This question assesses the understanding of how major equity indices in Hong Kong, such as the Hang Seng Index, calculate constituent weights. The core principle is that a stock’s influence on the index is not based on its total market capitalisation but on its ‘investable’ or ‘freefloat-adjusted’ market capitalisation. The Freefloat-Adjusted Factor (FAF) represents the proportion of a company’s shares that are readily available for trading on the public market, excluding shares held by strategic investors like governments, founding families, or other corporations. The calculation process is sequential: First, the total market capitalisation (Closing Price x Total Issued Shares) is multiplied by the FAF to arrive at the Freefloat-Adjusted Market Capitalisation. For Phoenix Corp, this is HKD 1,200 billion 0.40 = HKD 480 billion. For Quantum Holdings, this is HKD 800 billion 0.75 = HKD 600 billion. This adjusted figure is then used to determine the stock’s initial weight relative to the sum of all constituents’ adjusted market capitalisations. Only after this initial weighting is calculated would a Cap Factor be applied if any single constituent’s weight exceeds the predefined limit (e.g., 8%). Therefore, despite having a lower total market capitalisation, Quantum Holdings has a higher investable market capitalisation and will thus have a greater initial weighting in the index before any capping is applied.

A public listing on a stock exchange like the SEHK offers several strategic advantages to a company. Statement I is correct because one of the most compelling reasons for an IPO is to gain initial and, crucially, ongoing access to the capital markets for future expansion and funding needs through secondary offerings. Statement II is also correct; being a listed company significantly raises its public profile, enhances brand recognition, and can improve its standing with customers, suppliers, and lenders. Statement IV is correct as listing allows the original owners to diversify their holdings and spreads the company’s ownership risk across a much wider base of public shareholders. However, Statement III is a common misconception. A public listing does not guarantee a higher valuation. The final valuation is determined by market demand, investor sentiment, and prevailing economic conditions at the time of the IPO and thereafter. The company’s share price can fluctuate and may even trade below its private valuation or IPO price. Therefore, statements I, II and IV are correct.

In the context of an Initial Public Offering (IPO) in Hong Kong, the share registrar plays a critical administrative role. Appointed by the company seeking to list, the registrar is responsible for managing the register of shareholders. During an oversubscribed IPO, this responsibility extends to working with the sponsor to process the large volume of applications from investors, conduct the balloting process, and implement the final allocation of shares. This is distinct from the role of Hong Kong Exchanges and Clearing Limited (HKEx), which acts as the market operator and regulator, approving the listing but not managing the application mechanics. A custodian’s primary function is to hold and safeguard assets for clients, which is a post-allocation activity. The receiving bank’s role is to collect and manage the subscription funds from applicants, not to allocate the shares themselves.

This question assesses the understanding of the distinct roles of key professional parties in an IPO process under the SEHK Listing Rules. Statement I is correct; a primary duty of the sponsor is to conduct due diligence to ensure the listing applicant is suitable for listing and to advise the directors on their responsibilities and obligations. Statement II is correct; the reporting accountants must be independent and are responsible for preparing the accountant’s report, which includes historical financial information on profits, losses, assets, and liabilities. Statement III is incorrect; the legal advisers are responsible for legal due diligence, corporate restructuring for compliance, and verifying legal documentation. Assessing the commercial viability and valuation of the business is primarily the responsibility of the sponsor and the underwriters. Statement IV is correct; the underwriter’s main role is to manage the sale and distribution of the securities to the public and to assume the financial risk of the offering, often by committing to purchase any shares that are not sold. Therefore, statements I, II and IV are correct.

