CMFAS M6 Exam Free Trial Set Two
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Question 1 of 20
1. Question
Which of the following statements is true regarding the valuation approach?
Correct
The valuation approach seeks to identify the relative value of an asset class. In general, asset classes that are considered expensive are sold, and those considered cheap are purchased. The most common valuation approach is the risk premium approach or spread approach. Basically, if the expected return on equities relative to bonds is above average, an above-average allocation is made to equities. However, if the expected return on equities relative to bonds is below average, a lower allocation is made to equities. This is also referred to as the equity bond yield gap.
Incorrect
The valuation approach seeks to identify the relative value of an asset class. In general, asset classes that are considered expensive are sold, and those considered cheap are purchased. The most common valuation approach is the risk premium approach or spread approach. Basically, if the expected return on equities relative to bonds is above average, an above-average allocation is made to equities. However, if the expected return on equities relative to bonds is below average, a lower allocation is made to equities. This is also referred to as the equity bond yield gap.
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Question 2 of 20
2. Question
Which shares are attractive to investors who buy shares for current income?
Correct
Income Shares – These are shares of companies that pay higher than average dividend yields. These include mature companies, which can generate large cash flows that are not required for expansion purposes.
Income shares are attractive to investors who buy shares for current income. They are often sought by trust funds, pension funds, endowment funds, and charitable and educational foundations. Selecting income shares can be a very tricky business. The share may be paying a high dividend yield because its price has fallen due to the fact that there is considerable uncertainty as to whether the dividend can be maintained in the light of declining earnings. Or the share may also be that of a lackluster company in an unpopular industry with little future.Incorrect
Income Shares – These are shares of companies that pay higher than average dividend yields. These include mature companies, which can generate large cash flows that are not required for expansion purposes.
Income shares are attractive to investors who buy shares for current income. They are often sought by trust funds, pension funds, endowment funds, and charitable and educational foundations. Selecting income shares can be a very tricky business. The share may be paying a high dividend yield because its price has fallen due to the fact that there is considerable uncertainty as to whether the dividend can be maintained in the light of declining earnings. Or the share may also be that of a lackluster company in an unpopular industry with little future. -
Question 3 of 20
3. Question
Which of the following statements is true regarding hard asset shares?
Correct
Hard Asset Shares – These are shares of companies that own valuable assets. Often, such valuable assets are in the form of property or investments that have appreciated in value. Investors normally show strong interest in these shares when their share prices trade below their net asset values.
Incorrect
Hard Asset Shares – These are shares of companies that own valuable assets. Often, such valuable assets are in the form of property or investments that have appreciated in value. Investors normally show strong interest in these shares when their share prices trade below their net asset values.
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Question 4 of 20
4. Question
Which of the following statements is true regarding the left shoulder on the head and shoulders’ pattern?
Correct
Left shoulder – 1st strong price rally normally accompanied by heavy volume, followed by a price decline with considerably less volume.
Incorrect
Left shoulder – 1st strong price rally normally accompanied by heavy volume, followed by a price decline with considerably less volume.
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Question 5 of 20
5. Question
Which of the following statements is true regarding the head in the head and shoulders’ pattern?
Correct
Head – Prices advance again on high volume to reach a higher level than the top of the left shoulder before falling on lower volume. Prices will fall below the top of the left shoulder but above or near the low of the left shoulder.
Incorrect
Head – Prices advance again on high volume to reach a higher level than the top of the left shoulder before falling on lower volume. Prices will fall below the top of the left shoulder but above or near the low of the left shoulder.
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Question 6 of 20
6. Question
Which of the following statements is true regarding strategic asset allocation?
Correct
Strategic asset allocation refers to how a portfolio’s funds are divided among the various asset classes, given the client’s risk tolerance, preferences and requirements and the portfolio manager’s long-term forecasts of expected returns, variances and co-variances of various asset classes. It constitutes the “policy”, “long-run” or “strategic” asset mix. The asset mix is normally expressed in terms of the percentage of total value invested in each asset class.
