CMFAS M6 Exam Free Trial

Some of the fundamental principles include:
1. Total return, accounting for realized and unrealized capital gains and income, must be used to
measure portfolio investment performance;
2. Time-weighted returns must be used;
3. Portfolios must be valued (marked to market) at least monthly, and returns have to be geometrically
linked i.e. the compounded annual growth rate (CAGR) must be used for annualized returns;
4. Performance must be calculated after deducting actual trading expenses (e.g. brokerage,
commissions, etc.);
5. Dividends, interest income and other sources of time-based income have to be accrued and
accounted for in the portfolio performance;
6. The annual returns for all years must be shown. If the investment management company is more
than 10 years, a 10-year performance record must be presented. Otherwise the performance record
has to be presented for the number of years since its inception;
7. Disclosure of whether performance results were calculated gross or net of investment management
fees; and
8. The use of leverage and derivatives has to be expressly disclosed.

Characteristics of Good Benchmarks
Good useful benchmarks should be
• Unambiguous – the asset class, securities, names and composition should be clearly stated;
• Investable – the benchmark portfolio should be practically and realistically investable as an actively managed portfolio;
• Measurable – the returns on the benchmark portfolio can be obtained from the market, and its performance measured;
• Consistent with the investment manager’s investment philosophy; and
• Bought in by the investment manager as an acceptable benchmark.

A pennant is formed after a sharp rise or fall in price with lower volume during its formation. The difference between a pennant and a flag is that the pennant is formed by a series of converging instead of parallel lines.

Runaway gaps or continuation gaps occur during rapid, straight-line rises or falls when price trends accelerate and emotions run high. Runaway gaps occur halfway between a previous breakout and ultimate duration of the move. Runaway gaps are also known as measuring gaps.

Monitoring market conditions. Market conditions and shifting relative values of various asset classes and securities in the market place are closely monitored. In addition, the investor’s needs, circumstances and objectives are evaluated periodically.

Industry analysis is as important as economic analysis when making investment decisions. Just as it is difficult for a company to perform well in a difficult economy, it is unlikely that a firm in a troubled industry will do well. An investor therefore has to consider the prospects of the industry for each stock.

The threat of entry places a limit on prices and shapes the investment required to deter entrants. Although the number of existing competitors in the industry may be few, one must assess the possibility of new entrants and increasing competition. High barriers to entry include low current prices relative to costs, large capital requirements, substantial economies of scale or the need for extensive distribution channels to compete.

A moving average is the average of the security’s closing price over a given period of time. The usefulness of a moving average is in the inclusion of past prices to obtain the moving average. Typically, each day of the moving average is given the same weighting. Hence in a 100-day moving average, each day is given a weighting of 1.

The secondary movement of the market is shorter in duration than the primary movement, and opposite in direction. The secondary movement usually lasts from several weeks to months, and usually retraces one-third to two-thirds of the previous advance (decline) in a bull (bear).

This ratio measures how well earnings cover total fixed financial charges including any fixed lease payments and any preferred dividends paid out of earnings after taxes.It is expressed as:
Fixed Charge Coverage =
Earnings Before Interest, Taxes and Lease Payments
____________________________________________________
Interest Expense + Lease Payments + Preferred Dividend/(1 – Tax Rate)

This ratio measures the average rate of speed with which inventories move through and out of the firm. A high inventory Turnover ratio means a rapid rate of sale for share and hence higher profits. It is calculated as follows:
Inventory Turnover =
Sales
__________________
Average Inventory
Some analysts prefer to use the cost of goods sold because inventories are stated at cost. Sales, on the other hand, include a profit. As the cost of goods sold figure is normally not available, the sales figure is used as a substitute.

The conversion ratio represents the number of shares of ordinary share for which the convertible bond (CB) can be exchanged.
In the case of Genesis convertible bond, the conversion ratio is 40, which means that a $1,000 par value convertible bond is exchangeable for 40 shares of ordinary share

Diversification and divisibility. By pooling investors’ money, unit trusts enable shareholders to hold fractional shares of many different securities. A diversified portfolio of securities can shield the investors from large losses.

Equity funds invest only in equity securities. A few specialized investment companies concentrate on the securities of firms in a particular industry or sector. For example, there are chemical funds, aerospace funds, technology funds and gold funds. Others provide a convenient means for holding the securities of firms in a particular country, such as Korea and Japan funds. The funds may have a regional orientation, such as European or Asian equity funds, while others may be globally invested.

Perpetual bonds have no maturity. Such bonds pay a higher coupon rate to compensate the investor for an indefinite holding period. Perpetual bond issuers are not legally obligated to redeem these bonds although there is usually an option for the bonds to be redeemed by the issuer on specific dates, usually five years after the bond issuance. These bonds rank before equities, in the order of discharge in an event of default.

The call price, i.e. the price at which the bond may be called, is normally higher than the par value of the bond issue. The difference between the call price and par value is the call premium. The call premium tends to be higher in the early life of the bond and declines gradually towards par as the bond approaches maturity.

II & III.
The price of a bond that has an embedded option depends on the level of interest rates and other factors that influence the value of the embedded option. One of the factors is the expected volatility of interest rates. This is also referred to as the vega risk. Specifically, the value of an option rises when expected interest-rate volatility increases. The risk that a change in volatility will adversely affect the price of a security is called volatility risk.

II, III & IV.
The following points clarify how these three properties affect a bond’s duration:
• If the coupon and yield are the same, duration increases with remaining period to maturity;
• If the maturity and yield are the same, duration increases with a lower coupon; and
• If the coupon and maturity are the same, duration increases with a lower yield.

I & IV.
Current yield measures the rate of return from the annual interest payments of the bond as a percentage of its market price. For example, a 10-year, 6% coupon bond with a par value of $1,000 and a price of 115% would provide a yield of 5.22%. The current yield considers only the annual interest payment and does not account for any potential capital gain or loss that the investor may realize if the bond is held to maturity.

Singapore Depositary Receipts (“SDRs”) are depositary receipts listed on SGX, allowing non-Singapore companies to access investors in Asia. The principal characteristics of SDRs are similar to those of other forms of depositary receipts, such the ADRs and GDRs.