The Stock Exchange of Hong Kong (SEHK) operates two distinct equity markets: the Main Board and the Growth Enterprise Market (GEM). The Main Board is intended for larger, more established companies that can meet specific financial criteria, such as the profit test, which requires a track record of profitability. In contrast, GEM is designed for smaller, emerging companies with high growth potential that may not yet be profitable. A key distinction in the Listing Rules is that GEM does not have a profitability requirement for applicants. Instead, it focuses on other indicators of viability, such as having a positive aggregate operating cash flow over the two financial years immediately preceding listing. This structure allows growth-stage companies to access public capital markets earlier in their development. The principle of ‘caveat emptor’ (buyer beware) is strongly associated with GEM, highlighting the higher investment risk and catering primarily to professional and sophisticated investors who can assess such risks. However, this does not mean there is an absence of regulatory oversight; all listed companies on both boards are subject to the Listing Rules and regulations enforced by the SEHK and the Securities and Futures Commission (SFC).

This question assesses the fundamental principles of technical analysis. Statement I is correct as technical analysis is defined by its use of historical market data, such as price and volume, to identify trends and make predictions. Statement II is also correct; a core assumption of technical analysis is that past market patterns and human behaviour tend to repeat over time, making historical data a useful guide for future movements. Statement III is incorrect because it describes fundamental analysis, which evaluates a security’s intrinsic value by examining related economic, financial, and other qualitative and quantitative factors, including financial statements. This is a distinct methodology from technical analysis. Statement IV is correct; candlestick charts are a popular tool in technical analysis that visually represent the open, high, low, and close prices for a specific time period, helping analysts identify patterns. Therefore, statements I, II and IV are correct.

In the methodology of major stock market indices like the Hang Seng Index (HSI), mechanisms are in place to ensure the index remains a diversified and representative benchmark of the market. One such mechanism is capping. The Freefloat-adjusted Factor (FAF) is first applied to a company’s total market capitalization to reflect the portion of shares available for public trading. The resulting figure is the freefloat-adjusted market capitalization. The Cap Factor (CF) is an additional adjustment applied when a single constituent’s weight, based on its freefloat-adjusted market cap, exceeds a predetermined limit (e.g., 8% for the HSI). The primary purpose of the Cap Factor is to reduce the weight of that specific, overly dominant stock down to the cap level. This prevents any single company from having an excessive influence on the index’s movement, thereby maintaining diversification and ensuring the index’s stability and integrity as a market indicator. The weights of other constituents are then proportionally re-distributed.

The calculation of basic Earnings Per Share (EPS) under Hong Kong Accounting Standard (HKAS) 33 requires the use of the weighted average number of ordinary shares outstanding during the period. This method accurately reflects the capital available to the company over the entire financial year. The calculation proceeds as follows:

1. Shares outstanding for the full period: The 500,000,000 shares in issue at the beginning of the year were outstanding for all 12 months. Their contribution is 500,000,000 x (12/12) = 500,000,000.

2. Shares issued during the period: The 120,000,000 new shares were issued on 1 April 2023. They were outstanding from that date until the year-end on 31 December 2023. This period covers 9 months (April, May, June, July, August, September, October, November, December).

3. Time-weighting factor: The time-weighting factor for the new shares is the number of months they were outstanding divided by the total months in the period, which is 9/12.

4. Weighted value of new shares: The weighted contribution of the new shares is 120,000,000 x (9/12) = 90,000,000.

5. Total weighted average number of shares: The total is the sum of the shares outstanding for the full period and the weighted value of the new shares: 500,000,000 + 90,000,000 = 590,000,000.

Statement II is incorrect as it uses a 3/12 weighting. Statement III is incorrect as it uses the closing number of shares without any time-weighting. Statement IV is incorrect as it only uses the opening number of shares. Therefore, statement I is correct.

This question assesses the understanding of how implied volatility is used to compare Equity Linked Instruments (ELIs). Implied volatility reflects the market’s expectation of the future price fluctuations of the underlying asset. For an ELI, which contains an embedded sold option, a higher implied volatility signifies that the market anticipates greater price swings. Because the investor in an ELI is effectively selling an option, a higher volatility increases the value of that option. This higher value is passed on to the investor as compensation for taking on greater risk. This compensation typically manifests as a higher potential coupon or a more attractive purchase price for the ELI. It is crucial to distinguish implied volatility, which relates to the market risk of the underlying asset, from other factors such as the issuer’s credit risk or the product’s trading liquidity.

