HKSI Licensing Examination Paper 8 (Securities) — All Questions

Dollar-cost averaging is the practice of:

• a.Investing a fixed amount at regular intervals, buying more units when prices are low and fewer when high, smoothing the average cost✓
• b.Trying to time the market perfectly
• c.Selling investments whenever prices fall
• d.Investing a single large lump sum right at the top of the market just before prices begin to fall back again

By committing the same sum each period regardless of price, an investor automatically buys more when markets are cheap and less when dear, averaging the entry cost and reducing the risk of a badly timed lump sum.

Asset allocation refers to:

• a.Holding only cash at all times
• b.Spreading investments across different asset classes such as equities, bonds and cash to balance risk and return✓
• c.Concentrating the whole of the portfolio into a single share in the hope of maximising the potential return
• d.Borrowing heavily to invest

Asset allocation decides how a portfolio is divided among the major asset classes according to the investor's objectives and risk tolerance. It is a primary driver of both a portfolio's risk and its long-term return.

An investor buys a share at HK$50 and sells it at HK$56, receiving no dividend. The return is:

• a.6%
• b.10%
• c.12%✓
• d.56%

Return = capital gain / cost = (HK$56 - HK$50) / HK$50 = HK$6 / HK$50 = 12%. With no dividend, the whole return is the capital gain.

Expressing a return on an 'annualised' basis means:

• a.It is always a larger figure than the actual total return, because the calculation compounds the return up
• b.It ignores the length of the holding period
• c.It is identical to the dividend yield
• d.Stating the return as the equivalent rate per year, so investments held over different periods can be compared✓

Annualising converts a return earned over any period into a comparable yearly figure. This lets an investor compare, say, a three-month and a two-year investment on the same standardised basis.

The difference between a gross return and a net return is that:

• a.They are always exactly equal
• b.The net return is what remains after deducting fees, costs and any taxes from the gross return✓
• c.The gross return is the figure that is left over only after all fees, costs and taxes have been deducted
• d.The net return is measured before any costs

Gross return is the headline performance before expenses. Net return subtracts management fees, transaction costs and taxes, giving the actual return the investor keeps, which is what matters in practice.

With positive inflation over time, a fixed sum of money:

• a.Buys fewer goods and services in the future, as its purchasing power falls✓
• b.Has permanently constant purchasing power
• c.Buys progressively more goods and services in the future, as inflation steadily raises its purchasing power
• d.Rises in purchasing power each year

Inflation raises the general price level, so the same amount of money buys less as time passes. This loss of purchasing power is why investors seek returns that at least keep pace with inflation.

Within a diversified portfolio, the typical role of fixed-income (bonds) is that they:

• a.Guarantee strong capital growth
• b.Provide regular, predictable income and tend to be less volatile than equities✓
• c.Are generally far more volatile in price than equities, which is why they are held to add risk to a portfolio
• d.Provide no income to the holder

Bonds pay scheduled coupons and repay principal at maturity, giving steadier, more predictable cash flows and lower price volatility than shares. They are often held to balance the higher risk of an equity allocation.

Value and growth investing differ in that:

• a.A value investor seeks shares trading below their estimated intrinsic worth, while a growth investor targets companies with rapidly rising earnings✓
• b.A value investor pays no attention at all to the price paid, focusing only on the quality of the business itself
• c.They follow exactly the same strategy
• d.A growth investor buys only bonds

Value investors look for under-priced, often out-of-favour companies, aiming to profit as the price converges on fair value. Growth investors pay up for firms whose earnings are expanding quickly, expecting future growth to justify the price.

An investor whose primary objective is capital preservation will:

• a.Prioritise safety of principal and favour lower-risk assets such as bank deposits and high-grade bonds✓
• b.Invest solely in derivatives
• c.Favour the most volatile and speculative shares available in the pursuit of the largest possible capital gain
• d.Use the maximum possible leverage

Capital preservation puts protecting the original sum ahead of growth, so the investor chooses low-risk, stable assets, accepting a modest return in exchange for a low probability of loss.

An investment offering an unusually high yield should be treated with caution because:

• a.An unusually high yield usually signals higher risk, as investors demand more return to compensate✓
• b.Lower-yielding assets are always the riskier choice
• c.Yield is completely unrelated to risk
• d.A high yield always signals a completely safe and superior investment that every prudent investor should hold

Markets price risk into yield: an abnormally high yield generally reflects greater perceived risk, such as a higher chance of default or price loss, not a free lunch. Investors should ask why the yield is so high before buying.

Under Hong Kong's Linked Exchange Rate System, the Hong Kong dollar is kept stable against the:

• a.Euro, on a free-floating basis
• b.Renminbi, at a fixed rate of 1:1
• c.Price of gold
• d.US dollar, within a band of about HK$7.75-7.85 per US$1✓

Since 1983 the HKMA has operated a currency-board peg linking the Hong Kong dollar to the US dollar, holding the rate within the HK$7.75-7.85 convertibility band. This anchors local monetary conditions and effectively imports US interest-rate policy.