funds differ in their specific mandates, risk tolerances, fee structures, and operational constraints, making direct comparisons challenging. Statement II is also correct. A standard market index (benchmark) may not be a suitable yardstick if the fund employs a specific strategy (e.g., value, growth, ESG focus) or has unique constraints not reflected in the index’s composition. This is known as benchmark mismatch. Statement III is correct as well. A fund manager’s investment style can be cyclical. For instance, a value-oriented manager might underperform in a market dominated by growth stocks. This short-term underperformance does not automatically signify a lack of skill but may reflect a style being temporarily out of favour. Statement IV is incorrect. The SFC’s Fund Manager Code of Conduct (FMCC) does not prohibit or discourage the use of peer group comparisons. Instead, it requires that any performance presentations, including comparisons, must be fair, not misleading, and presented with sufficient disclosure and context to enable investors to make an informed judgment. Therefore, statements I, II and III are correct.

This question tests the application of the Capital Asset Pricing Model (CAPM) to calculate the expected return of a security. The formula for CAPM is: Expected Return = Risk-Free Rate + Beta × (Expected Market Return − Risk-Free Rate). The term (Expected Market Return − Risk-Free Rate) is known as the market risk premium.

Given data:
Risk-Free Rate (Rf) = 3%
Expected Market Return (E(Rm)) = 11%

First, calculate the Market Risk Premium (MRP):
MRP = E(Rm) – Rf = 11% – 3% = 8%

Now, let’s evaluate each statement:

I. Security X (Beta = 1.5):
Expected Return = 3% + 1.5 × (8%) = 3% + 12% = 15%. This statement is correct.

II. Security Y (Beta = 0.8):
Expected Return = 3% + 0.8 × (8%) = 3% + 6.4% = 9.4%. The statement claims the return is 11.8%, which is incorrect. This incorrect value might be derived from a miscalculation like 3% + 0.8 11% = 11.8%, where the market return is used instead of the market risk premium.

III. Security Z (Beta = 1.0):
Expected Return = 3% + 1.0 × (8%) = 3% + 8% = 11%. This statement is correct. A security with a beta of 1.0 is expected to have the same return as the market.

IV. Security W (Beta = 0.5):
Expected Return = 3% + 0.5 × (8%) = 3% + 4% = 7%. The statement claims the return is 8.5%, which is incorrect. This incorrect value might be derived from a miscalculation like 3% + 0.5 11% = 8.5%, again using the market return instead of the market risk premium. Therefore, statements I and III are correct.

This question tests the ability to correctly calculate and differentiate between various investment return metrics.

Statement I calculates the Holding Period Return (HPR) over the two-year period. The initial investment is $100,000. After year 1 (+20%), the value is $120,000. After year 2 (-10%), the final value is $120,000 (1 – 0.10) = $108,000. The HPR is (Ending Value – Beginning Value) / Beginning Value = ($108,000 – $100,000) / $100,000 = 0.08 or 8%. Thus, Statement I is correct.

Statement II calculates the geometric average annual return, which is the standard method for determining the constant annual rate of return over multiple periods. The formula is √((1 + R1) × (1 + R2)) – 1. Plugging in the values: √((1 + 0.20) × (1 – 0.10)) – 1 = √(1.20 × 0.90) – 1 = √(1.08) – 1 ≈ 1.03923 – 1 = 0.03923 or 3.92%. Thus, Statement II is correct.

Statement III incorrectly uses the arithmetic average of the annual returns: (20% + (-10%)) / 2 = 10% / 2 = 5%. The arithmetic mean does not account for the effects of compounding and typically overstates the true investment performance over time. Thus, Statement III is incorrect.

Statement IV incorrectly states the total compounded return is 10%. This figure is derived from simply adding the annual returns (20% – 10%), which ignores the fact that the 10% loss in the second year was applied to a larger capital base ($120,000), not the original principal. The actual total compounded return is the HPR, which is 8%. Therefore, statements I and II are correct.

This question assesses the candidate’s ability to differentiate between key quantitative investment strategies based on their underlying principles. The scenario describes a model that identifies and buys stocks that have significantly underperformed over an intermediate period (three to five years), based on the expectation that their performance will revert to the mean. This is the core tenet of a contrarian strategy, which posits that markets overreact to news, causing assets to become temporarily undervalued (‘losers’) before correcting. In contrast, a momentum strategy would involve buying assets that have recently performed well (‘winners’), assuming the trend will continue in the short term. Fundamental analysis focuses on a company’s intrinsic value using financial statements and economic factors, which is not the primary driver described in the scenario. While both contrarian and momentum strategies fall under the broader category of behavioural finance, ‘contrarian strategy’ is the most specific and accurate description of the methodology employed by the model.