According to the listing rules and common market practice for derivative warrants in Hong Kong, a Liquidity Provider (LP) has specific obligations but is also granted exemptions under certain conditions. Statement I is correct because LPs are not required to provide liquidity during the pre-market opening session and for the first five minutes after the continuous trading session begins. Statement II is correct as LPs are explicitly exempt from providing a bid price if the theoretical value of the warrant is less than HK$0.01. Statement III is also correct; a ‘fast market’ is a recognized condition where extreme volatility makes it impractical to maintain continuous, orderly quotes, and this is a standard exemption. Statement IV is incorrect; there is no rule that exempts an LP from their duties simply because the warrant’s price has declined by a specific percentage from its issue price. The obligation is tied to market conditions and the warrant’s intrinsic value, not its historical price performance. Therefore, statements I, II and III are correct.

This question tests the application of modified duration to estimate the change in a bond’s price resulting from a change in its yield-to-maturity. The formula for the approximate dollar change in price (Δp) is Δp ≈ -D × p × Δy, where D is the modified duration, p is the initial price, and Δy is the change in yield. It is crucial to remember the negative sign in the formula, which reflects the inverse relationship between bond prices and yields. Additionally, the change in yield, often given in basis points, must be converted to its decimal form for the calculation (1 basis point = 0.01% = 0.0001). In this scenario, the inputs are D = 7.5, p = $1,020, and Δy = +25 basis points or +0.0025. Substituting these values into the formula gives the estimated price change: Δp ≈ -7.5 × $1,020 × 0.0025 = -$19.125. This indicates an expected price decrease of approximately $19.13.

Under the SEHK Listing Rules, when a listed company issues new securities as payment (consideration) for an acquisition, merger, or other transaction, this is defined as a ‘consideration issue’. The primary and immediate disclosure obligation for the issuer is to inform the market of this transaction. This is accomplished by publishing an announcement, often referred to as a press notice, which details the terms of the transaction and the securities being issued. This ensures timely and transparent communication with investors and the public. In contrast, a prospectus is generally required for a public offering of securities, not a private issuance to specific parties in a transaction. A circular to shareholders is typically required for actions that need shareholder approval or for specific corporate actions like an exchange or substitution of securities, which is distinct from a consideration issue. While advisers are involved, the submission of a new sponsor’s declaration is a requirement associated with an initial listing (IPO), not typically for a subsequent transaction of this nature by an already-listed company.

Statement I is correct as the Hong Kong Futures Exchange (HKFE), now part of Hong Kong Exchanges and Clearing Limited (HKEX), provides a marketplace for a broad range of derivative products. These include futures and options on equity indices (like the Hang Seng Index), individual stocks, interest rate products, and commodities. Statement II is also correct. The 1987 market crash highlighted severe deficiencies in market regulation. The subsequent Davison Report recommended the establishment of a single, independent regulator, which led directly to the formation of the Securities and Futures Commission (SFC) in 1989 to oversee both the securities and futures markets. Statement III is incorrect because the HKFE is the primary exchange for trading both futures and options contracts in Hong Kong. Statement IV is incorrect because the HKFE was established in 1976, whereas the SFC was not established until 1989. Therefore, statements I and II are correct.

