Advanced Portfolio Management Past Papers

CIFA ADVANCED LEVEL
ADVANCED PORTFOLIO MANAGEMENT
TUESDAY: 20 August 2024. Afternoon Paper. Time Allowed: 3 hours.
Answer ALL questions. Marks allocated to each question are shown at the end of the question. Show ALL your
workings. Do NOT write anything on this paper.
QUESTION ONE
(a) Alois Mwenda, a financial analyst with Fadhili Capital LLC is conducting a capital markets expectations forecast
for the upcoming year for their international portfolio.
Mwenda gathers the following details:

 Maldina county has a GDP of Sh.60 billion and has an economy dominated by the mining industry. It is an
emerging market and Maldina’s current account deficit has been growing over time.
 Ocenia county has a GDP of Sh.1.2 trillion and has an economy that sells a variety of items.
 Mwenda predicts a global economic slowdown for the upcoming year.
 Mwenda believes that Gross Domestic Product (GDP) is the best forecast using a system of equations that
can capture the fact that GDP is a function of many variables both current and lagged values.
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Required:
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(i) Explain to Alois Mwenda why a growing current account deficit is a sign of increasing risk. (2 marks)
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(ii) Explain which county between Maldina and Ocenia is at a greater risk given the expected global economic
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slowdown. (2 marks)
(iii) Recommend to Alois Mwenda which economic forecasting method is most appropriate to use. (1 mark)
(b) Joseph Lemayan has selected two adjacent corner portfolios; Acqua and Beta. Their expected return are 10% and
15% respectively while their standard deviations are 12% and 16% respectively.
Required:
(i) Determine the weights of portfolio Acqua and portfolio Beta necessary to construct a portfolio with an
expected return of 11%. (2 marks)
(ii) Determine the new portfolio’s standard deviation assuming portfolios Acqua and Beta are not correlated.
(2 marks)
(iii) Four asset classes; 1, 2, 3 and 4 are combined into portfolios Acqua and Beta according to the following
weights:
Portfolio Acqua → W1 = 0.25, W2 = 0.15, W3 = 0.20, W4 = 0.40

Portfolio Beta → W1 = 0.30, W2 = 0.20, W3 = 0.35, W4 = 0.15
Calculate the asset class weightings (for asset class 1, 2, 3 and 4) for the efficient new portfolio with an
expected return of 11% in (b) (i) above. (2 marks)
(c) On 1 June 2024, Rodgers Wasilwa had Sh.100,000 invested in shares and Sh.35,000 invested in treasury bills
giving a total investment of Sh.135,000. The securities market index on 1 June 2024 was at 1,240 and on 30 June
2024 it rose at 1,350. As at 31 July 2024, the securities market index has fallen back to 1,300. Wasilwa had the most
optimal shares-to-total-assets(S/TA) ratio.
Required:
(i) Determine Wasilwa’s share holdings as at 30 June 2024 under the buy-and-hold (BH) strategy. (2 marks)
(ii) Compute Wasilwa’s share holdings as at 31 July 2024 under the BH strategy. (2 marks)
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(iii) The amount of shares that Wasilwa should buy or sell as at 30 June 2024 under a constant-mix (CM)
strategy. (2 marks)
(iv) The amount of shares that Wasilwa should buy or sell as at 31 July 2024 under the CM strategy. (3 marks)
(Total: 20 marks)
QUESTION TWO
(a) Explain THREE sources of the total return for a fixed income investment portfolio. (6 marks)
(b) A domestic hedge fund intends to expand its portfolio to include global equities. The hedge fund does not seek to
purchase individual stocks. The fund engages in an equity total return swap whereby it will receive the return on
MSCI global equity index in exchange for interest payment on domestic treasury bonds.
Required:
(i) Discuss TWO advantages of the fund’s global equity allocation strategy. (4 marks)
(ii) In relation to hedge fund return statistics, distinguish between “backfill bias” and “survivorship bias”.
(4 marks)
(c) A chief investment officer is currently evaluating the expected performance for a group of portfolio managers they
have hired for a subset of their client’s portfolios. The following information is provided for the portfolio managers
performance:
Portfolio manager Expected alpha Expected tracking risk Allocations

A 2.80% 5.20% 10%
B 0% 0% 20%
C 2.00% 3.10% 25%
D 3.50% 6.80% 5%
E 1.10%
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1.62% 40%
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Required:
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Compute the expected information ratio. (6 marks)

(Total: 20 marks)
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QUESTION THREE
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(a) Emilio Kipsang is the Principal Investment Officer of Arusha International Financial Advisor (AIFA) and has
decided that AIFA will comply with Investment Performance Standards (IPS). Kipsang begins by reviewing all
monthly composite calculations to ensure that AIFA has complied with all of the IPS composite calculation
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requirements. AIFA currently presents its investment performance using a composite, calculated on a monthly
basis for each investment objective. AIFA’s growth equity composite consists of four client portfolios that are fully
invested in large capitalisation growth equities as shown below:
AIFA
Growth equity composite
Performance period: December 2023
Client portfolio Beginning market value Ending market value Monthly return
(Sh.“million”) (Sh.“million”) (%)
A 125.0 126.5 1.20
B 220.0 218.0 0.91
C 68.0 69.8 1.65
D 92.0 93.9 1.10
Total 505.0 508.2
Additional information:
1. The monthly returns are gross of both management fees and transaction costs.
2. Kipsang has decided that AIFA will obtain an independent third party verification prior to claiming
compliance with IPS and has contracted a local firm to perform a verification of only the growth equity
composite.
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Required:
Discuss whether AIFA can present each of the following in compliance with the account level calculation
requirements of IPS:
(i) Returns that are gross of management fees. (2 marks)
(ii) Returns that are gross of transaction costs. (2 marks)
(iii) Discuss whether AIFA could claim compliance with IPS without independent third party verification.
(2 marks)
(iv) Explain whether Kipsang’s plan to obtain independent verification of only the growth equity composite
would comply with IPS. (2 marks)
(b) In relation to pure bond indexing, explain TWO reasons as to why investors prefer investing in an indexed
portfolio. (4 marks)
(c) Tropical Consultants is working with a pension fund focused on fixed income investments. The investment
committee of the pension fund has three alternatives which it has requested the consultant to address:
Alternative 1
The pension fund is concerned about the use of leverage in the portfolio. By employing 100% leverage, the pension
fund can generate incremental returns and provide a portfolio with the following characteristics:
Portfolio characteristics
Assets Liabilities
Portfolio (Sh.million) 200 100
Duration 6.00 1.00
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Expected return (%) 5.50
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Interest rate on borrowed funds (%) 4.75
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Alternative 2
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The pension fund is interested in using the futures market to manage the interest rate risk of the portfolio. The
committee would like a target duration of 4. The data relating to futures market is provided below:
Futures market data

Futures contract price Sh.100,000
Conversion factor 1.15
Duration of the cheapest to deliver bond 5.2
Market price of the cheapest to deliver bond Sh.98,000
Alternative 3
The committee is aware that the international interest rates are not perfectly correlated. Their portfolio is invested
in their domestic country at the rate of 60% and the average duration of the portfolio is 7. The 40% of the portfolio
is invested in neighbouring country with the average duration of 4.5, before any hedging activities to meet the
committee duration target.
Historically, the country beta of the neighbouring country is estimated to be 0.55.
Required:
(i) Calculate the duration of the equity in the leveraged portfolio with respect to alternative 1 above.
(2 marks)
(ii) Compute the number of futures contracts that need to be sold in order for the committee’s target duration
of 4 to be realised with respect to alternative 2 above. (3 marks)
(iii) Determine the contribution to the portfolio’s overall duration from neighbouring country’s bond with
respect to alternative 3 above. (3 marks)
(Total: 20 marks)
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QUESTION FOUR
(a) Elaborate on the following sell disciplines commonly used by active equity investors:
(i) An opportunity cost sell discipline. (2 marks)
(ii) Deteriorating fundamentals sell discipline. (2 marks)
(iii) Up-from-cost sell discipline. (2 marks)
(b) A Djiboutian (DJF) investor holds an international portfolio with beginning investments of United States Dollar
(USD) of 1,253,000 and Euro (EUR) of 2,347,000.
Measured in the foreign currencies, these investments appreciate at the rate of 5% and 7% respectively.
The following information is provided:
Beginning spot Beginning forward Ending spot

Exchange rate Exchange rate Exchange rate
DJF/USD 179.54 DJF/USD 185.67 DJF/USD 192.85
EUR/DJF 0.00416 EUR/DJF 0.00413 EUR/DJF 0.00421
Required:
(i) The ending value of USD investment stated in DJF. (3 marks)
(ii) The unhedged return to the investor of the USD investment. (3 marks)
(c) Diana Musau, an investment analyst, is estimating various measures of spread for Nyati Limited. The following is
the bid and ask quote for a trade in July 2024:
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Bid price (Sh.) Ask price (Sh.)
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226.10 226.22
Diana initiated a buy trade that was executed at a price of Sh.226.17.