In asset management, the active return of a portfolio is generated through deliberate decisions aimed at outperforming a benchmark. This return is composed of tactical asset allocation (TAA), security selection, and the interaction between them. TAA involves making short-term adjustments to a portfolio’s asset class mix to capitalize on anticipated market movements. An asset allocation fund manager, who oversees a portfolio with multiple specialist managers for different asset classes, can implement TAA without disrupting the core investment activities of these specialists. One common method is the TAA overlay. This involves outsourcing the TAA function to a specialist TAA manager. This specialist manager typically uses a small portion of the fund’s assets, often cash, to take positions in derivatives (like futures or forwards) to achieve the desired tactical exposure. The primary advantage of this approach is that it allows the main asset allocation manager to implement broad market views efficiently while the underlying specialist managers continue their security selection process undisturbed.

According to the Code of Conduct for Persons Licensed by or Registered with the Securities and Futures Commission (SFC), licensed corporations have a duty to conduct thorough product due diligence before recommending any investment product. This involves a comprehensive assessment of the product’s nature, features, and risks. Statement I is correct as documenting the selection criteria and rationale is a fundamental part of demonstrating a robust due diligence process. Statement II is also correct because the firm must understand and document for which client segments the product is suitable, aligning with the suitability obligations. This involves mapping the product’s risk-return profile to different client risk tolerances. Statement III is correct as internal governance requires that the decision to offer a new product, especially a complex one, receives formal approval from senior management or a designated committee, and this approval must be documented. Statement IV is incorrect and describes a prohibited practice. The SFC explicitly prohibits intermediaries from including non-reliance clauses in client agreements or any other documents that would require a client to acknowledge they are not relying on the intermediary’s advice. Such clauses are seen as an attempt to derogate from the firm’s fundamental suitability obligation. Therefore, statements I, II and III are correct.

According to the SFC’s Fund Manager Code of Conduct (FMCC), a fund manager must establish, implement, and maintain an effective liquidity risk management (LRM) framework. Statement I is correct because the FMCC explicitly requires fund managers to conduct regular stress testing under various plausible and severe scenarios to assess the fund’s liquidity profile and the adequacy of its LRM policies. Statement II is also correct as the LRM framework, including its policies and procedures, must be formally documented and approved by the governing body (e.g., the Board of Directors) or senior management, ensuring proper oversight and accountability. Statement III is incorrect; liquidity risk management is not a one-off exercise. The FMCC mandates ongoing monitoring of the fund’s liquidity profile, which must be performed at least on a monthly basis, and more frequently if the fund’s nature warrants it. Statement IV is incorrect because the use of liquidity management tools (LMTs) like swing pricing or redemption gates is complementary to, not a substitute for, a robust LRM framework. The obligation to conduct stress testing remains regardless of which LMTs are available to the fund. Therefore, statements I and II are correct.

The Security Market Line (SML) is a graphical representation of the Capital Asset Pricing Model (CAPM). It illustrates the expected return of a security or portfolio based on its systematic, or non-diversifiable, risk, which is measured by beta (β). The y-intercept of the SML is the risk-free rate (rf), representing the return on an investment with zero risk. The slope of the SML is the market risk premium (rm – rf), which is the excess return expected from investing in the market portfolio over the risk-free rate. Any asset that is correctly priced according to the CAPM will lie on the SML. If an asset is plotted above the SML, it indicates that its expected return is higher than the return required for its level of systematic risk, suggesting the asset is undervalued. Conversely, an asset plotted below the SML has an expected return lower than what is justified by its beta, suggesting it is overvalued. The vertical distance of a security’s plot from the SML is known as its alpha; a positive alpha (above the line) is desirable.

This question assesses the understanding of how different derivative instruments are used for risk management, and the key distinctions between over-the-counter (OTC) and exchange-traded derivatives. Statement I is correct because forward contracts are classic OTC instruments. Their key advantage is customization (matching the exact notional amount and date), but this comes with the trade-off of bearing counterparty credit risk, as there is no central clearing house. Statement II is also correct. Currency futures are standardized contracts traded on an exchange. The exchange’s clearing house acts as the counterparty to every trade, effectively eliminating the credit risk of the original counterparty defaulting. Statement III is incorrect. An interest rate swap is used to hedge against fluctuations in interest rates, not foreign exchange risk on a specific future receivable. A currency forward or futures contract would be the appropriate tool. Statement IV is correct and captures the fundamental purpose of these hedging instruments. Both forwards and futures allow an entity to lock in a price or rate for a future transaction, thereby transferring the risk of adverse price movements to another party. Therefore, statements I, II and IV are correct.

