CMFAS CACS – Client Advisor Competency Standards (CACS) ​Paper 2 Exam

Correct: Statement I is correct because the Sharpe Ratio uses standard deviation (total risk), which is the appropriate measure for a single fund, whereas the Treynor Ratio is designed for diversified portfolios using beta. Statement II is correct because the Sortino Ratio specifically isolates and penalizes only downside volatility, whereas the Sharpe Ratio penalizes both upside and downside volatility equally.

Incorrect: Statement III is incorrect because the CACS Paper 2 text explicitly states that if an investor uses CPF savings to purchase a fund, the relevant risk-free rate is the CPF interest rate, not the bank deposit rate. Statement IV is incorrect because an alpha of 1.0 represents an outperformance of 1% over the benchmark index, not 10%.

Takeaway: Selecting the correct risk-adjusted return measure depends on whether the investor is evaluating total risk, systematic risk, or specifically downside risk, as well as the source of the investment capital. Therefore, statements I and II are correct.

Correct: Statement I is correct because money-market instruments are less volatile than equities and typically receive higher lending values (up to 90-95%) compared to equity investments (30-70%). Statement III is correct because Covered Entities maintain the right to change lending values at their discretion, which directly impacts margin erosion and the timing of margin calls.

Incorrect: Statement II is incorrect because mortgage loans offered by private banks provide clients with the flexibility to draw-down larger or smaller quantities of the loan midway through the period, unlike more restrictive retail housing loans. Statement IV is incorrect because mortgage loans are designed to help clients retain their financial investments and assets under management with the bank, rather than encouraging liquidation.

Takeaway: Lending values are determined by asset volatility and bank policy, while private bank mortgage loans are structured to provide flexibility and help retain client assets under management. Therefore, statements I and III are correct.

Correct: Statement II is correct because even when a portfolio is managed on a discretionary basis by an internal manager, the Covered Person remains responsible for ensuring the investment strategy is carried out and objectives are met. Statement III is correct because rebalancing is the specific process of buying or selling assets to restore the prescribed asset allocation mix after market price changes.

Incorrect: Statement I is incorrect because yield only measures annualized income such as interest and dividends and explicitly excludes capital gains, whereas total return includes both. Statement IV is incorrect because the Dollar-Weighted Rate of Return (DWR) is used specifically to account for cash flows during the investment period; simple returns are used when no such cash flows occur.

Takeaway: Covered Persons maintain oversight responsibility for client objectives across all mandate types, and performance measurement must distinguish between income-only yields and total returns. Therefore, statements II and III are correct.

Correct: Statement I is correct because forward pricing is the standard market practice where the actual transaction price is determined at a future valuation point to allow administrators to process all subscriptions, redemptions, and expenses. Statement IV is correct because Bid-to-Bid (or NAV-to-NAV) returns measure the change in the fund’s net asset value over a period, excluding the impact of initial sales charges.

Incorrect: Statement II is incorrect because Offer-to-Bid returns include sales charges, which are distribution costs that do not reflect the fund manager’s actual investment management ability; NAV-to-NAV is the preferred metric for that purpose. Statement III is incorrect because global funds typically use forward pricing due to the complexities of different exchange closing times across time zones; historical pricing is only suitable for funds with less volatile securities.

Takeaway: Most funds utilize forward pricing for transactions, and while Offer-to-Bid returns reflect an investor’s actual experience, NAV-to-NAV returns are the appropriate measure for evaluating a fund manager’s performance. Therefore, statements I and IV are correct.

Correct: Statement II is correct because the source text states that derivatives may provide leveraged exposure and their fulfillment depends on other parties, leading to counterparty risk. Statement IV is correct because Yield to Maturity is a comprehensive indicator that accounts for the coupon rate, current market price, and the length of maturity.

Incorrect: Statement I is incorrect because the text explicitly states that no hedging strategy will eliminate currency risk entirely, even when using currency-hedged classes. Statement III is incorrect because the average annual coupon rate is calculated as a weighted average based on the market value of the bonds within the fund, rather than a simple average.

Takeaway: Wealth managers must distinguish between different yield metrics and recognize that specialized fund classes, such as currency-hedged options, mitigate but do not entirely eliminate underlying market risks. Therefore, statements II and IV are correct.