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Required:
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(i) The quoted spread. (3 marks)

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(ii) The effective spread. (3 marks)
(iii) Determine the condition under which the effective and quoted spread would be equal. (2 marks)
(Total: 20 marks)
QUESTION FIVE
(a) Describe the following rebalancing strategies as used in portfolio management:
(i) Calendar rebalancing strategy. (2 marks)
(ii) Percentage of portfolio rebalancing strategy. (2 marks)
(b) The following shares of AQR Ltd. are sold at different times in the course of a trading day:
Trading volume (number of shares) Transaction price per share (in Sh.)
400 50.00
800 50.50
1,100 50.75
700 51.00
Required:
(i) Calculate the volume weighted average price (VWAP) of the trading day. (2 marks)
(ii) Determine the implied trading costs for a trader who sold 800 AQR Ltd. shares at a price of Sh.50.50 per
unit. (2 marks)
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(c) Rhino is a foundation for a wildlife conservation college. The foundation has a market value of Sh.2 billion Mark
Mugo is a financial advisor and works with Rhino Foundation. At its Investment Policy Statement (IPS)
formulation meeting, Mark notes the following points:
 Rhino Foundation must spend 3% of its beginning of the year asset value annually to meet legal
obligations.
 The investment committee seeks exposure to private equity investments and requests that Mark reviews
the CRF private equity fund as a potential new investment.
 Enrolment is strong and growing, leading to increased operating revenues from tuition.
 A recent legal settlement eliminated an annual obligation of Sh.50 million from the portfolio to support a
biodigester used in the college’s centre for renewable energy.
Mark instructs his junior analyst to formulate new allocations for Rhino Foundation. This analyst proposes the
allocation presented below:
Fund name Existing Proposed Fund size (in billions) Fund minimum
allocation allocation Asset under management (AUM) investment
(%) (%) (Sh.) (Sh.)
Large-cap equity fund 49 29 50 250,000
Investment-grade bond fund 49 59 80 500,000
CRF private equity fund 0 10 0.50 5,000,000
Cash equivalent 2 2 50 250,000
Required:
Discuss THREE reasons why the proposed Investment Policy Statement (IPS) asset allocation is inappropriate for
Rhino Foundation. (6 marks)
(d) The following information relates to Daudi Investment Fund:
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Annual performance attribution
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Beginning value Sh.150,000,000
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Net contributions Sh.850,000
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Incremental value contributions (Risk free asset) Sh.675,000
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Fund value (asset category) Sh.165,500,000
Fund value (benchmark) Sh.165,900,000
Incremental return contribution for allocation effects Sh.0%
Total Fund return 11.05%
Required:
(i) Determine how much of the total return was attributed to style bias. (4 marks)
(ii) Determine how much value active stock selection added to the fund. (2 marks)
(Total: 20 marks)
………………………………………………………………………
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CIFA ADVANCED LEVEL
TUESDAY: 23 April 2024. Afternoon Paper. Time Allowed: 3 hours.
QUESTION ONE
(a) Examine FOUR phases of an individual life cycle as used in the investment policy statement (IPS). (4 marks)
(b) Explain THREE factors that could influence the optimal corridor width for an asset class. (6 marks)
(c) Kilimo Foundation has a stated goal of reducing the impact of damage caused by insects on farms. The foundation
risk tolerance and return requirements are summarised below:
Risk tolerance: Above average (maximum 15% annual standard deviation of returns).
Return requirement: To earn an average annual return to meet a spending rate of 7.5% (including expected
inflation) and management/administration fees of 0.6%.
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The foundation has approached an asset management firm to assess the appropriate strategic asset allocation for the
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foundations portfolio, which has generated the corner portfolios shown below:
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Asset classes (Portfolio weights %)
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Corner Expected Standard Sharpe Global Domestic Long Short Global Real
portfolio return deviation ratio equities equities term term bonds estate
(%) (%) treasury treasury
bonds bonds
1 10.8 16.1 0.42 100.0 0.0 0.0 0.0 0.0 0.0
2 10.4 14.2 0.45 82.4 0.0 0.0 0.0 0.0 17.6
3 10.3 13.6 0.46 74.1 4.0 0.0 0.0 0.0 21.9
4 9.1 9.1 0.55 33.7 12.0 36.7 0.0 0.0 17.6
5 8.9 8.7 0.56 31.4 12.0 26.7 13.0 0.0 16.9
6 8.5 7.4 0.60 25.0 11.8 0.0 45.3 3.4 14.5
7 7.2 5.2 0.62 0.0 13.7 0.0 53.0 27.1 6.2
8 7.3 5.1 0.61 0.0 11.2 0.0 53.0 31.5 4.3
1. The risk free rate is 4.0%.
2. The foundation by-law prohibits short position, or the use of margin but allows investment in any portfolio
or a combination of portfolios described above.
3. The foundation considers Sharpe ratio to be a dominant factor in asset allocation decisions.
Required:
(i) Identify with reason the two adjacent corner portfolios to be used in finding the most appropriate strategic
allocation for Kilimo Foundation investment portfolio. (3 marks)
(ii) Determine the most appropriate strategic asset allocation between the two adjacent corner portfolios
identified in (c) (i) above. (3 marks)
(iii) Calculate the percentage amount of the most appropriate strategic asset allocation that should be invested
in domestic equities and real estates based on your allocation in (c) (ii) above. (4 marks)
(Total: 20 marks)
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QUESTION TWO
(a) In relation to equity portfolio management, describe THREE substyles in value investing style. (6 marks)
(b) Eliud Warigo is a small cap growth manager who invests in United States (U.S.) equities. Eliud was hired by a
pension fund that benchmarks him against a broad U.S. market index. The following information is gathered:
Manager return 18%

Broad market return 15%
Normal portfolio return 20%
Total active risk 5%
Misfit active risk 3.5%
Required:
Calculate the manager’s information ratio that must accurately reflect his abilities. (4 marks)
(c) Rona Ltd. is a company listed in the securities exchange. A trader sold 100 shares of this company on 10 April
2024 at 15:52:59 at a price of Sh.2.66 per share. All the trades that occurred in Rona Ltd. on that day are listed
below:
Time of trade Price (Sh.) Shares traded

10:00:37 2.71 200
10:00:39 2.72 200
10:00:43 2.76 100
13:09:07 2.77 100
14:13:11 2.70 1100
15:52:59 2.66 100
15:53:01 2.65 100
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The trader is analysing the implicit costs of the trade, focusing on the bid-ask spread and market impact using
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specified price benchmarks.
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Required:
The estimated implicit transaction costs using each of the following as the price benchmark:
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(i) Opening price. (3 marks)

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(ii) Closing price. (3 marks)

(iii) Volume-weighted average price (VWAP). (4 marks)
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(Total: 20 marks)
QUESTION THREE
(a) Describe the THREE main inputs to the macro attribution analysis approach as used in portfolio management.
(6 marks)
(b) Dhahabu Fund is a portfolio managed by Abby capital. The reporting currency for the fund is the Korean won
(KRW) and the portfolio holds investments denominated in Euro (EUR), United States Dollars (USD) and Swiss
Francs (CHF). The current exchange rate information is provided below along with the manager’s expectation for
the spot rate in six months:
Spot Six-month Portfolio

rate forward manager’s
exchange rate forecast
KRW/EUR 1,483.99 1,499.23 1,450.87
KRW/USD 1,108.78 1,112.56 1,146.63
KRW/CHF 1,265.22 1,257.89 1,212.65
Required:
(i) Explain whether the two foreign currencies (EUR/USD) are trading at a forward premium or discount.
(2 marks)
(ii) Justify which currency hedges would earn a positive roll yield to the fund manager. (1 mark)
(iii) Calculate the implied un-annualised roll yield of a currency hedged for the portfolios long exposure to the
Swiss Francs (CHF). (3 marks)
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(c) Emily Karambu is the portfolio manager of KBU Corporate Bond investors and is evaluating two bond portfolios
whose information is given as follows:
Bond portfolio 1: The bond has a value of Sh.10 million whose position is as shown below:
Bond Market value weight (%) Effective duration
1 50 2.00
2 40 3.00
3 10 4.00
The investment policy statement (IPS) allows the portfolio manager to leverage the portfolio by 20% or Sh.2
million.
Bond portfolio 2: Karambu analyses the spread duration (based on option adjusted spread (OAS) for KBU. This
portfolio 2 consist of Sh.5 million in Treasury Bills and Sh.10 million in corporate bonds. The portfolio’s spread
duration is 5.6.
Required:
(i) The duration of bond portfolio 1. (2 marks)
(ii) The contribution of bond 2 to the duration of bond portfolio 1. (2 marks)
(iii) The spread duration of the corporate bonds in bond portfolio 2. (4 marks)
(Total: 20 marks)
QUESTION FOUR
(a) Describe the following approaches used in setting capital market forecasts:
(i) Surveys. (2 marks)
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(ii) Panel method. (2 marks)
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(iii) Judgement. (2 marks)
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(b) Pamela Akinyi is a local domestic equities investor. Her portfolio has a zero factor value of 0.5 and a beta of 1.15
at the beginning of the investment period. During the first quarter of the year 2023, the return on a broad domestic
market index was 5.9%. Akinyi has just been hired by a large plan sponsor. The sponsor is sosphicated in her use
of benchmarks. The sponsor has developed a custom benchmark for her portfolio. This benchmark has a zero factor
value of 1.5 and a beta of 0.95. Her portfolio actually returned 8.13% during the period.
Required:
Determine how much of the return can be attributed to the value added investment skill of Pamela Akinyi.
(4 marks)
(c) The Tala health Foundation is a company-sponsored foundation, with the sole mission of supporting the Afya
Clinic. Over the past five years, Tala Foundation has contributed 75.80% of Afya clinic’s operating budget. Health
care costs have grown at a rate of 1% above the annual rate of inflation and this trend is expected to continue in the
foreseeable future. This year, Tala Foundation estimates its spending budget for the clinic will be Sh.11 million.
Tala’s management expenses average 0.40% of assets. In addition to the ongoing spending budget, Tala
Foundation is funding a new facility for the clinic, which will require a final cash outlay of Sh.4 million within six
months.
Tala Foundation was founded five years ago by Global Pharmaceuticals with a gift consisting of Global company
stock and a 100% ownership interest in a privately held computer consulting business. Global Pharmaceuticals has
contributed Sh.2 million annually to Tala Foundation since the initial gift. However, Global Pharmaceuticals has
faced increasing capital expenditure and recently announced that it will be unable to make additional contributions
to Tala Foundation. The computer consulting business is expected to generate Sh.1.25 million of pretax income this
year; pretax income will grow with little volatility at the annual inflation rate, which is expected to be 1.5% for the
foreseeable future. The corporate tax rate is 30%.
The board of trustees for Tala Foundation has diversified the portfolio over time and has expressed a desire to sell
the computer consulting business. Excluding the computer consulting business, Tala’s portfolio has a market value
of Sh.200 million. The board is concerned about the uncertainty of the exact amount of required spending during
the year. The board has designated a portion of the portfolio to serve as a reserve of approximately 15% of its
spending budget for the clinic to ensure that Tala’s annual spending goals will be met.
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The board is aware of the market risk/return trade off and is willing to accept the risk necessary to support Tala
Foundation long term growth orientation. With respect to return on investable assets, the trustees have agreed that a
shortfall risk limit defined as expected total return minus two standard deviations of -14% in any one year is
acceptable.
Required:
(i) Formulate the risk objective of an investment policy statement for Tala Foundation. (4 marks)
(ii) Formulate the return objective of an investment policy statement for Tala Foundation. (2 marks)
(iii) Calculate the rate of return that is required to achieve the return objective in (c) (ii) above. (4 marks)
(Total: 20 marks)
QUESTION FIVE
(a) Discuss FOUR objectives of investment performance standards. (8 marks)
(b) Paul Rotich has a portfolio worth Sh.160 million, Sh.40 million of which is his own funds and Sh.120 million is
borrowed.
1. The return on the invested funds is 7% and the cost of borrowed funds is 4%.
2. The duration of the invested funds is 4.20 and the duration of borrowed funds is 0.8.
Required:
(i) The return on the portfolio. (3 marks)
(ii) The duration of the equity invested. (3 marks)
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Tamadi Recylers, a recycling company, contacts fixed income consultant, Jerusha Mwai. Tamadi Recyclers
recently acquired a ground along with the associated liability to pay its reclamation costs. Jerusha is asked to
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construct a portfolio that will fund Tamadi’s liability, which will be payable in full at the end of the ground usage
in 10 years. The objective for the portfolio is to immunise the liability while minimising reinvestment risk. Jerusha
reviews three potential portfolio shown below. The initial value of each portfolio equals the present value of the
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estimated reclamation costs.