According to Paragraph 15.3A of the SFC’s Code of Conduct for Persons Licensed by or Registered with the Securities and Futures Commission, an intermediary must conduct a principle-based assessment before treating a client as a Corporate Professional Investor (CPI). Merely meeting the asset or portfolio thresholds is not sufficient. This assessment must be documented and should satisfy the intermediary that the client has the necessary experience and understanding to be classified as such. The assessment involves three key criteria: (I) evaluating the corporation’s investment process and controls, such as having a dedicated treasury function or investment committee; (II) assessing the investment background and experience of the individuals making investment decisions; and (III) ensuring the corporation is aware of the risks involved. Statement (IV) is incorrect because automatic exemptions from the Code of Conduct are granted when dealing with Institutional Professional Investors, not Corporate Professional Investors. For CPIs, the exemptions are only available after the successful completion of the principle-based assessment. Therefore, statements I, II and III are correct.

This question assesses the specific regulatory obligations for intermediaries in Hong Kong when recommending synthetic ETFs. According to the SFC’s Code of Conduct for Persons Licensed by or Registered with the Securities and Futures Commission, synthetic ETFs are considered structured products due to their use of financial derivatives to achieve their investment objectives. Consequently, intermediaries must adhere to enhanced investor protection measures. A key requirement is to assess the client’s knowledge and experience with derivatives. The intermediary must ensure the client fully comprehends the product’s nature, particularly the inherent risks that are not present in physical ETFs, such as counterparty risk (the risk that the swap provider may default on its obligations) and the risks associated with the collateral. This process is part of the overall suitability assessment, which ensures the product is appropriate for the client’s financial situation, investment objectives, and risk tolerance. While factors like liquidity and tracking error are relevant to all ETFs, the derivative-specific risk disclosure and client knowledge assessment are paramount regulatory duties for synthetic products.

This question assesses the candidate’s ability to differentiate between simple and compound interest and to calculate the time required for an investment to double under each method. For simple interest, the interest is calculated only on the initial principal amount. To double the investment, the total interest earned must equal 100% of the principal. The time required is calculated by dividing 100% by the annual interest rate. In this scenario, with a 4% simple interest rate, the calculation is 100 / 4 = 25 years. For compound interest, interest is earned on both the principal and the accumulated interest from previous periods. A common and practical estimation method used in finance is the ‘Rule of 72’. This rule provides a quick approximation of the number of years required to double an investment. The formula is: Years ≈ 72 / Interest Rate (as a percentage). Applying this to the scenario, with a 4% compounded interest rate, the calculation is 72 / 4 = 18 years. Understanding these two distinct calculation methods is fundamental for advising clients on the long-term performance of different financial products.

This question assesses the understanding of two key behavioural finance strategies: momentum and contrarian. Statement I is incorrect because a momentum strategy is based on the continuation of past price trends, not mean reversion. Mean reversion, the tendency for asset prices to revert to a long-term average, is the underlying principle for contrarian strategies. Statement II is correct; it accurately describes the contrarian approach, which involves buying ‘loser’ stocks and selling ‘winner’ stocks based on the belief that markets overreact and that performance will revert to the mean over an intermediate horizon, typically cited as three to five years. Statement III is correct; the post-announcement drift, where a stock’s price continues to move in the direction of an earnings surprise, is a classic example of short-term momentum that quantitative strategies seek to capture. Statement IV is incorrect because the rationale for a contrarian strategy is that investors tend to overreact to dramatic news, not underreact. This overreaction leads to mispricing that the contrarian investor aims to exploit. Therefore, statements II and III are correct.

To determine the portfolio’s expected return under different scenarios, one must calculate the weighted average of the expected returns of the underlying asset classes. The formula is: Portfolio Return = Σ (Weight of Asset Classᵢ × Expected Return of Asset Classᵢ). This calculation must be performed separately for each economic scenario using the corresponding expected return figures.