This question assesses the understanding of the core components of the Capital Asset Pricing Model (CAPM).
Statement I is correct. The risk-free rate (Rf) is a fundamental component of the CAPM, representing the baseline return an investor can expect from an asset with zero risk. In practice, the yield on short-term government securities, such as Hong Kong’s Exchange Fund Bills or US Treasury Bills, is commonly used as a proxy for this rate.
Statement II is correct. Beta (β) measures a stock’s systematic risk, or its volatility relative to the overall market. A beta greater than 1.0 indicates that the stock is more volatile than the market. For instance, a beta of 1.2 suggests the stock’s price is expected to move 1.2% for every 1% move in the market. According to CAPM, this higher systematic risk requires a higher expected return to compensate investors.
Statement III is correct. The market risk premium, represented by the term (Rm – Rf), is the excess return that investors require for choosing to invest in a diversified market portfolio (with average market risk) instead of a risk-free asset. It is a critical driver of expected returns in the model.
Statement IV is incorrect. A stock with a beta of 0.7 is indeed considered a defensive stock because it is less volatile than the market. However, this means that during a strong bull market (when the market is rising significantly), the stock is expected to rise by a smaller percentage than the market, thereby underperforming it. Its defensive nature is demonstrated during a bear market, where it would be expected to fall less than the overall market. Therefore, statements I, II and III are correct.

Statement I is correct. Exchange Fund Notes are debt securities issued by the HKMA as part of the Exchange Fund Bill and Note programme. They are considered low-risk, high-quality Hong Kong dollar debt instruments and are issued with longer maturities (currently 2 to 15 years) than Exchange Fund Bills. Statement IV is also correct. In the capital structure of a company, debt (bonds) has seniority over equity (shares). This means in the event of a liquidation, bondholders are repaid before shareholders. However, this lower risk is typically associated with lower potential returns, and equities have historically provided greater scope for capital gains. Statement II is incorrect. The Government Bond Programme was explicitly established to promote the development of the local bond market, not to finance recurrent government expenditure. A dedicated fund was set up under the Public Finance Ordinance to manage the proceeds to ensure this separation. Statement III is incorrect. A floating-rate bond, by definition, has an interest rate that is adjusted periodically based on a benchmark indicator (like HIBOR), meaning its coupon payment is not fixed until maturity. Therefore, statements I and IV are correct.

To answer this question correctly, one must understand the specific purpose and composition of different Hong Kong and international market indices. The Hang Seng China-Affiliated Corporations Index (HSCCI), also known as the ‘Red Chip Index’, is specifically designed to track the performance of companies controlled by mainland Chinese entities but incorporated and listed outside of mainland China, primarily in Hong Kong. This directly matches the fund manager’s requirement for tracking a specific type of equity. Separately, the HSI Volatility Index (VHSI) serves a distinct function. It is not an equity performance benchmark but a forward-looking measure of market sentiment. It reflects the 30-day expected volatility of the Hang Seng Index, as implied by the prices of HSI options. Therefore, it is the appropriate tool for gauging anticipated market fluctuations. Other indices mentioned, such as the S&P/HKEx LargeCap Index, track the broader large-capitalization segment of the Hong Kong market, while the S&P/HKEx GEM Index focuses on the Growth Enterprise Market. The FTSE 100 is an index for the UK market and is not relevant for assessing Hong Kong market volatility.

This question assesses the understanding of the dual nature of margin financing, covering both its advantages and inherent risks as outlined in the HKSI Paper 8 syllabus.

Statement I is correct. Margin financing provides leverage, which magnifies returns. If an investor uses their own capital for only a fraction of a security’s purchase price, any percentage gain in the security’s value translates into a much larger percentage gain on their initial capital outlay.

Statement II is also correct. Leverage is a double-edged sword. Just as it magnifies gains, it also magnifies losses. A percentage decrease in the security’s price will result in a larger percentage loss on the investor’s initial capital, and losses can exceed the initial investment.

Statement III is correct. This describes a margin call. A core risk of margin financing is that if the value of the collateral (the securities purchased) declines significantly, the brokerage will issue a margin call, demanding the client to deposit more cash or securities to meet the required maintenance margin level. Failure to do so can lead to forced liquidation of the position.

Statement IV is correct. From a market-wide perspective, margin financing injects additional purchasing power into the market. When many investors use margin, it can lead to higher trading volumes and increased liquidity, making it easier to buy and sell securities without significantly impacting their price.

Since all four statements accurately describe the benefits and risks associated with margin financing, from both an individual investor and a market perspective, all are correct. Therefore, all of the above statements are correct.