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Portfolio Duration Spread duration Average maturity Average coupon

(Years)
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1 10.00 4.33 13.44 5.19%

2 10.00 2.00 13.25 4.91%
3 8.00 6.80 10.00 4.85%
Jerusha also reviews the bonds in a different Tamadi portfolio shown below. She wants to rebalance the portfolio’s
money duration to Sh.240,000 while maintaining the existing security weights.
Security Price Market value Duration

(Sh.)
Domestic government bond 96.42 771,360 11.2
Quickcom corporate bond 95.00 855,000 9.4
Daylever corporate bond 104.00 728,000 9.1
Total - 2,354,360 -
Required:
(i) Justify the portfolio that is most appropriate given the stated objective. (2 marks)
(ii) Explain why each of the other two portfolios is less appropriate given the stated objective. (2 marks)
(iii) Determine the amount of cash required to rebalance the portfolio’s money duration. (2 marks)
(Total: 20 marks)
………………………………………………………………………
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CIFA ADVANCED LEVEL
TUESDAY: 5 December 2023. Afternoon Paper. Time Allowed: 3 hours.
QUESTION ONE
(a) In relation to forming capital market expectations, explain THREE approaches to economic forecasting. (6 marks)
(b) Jane Maingi, a 50-year old single parent has recently inherited a fortune of Sh.20 million from her late uncle. Jane
is a successful lawyer and earns an annual income of Sh.5,000,000. She lives a luxurious lifestyle with annual
expenses of Sh.3,000,000. Jane has a niece in college to whom she wants to provide an annual support of
Sh.500,000. She also wishes to donate Sh.1,000,000 each year to her favourite charity.
Jane is risk averse and would like to ensure her wealth lasts her lifetime and beyond. She plans to retire at the age
of 65 years and maintain her current lifestyle. She also wants to leave a substantial portion of her wealth to her
niece and the charity.
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Required:
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Formulate an investment policy statement (IPS) for Jane Maingi under the following sections:
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(i) Return requirements. (2 marks)
(ii) Liquidity requirements. (2 marks)
(iii) Unique circumstances. (2 marks)
(iv) Time horizon constraints. (2 marks)
(c) Wilberforce Makandi is an investment consultant for a Jua Kali Fund. He has identified two portfolios; portfolio A
and portfolio B to be appropriate to Jua Kali Fund in meeting the Fund’s risk and return objectives. Both portfolios
comprise portfolio asset classes 1, 2, 3 and 4 and Makandi gathers the following additional information:
1. Portfolio A comprises 25%, 15%, 20% and 40% weights in asset class 1, 2, 3 and 4 respectively.
2. Portfolio B comprises 30%, 20%, 35% and 15% weights in asset class 1, 2, 3 and 4 respectively.
3. Portfolio A and B have expected returns of 10% and 15% respectively.
Required:
Determine the individual asset class weightings for the efficiency portfolio with an expected return of 11%.
(6 marks)
(Total: 20 marks)
QUESTION TWO
(a) Describe THREE roles of fixed income securities in portfolio management. (3 marks)
(b) Highlight FOUR reasons for the establishment of globally accepted investment performance standards (GIPs) in
your country. (4 marks)
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(c) The long-term market expectations for XDZ Ltd. and emerging market equities portfolio are provided below:
Return (%) Standard deviation (%)

Current XDZ portfolio 4.5 6.5
Emerging market equities 7.5 13.5
A portfolio manager is evaluating whether adding an additional asset class to XDZ Ltd.’s portfolio will improve its
risk-return characteristics. He establishes that the applicable inflation rate is 0.5%, the applicable risk free rate is
1.0% and the correlation between the current portfolio and emerging market equities is 0.79.
Required:
(i) The Sharpe ratio of the current portfolio. (2 marks)
(ii) The Sharpe ratio of the new asset class. (1 mark)
(iii) Explain the criteria the portfolio manager must follow in evaluating whether to add an additional asset
class to XDZ Ltd.’s portfolio. (2 marks)
(iv) Determine whether adding a new asset class in XDZ Ltd.’s portfolio is recommended. (2 marks)
(d) Ephraim Mpole is a small cap growth manager who invests in domestic equities. He was hired by an investment
firm that benchmarks against a broad domestic market index. He has gathered the following information:
(%)
Portfolio manager’s return 18.0
Broad market return 15.0
Normal portfolio return 20.0
Total active risk 5.0
Misfit active risk 3.5
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Required:
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Compute the following:
(i) Misfit active return. (2 marks)

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(ii) Time active risk. (2 marks)

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(iii) Misfit information ratio. (2 marks)

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(Total: 20 marks)
QUESTION THREE
(a) With respect to emerging markets debts (EMDs) investing, outline the following:
(i) THREE advantages of investing in EMDs. (3 marks)
(ii) THREE risks associated with EMDs. (3 marks)
(b) Michael Simba, a trader with Capera Brokers made the following trades for Wasafiri Limited’s shares on Tuesday,
7 November 2023:
• At 10 a.m. : Traded 100 shares at Sh.12.11 each.

• At 1 p.m. : Traded 300 shares at Sh.12.00 each.
• At 2 p.m. : Traded 600 shares at Sh.11.75 each.
Required:
(i) Calculate the volume weighted average price (VWAP) for Michael Simba’s trades. (3 marks)
(ii) Justify using THREE reasons why VWAP may not be a suitable measure to evaluate trades. (3 marks)
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(c) Bemuka Investment managers are desirous of making investment performance comparison with a different
portfolio in another jurisdiction but of comparable investment nature.
Bemuka’s portfolio of interest has the following performance:
Date Market value External cash flow Market value post cash flow
Sh.“million” Sh.“million” Sh.“million”
31 December 2022 200
31 January 2023 208
16 February 2023 217 +40 257
28 February 2023 263
22 March 2023 270 –30 240
31 March 2023 245
1. In order to have a like-for-like investment performance comparison with the other portfolio, Bemuka
Investment adopts a revaluing for large cash flows methodology where “large” is defined as greater than
5% in conformity to the investment performance standards.
2. Mathematical linking applies where appropriate.
Required:
(i) Time weighted rate of return (TWRR) for the months of January, February and March 2023 that
accommodates only the large cash flows for comparison purposes. (6 marks)
(ii) The return for the first quarter of the year 2023 by chain linking the daily TWRR in (c) (i) above.
(2 marks)
(Total: 20 marks)
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QUESTION FOUR
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(a) Explain the following types of rebalancing strategies used in portfolio management:
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(i) Buy and hold strategy. (2 marks)
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(ii) Constant mix strategies. (2 marks)
(iii) Constant proportion strategy. (2 marks)
(b) Describe the following trading tactics as used in the execution of portfolio decisions:
(i) Liquidity-at-any-cost trading. (2 marks)
(ii) Costs-are-not-important trading. (2 marks)
(iii) Need-trustworth-agent trading. (2 marks)
(c) Anastacia Wambura, a portfolio manager at Hepo Fund invests in small and medium sized companies whose shares
are primarily listed. The benchmark of the active investment is the market index.
The following performance data are available for the benchmark and the active portfolio:
Sector Weight of the Sector return of the Weight of the Sector return of
benchmark (%) benchmark (%) portfolio (%) the portfolio (%)
Industry 33.0 5 20.2 6
Finance 29.5 –5 39.4 8
Consumer goods and services 19.3 8 29.4 10
Technology 18.2 12 11.0 8
Total 100.0 100.0
CF34 Page 3
Out of 4
Required:
(i) Calculate the active return of the portfolio. (2 marks)
(ii) Determine the portfolio returns attributable to the following:
• Pure sector allocation. (2 marks)
• Security selection within sector. (2 marks)
• Sector allocation/security selection interaction. (2 marks)

(Total: 20 marks)
QUESTION FIVE
(a) Highlight THREE active currency portfolio management approaches. (3 marks)
(b) In relation to alternative investments portfolio management, summarise THREE risks associated with investing in
distressed securities. (3 marks)
(c) John Opiyo is an investment advisor at an asset management firm. He is developing an asset allocation for James
Mwamba, a client of the firm. Opiyo considers two possible allocations for James.
Allocation A: Consist of four asset classes; cash, domestic bonds, domestic equities and global equities.
Allocation B: Includes the same asset classes in allocation A as well as global bonds.
James Mwamba has a relatively low risk tolerance with a risk aversion coefficient (λ) of 7. John Opiyo runs a
mean-variance optimisation (MVO) to maximise the following utility function to determine the preferred allocation
for James.
Um = E(Rm) – 0.005λ б2m
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The resulting MVO statistics for the two asset allocations are presented below:
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Allocation A Allocation B
Expected return 6.7% 5.9%
Expected standard deviation 11.9% 10.7%
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Required:
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Determine, with reasons, the allocation that John Opiyo should recommend to James Mwamba. (4 marks)
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(d) A portfolio manager is desirous of implementing a contingent bond immunisation strategy to his fixed income
portfolio and has gathered the following information:
1. The firm has a three year investment horizon.