Correct: R-Squared, which quantifies the proportion of the fund’s return fluctuations that can be explained by movements in the benchmark, is the right answer because it specifically measures the percentage of a fund’s return attributable to its benchmark. According to the CACS Paper 2 syllabus, an R-squared of 1.0 means 100% of the fund’s variance is attributable to the index, indicating the fund tracks the index exactly.

Incorrect: The option regarding Beta is wrong because Beta measures the magnitude of volatility or sensitivity of a fund relative to the index, rather than the percentage of variance explained. The option regarding Tracking Error is wrong because it measures the standard deviation of the difference between the fund and the index returns, focusing on tracking precision rather than attribution of variance. The option regarding Standard Deviation is wrong because it measures absolute risk or the dispersion of returns on a standalone basis without reference to a benchmark.

Takeaway: R-Squared is a key metric for determining how much of a fund’s risk and return profile is derived from its benchmark index versus other specific risk factors not explained by the benchmark.

Correct: The Dirty Price is calculated by adding the quoted Clean Price to the Accrued Interest earned since the last coupon payment because it accounts for the interest that has accumulated but has not yet been paid out since the last coupon date.

Incorrect: The suggestion to subtract Accrued Interest is wrong because the buyer must compensate the seller for interest earned, not the other way around. The suggestion to divide by the yield to maturity is wrong because YTM is a discount rate for future cash flows and does not represent the settlement adjustment for accrued interest. The suggestion to add the full annual coupon is wrong because interest is only prorated for the specific number of days between the last coupon and settlement.

Takeaway: The Dirty Price represents the total cash consideration for a bond trade, combining the market-quoted Clean Price with the Accrued Interest since the last payment.

Correct: Statement II is correct because the Time Weighted Rate of Return (TWR) formula specifically requires the portfolio value (Mt) at the end of each sub-period immediately before any external cash flow (Ct) occurs. Statement III is correct because the Coefficient of Variation (CV) is defined in the formulae sheet as the Standard Deviation of Returns divided by the Expected Rate of Return.

Incorrect: Statement I is incorrect because simple returns must include income (I) such as dividends or interest, and TWR is a geometric calculation of sub-period returns rather than a simple division of end and beginning values. Statement IV is incorrect because the Sharpe Ratio uses the standard deviation of the portfolio (total risk) in its denominator, whereas the use of Beta (systematic risk) refers to the Treynor Ratio.

Takeaway: Accurate performance evaluation requires using sub-period valuations for TWR to eliminate the impact of cash flows, while risk-adjusted metrics must correctly distinguish between total risk and systematic risk. Therefore, statements II and III are correct.

Correct: Statement I is correct because the Quick Ratio formula (Current Assets – Inventory) / Current Liabilities is more conservative than the Current Ratio as it excludes inventory, which may be difficult to liquidate quickly. Statement III is correct because the Debt to Equity Ratio is defined in the CACS Paper 2 formulae as Long-Term Debt divided by Total Equity, measuring financial leverage.

Incorrect: Statement II is incorrect because the Interest Coverage Ratio is calculated by adding Interest Expense and Taxes back to Net Income in the numerator (effectively EBIT) before dividing by Interest Expense, not just Net Income alone. Statement IV is incorrect because the Inventory Turnover Ratio measures how many times inventory is sold and replaced, which is an efficiency metric rather than a direct component or determinant of the Current Ratio’s value.

Takeaway: Financial ratios allow advisors to assess different aspects of a firm’s health, such as using the Quick Ratio for immediate liquidity and the Interest Coverage Ratio for debt-servicing capacity. Therefore, statements I and III are correct.

Correct: The fund manager typically stops accepting fresh subscriptions to maintain the ability to add value is correct because when a fund grows too large relative to its target market, the manager loses nimbleness and faces difficulty in generating alpha. Closing the fund to new investors is a standard measure to protect existing performance.

Incorrect: Increasing the total expense ratio is incorrect because fixed costs like legal fees actually have a smaller percentage impact on larger funds, which usually helps lower the expense ratio. Shifting the investment objective to global equities is incorrect because a fund manager must stick to the mandate defined in the prospectus regardless of the fund’s size. Reducing the cash buffer is incorrect because the primary challenge of a large fund is the market impact of its trades and the lack of suitable investment opportunities, not its internal cash levels.