This question assesses the candidate’s understanding of common interpretations of key technical indicators used in financial markets.
Statement I is correct. A ‘golden cross’, where a shorter-term moving average (e.g., 50-day MA) crosses above a longer-term moving average (e.g., 200-day MA), is widely regarded by technical analysts as a significant bullish signal, often indicating the potential for a major uptrend.
Statement II is correct. The Relative Strength Index (RSI) is a momentum oscillator that measures the speed and change of price movements. A reading above 70 is generally considered to indicate that a security is ‘overbought’, suggesting that the bullish momentum may be waning and the price could be due for a correction or pullback.
Statement III is correct. The Moving Average Convergence-Divergence (MACD) indicator consists of the MACD line and the signal line. When the MACD line crosses above the signal line, it is known as a bullish crossover, signaling that upward momentum is increasing and potentially presenting a buying opportunity.
Statement IV is incorrect. An RSI reading of 80 reinforces the ‘overbought’ condition mentioned in Statement II. It is a cautionary signal suggesting a high probability of a price reversal or consolidation, not a strong signal to initiate a new long (buy) position. Acting on this signal alone to buy would be contrary to standard technical interpretation. Therefore, statements I, II and III are correct.

A standard OHLC (Open-High-Low-Close) bar chart provides four key pieces of price data for a specific period. Statement I is correct: the highest point of the vertical bar represents the high price for the period. Statement II is correct: the horizontal tick on the right side of the bar indicates the closing price. Statement IV is correct: the horizontal tick on the left side of the bar indicates the opening price. Statement III is incorrect: the total length of the vertical bar represents the trading range for the period (the difference between the high and the low price), not the net change between the open and close prices. The relationship between the open and close prices determines if the day was an ‘up’ day or a ‘down’ day, which is often shown by the color of the bar in modern charting software, but the bar’s length itself is the high-low range. Therefore, statements I, II and IV are correct.

For a Category R Callable Bull Contract, a Mandatory Call Event (MCE) occurs when the underlying asset’s price falls to or below the call level. After an MCE, the contract is terminated, and the investor may receive a residual value. This value is determined during a post-MCE observation period. Statement I is correct because the residual value is calculated using the formula: (Minimum Index Level – Strike Level) x (1 Board Lot / Entitlement Ratio). The ‘Minimum Index Level’ is the lowest level of the underlying asset observed during the post-MCE period. Statement III is also correct; this observation period starts from the moment the MCE is triggered and ends at the close of the next trading session. Statement II is incorrect because the call level’s only function is to trigger the MCE; it is not used in the residual value calculation itself, which relies on the strike level. Statement IV is incorrect because if the minimum index level falls below the strike level, the result of (Minimum Index Level – Strike Level) would be negative, meaning the residual value is zero. The investor would lose their entire initial investment, not receive the premium back as a residual value. Therefore, statements I and III are correct.

Technical analysis is a methodology for forecasting the direction of prices through the study of past market data, primarily price and volume. Statement I is correct as a fundamental assumption of technical analysis is that history tends to repeat itself, meaning that past patterns of price behaviour are likely to recur. Statement II is also correct because technical analysts use historical market data, such as price charts and trading volumes, as the basis for their predictions. Statement III is incorrect; the examination of a company’s financial statements, management, and macroeconomic factors is characteristic of fundamental analysis, not technical analysis. Statement IV is incorrect because a line chart is the simplest type of chart, typically plotting only the closing prices over a set period. It is the bar chart and candlestick chart that provide more detailed information by displaying the opening, highest, lowest, and closing prices for each period. Therefore, statements I and II are correct.