2. The firm must earn an annual return of 3% as a minimum and can immunise its assets portfolio at a rate of
4.75% per annum.
3. The manager can actively invest part or all of the portfolio until it reaches the safety net return of 3%.
4. If the portfolio drops to its safety net level, the portfolio is immunised and active management is dropped.
5. The manager’s portfolio is worth Sh.500 million and immunisation is carried out using semi-annual pay
coupon bonds with the par value equal to the portfolio value.
Required:
(i) Explain the term “cushion spread” as used in contingent immunisation strategies. (1 mark)
(ii) Determine the cushion spread for the portfolio manager’s immunisation. (1 mark)
(iii) Compute the ending value of the immunisation portfolio after 3 years using the safety net rate of return.
(2 marks)
(iv) Determine the required terminal value of the portfolio at the beginning of the immunisation, assuming the
portfolio is immunised at a rate of 4.75% per annum. (2 marks)
(v) If the manager invests the entire Sh.500 million at the rate of 4.75% per annum and the yield to maturity
(YTM) immediately drops to 3.75% per annum, determine the value of the safety margin. (4 marks)
(Total: 20 marks)
………………………………………………………………………
CF34 Page 4
Out of 4
CIFA ADVANCED LEVEL
TUESDAY: 22 August 2023. Afternoon Paper. Time Allowed: 3 hours.
QUESTION ONE
(a) Describe how each of the FIVE phases of business cycle affect the short-term and long-term capital market
expectations. (5 marks)
(b) A consultant has recently acquired a new client, Uzima pension scheme which is a defined benefit scheme. The
consultant has compiled the following data for the scheme:
Active employees 5277

Retired employees 1595
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Active employees’ average age 51.7 years
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Pension assets Sh. 760 million
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Pension liabilities Sh. 720 million
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Pension payment, current year Sh. 48 million
Pension payment: inflation-adjusted? Yes
Lump sum distribution option? Yes
Open to new employees? No
For new workers, the scheme has been replaced by a defined contribution scheme, but the scheme sponsors are
committed to ensuring that the scheme will be fully funded. Workers typically retire at age 60.
Required:
In the preparation of the scheme’s investment policy statement (IPS):
(i) Identify TWO factors that will most likely contribute to an increase in the scheme’s ability to take risk.
(2 marks)
(ii) Identify TWO factors that will contribute to a decrease in the scheme’s ability to take risk. (2 marks)
(iii) Formulate the time horizon section of the scheme’s IPS. (4 marks)
(iv) Highlight TWO factors that will most likely contribute to an increase in the scheme’s liquidity needs.
(2 marks)
(c) Kiegoi Fund is a Fund of Funds (FoFs) that comprise the following funds:
Fund Return Beta (ᵦ) Total risk

KBU 18% 1.2 17%
KBR 12% 1.05 15%
The applicable risk free rate for the two funds is 4.5%.
CF34 Page 1
Out of 5
Required:
Advise Kiegoi Fund on the fund to choose based on the following performance measures:
(i) Sharpe measure. (2 marks)
(ii) Treynor’s measure. (3 marks)

(Total: 20 marks)
QUESTION TWO
(a) A security market should provide liquidity, transparency and assurity of completion as essential qualities of
markets in execution of portfolio decisions.
Required:
In reference to the above statement, assess THREE factors that are necessary for a market to be liquid. (6 marks)
(b) Explain TWO types of target rebalancing that are aimed at protecting the future value of a portfolio. (4 marks)
(c) Maurine Akinyi has constructed a portfolio consisting of three bonds; X, Y and Z in equal par amounts of
Sh.1,000,000 each.
The initial values and durations are as shown below:
Bond Price (per par value of Sh. 100) Duration

X 104.013 5.025
Y 96.089 1.232
Z 103.063 4.479
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The portfolio values and durations after one year are as follows:
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Bond Price (per par value of Sh. 100) Duration
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X 99.822 4.246
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Y 98.728 0.305
Z 99.840 3.596
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Maurine Akinyi would like to maintain the portfolio’s shilling duration at the initial level by rebalancing the
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portfolio. She chose to rebalance using the existing bond proportions of one third each.
Required:
(i) The initial portfolio shilling duration. (3 marks)
(ii) The portfolio shilling duration after one year. (3 marks)
(iii) The rebalancing ratio necessary for the rebalancing. (2 marks)
(iv) The cash required for the portfolio rebalancing. (2 marks)

(Total: 20 marks)
QUESTION THREE
(a) With respect to mean variance optimisation approaches to asset allocation, explain:
(i) TWO advantages of using the Black – Litterman approach. (2 marks)
(ii) TWO advantages of using a Monte Carlo simulation. (2 marks)
(b) Identify THREE reasons for more price inefficiencies on the short side of the market than on the long side in equity
portfolio management and execution of short extension portfolios. (3 marks)
CF34 Page 2
Out of 5
(c) One of the Bernard Muya’s client allows the use of leverage in his portfolio. Muya considers a 6-month loan to
leverage an investment in Faida Ltd. 5 year bonds, which today made their semi-annual coupon payment.
The details on Muya’s analysis of the investment are provided below:
Amount to borrow Sh. 3 million

Borrowing rate (annual, nominal) 1.40%
Investment in Faida Ltd. bonds Sh. 5 million
Faida Ltd. bond par value Sh. 1000
Faida Ltd. bond price today Sh. 1,024.73
Faida Ltd. bond coupoun rate Sh. 4.50%
Projected Faida Ltd. bond price in 6 months Sh. 1,022.47
Required:
Calculate the expected 6 month holding period return on Bernard Muya’s proposed investment in Faida Ltd. bonds.
(4 marks)
(d) A bond portfolio manager is contemplating purchase of a corporate bond and gathers the information below:
1. Coupon rate of 11% paid semi-annually.

2. Four years are remaining until maturity.
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3. The current price of the bond is Sh. 98.4321 with a yield to maturity of 11.5%.
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4. The treasury yield curve is flat at 8.0%
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5. The credit spread for the issuer is 350 basis points for all maturities.
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6. The manager’s investment horizon is 1 year.
7. Coupon re-investment rate is 6% (stated annually).
8. There is a forecasted decline in the credit spread for all maturities to 250 basis points.
Required:
Perform an assessment of the return characteristic of the proposed investment in the corporate bond using total
return analysis by computing:
(i) The horizon price of the bond using 9% yield. (3 marks)
(ii) End of value accumulated coupon income at a re-investment rate of 6% annually. (2 marks)
(iii) The semi-annual total return. (2 marks)
(iv) The investment’s effective annual return. (2 marks)

(Total: 20 marks)
QUESTION FOUR
(a) In relation to selection of active managers of alternative investment scheme, identify TWO considerations under
each of the following due diligence check points:
(i) Assessment of market opportunity offered. (2 marks)
(ii) Assessment of investment process. (2 marks)
(iii) Assessment of terms and structure of investment. (2 marks)
CF34 Page 3
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(b) Alfred Sirma is a financial analyst for a fund sponsor and has prepared a performance attribution analysis for the
fund. He identifies the fund’s sources of return and develops the macro attribution table shown below:
Macro attribution for 1 April – 30 June 2023
Decision making level Find Values Incremental contribution (%) Incremental value
(investment alternative) contribution/(withdrawal)
Sh. “000” Sh. “000”
Beginning value 360,000 - -
Risk free asset 361,800 0.50 1,800
Asset category 388,872 7.52 27,072
Benchmarks 389,376 0.14 504
Investment managers 389,664 0.08 288
Allocation effects 389,304 -0.10 (360)
Total fund 389,304 8.14 29,304
Required:
(i) Determine how much of the fund’s return was due to each of the following:
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1. Style bias. .k (2 marks)
2. Active management. (2 marks)
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(ii) Demonstrate whether the total fund outperformed a pure indexing strategy. (4 marks)
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(c) Augustine Nemayian is a portfolio manager who believes that Magadi Cement Limited (MCL) is undervalued.
Augustine obtains approval at 10 a.m. to buy 120,000 shares of MCL when the price is Sh 40 using a limit order of
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Sh 42. The order is released for market execution when the price is at Sh. 40.50. The only fee is a commission of
Sh. 0.02 per share. By the end of the trading day 90,000 shares of the order had been executed, and MCL closes at
Sh. 42.50. The trade was executed at an average price of Sh 41.42. Details about the executed trades are presented
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below:
Trades Execution price Shares Executed

Sh.
1 40.75 10,000
2 41.25 30,000
3 41.50 20,000
4 41.75 30,000
Total 90,000
Required:
Determine the following costs for purchasing 90,000 shares of Magadi Cement Limited:
(i) The execution costs. (2 marks)
(ii) The opportunity costs. (2 marks)
(iii) The arrival costs. (2 marks)

(Total: 20 marks)
CF34 Page 4
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QUESTION FIVE
(a) Outline SIX general characteristics of investment performance standards (IPSs) in your jurisdiction. (6 marks)
(b) The following investment performance is an extract from a micro attribution analysis for the second quarter ending
30 June 2023 of Fanaka Fund:
Economic Portfolio weight Sector benchmark Portfolio return Sector benchmark

sectors (%) weight (%) (%) return (%)
Energy 8.38 7.72 3.55 3.32
Financial 15.48 13.42 1.66 1.10
Technology 17.89 22.01 3.21 3.18
NOTE: The overall benchmark return was 2.32%.
Required:
Perform micro attribution analysis for Fanaka fund using:
(i) Pure sector allocation return for the energy sector. (2 marks)
(ii) Within - sector selection return for the financial sector. (2 marks)
(iii) The allocation/selection interaction return for the technology sector. (2 marks)
(c) Zachary Onsore is a currency overly manager with Odipo Global Analysts, which is based in Canada. Onsore is
responsible for hedging the currency exposure of Odipo’s investments in Great Britain valued at £1,500,000. The
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spot exchange rate at the time of the investment was C$ 1.89/£ and the futures contract rate was C$ 1.91/£. One
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hundred and eighty (180) days later into the futures contract undertaken, the investment is liquidated realising a
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6 percent return (for the six months).
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The spot exchange rate at the time of liquidation is C$ 1.85/£ and the futures rate is C$ 1.87/£.
Required:
Evaluate the effects of currency movements on Odipo’s portfolio return in the following aspects:
(i) Translation gain/loss on the unhedged British Investment. (4 marks)
(ii) Since Onsore hedged the principal amount using the British Pound futures, determine the domestic return
of the portfolio. (4 marks)
(Total: 20 marks)
………………………………………………………………………
CF34 Page 5
Out of 5
CIFA ADVANCED LEVEL
TUESDAY: 25 April 2023. Afternoon Paper. Time Allowed: 3 hours.
QUESTION ONE
(a) Identify TWO characteristics of each of the following phases of a business cycle on short-term and long-term
capital market returns:
(i) Initial recovery. (2 marks)

