Ang, Chapters 6, 7 & 10 practice question set consists of 23 pages reviewing the following concepts:
* Provide examples of factors that impact asset prices, and explain the theory of factor risk premiums.
* Describe the capital asset pricing model (CAPM) including its assumptions, and explain how factor risk is addressed in the CAPM.
* Explain implications of using the CAPM to value assets, including equilibrium and optimal holdings, exposure to factor risk, its treatment of diversification benefits, and shortcomings of the CAPM.
* Describe multifactor models, and compare and contrast multifactor models to the CAPM.
* Explain how stochastic discount factors are created and apply them in the valuation of assets.
* Describe efficient market theory and explain how markets can be inefficient.
* Describe the process of value investing, and explain reasons why a value premium may exist.
* Explain how different macroeconomic risk factors, including economic growth, inflation, and volatility affect risk premiums and
* Assess methods of mitigating volatility risk in a portfolio, and describe challenges that arise when managing volatility risk.
* Explain how dynamic risk factors can be used in a multifactor model of asset returns, using the Fama-French model as an example.
* Compare value and momentum investment strategies, including their risk and return profiles.
* Describe and evaluate the low-risk anomaly of asset returns.
* Define and calculate alpha, tracking error, the information ratio, and the Sharpe ratio.
* Explain the impact of benchmark choice on alpha, and describe characteristics of an effective benchmark to measure alpha.
* Describe Grinold’s fundamental law of active management, including its assumptions and limitations, and calculate the information ratio using this law.
* Apply a factor regression to construct a benchmark with multiple factors, measure a portfolio’s sensitivity to those factors and measure alpha against that benchmark.
* Explain how to measure time-varying factor exposures and their use in style analysis.
* Describe issues that arise when measuring alphas for nonlinear strategies.
* Compare the volatility anomaly and beta anomaly, and analyze evidence of each anomaly.
* Describe potential explanations for the risk anomaly.
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