Past Paper Questions

Question 1

a) In equilibrium, all the following are true for the arbitrage pricing theory (APT) EXCEPT:

A) There is no under or overvaluation.
B) Non-systematic risk is priced.
C) No arbitrage opportunities exist.
D) Return is explained by a multifactor model.

Answer 1

B) Non-systematic risk is priced.

non-systematic risk is not priced as it can be diversified out

Question 2

b) Which is least likely to be a reason for the normal expectation that the term structure of interest rates is upward sloping?

A) Time value of money.
B) Duration.
C) Liquidity.
D) Preferred habit theory.

Answer 2

C) Liquidity.

Question 3

c) Which of the following statements about factor models is true?

A) The intercept term in APT is the risk-free interest rate.
B) In the multifactor capital asset pricing model (CAPM), the required return is equal to the sum of the exposures to each factor multiplied by each factor beta.
C) The intercept term in a macroeconomic model is usually equal to the risk-free interest rate and the factors are surprises in macroeconomic variables.
D) The intercept of the Zero Beta CAPM is equal to zero.

Answer 3

A) The intercept term in APT is the risk-free interest rate.

Question 4

d) Which of the following statements about private equity is MOST correct?

A) Private equity companies’ greater use of debt increases company efficiency but transfers risk to debt holders.
B) Private equity companies with high leverage will not benefit from an increased interest tax shield.
C) The impact of changes in interest rates and exchange rates on private equity investments is referred to as capital risk.
D) One source of potential value added in a private equity firm is the alignment of the economic interests of the limited partner and the portfolio managers.

Answer 4

D) One source of potential value added in a private equity firm is the alignment of the economic interests of the limited partner and the portfolio managers.

aligning the interests of limited partners (investors) and portfolio managers (who manage the investments) can enhance value by ensuring both parties are incentivized to achieve strong performance, often through performance-based compensation or co-investment structures.

Question 5

e) Peter follows a disciplined approach to investing and has in place a ‘collar’ to selling stocks. He sells a stock once the price today has appreciated by 20% above the purchase price. He also sells a stock once the price today has declined by 30% from the initial purchase price. Peter’s investment behaviour is most consistent with:

A) Modern portfolio theory.
B) Expected utility theory.
C) Behavioural portfolio theory.
D) Prospect theory.

Answer 5

C) Behavioural portfolio theory.

Question 6

g) All the following are FCA operational objectives EXCEPT:

A) Securing an appropriate degree of protection for consumers.
B) Promoting efficiency and choice in the market for financial services.
C) Ensuring markets work well for consumers.
D) Protecting and enhancing the integrity of the UK financial system.

Answer 6

C) Ensuring markets work well for consumers.

Question 7

h) Which of the following is not a vote in law?

A) A vote for the management resolution.
B) An abstain vote on the management resolution.
C) A vote against the management resolution.
D) A shareholder resolution.

Answer 7

B) An abstain vote on the management resolution.

Question 8

k) When a shareholder exercising investment stewardship decides that voting and dialogue has proven insufficient, all the following represent potential stewardship next steps EXCEPT:

A) Class action.
B) Direct litigation.
C) Derivative litigation.
D) Exiting the holding in the company.

Answer 8

D) Exiting the holding in the company.

Question 9

l) All of the following about covariance are true EXCEPT:

A) The units are squared.
B) The units of measurement are not standardised.
C) A high negative figure may or may not indicate a weak relationship.
D) A low negative figure may or may not indicate a strong relationship.

Answer 9

A) The units are squared.

Question 10

p) For the inheritance tax disposition exemption to apply, all the following statements about normal expenditure out of income are correct EXCEPT:

A) It is made as part of the normal expenditure of the transferor.
B) Taking one year with another, it was made out of income.
C) It was made only within marriage or civil partnership.
D) It leaves the transferor with sufficient income to maintain their usual standard of living.

Answer 10

C) It was made only within marriage or civil partnership.

Question 11

q) Stamp duty land tax (SDLT) for non-residential property applies to all the following EXCEPT:

A) Commercial property such as shops or offices.
B) Agricultural land and forests.
C) Any other land or property which is not used as a residence.
D) Three or more residential properties bought in a single transaction.

Answer 11

D) Three or more residential properties bought in a single transaction.