(ii) Early upswing. (2 marks)
(iii) Slowdown. (2 marks)
(iv) Recession. (2 marks)
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(b)
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Concord Insurance Limited underwrites auto and home owners insurance. The company is licensed to do business
in all the 47 counties of country X. The company has achieved stable growth rate and the Board of Directors
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(BOD) of the company has approved a strategic plan for increasing the company’s growth rate and profitability.
The company’s total assets exceed Sh.5 billion and its surplus approaches Sh.2 billion. The company is facing
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increased competition in its markets from competitors through internet sales. The competitive environment has
focused the BOD on increasing the after-tax returns on the bond portfolio and the growth of the portfolio. The
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company’s chief investment officer (CIO) has been tasked by the BOD to revise the company’s investment policy
statement (IPS) to reflect the changes that will be necessary to meet the new growth targets.
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Required:
Formulate, for the CIO the following aspects of the IPS for Concord Insurance Limited:
(i) Investment philosophy. (2 marks)
(ii) Return objectives. (2 marks)
(iii) Risk tolerance. (2 marks)
(c) Edna Maasai placed three sell orders for Rahisi Limited shares and gathered the following data for the quoted bid
and ask quotes at various points in the day:
Time of trade Bid price Bid volume Ask price Ask volume
1 pm Sh.20 400 Sh.20.08 500
2 pm Sh.20.08 400 Sh.20.18 500
4 pm Sh.20.12 400 Sh.20.24 500
Edna has provided the following further information:
1. At 1 pm, she placed an order to sell 200 shares. The execution price was Sh.20.02.
2. At 2 pm, she placed an order to sell 300 shares. The execution price was Sh.20.11.
3. At 4 pm, she placed an order to sell 500 shares. The average execution price was Sh.20.09.
Required:
Calculate the effective spreads for each of Edna’s orders. (6 marks)
(Total: 20 marks)
CF34 Page 1
Out of 5
QUESTION TWO
(a) Highlight FIVE fixed income enhancement strategies available to portfolio managers seeking to reduce the
component of tracking errors associated with the expenses and transaction costs of portfolio management.
(5 marks)
(b) Mbunika Ltd. offers its employees attractive benefits which include a defined contribution pension plan. An asset
only (AO) approach to strategic asset allocation is currently used for the investment management of the pension
plan. Titus Mezo is a consultant to the board of trustees of the pension plan. The board has requested Titus Mezo to
recommend a strategic asset allocation for the pension plan given the following investment policy objectives:
1. Return requirement: Earn an average annual return of 8.7% plus management and administrative fees of
0.7%.
2. Risk objectives: A maximum standard deviation of portfolio returns of 10%.
For the strategic asset allocation analysis, Titus Mezo has generated the corner portfolio shown below:
Corner portfolios
Asset classes (portfolio weights, %)
Corner Expected Expected Sharpe Domestic Non Intermediate Non Domestic
portfolio return standard ratio equities domestic domestic domestic real estate
number (%) deviation (%) equities bonds bond
1 10.8 16.1 0.39 100.0 0.0 0.0 0.0 0.0
2 10.4 14.2 0.42 82.4 0.0 0.0 0.0 17.6
3 10.3 12.7 0.46 74.1 4.0 0.0 0.0 21.9
4 9.1 9.1 0.51 33.7 12.0 36.7 0.0 17.6
5 8.0 7.4 0.47 25.0 11.8 45.3 3.4 14.5
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6 6.9 5.2 0.46 0.0 13.7 53.0 27.1 6.2
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7 6.6 4.8 0.44 0.0 11.2 53.0 31.5 4.3
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1. The risk free rate is 4.5%.
2. Currently, the pension plan investment policy statement (IPS) prohibits short positions and the use of
leverage.
3. The IPS allows investment in any single portfolio or combination of portfolio described above.
4. Titus is proposing a change in the IPS to allow borrowing or lending at the risk free rate.
Required:
Using traditional mean-variance analysis:
(i) Determine with TWO reasons the most appropriate portfolio or combination of portfolios for the strategic
asset allocation of the current pension plan. (2 marks)
(ii) Determine the weight of total equities in the most appropriate strategic asset allocation of the current
pension plan. (3 marks)
(iii) Determine the optimal asset allocation for the overall portfolio for the pension plan based on Titus’
proposal. (4 marks)
(iv) Explain how the proposed allocation by Titus improves the plan’s risk adjusted return. (2 marks)
(c) (i) State TWO advantages of the resampled efficient frontier approach relative to the traditional mean-
variance efficient frontier approach. (2 marks)
(ii) Highlight TWO advantages of the Asset Liability Management (ALM) approach to the Asset Only (AO)
approach. (2 marks)
(Total: 20 marks)
CF34 Page 2
Out of 5
QUESTION THREE
(a) Distinguish between “micro attribution analysis” and “macro attribution analysis” in relation to portfolio
performance evaluation. (4 marks)
(b) Discuss THREE key areas that must be addressed in formulating a private equity investment strategy as used in
alternative investment portfolio management. (6 marks)
(c) Eliud Omondi has compiled data on the performance of a plan’s portfolio for the year ending 31 December 2022.
Eliud has noted that each sub-portfolio has its own external manager with the plan trustees determining the portion
of the overall portfolio allocated to each manager as shown below:
Sub-portfolio Weight Return

Plan portfolio (%) Benchmark (%) Plan portfolio (%) Benchmark (%)
Equity 65 60 8.2 8.0
Fixed income 20 30 2.4 2.5
Alternative investments 15 10 9.2 10.8
Total 100 100
Eliud uses the Brinson model for performance attribution:

Hint: The Brinson model is given as follows:
• Allocation effect =
• Security selection + interaction effects =

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Required:
(i) The return attributable to asset owner. (2 marks)
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(ii) The return attributable to the managers. (2 marks)

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(iii) Comment on your results in (c) (i) and (c) (ii) above. (1 mark)
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(d) Wangechi Joy, a Fund manager is responsible for the Uganda equity portion of her company’s pension plan. She is
thinking about trying to boost the overall alpha in Ugandan equities by using an enhanced index to replace her core
index fund. Further, it is established that:
• The Uganda equity portion of the pension plan currently consists of three managers (one index, one value
and one growth) and the portion is expected to produce a target annual alpha of 2.4% with a tracking risk
of 2.75%.
• By replacing the index manager with an enhanced indexer, the target alpha changes to 2.8% with a
tracking risk of 2.9%.
• Wangechi Joy is willing to accept a slightly higher level of tracking risk.
Required:
Using information ratio, justify whether there is any change in the equity portfolio. (5 marks)
(Total: 20 marks)
QUESTION FOUR
(a) Describe TWO benefits that each of the following players could derive by complying with performance standards
in the investment industry:
(i) Investment managers. (2 marks)
(ii) Prospective clients. (2 marks)
(b) Job Wambua manages a Kenya (KES) based hedge fund. A portion of the fund is currently allocated 60% and 40%
respectively to Uganda (UGX) and Rwanda (RWF) risk free investments, pending other investment opportunities.
CF34 Page 3
Out of 5
Job has collected the following information:
Estimates Uganda Rwanda
Asset return in foreign currency 2.0% 2.5%
Change in spot exchange rate versus the KES –1.0% 3.0%
Asset risk measured in foreign currency (σ) 0.0% 0.0%
Currency risk (σ) 7.0% 9.0%
Correlation of currency returns (KES/UGX, KES/RWF) +0.70
Required:
Determine the following from the portfolio perspective, measured in KES:
(i) The expected returns as measured in investor’s domestic currency. (2 marks)
(ii) The standard deviation of the risk free assets as measured in the investor’s domestic currency. (2 marks)
(c) Mema Capital Ltd. is a United States based investment firm that invests in a portfolio of bonds that trade in Euros.
Over a one year holding period, the value of the portfolio increases by 5% (in Euros) and the Euro-Dollar exchange
rate increases from 1.300 USD/EUR to 1.339 USD/EUR.
Required:
(i) The currency that has appreciated. (1 mark)
(ii) The returns from foreign exchange. (2 marks)
(iii) Investor’s return in domestic currency terms (USD) over a one-year holding period. (2 marks)
(d) The following information is available regarding four managers benchmarked against the MSCI World Index:
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Manager constraints A B C D
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Target active risk 10% 1% 4% 7%
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Maximum sector deviations 0% 3% 10% 15%
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Maximum risk contributions, single security 5% 1% 1% 3%
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Required:
Based on major types of traders and their motivation to trade, justify which manager is:
(i) A closet indexer. (1 mark)
(ii) Concentrated stock picker. (2 marks)
(iii) Diversified multi-factor investor. (2 marks)
(iv) Sector rotator. (2 marks)

(Total: 20 marks)
QUESTION FIVE
(a) Highlight TWO weaknesses of using each of the following benchmarks to measure the performance of a portfolio:
(i) Market index. (2 marks)
(ii) Benchmark normal portfolio. (2 marks)
(iii) Median of the manager universe. (2 marks)
(b) A client hires a fixed income portfolio manager to pursue a contingent immunisation strategy for his portfolio. The
goal is to reach a terminal distribution in 6.75 years of Sh.525 million. The required amount to immunise the
portfolio is Sh.375 million. The portfolio was funded with Sh.400 million. Three months later, the portfolio is
worth Sh.390 million. The immunisation rate for the remaining term of the portfolio is now 5.0%.
Required:
Determine whether the manager has increased or decreased the surplus during the first three months of managing
the portfolio. (3 marks)
CF34 Page 4
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(c) Sherly Achieng initially has Sh.100,000 invested in shares at the Nairobi Securities Exchange (NSE) and Sh.35,000
in T-bills so that the total portfolio is worth Sh.135,000. Sherly observes that the share market index rise from
1,240 to 1,350 following the recently concluded peaceful general election that boosted investors’ confidence. The
index rise was from 1 September 2022 to 30 September 2022. By the end of 30 October 2022, the share market had
fallen to 1,300. Sherly discloses that her initial position held her most optimal stock-to-total assets ratio (S/TA).
Required:
Advise Sherly Achieng on the following:
(i) Optimal S/TA ratio. (1 mark)
(ii) Stockholding as at 30 September 2022 under a buy and hold strategy. (2 marks)
(iii) Stockholding as at 30 October 2022 under the buy-and hold strategy. (2 marks)
(iv) The amount of stock to buy or sell as at 30 September 2022 under the constant-mix strategy. (3 marks)
(v) The amount of stock to buy or sell as at 30 October 2022 under the constant-mix strategy. (3 marks)
(Total: 20 marks)
………………………………………………………………………
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CF34 Page 5
Out of 5
CIFA ADVANCED LEVEL
TUESDAY: 6 December 2022. Afternoon Paper. Time Allowed: 3 hours.
Answer ALL questions. Marks allocated to each question are shown at the end of the question. Show ALL your workings.
Do NOT write anything on this paper.
QUESTION ONE
(a) Describe how the following factors could affect an individual investor’s risk tolerance:
(i) Source of wealth. (1 mark)
(ii) Measure of wealth. (1 mark)
(iii) Stage of life. (1 mark)
(b) Capital market expectations are the essential inputs to deciding on a strategic asset allocation.
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In relation to the above statement, identify the SEVEN steps involved in the process of capital markets
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expectations setting. (7 marks)
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(c) XYZ is an investments practitioner and is analysing Elimu Msingi endowment fund with Sh.20 million in assets.
The fund has a targeted spending rate of 4.5%. The fund has been incurring 0.75% as management costs.
The trustees would like to preserve the purchasing power of the fund and curtail the risk in terms of standard
deviation to no more than 10%. Inflation expectation for the coming year is 2%.
1. XYZ is considering the following domestic investments to recommend to Elimu Msingi Board of trustees
for incorporation into their investment portfolio:
Investment Return (%) Standard deviation (%)

