TUESDAY: 22 August 2023. 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.


1. Describe how each of the FIVE phases of business cycle affect the short-term and long-term capital market expectations. (5 marks)

2. 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:

For new workers, the scheme has been replaced by a defined contribution scheme, but the scheme sponsors are committed to ensuring that the scheme will be fully funded.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.


In the preparation of the scheme’s investment policy statement (IPS):

Identify TWO factors that will most likely contribute to an increase in the scheme’s ability to take risk.
(2 marks)

Identify TWO factors that will contribute to a decrease in the scheme’s ability to take risk. (2 marks)

Formulate the time horizon section of the scheme’s IPS. (4 marks)

Highlight TWO factors that will most likely contribute to an increase in the scheme’s liquidity needs.
(2 marks)

3. Kiegoi Fund is a Fund of Funds (FoFs) that comprise the following funds:

The applicable risk free rate for the two funds is 4.5%.

Advise Kiegoi Fund on the fund to choose based on the following performance measures:

Sharpe measure. (2 marks)

Treynor’s measure. (3 marks)

(Total: 20 marks)



1. A security market should provide liquidity, transparency and assurity of completion as essential qualities of markets in execution of portfolio decisions.

In reference to the above statement, assess THREE factors that are necessary for a market to be liquid. (6 marks)

2. Explain TWO types of target rebalancing that are aimed at protecting the future value of a portfolio. (4 marks)

3. Maurine Akinyi has constructed a portfolio consisting of three bonds; X, Y and Z in equal par amounts of Sh.1,000,000 each.

Maurine Akinyi would like to maintain the portfolio’s shilling duration at the initial level by rebalancing the portfolio. She chose to rebalance using the existing bond proportions of one third each.


The initial portfolio shilling duration. (3 marks)

The portfolio shilling duration after one year. (3 marks)

The rebalancing ratio necessary for the rebalancing. (2 marks)

The cash required for the portfolio rebalancing. (2 marks)

(Total: 20 marks)



1. With respect to mean variance optimisation approaches to asset allocation, explain:

TWO advantages of using the Black – Litterman approach. (2 marks)

TWO advantages of using a Monte Carlo simulation. (2 marks)

2. 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)

3. 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.

Calculate the expected 6 month holding period return on Bernard Muya’s proposed investment in Faida Ltd. bonds. (4 marks)

4. 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.
3. The current price of the bond is Sh. 98.4321 with a yield to maturity of 11.5%.
4. The treasury yield curve is flat at 8.0%
5. The credit spread for the issuer is 350 basis points for all maturities.
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.


Perform an assessment of the return characteristic of the proposed investment in the corporate bond using total return analysis by computing:

The horizon price of the bond using 9% yield. (3 marks)

End of value accumulated coupon income at a re-investment rate of 6% annually. (2 marks)

The semi-annual total return. (2 marks)

The investment’s effective annual return. (2 marks)

(Total: 20 marks)



1. In relation to selection of active managers of alternative investment scheme, identify TWO considerations under each of the following due diligence check points:

Assessment of market opportunity offered. (2 marks)

Assessment of investment process. (2 marks)

Assessment of terms and structure of investment. (2 marks)

2. 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:


Determine how much of the fund’s return was due to each of the following:
1. Style bias. (2 marks)
2. Active management. (2 marks)

Demonstrate whether the total fund outperformed a pure indexing strategy. (4 marks)

3. 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 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 below:

Determine the following costs for purchasing 90,000 shares of Magadi Cement Limited:

The execution costs. (2 marks)

The opportunity costs. (2 marks)

The arrival costs. (2 marks)

(Total: 20 marks)



1. Outline SIX general characteristics of investment performance standards (IPSs) in your jurisdiction. (6 marks)

2.  The following investment performance is an extract from a micro attribution analysis for the second quarter ending 30 June 2023 of Fanaka Fund:

NOTE: The overall benchmark return was 2.32%.

Perform micro attribution analysis for Fanaka fund using:

Pure sector allocation return for the energy sector. (2 marks)

Within – sector selection return for the financial sector. (2 marks)

The allocation/selection interaction return for the technology sector. (2 marks)

3. 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 spot exchange rate at the time of the investment was C$ 1.89/£ and the futures contract rate was C$ 1.91/£. One hundred and eighty (180) days later into the futures contract undertaken, the investment is liquidated realising a 6 percent return (for the six months).
The spot exchange rate at the time of liquidation is C$ 1.85/£ and the futures rate is C$ 1.87/£.

Evaluate the effects of currency movements on Odipo’s portfolio return in the following aspects:

Translation gain/loss on the unhedged British Investment. (4 marks)

Since Onsore hedged the principal amount using the British Pound futures, determine the domestic return of the portfolio. (4 marks)

(Total: 20 marks)

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