For the Optimistic Scenario:
– Hong Kong Equities: 30% weight × 12.0% return = 3.60%
– Global Bonds: 40% weight × 3.0% return = 1.20%
– REITs: 20% weight × 8.0% return = 1.60%
– Cash: 10% weight × 1.0% return = 0.10%
– Total Optimistic Return = 3.60% + 1.20% + 1.60% + 0.10% = 6.50%

For the Pessimistic Scenario:
– Hong Kong Equities: 30% weight × -5.0% return = -1.50%
– Global Bonds: 40% weight × 1.5% return = 0.60%
– REITs: 20% weight × -2.0% return = -0.40%
– Cash: 10% weight × 0.5% return = 0.05%
– Total Pessimistic Return = -1.50% + 0.60% – 0.40% + 0.05% = -1.25%

This process is fundamental in portfolio construction and risk management, as required by the Fund Manager Code of Conduct for assessing potential portfolio performance under various market conditions.

Statement I is correct. A fund manager who anticipates a rise in a stock’s price can buy call options. This strategy provides exposure to the potential upside of the stock for a fraction of the cost of buying the shares outright (only the premium is paid). This is a capital-efficient way to participate in a rising market. Statement II is also correct. Buying put options is a common hedging technique. If the fund holds a significant position in a stock and is concerned about a short-term price decline, purchasing put options establishes a ‘floor’ price. If the stock price falls below the option’s strike price, the fund can exercise the put to sell the shares at the higher strike price, thus limiting downside losses. Statement III is incorrect. If a manager expects a share price to fall, selling a put option is a speculative strategy that would incur losses if the expectation is correct. The seller of a put option is obligated to buy the underlying asset at the strike price if the option is exercised. If the price falls, the fund would be forced to buy the depreciating shares at a price higher than the current market value. Statement IV is incorrect as it misrepresents the fundamental nature of an option from the buyer’s perspective. The purchaser of an option acquires the right, but not the obligation, to buy or sell the underlying asset. The obligation rests with the seller (writer) of the option. Therefore, statements I and II are correct.

Statement I is correct. A key reason for clearly defining and communicating a fund’s investment style is to allow investors to build a diversified portfolio. By combining funds with different styles (e.g., value, growth, momentum), an investor can potentially achieve more consistent outperformance across different phases of the economic cycle, as outlined in the SFC’s Fund Manager Code of Conduct regarding fund information disclosure.

Statement II is incorrect. It mischaracterizes growth investing. Growth managers seek companies with strong potential for future earnings growth, which often trade at high price-to-earnings (P/E) ratios and typically reinvest profits rather than paying high dividends. The characteristics described—low P/E ratios and high dividend yields—are hallmarks of a value investment style.

Statement III is correct. It is a critical due diligence and monitoring function for fund promoters and managers to ensure that any sub-managers or specialist managers they hire are adhering to their mandated style. This is known as being ‘true to label’. Significant deviation, or ‘style drift’, can alter the fund’s risk-return profile and undermine its intended role in an investor’s portfolio, which is a key governance concern for licensed corporations.

Statement IV is incorrect. The primary objective of an active management style is to outperform a specified benchmark, not to replicate it. Strategies like a contrarian approach involve taking positions that are deliberately different from the market consensus and the benchmark index. The goal of replicating a market index with minimal tracking error is the defining characteristic of passive management. Therefore, statements I and III are correct.

This question tests the fundamental understanding of simple versus compound interest calculations and their implications over time.

Statement I is correct. For simple interest, the formula is A = P(1 + rt), where A is the future value, P is the principal, r is the annual interest rate, and t is the time in years. To find the time to double the investment: HKD 200,000 = HKD 100,000 (1 + 0.05 t). Solving for t: 2 = 1 + 0.05t -> 1 = 0.05t -> t = 1 / 0.05 = 20 years.

Statement II is correct. For annually compounded interest, the formula is A = P(1 + r)^t. To find the time to double: HKD 200,000 = HKD 100,000 (1 + 0.05)^t. Solving for t: 2 = (1.05)^t -> log(2) = t log(1.05) -> t = log(2) / log(1.05) ≈ 14.21 years.

Statement III is correct. Comparing the results, 20 years (simple) versus approximately 14.2 years (compound), it is clear that compounding interest allows the investment to grow and reach the target value significantly faster because interest is earned on previously earned interest.

Statement IV is incorrect. The time difference between the two methods is dependent on the interest rate. At 5%, the difference is 20 – 14.21 = 5.79 years. If the rate were 10%, simple interest would take 1 / 0.10 = 10 years. Compound interest would take log(2) / log(1.10) ≈ 7.27 years. The difference would be 10 – 7.27 = 2.73 years. Since 5.79 years is not equal to 2.73 years, the time difference is not constant and changes with the interest rate. Therefore, statements I, II and III are correct.