This question assesses the candidate’s ability to differentiate between the various statutory and operational charges involved in a Hong Kong securities transaction. It is crucial to understand the recipient and purpose of each fee. The Stamp Duty is a tax levied directly by the HKSAR Government on the transfer of Hong Kong stock. The Transaction Levy is collected for the Securities and Futures Commission (SFC) to fund its regulatory operations. The Trading Fee is payable to the Stock Exchange of Hong Kong Limited (SEHK) for the use of its trading facilities. The Investor Compensation Levy, also collected for the SFC to fund the Investor Compensation Fund, has been suspended since December 2005 as the fund’s value exceeded the prescribed threshold. Therefore, candidates must distinguish between charges for the government, the regulator (SFC), and the exchange operator (SEHK).

A comprehensive analysis of major Asian securities markets requires an understanding of various interrelated factors. Statement I is correct because a major shift in the monetary policy of an economic powerhouse like Japan, such as moving away from negative interest rates, has significant ripple effects. It influences global capital flows, currency exchange rates (e.g., JPY/USD), and the attractiveness of Japanese assets, impacting regional investment strategies. Statement II is correct as shifts in global supply chains and foreign direct investment (FDI) are fundamental, long-term economic drivers. Increased investment in Southeast Asian manufacturing directly boosts the economies and corporate earnings of markets like Malaysia and Taiwan, affecting their stock market performance. Statement III is correct because geopolitical risk is a critical factor. Tensions in key trade routes like the Taiwan Strait can disrupt international trade, increase operating costs for companies, and negatively impact investor sentiment across the entire Asia-Pacific region. Statement IV describes a routine, technical market event. While the rebalancing of a major index like the Nikkei 225 causes short-term price volatility for its constituent stocks, it is not a fundamental macroeconomic or geopolitical factor that shapes the broad, long-term strategic outlook for multiple Asian markets in the same way as monetary policy, FDI trends, or geopolitical stability. Therefore, statements I, II and III are correct.

The Price-to-Earnings (P/E) ratio is a fundamental valuation metric calculated by dividing the current market price per share by the earnings per share (EPS). It is crucial to distinguish between the historical (or trailing) P/E and the prospective (or forward) P/E. The historical P/E uses the most recently reported annual EPS, providing a view based on past performance. The prospective P/E uses the forecast EPS for the next period, which is often more relevant for investors as stock prices are inherently forward-looking. To solve this problem, one must calculate both ratios using the provided data. The historical P/E is found by dividing the current share price (HKD 25.00) by the last reported EPS (HKD 1.25). The prospective P/E is calculated by dividing the same current share price (HKD 25.00) by the forecast EPS (HKD 1.60). A lower prospective P/E compared to the historical P/E suggests that the market expects earnings to grow, which, if achieved, would make the stock’s valuation appear more attractive in the future at its current price level.

Statement I is incorrect. The STAR Market on the Shanghai Stock Exchange is specifically designed for emerging, innovative, and technology-focused companies. Its listing requirements are more flexible than traditional main boards and can accommodate companies that are not yet profitable, which is contrary to the description of focusing on established companies with consistent profitability. Statement II is incorrect. Holders of corporate bonds are creditors of the issuing company, not owners. As such, they do not have voting rights in shareholder meetings; these rights are reserved for equity holders (shareholders). Statement III is correct. The NASDAQ is a major US stock market known for its fully electronic trading system and its heavy concentration of technology, internet, and biotechnology companies. Statement IV is correct. A primary function of the derivatives market is risk management. Instruments like futures and options allow participants to hedge, or protect against, potential losses from adverse price movements in an underlying asset. Therefore, statements III and IV are correct.

This question assesses the application of the Dividend Growth Model (also known as the Gordon Growth Model) for equity valuation. The model calculates the intrinsic value of a stock based on its future series of dividends that are expected to grow at a constant rate. The formula is P0 = D1 / (r – g), where P0 is the current stock price, D1 is the dividend expected in one year, ‘r’ is the required rate of return, and ‘g’ is the constant dividend growth rate. A common mistake is to use the most recently paid dividend (D0) instead of the expected next dividend (D1). To find D1, you must first grow D0 by the growth rate: D1 = D0 (1 + g). In this scenario, with the revised growth rate of 3%, the next dividend (D1) would be HKD 3.00 (1 + 0.03) = HKD 3.09. The denominator (r – g) becomes 8% – 3% = 5%. Therefore, the estimated intrinsic value is HKD 3.09 / 0.05 = HKD 61.80.