Incorrect
Strategic asset allocation refers to how a portfolio’s funds are divided among the various asset classes, given the client’s risk tolerance, preferences and requirements and the portfolio manager’s long-term forecasts of expected returns, variances and co-variances of various asset classes. It constitutes the “policy”, “long-run” or “strategic” asset mix. The asset mix is normally expressed in terms of the percentage of total value invested in each asset class.
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Question 7 of 20
7. Question
Which of the following statements is true regarding tactical asset allocation?
Correct
This refers to active strategies that seek to enhance performance by shifting the asset mix of a portfolio in response to the changing patterns of reward available in the capital markets. The goal is to take advantage of inefficiencies in the relative prices of securities in different asset classes. Tactical changes in asset mixes are driven by changes in predictions concerning asset returns. For example, if the outlook for equities is favourable, the allocation mix can be changed.
Incorrect
This refers to active strategies that seek to enhance performance by shifting the asset mix of a portfolio in response to the changing patterns of reward available in the capital markets. The goal is to take advantage of inefficiencies in the relative prices of securities in different asset classes. Tactical changes in asset mixes are driven by changes in predictions concerning asset returns. For example, if the outlook for equities is favourable, the allocation mix can be changed.
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Question 8 of 20
8. Question
What is the significance of exchange of equation formula?
Correct
The significance of this equation is that when it is fully operative, the central bank will not be able to increase output by increasing money supply, because as M increases, the price level, P, will increase (more money chasing goods, causing inflation), and the velocity of money, V (which is socially determined i.e. decided by consumers) will then determine the output, Q.
Incorrect
The significance of this equation is that when it is fully operative, the central bank will not be able to increase output by increasing money supply, because as M increases, the price level, P, will increase (more money chasing goods, causing inflation), and the velocity of money, V (which is socially determined i.e. decided by consumers) will then determine the output, Q.
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Question 9 of 20
9. Question
What happens in the slightly negative scenario regarding interest rates?
Correct
Slightly negative scenario – Interest rates rise but there is little change in expected cash flows because firms are unable to increase prices to match higher costs. This will result in a fall in stock prices, as k increases but g remains constant
Incorrect
Slightly negative scenario – Interest rates rise but there is little change in expected cash flows because firms are unable to increase prices to match higher costs. This will result in a fall in stock prices, as k increases but g remains constant
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Question 10 of 20
10. Question
Which of the following statements is true regarding money supply?
Correct
Studies on the monetary history in the United States have shown that declines in the rate of growth of money supply have preceded business contractions, while increases in the growth rate of the money supply have preceded economic expansions. An important facet of monetary policy is the rate at which the Federal Reserve allows the money supply to grow. Money supply can also come from external sources for the following reasons:
1. Funds seeking higher yields (carry trade transactions that seek to earn the interest differential
between a low interest currency, e.g. US Dollars and a higher interest rate currency e.g. Indonesian Rupiah). This is sometimes referred to as “hot money”;
2. Funds seeking higher stock market returns in emerging markets and sometimes frontier markets; or
3. Funds seeking higher quality of credit, also referred to as “flight to quality”. This happened in the 3rd quarter of 2013, when Asian markets were trounced because of the announcement of the QE taper, which led to funds flowing out of Asia back to the US and Europe.Incorrect
Studies on the monetary history in the United States have shown that declines in the rate of growth of money supply have preceded business contractions, while increases in the growth rate of the money supply have preceded economic expansions. An important facet of monetary policy is the rate at which the Federal Reserve allows the money supply to grow. Money supply can also come from external sources for the following reasons:
1. Funds seeking higher yields (carry trade transactions that seek to earn the interest differential
between a low interest currency, e.g. US Dollars and a higher interest rate currency e.g. Indonesian Rupiah). This is sometimes referred to as “hot money”;
2. Funds seeking higher stock market returns in emerging markets and sometimes frontier markets; or
3. Funds seeking higher quality of credit, also referred to as “flight to quality”. This happened in the 3rd quarter of 2013, when Asian markets were trounced because of the announcement of the QE taper, which led to funds flowing out of Asia back to the US and Europe. -
Question 11 of 20
11. Question
What is the definition of an investment?