A 15.50 19
B 10.85 12
C 8.50 14
D 14.25 16
The risk free rate applicable for these investments is 3% and XYZ estimates Elimu Msingi to be
moderately risk averse with a numerical ranking of 5.
2. XYZ identifies further foreign investment opportunities presented by various portfolios listed below:
Asset class weights (%)
Portfolio Expected Standard 1 2 3 4
return (%) deviation (%)
E 12.00 10.5 65 –20 35 20
F 16.50 15.00 15 20 50 15
G 18.00 20.00 30 20 25 25
H ? ? ? ? ? ?
CF34 Page 1
Out of 4
Required:
(i) Determine Elimu Msingi’s endowment fund required rate of return. (1 mark)
(ii) Advise XYZ on the most appropriate domestic investment to recommend to the Board of trustees of Elimu
Msingi using the utility adjusted rate of return. (5 marks)
(iii) Given that portfolio H is composed of 35% of portfolio E and 65% of portfolio F, determine the optimal
asset class weights in portfolio H. (4 marks)
(Total: 20 marks)
QUESTION TWO
(a) Describe THREE primary portfolio rebalancing strategies. (6 marks)
(b) Daniel Menzo who is 35 years old has recently retired from playing football. He is meeting with his portfolio
manager to update his investment policy statement (IPS):
Income
He will receive an annual pension of Sh.1,000,000 before tax in the coming year. In future years, this amount will
be indexed for inflation which is expected to be 5% per year. The pension is taxed at 30%.
Expenses
His living expenses over the previous twelve months were Sh.1,200,000. He expects these expenses will grow at the
expected rate of inflation this year and in each future year.
Assets
In addition to his pension payments, his investment portfolio is currently valued at Sh.15 million. Next month, he
wants to make a direct equity real estate investment of Sh.1,000,000 in a junior school sports training facility. He
also anticipates that he will receive a performance cash bonus of Sh.3,500,000 which will be immediately invested
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in his portfolio. This bonus and all investment returns are taxed at 30%.
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Daniel wants his portfolio to fund any expenses not covered by his pension, while maintaining its real value over
time. He is eager to consider investments in more risky asset classes. He is not concerned about volatility in the
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value of his portfolio as long as it continues to support his living expenses. He does not intend to seek further
employment in retirement.
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Required:
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(i) Calculate Daniel’s nominal after tax required rate of return for the coming year. (8 marks)
(ii) Identify FOUR factors that indicate Daniel has a high ability to take risk. (4 marks)
(iii) Formulate the time horizon and unique circumstances constraints section of Daniel’s IPS. (2 marks)
(Total: 20 marks)
QUESTION THREE
(a) Describe TWO spread duration measures used for fixed rate bond. (4 marks)
(b) An investor gathers the following information relating to Kimbo shares listed at the securities exchange:
• On Wednesday, the shares closed the day at Sh.40 per share.

• On Thursday morning before market open, the investor decides to buy Kimbo Ltd.’s shares and transfers a
limit order for Sh.39.95 per share for 1,000 shares. The price never falls to Sh.39.95 during the day and the
order expires unfilled. The shares closes the day at Sh.40.04 per share.
• On Friday, the order is revised to limit of Sh.40.05. The order is partially filled that day as 700 shares are
bought at Sh.40.05. The commission is Sh.17. The share closes at Sh.40.08 and the order is cancelled.
Required:
Calculate the following:
(i) Explicit cost of trade. (1 mark)
(ii) Realised profit or loss. (1 mark)
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(iii) Delay cost. (1 mark)
(iv) Missed trade opportunity costs. (1 mark)
(v) Implementation shortfall. (2 marks)
(c) Silvester Onyango, a high net worth (HNW) investor has approached Antony Makau, an independent financial
consultant to review the performance of his investment account over the past four years. The account is managed by
an external portfolio manager, but Silvester Onyango has full control over the timing and the size of the cash flows
being invested into and withdrawn from the account.
Account values and cash flows:

Year Year end Year end value (including year end cash flow)
Cash flow
Sh.“million” Sh.“million”
2017 - 90
2018 5 100
2019 5 110
2020 120 230
2021 –30 250
Required:
(i) The annualised time weighted rate of return (TWRR). (4 marks)
(ii) The annualised money weighted rate of return (MWRR). (4 marks)
(iii) Advise on the most appropriate return measure for use in evaluating the external portfolio manager’s
investment performance. (2 marks)
(Total: 20 marks)
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QUESTION FOUR
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(a) Assess THREE potential sources of excess return for an international bond portfolio. (6 marks)
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(b) Explain THREE guiding principles that firms should consider while applying the global investment performance
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standards (GIPS) to wrap fee portfolios. (6 marks)
(c) Caroline Wesula is evaluating several alternatives for the Ugandan equity portfolio of her company’s pension plan
involving the following managers:
Active risk
with respect to
Active return (%) Benchmark (%) Normal benchmark
Index 0 0 Dumax 3000
Semi-active 1 1.5 Dumax 3000
Active N(value) 3 5 Dumax 1000 value
Active M(Growth) 4 6 Dumax 1000 growth
Long-short 6 6 Cash with Dumax 1000 overlay
1. Active versus misfit risk is 7.13%.
2. Active returns are uncorrelated.
3. Overall equity portfolio benchmark is Dumax 3000.
4. Caroline Wesula has taken information in the table above and used mean-variance optimizer to create an
implementation efficient frontier. The highest risk point on the efficient frontier is 100% allocation to the
long-short manager with a 100% Dumax 1000 overlay.
5. The active risk of this portfolio with the adjustments in point (4) above is 6.1%.
Required:
(i) Justify why the active risk is greater than 6%. (2 marks)
(ii) Calculate the total active risk for Active N. (2 marks)
(iii) Caroline Wesula’s current equity manager allocation is 30% Dumax Index and 70% semi-active:
Calculate total current expected active return, active risk and information ratio. (4 marks)
(Total: 20 marks)
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QUESTION FIVE
(a) Describe TWO approaches used in constructing an index portfolio. (4 marks)
(b) Explain THREE components of returns for commodity futures contracts. (6 marks)
(c) A portfolio manager has a portfolio worth Sh.100 million, Sh.30 million of which is his own funds and Sh.70
million is borrowed. If the return on the invested funds is 6% and the cost of borrowed funds is 5%.
Required:
Calculate the return on the portfolio. (4 marks)
(d) Brian Maritim is the portfolio manager of Rich Corporate Bond investors. His current Sh.100 million bond position
is as follows:
Bond Market value weights (%) Effective duration

A 50 2.00
B 40 3.00
C 10 4.00
The investment policy statement (IPS) allows the portfolio manager to leverage the portfolio by 20%.
Required:
(i) The effective duration of the bond portfolio. (2 marks)
(ii) The contribution of bond B to the effective duration of portfolio. (1 mark)
(iii) Identify THREE types of risks that Brian’s bond portfolio is potentially exposed to. (3 marks)
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CIFA ADVANCED LEVEL
PILOT
December 2021. Time Allowed: 3 hours.
workings.
QUESTION ONE
(a) Using historical data, F.A. Cherono calculated the covariance between Kenyan and Rwandan stocks to be 230.
She estimates the correlation as 190 using a factor model method based on a proxy for the world market
portfolio. She uses a shrinkage estimator to estimate covariances and finds that 0.30 is the best weight on the
historical estimate.
Required
(i) Calculate the shrinkage estimate of the covariance between Kenyan and Rwandan equities. (2 marks)
(ii) Describe the theoretical advantage of a shrinkage estimate of covariance compared to a raw historical
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estimate. (1 mark)
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(b) Consider the responsibilities for two investment managers, F.A. Theuri and F.A. Gitahi. Theuri works in a
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Kenyan investment bank portfolio management department and manages separately managed accounts
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(SMA’s) for high-net-worth clients. The accounts' requirements limit investments to Kenyan stocks, Kenyan
fixed-income securities, and prime Kenyan money market products. The investing objective of these balanced
accounts is long-term capital growth and income. Gitahi, on the other hand, is the chief investment officer of a
big South African – based, internationally oriented asset management that invests in the following categories
of assets:
Equities Fixed Income Alternative Investments

South African equities West African sovereign debt East African venture capital
West African equities Kenyan government debt DR Congo timber assets
Kenyan large-cap equities Kenyan apartment properties
Kenyan small-cap equities
Tanzanian large -cap equites
NB: Venture capital is equity investment in private companies.
Gitahi also runs SMA’s with generally long-term time horizons and global tactical asset allocation programs.
Required
Using the above information, compare and contrast the information and knowledge requirements of Theuri
and Gitahi. (5 marks)
(c) Describe how an equity manager’s investment universe can be segmented. (6 marks)
(d) The following data is provided for four managers who are benchmarked against the same index:
Manager Constraints A (%) B(%) C (%)

Target Active Risk 8 5 9
Maximum sector deviations 20 8 0
Maximum risk contributions, single security 3 1 6
CF34 Page 1
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Required:
Identify and justify the manager most likely to be:
(i) A shrewd stock picker. (2 marks)
(ii) A multi-factor investor who is well-diversified. (2 marks)
(iii) A rotator for sectors. (2 marks)