Question 12

r) All the following about double top price patterns are true EXCEPT:

A) The two market tops are at a similar level.
B) It indicates a significant level of resistance.
C) It triggers the reversal of an uptrend.
D) It marks the continuation of an uptrend.

Answer 12

D) It marks the continuation of an uptrend.

It is incredibly bearish and marks the beginning of a fall in price after two peaks (looks like the letter M)

Question 13

t) An individual investing in a UK company will pay stamp duty reserve tax (SDRT) on all the following types of investment EXCEPT:

A) Share options.
B) Convertible loan stock.
C) An American depositary receipt (ADR) of a UK company.
D) Uncertificated shares.

Answer 13

C) An American depositary receipt (ADR) of a UK company.

Question 14

Current knowledge and evidence on pound cost averaging (PCA) vs single lump sum investment suggests that PCA:

A) Keeps better pace with inflation
B) Achieves lower volatility on average under normal market conditions
C) Achieves higher returns on average under normal market conditions
D) Relies on highly likely sequences of prices in order to perform better

Answer 14

B) Achieves lower volatility on average under normal market conditions

Question 15

e) The growth rate of equity earnings is equal to retention rate multiplied by:

A) Earnings per share growth
B) Return on capital employed
C) Book value per share growth
D) The return on equity

Answer 15

D) The return on equity

Question 16

g) All other things being equal, a stripped five-year bond may make a suitable risk-free rate because there is zero:

A) Interest and inflation risk
B) Call risk
C) Downgrade and default risk
D) Reinvestment risk

Answer 16

D) Reinvestment risk

Question 17

k) In a split capital investment trust an investor is most likely to get their capital back by holding which type of share?

A) Income shares
B) Capital shares
C) Income and residual capital shares
D) Zero dividend preference shares

Answer 17

D) Zero dividend preference shares

Question 18

r) You manage a discretionary gilt and euro sovereign bond portfolio for a client. Which of the following would you least likely undertake to reduce the risk of the portfolio on a mark-to-market, current valuation cash basis?

A) Increase the proportion held in index-linked bonds
B) Increase the proportion held in gilts
C) Switch to shorter dated bonds
D) Switch to higher coupon bonds

Answer 18

A) Increase the proportion held in index-linked bonds

Question 19

All of the following are key factors in calculating the premium of an option on an
equity index, except:

A) discount rate.
B) time to maturity.
C) current index level.
D) exercise index level.

Answer 19

A) discount rate.

Question 20

All of the following persons are exempt from stamp duty and stamp duty reserve
tax, except:

A) registered charities.
B) those receiving shares as gifts.
C) London Stock Exchange member firms.
D) those outside the UK transacting outside of CREST.

Answer 20

D) those outside the UK transacting outside of CREST.

Question 21

c) Which of the following is a parametric risk measure?

A) Runs test.
B) Drawdown.
C) Sortino ratio.
D) Value at Risk.

Answer 21

D) Value at Risk

Question 22

f) The total expense ratio includes all of the following costs involved in running a
fund, except:

A) audit fee.
B) any depositary fee.
C) interest on borrowing.
D) registration and regulatory fees.

Answer 22

C) interest on borrowing.

Question 23

i) All of the following are textbook bond indexation strategies, except:

A) duration switching.
B) duration matching.
C) maturity laddering.
D) short and long maturity barbell

Answer 23

a) duration switching

Question 24

m) Which metric is an indicator that guides switching between asset classes?

A) Yardeni.
B) Dividend yield.
C) Total equity yield.
D) Earnings yield (or price–earnings ratio).

Answer 24

A) Yardeni.

Question 25

p) Which of the following is an absolute measure of risk:

A) drawdown.
B) M2 measure.
C) tracking error.
D) conditional value at risk

Answer 25

A) drawdown.

Question 26

r) Barber and Odean rank retail investor portfolios by turnover and report that the
difference in return between the highest and lowest turnover portfolios is -7% per
year. They attribute this to:

A) anchoring.
B) loss aversion.
C) overconfidence.
D) availability bias.

Answer 26

C) overconfidence.

