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Question 1
(a) Explain how the investor risk profile is viewed traditionally and why this point of view
is difficult to use practically, especially with individual investors.
(6 marks)
(b) Critique the current commonly used risk profiling techniques used by practitioners.
(10 marks)
(c) Examine three (3) behavioural factors that may explain the variability of proportion of
risky assets in investors’ investment portfolios.
(9 marks)
Question 2
You are working for a start-up who has developed the rudiments of a Robo-Advisor. The client
service manager is still unhappy with the back-end of your Robo-Advisor. His Asian clients
had commented that the system only looks at their investment needs. In order to improve the
service, these clients would like services that are more customized to their needs. They have
specifically indicated that they have more than one goal and are looking for retirement income,
along with looking after their children careers and having some impact on society. You have
decided to approach their concerns with a goal based wealth management (GBWM) solution.
(a) Evaluate key behavioural underpinnings of Goal Based Wealth Management (GBWM)
to service the clients.
(5 marks)
(b) Design the key steps to implement a GBWM solution for wealth management clients.
(5 marks)
(c) Illustrate your design with a simple example:
(i) Three different goals: Lifestyle, non-lifestyle and internal.
(ii) Using the following information to develop three different subportfolios/modules:
Medium-term capital preservation, Long-term capital
preservation and Long-term growth.
Sub-Portfolios/Module Objective Expected Return
Medium-term Capital Preservation 6.1%
Long-term Capital Preservation 7.2%
Long-term Growth 10.1%
Asset Class Expected Return and Risk (Standard Deviation)
Asset Class Expected Return Risk
Large Cap 8.3% 17.0%
Small Cap 9.3% 20.5%
International Equity 9.0% 19.7%
Emerging Market Equity 11.3% 24.3%
Investment Grade 3.9% 5.2%
High Yield 6.3% 12.8%
International Fixed Income 2.6% 8.2%
Hedge Fund 6.1% 9.2%
Private Equity 11.6% 23.7%
Private Real Estate 7.6% 17.1%
Commodities 7.4% 17.6%
Cash 2.1% 0.9%
Source: MSCI
Correlation Matrix
Correlation Matrix
Estate Commodities Cash
Large Cap 1.00
Small Cap 0.94 1.00
International Equity 0.83 0.75 1.00
Emerging Market Equity 0.77 0.70 0.90 1.00
Investment Grade -0.13 -0.12 -0.12 -0.07 1.00
High Yield 0.59 0.54 0.60 0.61 0.12 1.00
International Fixed Income 0.19 0.13 0.39 0.28 0.35 0.12 1.00
Hedge Fund 0.04 0.00 0.05 0.03 0.05 0.19 0.20 1.00
Private Equity 0.81 0.76 0.91 0.85 -0.08 0.65 0.27 0.02 1.00
Private Real Estate 0.84 0.86 0.64 0.63 -0.02 0.48 0.21 0.04 0.66 1.00
Commodities 0.55 0.48 0.58 0.55 -0.15 0.43 0.32 0.22 0.52 0.40 1.00
Cash -0.24 -0.20 -0.20 -0.21 0.15 -0.19 0.20 -0.01 -0.21 -0.12 -0.09 1.00
Write a report of your examination, evaluation, suggested design and implementation (in 1,000 words or less). You may use
appendices that are clearly referenced in the body of the report.
(25 marks)
Question 3
(a) Appraise the multifactor model of asset returns and explain the advantage of such a
model in relation to the Capital Asset Pricing Model (CAPM). Provide two implications
of the multifactor model in professional asset management.
(10 marks)
(b) Suggest two (2) factors that are likely to drive Bitcoin valuation. Discuss reasons for
your suggestion.
(10 marks)
Question 4
(a) Calculate the equity risk premium on the S&P 500 index level of 3,200 as at July 2020.
State all assumptions made and the source of information. Attach your Excel worksheet
workings in your submission.
(10 marks)
(b) An investor is considering adding two new securities to his fixed income portfolio. The
securities under consideration are as follows:
10-year A-rated corporate bond
10-year B-rated corporate bond
The investor has gathered the following information:
- Real risk-free interest rate 1.2%
- Current inflation rate 2.2%
- Spread of 10-year over 1-year Treasury note 1.0%
- Long-term inflation expectation 2.6%
- 10-year A credit risk spread (over 10-year Treasuries) 0.65%
- 10-year B credit risk spread (over 10-year Treasuries) 0.90%
The investor will make an equally weighted investment in the 10-year A-rated corporate
bond and the 10-year B-rated corporate bond provided that the expected spread (risk
premium) over the similar-term Treasury bond is at least 0.8 percent.
(i) Calculate the expected annual return for the 10-year A-rated corporate bond and
the 10-year B-rated corporate bond respectively (to the nearest 0.01 percent).
(4 marks)
(ii) Calculate the expected risk premium for an equally weighted fixed income bond
portfolio (to the nearest 0.001 percent).
(4 marks)
(iii) Discuss the investor’s decision and action.