(Total: 20 marks)
QUESTION TWO
(a) Ngwiri is managing a diversified portfolio which has the following characteristics:
Portfolio Weight Standard Deviation

Asset A 20% 22%
Asset B 30% 12%
Asset C 50% 10%
Portfolio 100% 8.6%
The Covariances are shown below:
Asset A Asset B Asset C

Asset A 0.050000 0.006700 0.001300
Asset B 0.006700 0.014400 0.002000
Asset C 0.001300 0.002000 0.009800
Required:
(i) Calculate the absolute contribution to portfolio variance of asset A. (2 marks)
(ii) Given that the absolute contribution to portfolio variance of assets B and C are 0.001998 and
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0.002880 respectively, calculate the relative contribution to portfolio variance of asset A. (1 mark)
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(b) The following information on three bonds is provided.
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Price Yield (YTM) Maturity Effective Duration

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7-year corporate bond 101.5 3.77% 6.7 6.1

5-year government bond 99.96 1.9% 4.9 4.7
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7-year government bond 99.56 2.2% 7.0 6.5

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F.A. Mwende plans to buy 1 million par of the corporate bond and she is aware that there is some controversy
in the financial services industry regarding whether it is best to compute G-spread by matching maturity or
duration. Maturity has been used in the industry for sometime and is regarded as simpler. Some theoretical
arguments favour an interpolation based on duration as more accurate. She has determined the difference in
the two methods is not generally large and favours the more traditional “use maturity “approach.
Required:
(i) Calculate the initial benchmark (G-spread) of the corporate bond based on interpolated maturity
matching. (2 marks)
(ii) Calculate the hedge position to abolish interest rate risk for the 1 million par of the corporate bond
and calculate the expected return on the hedged position. (2 marks)
(iii) After buying the corporate bond, the yield of the 5 and 7 year government bonds increase 10 and 15
bp respectively, while the corporate bonds yield declines 3 bp. Estimate the new price of the
corporate bond. (2 marks)
(c) Western Kenya Investment Management (WKIM) wishes to capitalize on the prestige associated with
presenting GIPS-compliant performance statistics for promotional purposes. WKIM chooses to develop five
composites for marketing reasons to save time and money. These portfolios constitute 60% of the firm's fee-
paying discretionary holdings. Recognising that it cannot claim compliance for all of its portfolios, WKIM
intends to incorporate the following compliance statement in its performance presentation: "The investment
results contained in this report have been compiled and presented in accordance with the requirements of the
Global Investment Performance Standards (GIPS) for the bulk of assets managed by Western Kenya
Investment Management, Incorporated."
CF34 Page 2
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Required:
Discuss if WKIM's claim of GIPS compliance is appropriate. (3 marks)
(d) Nyamongo is in charge of investing a fresh Sh.10 billion contribution to Koner Bank's pension fund. The
mandate is to work with active managers to make investments. The equity portion of the pension plan is
benchmarked against the wider equity market.
Required:
Discuss the benefits and drawbacks of employing a single manager with either a growth or value style, one
manager with each style, or one manager with a market-oriented style. (8 marks)
(Total: 20 marks)
QUESTION THREE
(a) KBA, a big charity organisation, intends to invest in one or more hedge funds. Amina, KBA's CIO, is
reviewing data provided by the organisation's senior analyst, F.A. Saroni. Amina questions Saroni about why a
market-neutral long-short hedge fund that KBA is exploring has refused to use an equity index as a
benchmark.
Required:
(i) Prepare an answer to Amina's inquiry to Saroni. (2 marks)
(ii) Suggest an alternative to utilising a stock index benchmark as a baseline for a market-neutral long-
short fund. (2 marks)
(iii) Discuss how the following variables affect index development in the context of hedge funds:
 Survival bias. (2 marks)
 Value-weighted indices. (2 marks)
 Price staleness. (2 marks)
(b) The following strategic asset allocation is being reviewed by an investing committee:
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Domestic equities 50% ± 5%
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International equities 15% ± 1.5%
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Domestic bonds 35% ± 3.5%
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The committee believes that the corridors outlined above are suitable if each asset type has the same risk and
transaction-cost characteristics. It now seeks to account for asset class disparities when determining corridors.
Required:
Evaluate the consequences of the following sets of facts on the specified tolerance range, given an all-else-
equal assumption in each case:
(i) Domestic bond volatility is much lower than that of domestic or international equities, which are
equal. Tolerance band for domestic bonds. (1 mark)
(ii) Transaction costs in international equities are 10% higher than those for domestic equities. Tolerance
band for international equities. (1 mark)
(iii) Transaction costs in international equities are 10% higher than those for domestic equities, and
international equities have a much lower correlation with domestic bonds than do domestic equities.
Tolerance band for international equities. (1 mark)
(c) F.A. Kamau manages the equity portion of the pension portfolio of Klinker Minerals, a large Kenyan mining
company. Kamau is responsible for a portfolio of Sh.700 million of Kenyan equities. Kamau’s annual reward
is related to the performance of this portfolio versus the MSCI Kenyan Index, the benchmark for the pension
portfolio’s equity portion. He has hired the following managers with expected alphas and active risk shown
below:
AUM (millions) Expected Alpha Expected Tracking Risk
Manger A 400 0% 0%
Manger B 100 2% 4%
Manger C 100 4% 6%
Manger D 100 4% 6%
CF34 Page 3
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All four managers’ alphas are uncorrelated and are measured against the MSCI Kenyan benchmark. The
pension fund’s trustees have stated objectives of achieving an information ratio of 0.6 or greater, with tracking
risk of no more than 2% a year. An optimisation model results in weights on Managers A, B, C and D of 4/7,
1/7, 1/7, and 1/7, respectively.
Required:
(i) Identify the investment approach of Manager A. (2 marks)
(ii) Characterise the structure of the optimal portfolio of managers. (2 marks)
(iii) Evaluate whether the optimal portfolio of managers is expected to meet the trustees’ investment
objectives. (3 marks)
(Total: 20 marks)
QUESTION FOUR
(a) A Kenyan fixed-income fund has substantial holdings in euro-denominated German bonds. The portfolio
manager of the fund is considering whether to leave the fund’s exposure to the euro unhedged or fully hedge it
using a dollar–euro forward contract. Assume that the short-term interest rates are 4% in Kenya and 3.2% in
Germany. The fund manager expects the euro to appreciate against the shilling by 0.6%. Assume that IRP
holds.
Required:
Explain which alternative has the higher expected return based on the short-term interest rates and the
manager’s expectations about exchange rates. (3 marks)
(b) The manager of an investment-grade fixed-income fund is concerned about the possibility of a rating
downgrade of Alpha Ltd. The fund’s holding in this company consists of 5,000 bonds with a par value of Ksh
1,000 each. The fund manager doesn’t want to liquidate the holdings in this bond, and instead decides to
purchase a binary credit put option on the bond of Alpha Ltd. This option expires in six months and pays the
option buyer if the rating of Alphas’ bond on expiration date is below investment grade (Standard &
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Poor’s/Moody’s BB/Ba or lower.) The payoff, if any, is the difference between the strike price and the value
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of the bond at expiration. The fund paid a premium of Sh. 130,000 to purchase the option on 5,000 bonds.
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Required:
(i) What would be the payoff and the profit if the rating of Alpha Motors’ bond on expiration date is
below investment grade and the value of the bond is Sh.870. (4 marks)
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(ii) What would be the payoff and the profit if the rating of Alpha Motors’ bond on expiration date is
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investment grade and the value of the bond is Sh.980. (3 marks)

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(c) Explain event risk, market liquidity risk, market risk, and "J – factor risk'' in relation to investing in distressed
securities. (8 marks)
(d) Define algorithmic trading and its motivation. (2 marks)

(Total: 20 marks)
QUESTION FIVE
(a) As an analyst, you are provided with the following information:
Neutral rate 4%
Inflation target 3%
Expected inflation 7%
GOP long-term trend 2%
Expected GOP growth 0%
Required:
Calculate the short-term interest rate target and comment on your answer. (5 marks)
(b) Compare the major approaches to economic forecasting. (6 marks)
(c) Explain the requirements for compliance with the GIPS Advertising Guidelines (9 marks)
(Total: 20 marks)
………………………………………………………………………
CF34 Page 4
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CIFA ADVANCED LEVEL
TUESDAY: 2 August 2022. Afternoon paper. Time Allowed: 3 hours.
Answer ALL questions. Marks allocated to each question are shown at the end of the question. Show ALL your workings.
Do NOT write anything on this paper.
QUESTION ONE
(a) Describe two costs associated with rebalancing a portfolio. (4 marks)
(b) Discuss three factors that should be considered when setting the corridor for an asset class. (6 marks)
(c) Peter Mwangangi is a financial analyst. He manages a portfolio consisting of three bonds with equal par value
amounts of Sh.1,000,000 each. Table 1 shows the market value of the bonds and their durations (the price includes
accrued interest).
Table 2 contains the market value of the bonds and their durations one year later.
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Table 1: Initial values
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Security Market value (Sh.) Duration
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Bond A 1,060,531 5.909
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Bond B 981,686 3.691
Bond C 1,090,797 5.843
Table 2: Values after one year
Security Market value (Sh.) Duration

Bond A 1,042,043 5.177
Bond B 980,461 2.817
Bond C 1,068,319 5.125
Peter Mwangangi would like to maintain the portfolio’s shilling duration at the initial level by rebalancing the
portfolio. He chose to rebalance using the existing security proportions of one third each.
Required:
(i) The initial portfolio shilling duration. (3 marks)
(ii) The portfolio shilling duration after one year. (3 marks)
(iii) The rebalancing ratio necessary for the rebalancing. (2 marks)
(iv) The cash required for the rebalancing. (2 marks)

(Total: 20 marks)
QUESTION TWO
(a) Examine five challenges faced when managing emerging markets currency exposures. (5 marks)
(b) Outline four characteristics of a customised benchmark. (4 marks)
CF34 Page 1
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(c) Hope University (HU) is a private domestic university with a Sh.2 billion endowment fund as of fiscal year ended
31 May 2022. The fund is heavily dependent on its endowment fund to support ongoing expenditures because the
university’s enrolment growth and tuition revenue have not met expectations in recent years. The endowment fund
must make a Sh.126 million annual contribution which is indexed to inflation to HU’s general operating budget.
The domestic inflation is expected to rise by 2.5% annually and the higher education cost index is anticipated to rise
by 3% annually. The endowment has also budgeted Sh.200 million due on 31 January 2023 representing a final
payment for construction of a new main library.
The HU endowment fund asset allocation as at 31 May 2022 is shown below:
Asset Current allocation Current Current yield Expected annual

