P2.T8. Investment Management

Practice questions for investment management and risk management

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  1. Nicole Seaman

    P2.T8.414. Hedge fund due diligence, continued

    AIMs: Explain how due diligence can be performed on a fund’s operational environment. Explain how a fund’s business model risk and its fraud risk can be assessed. Describe elements that can be included as part of a due diligence questionnaire. Questions: 414.1. In regard to the hedge fund's operational environment, Mirable advises each of the following as true for investors during due...
    AIMs: Explain how due diligence can be performed on a fund’s operational environment. Explain how a fund’s business model risk and its fraud risk can be assessed. Describe elements that can be included as part of a due diligence questionnaire. Questions: 414.1. In regard to the hedge fund's operational environment, Mirable advises each of the following as true for investors during due...
    AIMs: Explain how due diligence can be performed on a fund’s operational environment. Explain how a fund’s business model risk and its fraud risk can be assessed. Describe elements that can be included as part of a due diligence questionnaire. Questions: 414.1. In regard to the hedge fund's...
    AIMs: Explain how due diligence can be performed on a fund’s operational environment. Explain how a fund’s business model risk and its fraud risk can be assessed. Describe elements that can be...
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    0
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    76
  2. Nicole Seaman

    P2.T8.413. Hedge fund due diligence

    Hi @Sergey Vorobyev I agree, you make an excellent point. 413.2. is poorly written: while I did not indent to imply the manager would answer "the process is complex" without further explanation, it certainly reads in a way open to that interpretation. And, for myself, if a manager wouldn't elaborate on "it's complex," not only would that be a huge red flag, it would be a dealbreaker for me. I...
    Hi @Sergey Vorobyev I agree, you make an excellent point. 413.2. is poorly written: while I did not indent to imply the manager would answer "the process is complex" without further explanation, it certainly reads in a way open to that interpretation. And, for myself, if a manager wouldn't elaborate on "it's complex," not only would that be a huge red flag, it would be a dealbreaker for me. I...
    Hi @Sergey Vorobyev I agree, you make an excellent point. 413.2. is poorly written: while I did not indent to imply the manager would answer "the process is complex" without further explanation, it certainly reads in a way open to that interpretation. And, for myself, if a manager wouldn't...
    Hi @Sergey Vorobyev I agree, you make an excellent point. 413.2. is poorly written: while I did not indent to imply the manager would answer "the process is complex" without further explanation,...
    Replies:
    6
    Views:
    155
  3. Nicole Seaman

    P2.T8.412. Hedge funds as diversifiers and agents

    AIMs: Describe the historical portfolio construction and performance trend of hedge funds compared to equity indices. Describe market events which resulted in a convergence of risk factors for different hedge fund strategies, and explain the impact of such a convergence on portfolio diversification strategies. Describe the problem of risk sharing asymmetry between principals and agents in the...
    AIMs: Describe the historical portfolio construction and performance trend of hedge funds compared to equity indices. Describe market events which resulted in a convergence of risk factors for different hedge fund strategies, and explain the impact of such a convergence on portfolio diversification strategies. Describe the problem of risk sharing asymmetry between principals and agents in the...
    AIMs: Describe the historical portfolio construction and performance trend of hedge funds compared to equity indices. Describe market events which resulted in a convergence of risk factors for different hedge fund strategies, and explain the impact of such a convergence on portfolio...
    AIMs: Describe the historical portfolio construction and performance trend of hedge funds compared to equity indices. Describe market events which resulted in a convergence of risk factors for...
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    0
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    73
  4. Nicole Seaman

    P2.T8.411. Hedge funds strategies

    AIMs: Evaluate the role of investors in shaping the hedge fund industry. Explain the relationship between risk and alpha in hedge funds. Compare and contrast the different hedge fund strategies, describe their return characteristics, and describe the inherent risks of each strategy. Questions: 411.1. According to Fung and Hsieh "the majority of managed futures funds pursue trend following...
    AIMs: Evaluate the role of investors in shaping the hedge fund industry. Explain the relationship between risk and alpha in hedge funds. Compare and contrast the different hedge fund strategies, describe their return characteristics, and describe the inherent risks of each strategy. Questions: 411.1. According to Fung and Hsieh "the majority of managed futures funds pursue trend following...
    AIMs: Evaluate the role of investors in shaping the hedge fund industry. Explain the relationship between risk and alpha in hedge funds. Compare and contrast the different hedge fund strategies, describe their return characteristics, and describe the inherent risks of each...
    AIMs: Evaluate the role of investors in shaping the hedge fund industry. Explain the relationship between risk and alpha in hedge funds. Compare and contrast the different hedge fund strategies,...
    Replies:
    0
    Views:
    77
  5. Nicole Seaman