Asset allocation is tailored to an investor’s individual circumstances. Statement I is correct because a long investment horizon (35 years to retirement) allows the client to withstand short-term market volatility, which is characteristic of equities, in pursuit of higher long-term returns. Statement II is also correct; a high-risk tolerance, often associated with a goal of ‘aggressive capital growth’, directly supports a larger allocation to assets like equities that have higher potential returns and higher risk. Statement III is incorrect because a need for immediate liquidity would argue for holding more cash or short-term, highly liquid instruments, not a higher allocation to equities which can be volatile and may need to be sold at a loss if cash is needed unexpectedly. Statement IV is incorrect; while tax is a crucial consideration, significant concerns about capital gains tax would typically lead to a more nuanced strategy (e.g., tax-loss harvesting, holding for long-term gains) rather than simply increasing the equity allocation. It does not, in itself, justify a higher weighting in equities. Therefore, statements I and II are correct.

This question tests the candidate’s ability to calculate the future value of a lump-sum investment using the formula for compound interest. The formula is: Future Value (FV) = Present Value (PV) × (1 + r)^n, where ‘r’ is the annual interest rate and ‘n’ is the number of years. In this scenario, the PV is HKD 500,000, the annual rate ‘r’ is 8% (or 0.08), and the number of years ‘n’ is 5. The calculation is as follows: FV = HKD 500,000 × (1 + 0.08)^5 = HKD 500,000 × (1.08)^5 ≈ HKD 500,000 × 1.4693 ≈ HKD 734,664. Other options represent common errors, such as calculating simple interest (HKD 500,000 + (HKD 500,000 × 8% × 5) = HKD 700,000) or miscalculating the number of compounding periods. Understanding this concept is fundamental for providing suitable investment advice as required by the SFC’s Code of Conduct.

Performance attribution analysis is a method used to decompose a portfolio’s performance to identify the sources of excess return relative to a benchmark. This process typically breaks down performance into three key decision-making components.

Statement I correctly describes Tactical Asset Allocation (TAA). This decision involves deviating from the benchmark’s asset class weights (e.g., equities, bonds, cash) to capitalize on expected short-term market movements. Overweighting Hong Kong equities while underweighting US bonds is a classic example of a TAA decision.

Statement II accurately represents Sector Selection. Within a specific asset class (in this case, Hong Kong equities), this decision involves overweighting or underweighting certain industry sectors (e.g., technology, financials, consumer staples) based on their expected performance relative to the benchmark’s sector weightings.

Statement III correctly illustrates Security Selection (or stock selection). This is the most granular level of analysis, focusing on the manager’s ability to pick individual securities within a given sector that outperform the sector’s average return. Selecting specific high-performing tech stocks is a direct example of this.

Statement IV is incorrect. While comparing the fund’s return to the risk-free rate is a valid measure of absolute performance (related to metrics like the Sharpe ratio), it is not a component of attribution analysis. Attribution analysis specifically focuses on explaining the difference in performance between the portfolio and its benchmark, not its absolute return. Therefore, statements I, II and III are correct.

This question assesses the understanding of the ‘forward pricing’ mechanism, a fundamental concept for managed funds as outlined in the SFC Code on Unit Trusts and Mutual Funds. When an investor places an order to buy (subscribe) or sell (redeem) units in a fund, the transaction does not occur at the last known Net Asset Value (NAV). Instead, the order is executed at the next calculated NAV, which is typically determined after the market closes for the day (the valuation point). This means the investor does not know the exact price at the time of placing the order. The final price will reflect the market movements that occurred throughout the trading day up until the valuation point. The other options describe different concepts: slippage is more relevant to direct market orders for securities like stocks, a bid-ask spread is characteristic of market-making for exchange-traded instruments, and while a subscription fee is common, it is a separate charge calculated on the investment amount, not a factor that changes the underlying NAV per unit at which the transaction is priced.

Statement I correctly defines a managed fund as a form of indirect, pooled investment where a professional manager exercises discretion over the assets, aligning with the core concept of collective investment schemes. Statement II is historically accurate; the Code on Unit Trusts and Mutual Funds, enacted in the late 1970s, was a pivotal piece of regulation that opened the Hong Kong market to authorised offshore funds, contributing significantly to its development as an international financial centre. Statement III accurately lists several key factors that make Hong Kong an attractive domicile for international fund management companies, including its strategic location, reliable legal system, and the common use of English. Statement IV is incorrect. The provided materials and general market knowledge confirm that large managed funds, due to their substantial assets under management, can exert significant influence on market prices, liquidity, and even broader economic conditions. There are no legal restrictions that inherently prevent this influence based on their collective nature; rather, regulations focus on fair treatment of investors and market integrity. Therefore, statements I, II and III are correct.