Takeaway: When a fund reaches its optimal capacity, it often stops accepting new subscriptions to prevent the fund size from hindering the manager’s ability to add value to the portfolio.

Correct: Statement I is correct because the Equity Yield formula for Annual Cash Flow specifically adds back non-cash charges like depreciation and amortization to the net income. Statement III is correct because interest costs are explicitly subtracted from rental income to determine the net annual cash flow available to the equity holder.

Incorrect: Statement II is incorrect because the denominator for Equity Yield is the Total Amount Invested, which is the transacted price minus the loan amount plus transaction costs, not the gross price. Statement IV is incorrect because the calculation requires deducting all expenses, interest costs, and taxes, rather than just property-level operating expenses.

Takeaway: The Equity Yield ratio measures the cash return on the actual capital outlay by accounting for financing leverage, transaction costs, and the add-back of non-cash accounting items. Therefore, statements I and III are correct.

Correct: Statement I is correct because duration measures the sensitivity of a bond fund’s value to interest rate movements; a 1% increase in rates leads to a percentage price decline approximately equal to the duration. Statement II is correct because the disclosure of the Total Expense Ratio (TER) in annual or semi-annual reports is a specific regulatory requirement for fund managers. Statement IV is correct because risk-adjusted measures like the Sharpe ratio are necessary to determine if a fund’s performance was due to manager skill or simply taking on excessive risk.

Incorrect: Statement III is incorrect because the text explicitly states that if the top 10 holdings of a fund account for more than 50% of its total value, the fund is likely not well-diversified.

Takeaway: Comprehensive fund evaluation requires analyzing interest rate sensitivity through duration, monitoring regulatory cost disclosures, and applying risk-adjusted metrics to assess performance quality. Therefore, statements I, II and IV are correct.

Correct: Eliminating the impact of the timing and size of external cash flows is the right answer because these factors are typically determined by the client rather than the investment manager. According to the CACS Paper 2 syllabus, the Time-Weighted Rate of Return (TWR) is more appropriate for evaluating manager performance because it measures investment results independent of the injection or withdrawal of cash.

Incorrect: The suggestion that the metric accounts for compounding over multiple years to provide a geometric average describes the methodology for calculating annualized returns rather than the specific objective of TWR. The option regarding the use of probabilities for different economic scenarios refers to the calculation of Expected Return, which is a point estimate based on potential outcomes. The claim that the metric adjusts for volatility is incorrect, as TWR focuses on isolating return performance from cash flow timing and does not inherently adjust for risk levels.

Takeaway: TWR is the preferred performance metric for investment managers because it removes the distorting effects of client-driven cash flows, which are outside the manager’s control.

Correct: Statement I is correct because the Return on Investment (ROI) calculation for real estate is designed to be a comprehensive measure that incorporates both rental income (annual cash inflow) and capital appreciation. Statement III is correct because the CACS syllabus explicitly identifies comparing the Rental Yield and Cap Rate of a property against neighbouring projects as a valid benchmarking method to assess performance.

Incorrect: Statement II is incorrect because pro forma measures are prepared before an investment is undertaken to estimate potential returns; after the investment is made, actual returns are compared against these pre-existing estimates. Statement IV is incorrect because the formula for ‘Total Amount Generated’ specifically requires the deduction of transaction costs upon sale to ensure the ROI reflects the net amount generated.

Takeaway: Calculating real estate ROI requires accounting for all inflows, valuations, and costs, which are then benchmarked against indices, pro forma estimates, or peer property data. Therefore, statements I and III are correct.

Correct: The statement that total portfolio risk is generally lower than the weighted average of individual asset risks when the correlation is less than one is correct. According to the portfolio risk formula, the standard deviation of a portfolio is influenced by the correlation coefficient (ρ1,2); as long as assets are not perfectly positively correlated (ρ < 1), the portfolio benefits from diversification, resulting in a total risk that is less than the simple weighted average of the individual risks.