    P2.T8.410. Fung and Hsieh on hedge funds: industry and biases

    AIMs: Describe the characteristics of hedge funds and the hedge fund industry, and compare hedge funds with mutual funds. Explain biases which are commonly found in databases of hedge funds. Explain the evolution of the hedge fund industry and describe landmark events which precipitated major changes in the development of the industry. Questions: 410.1. Your wealthy Aunt Betty has capital to...
    AIMs: Describe the characteristics of hedge funds and the hedge fund industry, and compare hedge funds with mutual funds. Explain biases which are commonly found in databases of hedge funds. Explain the evolution of the hedge fund industry and describe landmark events which precipitated major changes in the development of the industry. Questions: 410.1. Your wealthy Aunt Betty has capital to...
    AIMs: Describe the characteristics of hedge funds and the hedge fund industry, and compare hedge funds with mutual funds. Explain biases which are commonly found in databases of hedge funds. Explain the evolution of the hedge fund industry and describe landmark events which precipitated major...
    AIMs: Describe the characteristics of hedge funds and the hedge fund industry, and compare hedge funds with mutual funds. Explain biases which are commonly found in databases of hedge funds....
    Replies:
    0
    Views:
    62
  6. Nicole Seaman

    P2.T8.409. Litterman on performance measurement

    Hello @Anay The practice questions that you are referring to are part of the global topic review question sets which are separate from the question sets that include the actual learning objectives. We will be publishing separate global topic review question sets when we have updated them to coincide with the current curriculum. Thank you, Nicole
    Hello @Anay The practice questions that you are referring to are part of the global topic review question sets which are separate from the question sets that include the actual learning objectives. We will be publishing separate global topic review question sets when we have updated them to coincide with the current curriculum. Thank you, Nicole
    Hello @Anay The practice questions that you are referring to are part of the global topic review question sets which are separate from the question sets that include the actual learning objectives. We will be publishing separate global topic review question sets when we have updated them to...
    Hello @Anay The practice questions that you are referring to are part of the global topic review question sets which are separate from the question sets that include the actual learning...
    Replies:
    8
    Views:
    138
  7. Nicole Seaman

    P2.T8.408. Risk planning and budgeting

    AIMs: Define, compare and contrast VaR and tracking error as risk measures. Describe risk planning, including its objectives, effects and the participants in its development. Describe risk budgeting and the role of quantitative methods in risk budgeting. Questions: 408.1. Both value at risk (VaR) and tracking error (TE) are considered risk measures. Which of the following statements is TRUE...
    AIMs: Define, compare and contrast VaR and tracking error as risk measures. Describe risk planning, including its objectives, effects and the participants in its development. Describe risk budgeting and the role of quantitative methods in risk budgeting. Questions: 408.1. Both value at risk (VaR) and tracking error (TE) are considered risk measures. Which of the following statements is TRUE...
    AIMs: Define, compare and contrast VaR and tracking error as risk measures. Describe risk planning, including its objectives, effects and the participants in its development. Describe risk budgeting and the role of quantitative methods in risk budgeting. Questions: 408.1. Both value at risk...
    AIMs: Define, compare and contrast VaR and tracking error as risk measures. Describe risk planning, including its objectives, effects and the participants in its development. Describe risk...
    Replies:
    0
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    65
  8. Nicole Seaman

    PQ-T8 P2.T8.407 Hedge fund strategies (topic review)

    Hi @Kashif Khalid I agree with you that global macro are top-down managers. But I think the reading stated that a global macro manager could employ some component of bottom-up approach, in addition to their top-down approach (which seems like the natural primary given their broad discretion across asset classses). But don't get me wrong, in terms of simplification and primary emphasis, I think...
    Hi @Kashif Khalid I agree with you that global macro are top-down managers. But I think the reading stated that a global macro manager could employ some component of bottom-up approach, in addition to their top-down approach (which seems like the natural primary given their broad discretion across asset classses). But don't get me wrong, in terms of simplification and primary emphasis, I think...
    Hi @Kashif Khalid I agree with you that global macro are top-down managers. But I think the reading stated that a global macro manager could employ some component of bottom-up approach, in addition to their top-down approach (which seems like the natural primary given their broad discretion...
    Hi @Kashif Khalid I agree with you that global macro are top-down managers. But I think the reading stated that a global macro manager could employ some component of bottom-up approach, in...
    Replies:
    4
    Views:
    163
  9. Nicole Seaman

    PQ-T8 P2.T8.406. Equity market neutral hedge funds (topic review)

    Ah I got it!Actually wasn't thinking from a hedged(post hedging)portfolio persepective,in which case what you say is bang on.Thanks a ton David!
    Ah I got it!Actually wasn't thinking from a hedged(post hedging)portfolio persepective,in which case what you say is bang on.Thanks a ton David!
    Ah I got it!Actually wasn't thinking from a hedged(post hedging)portfolio persepective,in which case what you say is bang on.Thanks a ton David!
    Ah I got it!Actually wasn't thinking from a hedged(post hedging)portfolio persepective,in which case what you say is bang on.Thanks a ton David!
    Replies:
    6
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    207
  10. Nicole Seaman