Correct
An investment is a commitment of funds to a specific asset to generate a favourable future return. Investments can be made in financial assets or real assets. A financial asset represents a financial claim that is documented and represented in a legally enforceable form e.g. a stock, or a bond. On the other hand, real assets are claims on physical asset e.g. real estate or gold.
Incorrect
An investment is a commitment of funds to a specific asset to generate a favourable future return. Investments can be made in financial assets or real assets. A financial asset represents a financial claim that is documented and represented in a legally enforceable form e.g. a stock, or a bond. On the other hand, real assets are claims on physical asset e.g. real estate or gold.
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Question 12 of 20
12. Question
Which of the following is NOT one of financial assets examples?
Correct
Financial Assets
Equities – Direct claims
• Ordinary shares
• Warrants
• OptionsFunds / collective investment schemes
• Mutual funds / unit trusts
• Exchange-traded funds
• Pension funds
Creditor Claims
• Savings accounts
• Money market instruments
• Commercial paper
• Treasury bills, notes & bonds
• Corporate bondsPreference shares
Commodities FuturesIncorrect
Financial Assets
Equities – Direct claims
• Ordinary shares
• Warrants
• OptionsFunds / collective investment schemes
• Mutual funds / unit trusts
• Exchange-traded funds
• Pension funds
Creditor Claims
• Savings accounts
• Money market instruments
• Commercial paper
• Treasury bills, notes & bonds
• Corporate bondsPreference shares
Commodities Futures -
Question 13 of 20
13. Question
Which of the following statements is true regarding the capital gain or loss?
Correct
The capital gain or loss is the difference between the beginning (or purchase) price and the ending (or
sale) price. The equation can also be written as:
Total Return =
CFt + (PE -PB)
_______________
PBwhere
CFt = sum of cash flows during the measurement period t
PE = price at the end of period t or sale price
PB = price at the beginning of the period or purchase priceIncorrect
The capital gain or loss is the difference between the beginning (or purchase) price and the ending (or
sale) price. The equation can also be written as:
Total Return =
CFt + (PE -PB)
_______________
PBwhere
CFt = sum of cash flows during the measurement period t
PE = price at the end of period t or sale price
PB = price at the beginning of the period or purchase price -
Question 14 of 20
14. Question
Which of the following statements is true regarding the expectations theory?
Correct
One important assumption in the expectations theory is that investors have perfect foresight regarding future spot rates. The shape of the yield curve is determined by the interest rate expectations of investors. When the market expects interest rates to rise, lenders will prefer to lend for shorter periods, forcing interest rates down in the shorter periods. Conversely, borrowers will prefer to borrow for longer periods, forcing interest rates up in the longer maturities. These opposing pressures create an upward sloping yield curve.
Incorrect
One important assumption in the expectations theory is that investors have perfect foresight regarding future spot rates. The shape of the yield curve is determined by the interest rate expectations of investors. When the market expects interest rates to rise, lenders will prefer to lend for shorter periods, forcing interest rates down in the shorter periods. Conversely, borrowers will prefer to borrow for longer periods, forcing interest rates up in the longer maturities. These opposing pressures create an upward sloping yield curve.
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Question 15 of 20
15. Question
Which theory argues that the shape of the yield curve should always be upward sloping and that any other shape would be a temporary aberration?
Correct
The theory of liquidity preference argues that the shape of the yield curve should always be upward sloping and that any other shape would be a temporary aberration. Because of the greater impact from the price volatility of long maturity securities (compared to shorter maturities), investors will require a higher return to hold long-term securities relative to short-term securities. From a lender’s perspective, he will prefer short-term loans. Higher yields will be required to induce them to lend long-term.
Incorrect
The theory of liquidity preference argues that the shape of the yield curve should always be upward sloping and that any other shape would be a temporary aberration. Because of the greater impact from the price volatility of long maturity securities (compared to shorter maturities), investors will require a higher return to hold long-term securities relative to short-term securities. From a lender’s perspective, he will prefer short-term loans. Higher yields will be required to induce them to lend long-term.
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Question 16 of 20
16. Question
Which of the following statements is/ are true regarding the bid price?
