CII AF4: The October 2014 Exam Paper Uncovered
The exam paper for the October 2014 sitting of the CII AF4 exam has been released. In the following article we take a look at what was on the exam, what pitfalls there were and how you can avoid these if you’re planning on sitting AF4 in the near future.
A Surprise Omission
In 2013, the CII received a lot of flak about the format of the October AF4 exam. Until then, the exam structure had followed a formula, and most candidates would have used the past papers to help them prepare, not least in making sure they could calculate the performance of a portfolio compared with a benchmark. When those candidates opened the exam paper, they must have been distraught. All that wasted effort. The question simply wasn’t there.
In 2014, it was a relief to see that the CII reverted back to the way it was, and both papers in 2014 had the very question everyone had grown to expect.
Similar to a Maths Exam
It has been said by many a student that the AF4 exam is like a maths exam, and you really have to know all the formulas and ratios, because some of them are sure to come up. So divided cover, dividend yield, yields on bonds, alpha, Sharpe ratio, information ratio, CAPM – to name but a few – all need to be fully understood and up your sleeve, ready to retrieve in a second.
J10 is the Manual of Choice – But Watch Out for Benchmarking!
The exam should test the syllabus alone, and you definitely need to study J10, as R02 just doesn’t go into some of the detail necessary to pass AF4. It could be argued J10 doesn’t either, in some areas. If we had to choose which manual to use to prepare for AF4 it would be J10. Neither text, though, covers the benchmarking question in enough detail, so using past papers to practise this, is an absolute must.
Previous Exam Papers
Last October’s paper can be found here:
Question 1, 2 and 3
The first question was worth 25 marks and tested the student’s ability to analyse a portfolio against a benchmark – it was back!
Those people who spent the weekend before practising and practising this style of question would have heaved a big sigh of relief. You also had to calculate bond yields and state the risks of holding overseas bonds – typical AF4 questions. Question 2 was on commodities and the features of ETCs and also investment trusts. Question 3 had, within it, questions on the economic cycle and more calculations around analysing equities. The October 2014 AF4 definitely reverted to type.
Compare this to the April exam of 2014 (which can be found by clicking on the following link).
This question tested the ability to calculate money weighted rates of return – 9 points available here. Then there were questions on alpha, Sharpe ratio, information ratio and standard deviation, a 10-point question on part of the investment advice process and recommendations, charges, and reviews. Lots of standard AF4 questions.
This started with testing economics – inflation rates, interest rates etc and finished with more calculations on company analysis – working capital ratios and liquidity ratios.
Question 3, this time, was home to the benchmarking question – not so many marks here – just 14. The rest of this question was made up of ETF detail and the pros and cons of collectives as opposed to direct investment. Interestingly, the questions on ETFs were answered poorly, and in October we saw that another member of the Exchange Traded Product family was the focus – in the shape of ETCs. These products are growing in popularity so I wonder – will ETNs be the next ETP to be tested in April 2015?
Overall, this paper seemed like a very typical AF4 exam, and the well prepared candidate should have been pleased.
Anyone preparing for the forthcoming April exam should be aware of some of the examiner comments from previous years.
Common pitfalls, as with many of the other AF exams, are that candidates do not answer the question specifically being asked. In April 2014, rather than explaining why the information ratio was valid in its use, some candidates answered by describing what it was and how it was worked out – maximum marks will never be achieved by doing this.
Saved by the Bullet
Also you must spend your time appropriately – and answer in enough detail. A 10-point question needs at least 10 bullet points – and use bullet points if you can. It really will save you time and is a totally acceptable (and encouraged) way to structure your answers.
Keeping Abreast of Changes
Keeping up to date is of course paramount for any good adviser – any changes in legislation are tested by the CII 3 months after they take effect. It’s worth looking at the section on their website which has the amendments to all exams to ensure you know when testing will start. Using past papers is of course a really good way to prepare – but don’t limit it to just the last one – many of the older exam papers are available from the CII website with no charge.
Overall a Challenge
AF4 is a challenging exam – investments are a massive subject – you must know your formulas, you must know how to do performance attribution, you must know your investment products. Using mind maps is a useful way of getting all the key facts on one page and are great for when you have 20 minutes for a quick bit of revision.
Grab the resources you need!
If you’re studying for your CII AF4 exam, and you’re stressing out, grab our free taster to try out one of Brand Financial Training’s mock exam papers for yourself. Click the link to download the AF4 mock exam taster now!
Over to You…
Did you attempt the AF4 in October? Were you caught off guard by the omission of the ‘calculate the performance of a portfolio compared with a benchmark’ question?