    PQ-T8 P2.T8.405. Style analysis and market timing (topic review)

    Thanks David,....this helps !!
    Thanks David,....this helps !!
    Thanks David,....this helps !!
    Thanks David,....this helps !!
    Replies:
    7
    Views:
    259
  11. Nicole Seaman

    PQ-T8 P2.T8.404. Information ratio, M-squared and the significance of performance (topic review)

    Right, that's clever and seems to pencil out in agreement, nice!
    Right, that's clever and seems to pencil out in agreement, nice!
    Right, that's clever and seems to pencil out in agreement, nice!
    Right, that's clever and seems to pencil out in agreement, nice!
    Replies:
    7
    Views:
    322
  12. Nicole Seaman

    PQ-T8 P2.T8.403. Time-weighted versus dollar-weighted returns (topic review)

    Yes Thanks David.
    Yes Thanks David.
    Yes Thanks David.
    Yes Thanks David.
    Replies:
    11
    Views:
    279
  13. Nicole Seaman

    PQ-T8 P2.T8.402. Performance evaluation (FRM handbook) (topic review)

    @ivojekle Yes, you found a good link. Currently (under the FRM) the information ration can be validly defined as either residual return (aka alpha)/residual risk, or active return/active risk (aka, tracking error) where the satisfying criteria is ratio consistency. In practice, I don't think it's really a problem if the question is carefully written. Question 402.3 happens to define an IR as...
    @ivojekle Yes, you found a good link. Currently (under the FRM) the information ration can be validly defined as either residual return (aka alpha)/residual risk, or active return/active risk (aka, tracking error) where the satisfying criteria is ratio consistency. In practice, I don't think it's really a problem if the question is carefully written. Question 402.3 happens to define an IR as...
    @ivojekle Yes, you found a good link. Currently (under the FRM) the information ration can be validly defined as either residual return (aka alpha)/residual risk, or active return/active risk (aka, tracking error) where the satisfying criteria is ratio consistency. In practice, I don't think...
    @ivojekle Yes, you found a good link. Currently (under the FRM) the information ration can be validly defined as either residual return (aka alpha)/residual risk, or active return/active risk...
    Replies:
    6
    Views:
    198
  14. David Harper CFA FRM

    PQ-T8 P2.T8.401. Component and marginal value at risk (VaR) calculations (topic review)

    Thank you David,....fully understand the calculation now.
    Thank you David,....fully understand the calculation now.
    Thank you David,....fully understand the calculation now.
    Thank you David,....fully understand the calculation now.
    Replies:
    3
    Views:
    190
  15. Nicole Seaman

    PQ-T8 P2.T8.400. Diversified portfolio Value at Risk (VaR) (topic review)

    Hi @Oliver Carson The weights are implicitly in the individual VaRs; e.g., the first position has an individual VaR of $242.0 million which is equal to 800 portfolio value *65% position weight * 20% volatility * 2.33 deviate. It's sort of cool how both the deviate and the portfolio dollar value distribute (as in, distributive property) such that the individual VaRs already contain the weights...
    Hi @Oliver Carson The weights are implicitly in the individual VaRs; e.g., the first position has an individual VaR of $242.0 million which is equal to 800 portfolio value *65% position weight * 20% volatility * 2.33 deviate. It's sort of cool how both the deviate and the portfolio dollar value distribute (as in, distributive property) such that the individual VaRs already contain the weights...
    Hi @Oliver Carson The weights are implicitly in the individual VaRs; e.g., the first position has an individual VaR of $242.0 million which is equal to 800 portfolio value *65% position weight * 20% volatility * 2.33 deviate. It's sort of cool how both the deviate and the portfolio dollar value...
    Hi @Oliver Carson The weights are implicitly in the individual VaRs; e.g., the first position has an individual VaR of $242.0 million which is equal to 800 portfolio value *65% position weight *...
    Replies:
    17
    Views:
    309
  16. Suzanne Evans

    P2.T8.27. More arbitrage strategies (Stowell)

    Thanks David, understood we net off any divs recvd from long vs divs owed on short to broker.
    Thanks David, understood we net off any divs recvd from long vs divs owed on short to broker.
    Thanks David, understood we net off any divs recvd from long vs divs owed on short to broker.
    Thanks David, understood we net off any divs recvd from long vs divs owed on short to broker.
    Replies:
    8
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    126
  17. David Harper CFA FRM

    P2.T8.26. Arbitrage strategies (Stowell)