Question 27

All else equal, a callable bond is characterised by:

a. The same convexity at different yields
b. Zero convexity at yields below the coupon rate
c. Negative convexity at lower than normal yields
d. Positive convexity at lower than normal yields

Answer 27

c. Negative convexity at lower than normal yields

issuer more likely to call a bond if yields fall

Question 28

Which of the following services is exempt from value added tax (VAT)?

a. Safe custody
b. Global custody
c. Discretionary investment management
d. Trustee and depositary

Answer 28

b. Global custody

Question 29

Which asset-class product is most likely to be able to offer significant exposure to
banking sector debt and has more than one source of credit protection?

a. Asset-backed securities
b. Collateralised debt obligations
c. Covered bonds
d. Senior subordinated bonds

Answer 29

c. Covered bonds

Question 30

A client’s portfolio contains futures contracts in gold that are nearing expiration. You note that gold futures are currently in contango. If the client rolls forward the futures position at expiration with an instruction to maintain the same dollar
exposure in gold futures, the number of gold futures contracts your clients holds will most likely:

a. Decrease
b. Stay the same
c. Increase
d. Go into backwardation

Answer 30

a. Decrease

Question 31

h) An adjusted beta is often calculated for stocks when using the market model because:

a. Betas tend to mean revert
b. Betas tend to be procyclical
c. Betas tend to follow a random walk
d. Beta requires a risk-free rate

Answer 31

a. Betas tend to mean revert

Question 32

An investor wants to insure their whole portfolio against losses, while continuing to benefit from any appreciation in the value of their portfolio. The investor is most likely to pursue a:

a. Investment return collar
b. Protective put strategy
c. Covered call strategy
d. Interest rate collar

Answer 32

b. Protective put strategy

Question 33

d) The call-option value of a callable bond is likely to be highest when?

a. Economic growth is moderate and expected to be moderate
b. Economic growth is variable
c. Interest rates are volatile
d. Inflation is moderate and expected to be moderate

Answer 33

c. Interest rates are volatile

Question 34

e) If futures prices are higher than cash prices, the market is said to be?

a. In backwardation
b. In contango
c. At a premium
d. At a discount

Answer 34

b. In contango

Question 35

k) Which of the following is a key motivation for investment in commodities?

b. High positive correlation with equity and bond investments
c. Higher volatility relative to equity and bond investments
d. Positive risk premium from a buy and hold strategy

Answer 35

a. Positive correlation with expected and unexpected inflation

Question 36

l) Which is the best test of the classic weak form of the efficient market hypothesis?

a. Serial correlation in stock returns
b. Share price reaction to news
c. Share price reaction to directors’ trades
d. Share price reaction to takeover announcements

Answer 36

a. Serial correlation in stock returns

Question 37

q) The government bond yield curve is conceptualised to comprise all of the following investment return premiums except?

a. Liquidity premium
b. Nominal rate premium
c. Expected inflation premium
d. Market risk premium

Answer 37

b. Nominal rate premium

Question 38

r) The Taylor rule is a macroeconomic measure used to inform investors and policymakers about?

a. Nominal additional output relative to full capacity output
b. Real additional output relative to real full capacity output
c. Potential inflation pressure relative to the target inflation rate
d. Central bank policy interest rate

Answer 38

d. Central bank policy interest rate

Question 39

Compared to the geometric mean return of a security, the arithmetic mean return
for the same security is:

a. Always higher
b. Always lower
c. Higher or the same but never lower
d. Lower or the same but never higher

Answer 39

c. Higher or the same but never lower

A>G

Question 40

p) The policy effect when measuring bond portfolio performance refers to?

a. The impact of short-term changes in the portfolio during the sample period
b. The return difference from changing portfolio duration within the sample
period
c. The incremental return from buying bonds that are mispriced relative to
their risk
d. The difference in portfolio duration and index duration

Answer 40

d. The difference in portfolio duration and index duration

Question 41

What textbook type of equity investment style would be most expected to
outperform if the bond yield curve is flat or downward sloping?

a. Growth investing
b. Value investing
c. Defensive
d. Momentum investing

Answer 41

a. Growth investing

downward sloping = conditions easing

Question 42

n) The revenue of an equity type of real estate investment trust (REIT) mostly
comes from?
a. Sale of properties for capital gain
b. Purchase and sale of undeveloped land
c. Income from lease and rent
d. Investment proceeds of loans secured on real estate

Answer 42

c. Income from lease and rent

Question 43

k) Disposal of a holding in a non-reporting fund is liable to be taxed as?