Incorrect: The claim that portfolio risk is a simple weighted average of individual standard deviations is incorrect because it fails to account for the interaction (correlation) between assets. The assertion that risk remains constant regardless of correlation is false, as the formula explicitly shows that a lower correlation coefficient reduces the portfolio’s standard deviation. The suggestion that risk is determined by the arithmetic mean is conceptually wrong, as the mean measures the average return, while risk is defined by the dispersion of returns around that mean.

Takeaway: Total portfolio risk is not a simple weighted average of individual asset risks but is reduced by diversification when the correlation between assets is less than one.

Correct: Equity Yield is the correct measure because it specifically calculates the return based on the actual cash outflow, factoring in the loan amount, transaction costs, and net cash flows after all expenses and interest.

Incorrect: Cap Rate is incorrect because it measures net operating income against the total property transacted price, ignoring the specific financing and transaction costs incurred by the investor. Gross Rental Yield is incorrect because it uses gross rental income and the full transacted price, failing to account for property expenses, taxes, or the impact of leverage. Property Valuation is incorrect because it is a professional assessment of market value at a specific time rather than a yield calculation based on cash flow and investment outlay.

Takeaway: Equity Yield is the most comprehensive performance metric for individual investors as it accounts for the magnification effects of leverage and the reality of transaction costs.

Correct: A market neutral strategy is the right answer because it utilizes long-short techniques specifically to eliminate market risk, allowing the manager to focus on the excess return of one stock over another regardless of whether the overall market moves up or down.

Incorrect: The equity long/short strategy option is wrong because, while it uses both positions, it typically aims to maximize profit through directional exposure rather than focusing on the complete elimination of market risk. The global macro strategy option is incorrect as it focuses on profiting from broad economic shifts and systemic trends rather than neutralizing market risk through paired security positions. The event-driven strategy option is incorrect because it targets specific corporate catalysts like mergers or restructuring rather than the relative valuation of stocks within a sector to hedge market volatility.

Takeaway: Market neutral funds aim to isolate alpha by pairing long and short positions to cancel out broader market movements, ensuring returns depend on security selection rather than market direction.

Correct: Statement II is correct because the source text explicitly states that combining securities with zero correlation has a great impact on reducing portfolio risk, although it cannot be totally eliminated. Statement III is correct because when securities are perfectly positively correlated (+1), diversification provides no risk reduction, and the portfolio risk is merely the weighted average of the individual securities’ risks.

Incorrect: Statement I is incorrect because systematic risk arises from general economic or market-wide factors, not firm-specific factors; it is unsystematic risk that is idiosyncratic and can be mitigated through diversification. Statement IV is incorrect because systematic risk, such as interest rate or inflation risk, cannot be diversified away regardless of the correlation between assets; diversification only targets the elimination of unsystematic risk.

Takeaway: While unsystematic risk can be reduced or eliminated through low correlation and diversification, systematic risk is inherent to the market and remains regardless of the number of securities held. Therefore, statements II and III are correct.

Correct: Decomposing the total performance into specific components to identify the reasons for deviations from the benchmark is the primary purpose of performance attribution. According to the CACS Paper 2 syllabus, this process allows a Covered Person to explain why a portfolio did better or worse than the target return by analyzing factors like asset allocation and sector selection.

Incorrect: Calculating risk-adjusted return by comparing excess return against total risk describes the Sharpe Ratio, which is a performance measurement tool but not the process of attribution. Determining the risk-free rate relative to systematic risk relates to the Treynor Ratio calculation rather than the decomposition of performance. Establishing a passive strategy describes the construction of a benchmark (or bogey) portfolio, which is the starting point for comparison rather than the attribution analysis itself.

Takeaway: Portfolio performance attribution is used to break down total returns into specific investment decisions, such as asset allocation and security selection, to explain deviations from a benchmark.

Correct: Statement II is correct because Singapore regulations mandate a minimum 90% profit distribution for the REIT to qualify for tax transparency at the trust level. Statement IV is correct because the debt-to-property value ratio is strictly capped at 45% of the property value to ensure financial stability.

Incorrect: Statement I is incorrect because the trustee holds the legal title to the properties, and investors only own units in the trust without direct decision-making power over property transactions. Statement III is incorrect because the primary objective of a REIT is to generate recurring rental income rather than seeking capital gains through property trading.

