SAMPLE WORK
QUESTION 1
August 2025 Question Five C
Mutual funds can effectively charge sales fees in three ways; front-end load fees, annual fees or deferred (that is back end) load fees.
ZM Growth Fund offers its investors the following choices:
- 2.5% front-end load fees.
- 0.75% annual deduction.
- 1.5% back-end load fees.
Moses Juma plans to invest Sh.200,000 in the fund.
The fund’s net asset value (NAV) average grows at an average rate of 10% per annum and all fees are applied as specified.
Required:
- Compute the investment’s worth in three years under each scheme.
- Advise Moses Juma on the best investment choice.
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Answer
(i) Compute the investment’s worth in three years under each scheme.
Front-End Load Fees (2.5%)
Initial investment after fee: 200,000×(1−0.025)
Growth over 3 years at 10%:
Final value = Sh. 259,545
Annual fee (0.75%)
This reduces the effective annual return: 10% − 0.75% = 9.25% (or 1.0925)
Value after 3 years:
Back-end load fee (1.5%)
First grow the full investment:
Then deduct 1.5% at the end:
266,200×(1−0.015) = 266,200 × 0.985 = 262,207
Final value = Sh. 262,207
(ii) Advise Moses Juma on the best investment choice.
Based on the computations above, the Back-End Load Fee (Option 3) is the best choice for Moses Juma.
Reasoning:
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Highest Returns: It yields the highest net investment worth of Sh. 262,207 after three years.
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Compounding Advantage: By deferring the fee to the end, the entire Sh. 200,000 is allowed to compound at the full 10% growth rate. In contrast, the front-end load reduces the starting principal, and the annual deduction reduces the compounding power every single year.
-
Cost Efficiency: For a short-to-medium term of 3 years, the 1.5% exit fee is financially lighter than losing 2.5% of the principal upfront or losing a portion of the growth rate every year.
QUESTION 2
April 2025 Question One A
Explain THREE limitations of pooled investment products to investors.
Answer
- Limited Control: Investors do not directly manage their investments in pooled funds. Instead, professional managers decide which securities to buy, hold, or sell. This may not suit individuals who prefer making their own investment decisions based on personal analysis and risk preferences.
- Costly Fees: These investment vehicles often charge various fees such as management, performance, administrative, and transaction costs. Such charges reduce overall returns and can significantly impact long-term gains, particularly if the fund does not perform better than its benchmark.
- Liquidity Constraints: Although some pooled investments allow frequent withdrawals, others—like hedge funds or private equity—impose lock-in periods. During such times, investors cannot access their funds. Even where withdrawals are allowed, penalties or restrictions may apply.
QUESTION 3
April 2025 Question Five A
Discuss THREE ways in which investors can diversify their investment portfolio.
Answer
Diversification is a strategy used to minimize risk by spreading investments across different assets so that losses in some are offset by gains in others. Investors can diversify in the following ways:
- Across Asset Classes: This involves investing in various asset types that do not move in the same direction. For instance:
- Stocks offer high growth potential but are riskier.
- Bonds provide stable income with lower risk.
- Real estate generates rental income and capital appreciation.
- Commodities help protect against inflation.
- Within an Asset Class: Investors can spread investments within a single category. For example, in stocks:
- Invest across multiple industries to avoid sector-specific risks.
- Include companies of different sizes (large, medium, small).
- Invest in both local and international markets.
- International Diversification: Investing globally helps reduce exposure to risks in one country, provides access to faster-growing economies, and offers protection against currency fluctuations.
QUESTION 4
December 2024 Question Five A
Explain FOUR advantages of performance standards in portfolio management.
Answer
- Consistency and Comparability: Standards ensure uniform calculation and presentation of returns, enabling investors to fairly compare different investment managers.
- Transparency and Trust: Following recognized standards improves openness and builds confidence among investors by demonstrating ethical reporting practices.
- Simplified Evaluation: Standardized reports make it easier for investors and analysts to assess a manager’s performance and investment approach.
- Better Internal Control: They provide a structured framework for reporting, ensuring accuracy, compliance, and reducing the risk of errors or misconduct.
QUESTION 5
April 2024 Question One A&B
Kemikali Ltd. is a locally incorporated firm operating in the field of investments and asset management with its asset under management (AUM) in excess of Sh.5 billion. Teddy Kioko is a high net worth individual and is seeking to invest Sh.150 million mainly in bonds and other long-term investments through the firm.
Required:
Evaluate the FOUR major steps in the portfolio management process that are expected to be followed while investing the client’s funds.
As a portfolio manager of XYZ Ltd., you have been tasked to prepare an outline to be used by new entrants to portfolio management on investment performance standards.
Required:
Prepare the outline covering FIVE features of investment performance standards.
Answer
The portfolio management process for Teddy Kioko’s investment involves:
- Planning:
Understanding the client’s financial goals, risk tolerance, and constraints, and documenting them in an Investment Policy Statement (IPS). - Execution:
Constructing the portfolio based on the IPS by selecting suitable assets and allocating funds accordingly. - Monitoring (Feedback):
Regularly reviewing performance and rebalancing the portfolio to maintain the desired asset allocation. - Evaluation:
Assessing portfolio performance against benchmarks and objectives, and reporting results to the client.
Key features of investment performance standards include:
- Consistency: Ensures uniform calculation and reporting methods.
- Transparency: Requires full disclosure of performance-related information.
- Accuracy: Prevents selective reporting of only successful investments.
- Ethics: Promotes integrity and professionalism.
- Broad Applicability: Covers various asset classes and strategies.
QUESTION 6
December 2023 Question One A
Summarise FOUR benefits that could accrue to investors who includes pooled investment products in their portfolio
Answer
- Diversification: Reduces risk by investing in many securities.
- Professional Management: Access to expert fund managers.
- Cost Efficiency: Lower transaction costs due to large-scale investing.
- Accessibility and Liquidity: Enables small investors to participate in diverse markets, with relatively easy entry and exit.
QUESTION 7
December 2023 Question Three A
Examine THREE benefits of a well written investment policy statement (IPS).
Answer
- Promotes Discipline: Provides a structured investment approach and prevents emotional decisions.
- Improves Communication: Clarifies expectations between the investor and manager and serves as a performance benchmark.
- Ensures Accountability: Holds managers responsible and provides continuity even if management changes.
QUESTION 8
August 2023 Question One A & B
- Enumerate FIVE elements of portfolio management.
- Summarise FIVE components of investment policy statement.
Answer
Key elements of portfolio management:
- Planning
- Analysis
- Implementation
- Monitoring and rebalancing
- Evaluation
Main components of an IPS:
- Investment objectives
- Constraints (time, liquidity, legal factors)
- Asset allocation
- Allowed and restricted investments
- Reporting and performance evaluation
QUESTION 9
December 2022 Question Two B
Explain THREE differences between individual investors and institutional investors.
Answer
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