a. Capital gain
b. Income
c. Capital gain and income
d. Neither capital gain nor income

Answer 43

b. Income

Question 44

j) A structured product linked to the FTSE 100 Index contains two component parts. If one component is a call option to provide the market participation, the second component is most likely to be a:

a. Treasury bill
b. Gilt
c. Put option to protect a floor value
d. Index future to provide a collar

Answer 44

b. Gilt

Question 45

g) All of the following investment instruments are exempt from UK stamp duty and stamp duty reserve tax (SDRT) except?

a. Convertible loan stock (bonds)
b. Bearer stocks
c. Right issues to existing owners
d. Exchange traded funds

Answer 45

a. Convertible loan stock (bonds)

Question 46

b) What textbook type of equity investment style would be most expected to outperform if the bond yield curve is upward sloping and steepening?

a. Low volatility investing
b. Value investing
c. Momentum investing
d. Growth investing

Answer 46

b. Value investing

conditions tightening = value firms with economic moats will perform better

Question 47

a) Dividend income is tax-free if received on?

a. Preference shares.
b. Ordinary shares of a venture capital trust (VCT).
c. Enterprise Investment Scheme (EIS) companies.
d. Seed Enterprise Investment Scheme (SEIS) shares.

Answer 47

b. Ordinary shares of a venture capital trust (VCT).

Question 48

d) Stamp Duty Reserve Tax (SDRT) is paid when?

a. Purchasing a contract for difference (CFD) on the FTSE 100 index.
b. Purchasing a new issue of shares in a public limited company.
c. Purchasing shares in an exchange-traded fund (ETF).
d. Purchasing an option to buy shares.

Answer 48

d. Purchasing an option to buy shares.

Question 49

j) All of the following are features of quadratic programming outputs within portfolio construction except?

a. The expected return should be no less than a minimal rate of portfolio
return that the investor desires.
b. Short (negative) and long (positive) positions.
c. Each coefficient is constrained to lie between 0 and 1.
d. The sum of the coefficients should add up to a total of 1.

Answer 49

b. Short (negative) and long (positive) positions.

Question 50

k) When exercising investment stewardship and firmer action is considered, the
expected order of activity would normally be?
a. Company engagement, share ownership, voting, divestment.
b. Share ownership, voting, divestment, company engagement.
c. Share ownership, company engagement, voting, divestment.
d. Share ownership, voting, company engagement, divestment.

Answer 50

d. Share ownership, voting, company engagement, divestment.

Question 51

The international capital asset pricing model (CAPM) assumes that?

Answer 51

b. The risk-free rate is the investor’s domestic risk-free rate, and the market portfolio is the market capitalisation weighted portfolio of all public-listed and private risky assets in the world

Question 52

m) In a situation where there is a risk of corporate insolvency, and where the equity value of the company is low, which is most likely?

a. Bondholders prefer the company to take additional risk.
b. Bondholders prefer the company to pay back unsecured loans.
c. Equity holders prefer the company to cut the dividend to conserve cash.
d. Equity holders prefer the company to take additional risk.

Answer 52

d. Equity holders prefer the company to take additional risk.

Question 53

n) Which type of stock has a high probability of a low return and a low probability of a high return?

a. Speculative.
b. Growth.
c. Low volatility.
d. Value.

Answer 53

a. Speculative.

Question 54

a) When valuing a company, the FIRST stage is most likely to be to
A) forecast the cost of equity.
B) select an appropriate valuation model.
C) forecast company performance.
D) understand the company’s business.

Answer 54

D) understand the company’s business.

Question 55

c) According to the preferred habitat hypothesis, when a portion of the yield curve
has excess supply, the slope of that portion of the yield curve is MOST likely to
be
A) neutral
B) positive
C) indeterminant
D) negative

Answer 55

D) negative

Question 56

) A stock has an expected capital gain of 8% and expected dividend yield of 2%.
The actual capital gain was 9% and dividend yield 2%. The cost of equity for the
stock is 7%. The expected alpha is closest to
A) 3%
B) 2%
C) 1%
D) 0.5%

Answer 56

A) 3%

Total Return - Cost of Equity
(8+2)-(7)=3

Question 57

l) A black swan event is an example of
A) Platykurtosis.
B) Leptokurtosis.
C) Positive skewness.
D) Negative skewness.