(2 marks)
Question 1
(a) Explain how the investor risk profile is viewed traditionally and why this point of view
is difficult to use practically, especially with individual investors.
(6 marks)
(b) Critique the current commonly used risk profiling techniques used by practitioners.
(10 marks)
(c) Examine three (3) behavioural factors that may explain the variability of proportion of
risky assets in investors’ investment portfolios.
(9 marks)
Question 2
You are working for a start-up who has developed the rudiments of a Robo-Advisor. The client
service manager is still unhappy with the back-end of your Robo-Advisor. His Asian clients
had commented that the system only looks at their investment needs. In order to improve the
service, these clients would like services that are more customized to their needs. They have
specifically indicated that they have more than one goal and are looking for retirement income,
along with looking after their children careers and having some impact on society. You have
decided to approach their concerns with a goal based wealth management (GBWM) solution.
(a) Evaluate key behavioural underpinnings of Goal Based Wealth Management (GBWM)
to service the clients.
(5 marks)
(b) Design the key steps to implement a GBWM solution for wealth management clients.
(5 marks)
(c) Illustrate your design with a simple example:
(i) Three different goals: Lifestyle, non-lifestyle and internal.
(ii) Using the following information to develop three different subportfolios/modules:
Medium-term capital preservation, Long-term capital
preservation and Long-term growth.
Sub-Portfolios/Module Objective Expected Return
Medium-term Capital Preservation 6.1%
Long-term Capital Preservation 7.2%
Long-term Growth 10.1%
Asset Class Expected Return and Risk (Standard Deviation)
Asset Class Expected Return Risk
Large Cap 8.3% 17.0%
Small Cap 9.3% 20.5%
International Equity 9.0% 19.7%
Emerging Market Equity 11.3% 24.3%
Investment Grade 3.9% 5.2%
High Yield 6.3% 12.8%
International Fixed Income 2.6% 8.2%
Hedge Fund 6.1% 9.2%
Private Equity 11.6% 23.7%
Private Real Estate 7.6% 17.1%
Commodities 7.4% 17.6%
Cash 2.1% 0.9%
Source: MSCI
Correlation Matrix
Correlation Matrix
Estate Commodities Cash
Large Cap 1.00
Small Cap 0.94 1.00
International Equity 0.83 0.75 1.00
Emerging Market Equity 0.77 0.70 0.90 1.00
Investment Grade -0.13 -0.12 -0.12 -0.07 1.00
High Yield 0.59 0.54 0.60 0.61 0.12 1.00
International Fixed Income 0.19 0.13 0.39 0.28 0.35 0.12 1.00
Hedge Fund 0.04 0.00 0.05 0.03 0.05 0.19 0.20 1.00
Private Equity 0.81 0.76 0.91 0.85 -0.08 0.65 0.27 0.02 1.00
Private Real Estate 0.84 0.86 0.64 0.63 -0.02 0.48 0.21 0.04 0.66 1.00
Commodities 0.55 0.48 0.58 0.55 -0.15 0.43 0.32 0.22 0.52 0.40 1.00
Cash -0.24 -0.20 -0.20 -0.21 0.15 -0.19 0.20 -0.01 -0.21 -0.12 -0.09 1.00
Write a report of your examination, evaluation, suggested design and implementation (in 1,000 words or less). You may use
appendices that are clearly referenced in the body of the report.
(25 marks)
Question 3
(a) Appraise the multifactor model of asset returns and explain the advantage of such a
model in relation to the Capital Asset Pricing Model (CAPM). Provide two implications
of the multifactor model in professional asset management.
(10 marks)
(b) Suggest two (2) factors that are likely to drive Bitcoin valuation. Discuss reasons for
your suggestion.
(10 marks)
Question 4
(a) Calculate the equity risk premium on the S&P 500 index level of 3,200 as at July 2020.
State all assumptions made and the source of information. Attach your Excel worksheet
workings in your submission.
(10 marks)
(b) An investor is considering adding two new securities to his fixed income portfolio. The
securities under consideration are as follows:
10-year A-rated corporate bond
10-year B-rated corporate bond
The investor has gathered the following information:
- Real risk-free interest rate 1.2%
- Current inflation rate 2.2%
- Spread of 10-year over 1-year Treasury note 1.0%
- Long-term inflation expectation 2.6%
- 10-year A credit risk spread (over 10-year Treasuries) 0.65%
- 10-year B credit risk spread (over 10-year Treasuries) 0.90%
The investor will make an equally weighted investment in the 10-year A-rated corporate
bond and the 10-year B-rated corporate bond provided that the expected spread (risk
premium) over the similar-term Treasury bond is at least 0.8 percent.
(i) Calculate the expected annual return for the 10-year A-rated corporate bond and
the 10-year B-rated corporate bond respectively (to the nearest 0.01 percent).
(4 marks)
(ii) Calculate the expected risk premium for an equally weighted fixed income bond
portfolio (to the nearest 0.001 percent).
(4 marks)
(iii) Discuss the investor’s decision and action.
(2 marks)