The CII AF4 September 2022 Exam in Review
It’s now time for us to turn our attention to the September CII AF4 exam. The following will be useful reading for those preparing to sit AF4 in the near future.
This article is correct as at 6 December 2022.
You can find the exam guide here.
Question 1 introduced us to Edyta, an investment adviser, who was planning an investment portfolio for a new client, Yoav.
The exam started with candidates having to calculate the expected return of the portfolio based on CAPM, with the second part a test of the relationship between the figures used in the CAPM equation and the client’s attitude to risk and objective. Also, candidates had to state and explain two central principles of the CAPM and the benefits and drawbacks of using this model. The total question was for 21 marks – a lot of marks if someone had not studied CAPM in sufficient detail.
In (b) the Macaulay duration was tested and in (c) candidates had to identify five main economic factors that may result in an increase in interest rates. This is topical information of course and well-prepared candidates keeping up to date with economic developments should have done well.
Part (d) tested alpha and correlation with (e) covering the risks of investing in ETFs with part (b) of this question covering the fund-related factors the client would consider when deciding whether to invest solely on an active basis.
Part (f) returned to the economy and a question this time on the potential economic consequences of the current account and the capital account being in deficit over the medium to long term. Question (g) asked for the main conditions that must be met for a property fund to qualify as a PAIF and finally in (h) aspects of behavioural finance were tested as in herding and the endowment effect.
Overall, this first case study tested a wide range of quite technical aspects of the AF4 syllabus.
In Question 2, we were introduced to Martim, who had invested in a thematic-based fund within his ISA. A table uncovered some figures regarding the fund.
Firstly, candidates had to identify the benefits of investing in a thematic-based specialist fund as well as some of the reasons for the level of fall in value. Candidates then had to calculate the compound annual return of the fund. Question (c) asked for a list of four main types of socially responsible investing and (d) continued the theme by asking for two examples within each category of the ESG criteria for investing. Part (e) asked for a calculation of the Sharpe Ratio and also the benefits and drawbacks of using the Sharpe Ratio in investment planning. Finally, candidates had to describe the definition and objective of a volatility-managed fund and outline why a volatility-managed fund could be suitable for Martim, the client.
Again, various themes and specialist areas are tested reminding us that AF4 can be a challenging paper to prepare for.
Finally, in Question 3, we met Sandra. The questions started gently with a test of the use of platforms.
Candidates then had to calculate the return on capital employed with comments on the answer and then explain the drawbacks of using ROCE as a metric when comparing two companies.
In Question (c), candidates had to identify the differences between an interim and a final dividend and then outline the tax benefits to Sandra of receiving a dividend on her new shareholding compared to receiving a bonus. Finally, another calculation – this time how much of the chargeable gain Sandra could invest into a new EIS to maximise the Income Tax relief available in the current year. This was followed with a description of the tax benefits and qualifying rules of an EIS including the time limits for deferral relief.
Candidates – I am sure – were very glad to reach the end of this September paper. It covered a wide range of topics, and students would need to have been very well prepared to have covered all of the areas in sufficient detail to gain a pass.
AF4 is a tough paper, and future students would do well to start a revision plan in plenty of time before the exam. It is crucial to extend the studying beyond just R02 and J10; as we have seen in this paper, candidates also need to keep up to date with current economic developments and the reasons behind any changes.
Comparison with the May 2022 Exam Paper
Let’s look at what was tested in May 2022’s paper. This question paper can be found here.
The topics covered were:
- Factors to consider when conducting an annual review
- The money-weighted rate of return
- Income Tax treatment of a REIT
- Investment risk with commercial property funds
- The Efficient Market Hypothesis
- Active vs passive investment
- With-profits policies
- Money market funds
- Sustainable withdrawal rates
- Benefits of using collectives
- Diversification rules for UCITs
- Beta and multi-factor models
- Preference shares
- Operating profit margin
- Dividend cover
- Conventional and index-linked gilts
- Corporate bonds
As you can see, very different areas were tested in the last paper. Future candidates will do well to study as many past exam guides as possible paying attention to the senior examiner comments to ensure they can learn from these and apply their knowledge to their own exam sitting.
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