Answer 57

D) Negative skewness.

Question 58

m) The complement of an event occurring means that
A) the event does occur.
B) the event does not occur.
C) a second event similar to a first event occurs.
D) a second event dissimilar to a first event occurs.

Answer 58

B) the event does not occur.

Question 59

In a covariance matrix, the covariance of the returns of a security on the returns
of the same security is equal to
A) 1
B) 0
C) the variance of the security.
D) the R2 of the security.

Answer 59

C) the variance of the security.

Covariance of the same security is not “CO”-variance, it is just measuring the variability of a single asset = variance

Question 60

A government bond yield is 2.5%. Inflation is 2.0%. The real yield is calculated
as bond yield
A) divided by inflation.
B) plus inflation.
C) minus inflation.
D) multiplied by inflation.

Answer 60

C) minus inflation.

Question 61

r) Using Treasury bill yields rather than Treasury bond yields for estimating the
equity risk premium will MOST likely result in
A) a higher risk premium.
B) a lower positive risk premium.
C) a lower negative risk premium.
D) the same risk premium.

Answer 61

B) a lower positive risk premium.

Question 62

s) An analyst compares a 20-year index-linked Gilt yield to a CPI adjusted 20-year
normal Gilt yield. The analyst should expect to find that the
A) index-linked Gilt yield is higher.
B) index-linked Gilt yield is lower.
C) index-linked Gilt yield equals the CPI-adjusted 20-year normal Gilt yield.
D) two are unequal, but randomly so.

Answer 62

B) index-linked Gilt yield is lower.

Question 63

a) Which is the BEST definition of tracking error?
A) Standard deviation of the portfolio’s returns minus the standard deviation of
the benchmark’s returns.
B) Standard deviation of the portfolio’s returns divided by the standard deviation
of the benchmark’s returns.
C) Standard deviation of the difference of the portfolio’s returns and the
benchmark’s returns.
D) Standard deviation of the portfolio’s returns divided by the benchmark’s
returns.

Answer 63

C) Standard deviation of the difference of the portfolio’s returns and the
benchmark’s returns.

Question 64

f) Which of the following is an absolute measure of risk in the sense that the
measure is not in any way relative to something else?
A) Volatility.
B) Tracking Error.
C) Conditional Value at Risk.
D) Drawdown.

Answer 64

D) Drawdown.

Question 65

g) Which of the following is FALSE for a basic-rate taxpayer with a portfolio of
equity and fixed-interest unit trusts and OEICs?
A) Any losses from the portfolio are allowable for Capital Gains Tax
calculations.
B) All share buyback proceeds are not subject to 10% tax credit.
C) All coupons received are subject to 10% tax credit.
D) The taxation of share buybacks on the OEICs held will be treated the same
way as the unit trusts.

Answer 65

C) All coupons received are subject to 10% tax credit.

Question 66

h) A portfolio perspective is expected to be especially important when constructing
a portfolio because
A) the volatility of asset returns are imperfectly correlated.
B) portfolio risk falls linearly as more investments are added to a portfolio.
C) total portfolio return can be increased by investing in a range of less than
perfectly correlated assets.
D) asset returns are related to their betas.

Answer 66

A) the volatility of asset returns are imperfectly correlated.

Question 67

n) Which parameter is NOT needed when estimating the efficient frontier by using a
variety of different securities?
A) The weight of each security.
B) The expected return of each security.
C) The beta of each security.
D) The covariance for each pair of securities.

Answer 67

C) The beta of each security.

Question 68

o) The tracing, or contour, which describes efficient portfolio combinations when
there is a risk-free asset and investors have heterogeneous expectations is
BEST described as the
A) portfolio possibility curve.
B) efficient frontier.
C) capital market line.
D) security market line.

Answer 68

C) capital market line.

Question 69

q) Two unrelated variables may appear to have a statistical negative correlation
coefficient because of
A) error terms being correlated across the observations.
B) error terms being normally distributed.
C) a small number of outliers.
D) truncation of the outliers.

Answer 69

C) a small number of outliers.

Question 70

r) An analyst evaluating a company’s ability to pay its credit obligations is LEAST
likely to consider the company’s
A) gearing ratio.
B) interest coverage ratio.
C) bond indenture provisions.
D) level of profitability.

Answer 70

C) bond indenture provisions.