According to the SFC’s ‘Guidelines for Reducing and Mitigating Hacking Risks Associated with Internet Trading’, licensed corporations are required to implement robust security measures to protect client accounts. A key principle is strong client authentication. While complex passwords and data encryption are essential components of a secure system, they address different aspects of security. Data encryption (like SSL/TLS) protects data in transit, and complex passwords form the first layer of authentication. However, to mitigate the risk of compromised credentials, the SFC mandates the use of two-factor authentication (2FA) for logging into internet trading accounts. 2FA adds a critical second layer of security by requiring users to provide two distinct forms of identification, such as a password (something they know) and a one-time code sent to their mobile device (something they have). This significantly enhances protection against unauthorized access compared to using a password alone. Regular penetration testing is a verification control to assess the effectiveness of security measures, not a login control itself.

This question assesses the ability to interpret and reconcile two key profitability ratios: Earnings Per Share (EPS) and Return on Equity (ROE).

Statement I is correct. EPS is calculated as (Profit After Tax) / (Weighted Average Number of Shares Outstanding). A rising EPS directly signifies that the portion of profit attributable to each individual ordinary share is increasing.

Statement II is correct. ROE is calculated as (Profit After Tax) / (Average Shareholders’ Equity). It measures how effectively a company uses the capital invested by its shareholders to generate profit. A declining ROE indicates that this efficiency is worsening; the company is generating less profit for each dollar of equity.

Statement III is correct. A common reason for EPS and ROE to move in opposite directions is a share repurchase program. By buying back its own shares, a company reduces the number of shares outstanding. This reduction in the denominator of the EPS formula can cause EPS to rise, even if net profit is flat or growing slowly. However, this action does not necessarily improve the company’s fundamental profitability relative to its total equity base, so ROE can still decline.

Statement IV is incorrect. This is a false conclusion. Net profit could be increasing, but if shareholders’ equity (the denominator for ROE) is increasing at an even faster rate (e.g., through retained earnings), ROE will fall. Simultaneously, a share buyback could amplify a small profit increase or even cause EPS to rise when profits are flat, making it incorrect to assume total net profit must have decreased. Therefore, statements I, II and III are correct.

This question assesses the candidate’s understanding of the Continuous Net Settlement (CNS) system used by the Central Clearing and Settlement System (CCASS) in Hong Kong. For trades executed on the Stock Exchange of Hong Kong (SEHK), CCASS consolidates all transactions in the same security made by a single Clearing Participant on the same day. Instead of settling each trade individually (gross settlement), the system calculates a single net obligation for that security. This means all buy and sell orders are offset, resulting in either a single net quantity of shares to be received or a single net quantity to be delivered. This process significantly enhances efficiency and reduces settlement risk. The Hong Kong Securities Clearing Company Limited (HKSCC) acts as the central counterparty through a process called novation, guaranteeing settlement, but the core mechanism for simplifying the daily obligations is CNS. The Derivatives Clearing and Settlement System (DCASS) is a separate system used for clearing and settling derivatives, such as stock options, not cash equity trades.

This question assesses the candidate’s ability to distinguish between different types of market participants based on their trading strategies. An arbitrageur is a person or entity that engages in arbitrage, which is the practice of simultaneously buying and selling an asset in different markets to profit from a temporary price discrepancy. The strategy described—exploiting price differences of a dual-listed stock—is a classic example of arbitrage. While the individual might also be a retail or high net worth investor, the specific strategy defines them as an arbitrageur in this context. An institutional investor refers to an organization (like a fund or corporation) rather than a specific strategy. A retail speculator engages in high-risk trading but does not necessarily focus on the risk-free mechanism of exploiting price mismatches that defines arbitrage.