Takeaway: Singapore REITs are income-focused vehicles characterized by high mandatory payout ratios, strict leverage limits, and a trust structure that separates legal ownership from investor units. Therefore, statements II and IV are correct.

Correct: Statement I is correct because mezzanine finance is defined as a combination of debt and equity where debt capital is provided on the condition it can be converted to equity if the loan is not repaid. Statement II is correct because companies slated for an IPO often offer shares at a discount to private equity firms to benefit from the enhanced branding and marketability that comes with having a reputable institutional shareholder.

Incorrect: Statement III is incorrect because the description provided refers to Growth Capital; Turnaround Capital specifically involves investing in companies that are in financial distress with the goal of seeking high returns upon their recovery. Statement IV is incorrect because ‘Core’ strategies represent property investments with the lowest risks and returns, while ‘Opportunistic’ strategies are those with the highest risks and returns.

Takeaway: Private equity investments offer diverse entry points including venture, growth, and turnaround capital, each serving different strategic rationales such as IPO preparation or corporate restructuring. Therefore, statements I and II are correct.

Correct: Explaining how currency fluctuations have influenced the total return when converted into the client’s home currency is a specific requirement for portfolios with multi-currency exposures to ensure the client understands their actual performance.

Incorrect: Providing a detailed breakdown of historical volatility for each individual currency pair is not a required standard and may introduce technical jargon that the guidelines suggest avoiding. Guaranteeing that future hedging strategies will eliminate all foreign exchange risks is inappropriate as it makes unrealistic promises about market movements. Focusing exclusively on local market performance is incorrect because it ignores the translation effect, which is a critical component of a holistic performance review for international portfolios.

Takeaway: When a portfolio has multi-currency exposures, the advisor must explain the impact of currency movements on the total return when translated into the client’s home currency.

Correct: Statement II is correct because style drift is a specific managerial risk where a manager moves into unfamiliar markets or asset categories when their primary area of expertise becomes less profitable. Statement III is correct because hedge funds often trade over-the-counter (OTC) instruments which lack a central exchange, making it difficult to establish a true intrinsic value and increasing the risk of conservative pricing by brokers.

Incorrect: Statement I is incorrect because it describes the characteristics of arbitrage funds; global macro funds typically take directional bets on macroeconomic variables and utilize high leverage rather than focusing on low-leverage paired trades. Statement IV is incorrect because the regulations explicitly state that distressed securities funds may take short positions if they believe a company’s financial condition will continue to worsen.

Takeaway: Hedge fund risks extend beyond market volatility to include managerial factors like style drift and structural issues like pricing difficulties in the over-the-counter market. Therefore, statements II and III are correct.

Correct: Statement II is correct because the comparable approach uses industry benchmarks, such as the Price to Earnings (P/E) ratio of similar actively traded companies, to derive a reference fair value. Statement III is correct because private equity transactions are concluded directly between the investor and investee without a clearing market, meaning either party failing to fulfill obligations creates counterparty risk.

Incorrect: Statement I is incorrect because the cost approach is specifically noted as being difficult to use for companies where value resides in human capital or intangible assets like intellectual property. Statement IV is incorrect because there are no formalized platforms in private equity that share information on transacted deals or pipelines, which is a key feature distinguishing it from public markets.

Takeaway: Private equity investments are characterized by valuation complexities and structural risks, such as counterparty and liquidity risk, due to the absence of formalized trading platforms and reliance on private legal contracts. Therefore, statements II and III are correct.

Correct: Statement I is correct because the Sharpe ratio evaluates the excess return of a portfolio relative to its total risk, which is represented by the standard deviation or volatility. Statement II is correct because the Treynor ratio specifically measures excess return per unit of systematic risk, using the portfolio’s beta as the denominator.

Incorrect: Statement III is incorrect because the standard deviation is derived by taking the square root of the variance, not by squaring it; squaring the variance would result in an even more exaggerated figure. Statement IV is incorrect because a portfolio’s return is a weighted average of its components’ returns based on their relative proportions, rather than a simple arithmetic average.