I. The bid price is the price at which the investor would sell the unit trust.
II. The bid price is the price at which the investor will buy the unit trust.
III. The bid price represents the cost of creating new units exactly equal in value to existing units on the basis of market prices at the latest valuation.
IV. The bid price is equivalent to the NAV of each unit in the event that the securities were all sold and the proceeds distributed in cash to unit holders.Correct
I & IV.
Conversely the bid price is the price at which the investor would sell the unit trust. It is equivalent to the NAV of each unit in the event that the securities were all sold and the proceeds distributed in cash to unit holders.
The steps involved in calculating the bid price are:
i. Determine the market value of the unit trust’s securities at the exchange-listed bid prices. This is the NAV per unit.
ii. Deduct expenses related to sale of securities.
iii. Add cash held by trust, and accrued income.Incorrect
I & IV.
Conversely the bid price is the price at which the investor would sell the unit trust. It is equivalent to the NAV of each unit in the event that the securities were all sold and the proceeds distributed in cash to unit holders.
The steps involved in calculating the bid price are:
i. Determine the market value of the unit trust’s securities at the exchange-listed bid prices. This is the NAV per unit.
ii. Deduct expenses related to sale of securities.
iii. Add cash held by trust, and accrued income. -
Question 17 of 20
17. Question
Which of the following statements is NOT one of the risks of investing in DRs?
Correct
1. DRs carry currency risks because of the currency in which the ADR is denominated.
2. DRs also carry price risk, which is essentially the price of the underlying share.
3. Higher counterparty risks in DRs.
4. DRs that have only one listing e.g. single-listed ADRs that are not listed in their home markets.
5. DRs bought on GlobalQuote may be terminated or delisted, without informing the holder.
6. Not all DRs have two-way fungibility which means that the Depository Receipts (ADRs/GDRs) can be converted into the underlying shares & the underlying shares can be converted into DRs.Incorrect
1. DRs carry currency risks because of the currency in which the ADR is denominated.
2. DRs also carry price risk, which is essentially the price of the underlying share.
3. Higher counterparty risks in DRs.
4. DRs that have only one listing e.g. single-listed ADRs that are not listed in their home markets.
5. DRs bought on GlobalQuote may be terminated or delisted, without informing the holder.
6. Not all DRs have two-way fungibility which means that the Depository Receipts (ADRs/GDRs) can be converted into the underlying shares & the underlying shares can be converted into DRs. -
Question 18 of 20
18. Question
Which of the following statements is true regarding perpetual bonds?
Correct
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.
Incorrect
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.
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Question 19 of 20
19. Question
Which of the following statements is true regarding the declining yield curve?
I. When the yields on short-term and long-term issues are the same, this will result in a declining yield curve.
II. The declining yield curve is seen when the yields on short-term issues are higher than the yields on longer maturities.
III. The declining yield curve is seen when the yields on short-term issues are lower than the yields on longer maturities.
IV. The declining yield curve indicates lower interest rates in the future.Correct
II & IV.
The declining yield curve is seen when the yields on short-term issues are higher than the yields on longer maturities. This generally indicates lower
interest rates in the future.Incorrect
II & IV.
The declining yield curve is seen when the yields on short-term issues are higher than the yields on longer maturities. This generally indicates lower
interest rates in the future. -
Question 20 of 20
20. Question
Which of the following is one of the advantages of price to book value ratios?
Correct
Advantages:
i. Book value is cumulative and is usually positive, unlike EPS;
ii. Book value is usually more stable than EPS, which can be more volatile; and
iii. Book value is well suited for companies with liquid assets i.e. banks and investment companies whose assets can be readily converted to cash – however non-performing loans will affect the book value of banks, and even the market values of liquid assets can change because of market factorsIncorrect
Advantages:
i. Book value is cumulative and is usually positive, unlike EPS;
ii. Book value is usually more stable than EPS, which can be more volatile; and
iii. Book value is well suited for companies with liquid assets i.e. banks and investment companies whose assets can be readily converted to cash – however non-performing loans will affect the book value of banks, and even the market values of liquid assets can change because of market factors
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