    With regards to question 2 i have following doubt :- a) How does she arbitrage in short position in swap and short position in bond. What i understand is she is paying floating rate in swap ( i.e there is outflow of money) and treasury bond she is paying fixed coupon (there is outflow). In both position there is outflow of money. b) what do u mean by the line "The modified duration of each...
    With regards to question 2 i have following doubt :- a) How does she arbitrage in short position in swap and short position in bond. What i understand is she is paying floating rate in swap ( i.e there is outflow of money) and treasury bond she is paying fixed coupon (there is outflow). In both position there is outflow of money. b) what do u mean by the line "The modified duration of each...
    With regards to question 2 i have following doubt :- a) How does she arbitrage in short position in swap and short position in bond. What i understand is she is paying floating rate in swap ( i.e there is outflow of money) and treasury bond she is paying fixed coupon (there is outflow). In both...
    With regards to question 2 i have following doubt :- a) How does she arbitrage in short position in swap and short position in bond. What i understand is she is paying floating rate in swap ( i.e...
    Replies:
    9
    Views:
    142
  18. Suzanne Evans

    P2.T8.25. Convertible arbitrage (Stowell)

    AIMs: Explain the common arbitrage strategies of hedge funds, including: Fixed income-based arbitrage; Convertible arbitrage; Relative value arbitrage Questions: 25.1. Arbitrage is possible in EACH of the following conditions EXCEPT for when: a. An otherwise identical bond trades at different prices in different markets b. Two assets with identical cash flows patterns trade at different...
    AIMs: Explain the common arbitrage strategies of hedge funds, including: Fixed income-based arbitrage; Convertible arbitrage; Relative value arbitrage Questions: 25.1. Arbitrage is possible in EACH of the following conditions EXCEPT for when: a. An otherwise identical bond trades at different prices in different markets b. Two assets with identical cash flows patterns trade at different...
    AIMs: Explain the common arbitrage strategies of hedge funds, including: Fixed income-based arbitrage; Convertible arbitrage; Relative value arbitrage Questions: 25.1. Arbitrage is possible in EACH of the following conditions EXCEPT for when: a. An otherwise identical bond trades at different...
    AIMs: Explain the common arbitrage strategies of hedge funds, including: Fixed income-based arbitrage; Convertible arbitrage; Relative value arbitrage Questions: 25.1. Arbitrage is possible in...
    Replies:
    0
    Views:
    72
  19. Suzanne Evans

    P2.T8.24. Equity long/short hedge fund strategies (Stowell)

    Hi Lee, As I understand, I *think* the difference is the strategic intent (the style) and maybe the role of beta exposures. While both are long/short: The key idea in equity long/short is to avail the manager of opportunities the additional opportunity to short (roughly doubling his/her opportunity set). But the equity/long short remains comfortable with beta exposures and probably engages...
    Hi Lee, As I understand, I *think* the difference is the strategic intent (the style) and maybe the role of beta exposures. While both are long/short: The key idea in equity long/short is to avail the manager of opportunities the additional opportunity to short (roughly doubling his/her opportunity set). But the equity/long short remains comfortable with beta exposures and probably engages...
    Hi Lee, As I understand, I *think* the difference is the strategic intent (the style) and maybe the role of beta exposures. While both are long/short: The key idea in equity long/short is to avail the manager of opportunities the additional opportunity to short (roughly doubling his/her...
    Hi Lee, As I understand, I *think* the difference is the strategic intent (the style) and maybe the role of beta exposures. While both are long/short: The key idea in equity long/short is to...
    Replies:
    3
    Views:
    114
  20. Suzanne Evans

    P2.T8.23. Hedge funds compared to private equity and mutual funds (Stowell)

    AIMs: Discuss the liquidity of hedge fund investments and the usage of lock-ups, gates and side pockets. Compare hedge funds to private equity and mutual funds. Describe what fund of funds are and provide arguments for and against using them as an investment vehicle. Questions: 23.1. Acme Hedge Fund earns an annual performance fee of 20%. During the current year, the valuation of an illiquid...
    AIMs: Discuss the liquidity of hedge fund investments and the usage of lock-ups, gates and side pockets. Compare hedge funds to private equity and mutual funds. Describe what fund of funds are and provide arguments for and against using them as an investment vehicle. Questions: 23.1. Acme Hedge Fund earns an annual performance fee of 20%. During the current year, the valuation of an illiquid...
    AIMs: Discuss the liquidity of hedge fund investments and the usage of lock-ups, gates and side pockets. Compare hedge funds to private equity and mutual funds. Describe what fund of funds are and provide arguments for and against using them as an investment vehicle. Questions: 23.1. Acme...
    AIMs: Discuss the liquidity of hedge fund investments and the usage of lock-ups, gates and side pockets. Compare hedge funds to private equity and mutual funds. Describe what fund of funds are and...
    Replies:
    0
    Views:
    65

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