Takeaway: Accurate portfolio performance analysis requires distinguishing between total risk (standard deviation) and systematic risk (beta) when applying the Sharpe and Treynor ratios. Therefore, statements I and II are correct.

Correct: Monetary policy is determined by the central bank’s assessment and can be implemented relatively quickly to address economic shifts is the right answer because central banks can act independently and faster than the legislative processes required for fiscal changes.

Incorrect: The claim that fiscal policy avoids political delays is wrong because the text explicitly states fiscal policy is often dragged down by political processes and the need for public support. The idea that monetary policy adjusts aggregate supply through production costs is incorrect because aggregate supply is determined by production factors like wages, whereas monetary policy influences aggregate demand. The assertion that fiscal policy manages the money supply and interest rates is false because these are the specific tools and responsibilities of monetary policy, not fiscal policy.

Takeaway: Monetary policy is the preferred tool for smoothing the business cycle due to its speed of implementation compared to the political hurdles associated with fiscal policy.

Correct: Statement I is correct because commodities are generally considered effective inflation hedges as their prices typically rise during inflationary periods. Statement III is correct because purchasing shares in companies that produce a specific commodity, such as gold mining firms, is a recognized indirect investment avenue. Statement IV is correct because the pricing of commodities is fundamentally driven by their inherent demand for consumption or as raw materials for production.

Incorrect: Statement II is incorrect because commodities are specifically noted for their inability to generate yield; unlike stocks or bonds, they do not provide dividends, interest, or rental income during the holding period.

Takeaway: Commodities are non-yield-bearing assets whose value is driven by inherent supply and demand, serving as tools for inflation hedging and economic participation through various indirect instruments. Therefore, statements I, III and IV are correct.

Correct: The potential for the asset’s value to be significantly impacted by the specific preferences of a limited pool of buyers is the right answer because passion investments are characterized by subjective appeal and high liquidity risk. As the target market for these items is small, it can be difficult to find a buyer who values the asset as highly as the seller.

Incorrect: The option regarding standardized public exchanges is wrong because passion investments are unique collectibles traded in niche markets, not on exchanges. The option describing a legal obligation to settle at a predetermined price is incorrect as it describes a forward contract rather than a risk inherent to passion assets. The option suggesting a lack of capital appreciation potential is wrong because the limited supply of these unique objects typically allows their value to increase over time.

Takeaway: Passion investments are characterized by subjective appeal and limited supply, which results in high liquidity risk and a dependency on a small group of specialized collectors.

Correct: Receiving the principal and interest in the alternate currency at the strike price is the standard outcome when the alternate currency depreciates against the base currency. In a Dual Currency Investment (DCI), the investor effectively sells a put option on the alternate currency; if the strike price is breached, the bank exercises its right to pay the investor in the weaker currency, resulting in a loss of value relative to the original base currency investment.

Incorrect: The claim that interest is forfeited to cover the option’s downside is incorrect because the enhanced interest is always paid, though it will be paid in the depreciated alternate currency. The suggestion that the principal is returned in the base currency at the strike price is wrong because the core mechanism of a DCI is the conversion into the alternate currency when the strike is hit. The idea that a penalty fee is deducted for failing to meet the strike price is inaccurate, as the financial loss stems from the currency conversion itself rather than an administrative fee.

Takeaway: A Dual Currency Investment provides an enhanced yield in exchange for the risk that the investor may be forced to receive their principal and interest in a depreciated alternate currency.

Correct: Statement I is correct because the FOMC is composed of twelve members, which includes all seven members of the Board of Governors and the President of the Federal Reserve Bank of New York. Statement II is correct as the source explicitly states the FOMC holds eight regularly scheduled meetings per year to review economic conditions. Statement III is correct because meetings in March, June, September, and December include the Summary of Economic Projections (SEP) and a press conference, which characterizes them as “live” meetings.

Incorrect: Statement IV is incorrect because Chart 2.4.2 and the accompanying text indicate that inflation typically leads the Fed funds rate, which suggests that the Federal Reserve is reactive rather than proactive in its policy adjustments.

Takeaway: The FOMC manages US monetary policy through eight annual meetings, with four “live” sessions providing detailed economic projections and press conferences to explain interest rate decisions. Therefore, statements I, II and III are correct.