(Sh. million) allocation (%) return (%)
percentage (%)
Money Market Fund 40 2 4 4
Global Bond Fund 60 3 5 5
Global Equity Fund 300 15 1.0 10.0
Domestic Equity Fund 400 20 0.1 15
Direct Real Estate 700 35 3.0 11.5
Venture Capital 500 25 0.0 20.0
Total 2,000 100
Required:
Investment policy statement (IPS) for Hope University endowment fund clearly covering the following elements;
return, risk, time horizon and liquidity. (11 marks)
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QUESTION THREE
(a) Agnes Kwamboka is a financial consultant at Puma Asset Managers. A client is meeting with her and Agnes asks
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the client to consider adding international investment to his portfolio. Agnes explains to the client her methodology
for developing capital market expectations and determining a recommended asset allocation. In her approach to
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developing capital market expectations, Agnes utilises sample statistics from the most recent twenty years of market
security and foreign exchange price data as estimates of asset class expected returns, expected volatilities of return
and expected correlations of returns. Agnes recommends the possible allocation of investments to South African
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real estate because prices of real estate tend to lag returns from the stock market. With the South Africa stock
market index registering positive returns recently, Agnes expects that the wealth gains from the equity market will
now be a positive factor for real estate prices.
Required:
(i) Propose five specific limitations to Agnes Kwamboka’s approach to developing capital market
expectations. (5 marks)
(ii) Identify one problem in using historical estimates of return correlations for alternative asset such as real
estate. (1 mark)
(iii) Explain how the problem in (a) (ii) above biases the formulation of expectations for real estate investment.
(2 marks)
(b) Neema Foundation is an organisation whose mission is to ensure credible elections in the country. The risk
tolerance and return requirement for the foundation are provided below:
Risk tolerance: Above average (maximum 15% annual standard deviation of returns).
Return requirement: To earn an average annual return to meet a spending rate of 7.5% (including expected
inflation) and management fee of 0.6%.
To help the directors of the Foundation assess the appropriate strategic asset allocation for their portfolio, a
financial consultant has prepared the following data which describes eight corner portfolios and risk a free portfolio.
CF34 Page 2
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Portfolio weights
Corner Domestic Nondomestic Domestic Domestic Domestic Expected Standard Sharpe
Portfolio equities equities intermediate long term real estate return deviation ratio
term bonds bonds
% % % % % % % %
1 100.0 0.0 0.0 0.0 0.0 8.9 18.0 0.272
2 76.2 23.8 0.0 0.0 0.0 8.7 16.8 0.280
3 64.6 24.0 0.0 0.0 11.4 8.5 16.0 0.281
4 55.6 22.6 0.0 9.5 12.3 8.2 14.9 0.282
5 53.2 24.7 13.3 0.0 8.8 8.0 14.1 0.284
6 32.6 26.2 41.2 0.0 0.0 7.1 11.0 0.282
7 0.0 24.8 75.2 0.0 0.0 5.7 7.7 0.221
8 0.0 15.5 84.5 0.0 0.0 5.5 7.5 0.200
A risk free portfolio is available and is expected to return 4%. Neema Foundation regulations prohibits short
positions or the use of margin but allows investment in any portfolio or combination of portfolios described above.
In addition to satisfying the risk tolerance and return requirement, Neema Foundation Directors consider the Sharpe
ratio to be a dominant factor in asset allocation decision.
A director of Neema Foundation is concerned how the strategic asset allocation would change if the return
requirement for the foundation including expected inflation and management fee was only 6% and the endowments
risk tolerance was consistent with a maximum 12% annual standard deviation of returns.
Required:
Using mean variance analysis:
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(i) Determine, with three reasons the portfolios to be combined in the optimal strategic asset allocation for the
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Foundation. (3 marks)
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(ii) Determine the appropriate portfolio weights for the domestic equities and domestic intermediate term
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bonds in the optimal strategic asset allocation. (5 marks)
(iii) Determine with reference to the tangency portfolio, the portfolio to be combined in a new strategic asset
allocation based on the information in the directors’ concern. (4 marks)
(Total: 20 marks)
QUESTION FOUR
(a) In relation to active equity investing, explain the two major approaches in identifying equity investment styles.
(4 marks)
(b) Twiga Investments is a large investment firm that utilises a core-satellite approach to allocate funds in its portfolio
amongst equity managers. For each equity manager that has been allocated funds in the last 6 months up to 30 June
2022, the expected active return, expected active risk and allocations are as follows:
Expected active return Expected active risk Allocations

Passive index 0.00% 0.00% 15%
Enhanced indexing 1.70% 2.50% 45%
Active manager – Alphax 1.90% 3.00% 25%
Active manager – Betax 3.30% 5.50% 10%
Active manager – Cetax 3.90% 7.20% 5%
Required:
(i) Determine Twiga Investments’ core and satellites. (2 marks)
(ii) The portfolio expected active return. (2 marks)
(iii) The portfolio active risk. (2 marks)
(iv) The information ratio. . (2 marks)
CF34 Page 3
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(c) The following data have been collected to appraise the performance of two asset management firms:
Zebra fund Adams fund Market Index

Return 5.12% 7.68% 6.4%
Beta 0.95 1.08 1.00
Variance 14.05 15.50 12.25
The risk free rate of return is 4%.
Required:
Calculate the following risk adjusted performance measures and rank them from the highest performing fund to the
lowest.
(i) Treynor’s measurers. (2 marks)
(ii) Modigliani – Modigliani (M2) measure. (2 marks)
(iii) Sharpe’s measure. (2 marks)
(v) Jensen’s alpha measure. . (2 marks)

(Total: 20 marks)
QUESTION FIVE
(a) In the context of investment performance standards, summarise four fundamental compliance requirements.
(4 marks)
(b) Assess four types of risk associated with distressed securities investments that a portfolio manager should take into
consideration before including distressed securities in the portfolio. (4 marks)
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(c)
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John Kirima, an investment analyst with Ndege Asset management firm has gathered the following sell orders that
he executed on the afternoon hours on 26 July 2022. The quoted bid and ask quotes were as follows:
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Time of trade Bid Price Bid size Ask Price Ask Size
Sh. Sh.
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13.00 Hours 40 400 40.16 500

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14.00 Hours 40.16 400 40.36 500

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16.00 Hours 40.24 400 40.48 500
Additional Information:
1. At 13.00 hours, John Kirima placed an order to sell 200 shares. The execution price was Sh.40.04.
2. At 14.00 hours, John Kirima placed an order to sell 300 shares. The execution price was Sh.40.22.
3. At 16.00 hours, John Kirima placed an order to sell 500 shares. The average execution price was Sh.40.18.
Required:
(i) The quoted spread at each time of trade. (2 marks)
(ii) The mid-point at each time of trade. (2 marks)
(iii) The effective spread at each time of trade. (2 marks)
(iv) Comment on any possible price improvement based in your answer in (c) (i) - (c) (iii) above. (2 marks)
(d) Determine four considerations that a bond portfolio manager should take into account before moving from a pure
indexing position to more active management. (4 marks)
(Total: 20 marks)
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Advanced Portfolio Management Past Papers

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CIFA ADVANCED LEVEL

ADVANCED PORTFOLIO MANAGEMENT

TUESDAY: 20 August 2024. Afternoon Paper. Time Allowed: 3 hours.

Mwenda gathers the following details:

Portfolio Acqua → W1 = 0.25, W2 = 0.15, W3 = 0.20, W4 = 0.40

Portfolio manager Expected alpha Expected tracking risk Allocations

Compute the expected information ratio. (6 marks)

(i) Returns that are gross of management fees. (2 marks)

(ii) Returns that are gross of transaction costs. (2 marks)

Futures market data

Historically, the country beta of the neighbouring country is estimated to be 0.55.

(i) An opportunity cost sell discipline. (2 marks)

(ii) Deteriorating fundamentals sell discipline. (2 marks)

(iii) Up-from-cost sell discipline. (2 marks)

The following information is provided:

Beginning spot Beginning forward Ending spot

Diana initiated a buy trade that was executed at a price of Sh.226.17.

(i) The quoted spread. (3 marks)

(ii) The effective spread. (3 marks)

(i) Calendar rebalancing strategy. (2 marks)

(ii) Percentage of portfolio rebalancing strategy. (2 marks)

(d) The following information relates to Daudi Investment Fund:

ADVANCED PORTFOLIO MANAGEMENT

TUESDAY: 23 April 2024. Afternoon Paper. Time Allowed: 3 hours.

Manager return 18%

Time of trade Price (Sh.) Shares traded

(i) Opening price. (3 marks)

(ii) Closing price. (3 marks)

Spot Six-month Portfolio

(ii) The duration of the equity invested. (3 marks)

estimated reclamation costs.

Portfolio Duration Spread duration Average maturity Average coupon

1 10.00 4.33 13.44 5.19%

Security Price Market value Duration

ADVANCED PORTFOLIO MANAGEMENT

TUESDAY: 5 December 2023. Afternoon Paper. Time Allowed: 3 hours.

(ii) Liquidity requirements. (2 marks)

(iii) Unique circumstances. (2 marks)

(iv) Time horizon constraints. (2 marks)

Return (%) Standard deviation (%)

(ii) The Sharpe ratio of the new asset class. (1 mark)

(i) Misfit active return. (2 marks)

(ii) Time active risk. (2 marks)

(iii) Misfit information ratio. (2 marks)

(i) THREE advantages of investing in EMDs. (3 marks)

(ii) THREE risks associated with EMDs. (3 marks)

• At 10 a.m. : Traded 100 shares at Sh.12.11 each.

Bemuka’s portfolio of interest has the following performance:

(iii) Constant proportion strategy. (2 marks)

(i) Liquidity-at-any-cost trading. (2 marks)

(ii) Costs-are-not-important trading. (2 marks)

(iii) Need-trustworth-agent trading. (2 marks)

(ii) Determine the portfolio returns attributable to the following:

• Pure sector allocation. (2 marks)

• Security selection within sector. (2 marks)

• Sector allocation/security selection interaction. (2 marks)

1. The firm has a three year investment horizon.

ADVANCED PORTFOLIO MANAGEMENT

TUESDAY: 22 August 2023. Afternoon Paper. Time Allowed: 3 hours.

Active employees 5277