# P2.T8. Investment Management

Practice questions for investment management and risk management

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1. ### Quiz - T8P2.T8.712. Hedge fund performance

Dear Mr David, Thanks a lot for perfect explanation, which was not clear in the original post. Now I got it and I am sure whoever refers to this post in future will not have any difficulty in understanding. Thanks again Regards Ashok
Dear Mr David, Thanks a lot for perfect explanation, which was not clear in the original post. Now I got it and I am sure whoever refers to this post in future will not have any difficulty in understanding. Thanks again Regards Ashok
Dear Mr David, Thanks a lot for perfect explanation, which was not clear in the original post. Now I got it and I am sure whoever refers to this post in future will not have any difficulty in understanding. Thanks again Regards Ashok
Dear Mr David, Thanks a lot for perfect explanation, which was not clear in the original post. Now I got it and I am sure whoever refers to this post in future will not have any difficulty in...
Replies:
3
Views:
60
2. ### Quiz - T8P2.T8.711. Time- versus dollar-weighted returns, M-squared measure, and performance attribution

That is helpful indeed. Thank you, David. (The quadratic formula '4a^2+3a-5=0' was merely an example, and not derived from your exercises.)
That is helpful indeed. Thank you, David. (The quadratic formula '4a^2+3a-5=0' was merely an example, and not derived from your exercises.)
That is helpful indeed. Thank you, David. (The quadratic formula '4a^2+3a-5=0' was merely an example, and not derived from your exercises.)
That is helpful indeed. Thank you, David. (The quadratic formula '4a^2+3a-5=0' was merely an example, and not derived from your exercises.)
Replies:
4
Views:
50
3. ### Quiz - T8P2.T8.710. Portfolio value at risk (VaR) and surplus at risk (SaR)

Concept: These on-line quiz questions are not specifically linked to learning objectives, but are instead based on recent sample questions. The difficulty level is a notch, or two notches, easier than bionicturtle.com's typical question such that the intended difficulty level is nearer to an actual exam question. As these represent "easier than our usual" practice questions, they are...
Concept: These on-line quiz questions are not specifically linked to learning objectives, but are instead based on recent sample questions. The difficulty level is a notch, or two notches, easier than bionicturtle.com's typical question such that the intended difficulty level is nearer to an actual exam question. As these represent "easier than our usual" practice questions, they are...
Concept: These on-line quiz questions are not specifically linked to learning objectives, but are instead based on recent sample questions. The difficulty level is a notch, or two notches, easier than bionicturtle.com's typical question such that the intended difficulty level is nearer to an...
Concept: These on-line quiz questions are not specifically linked to learning objectives, but are instead based on recent sample questions. The difficulty level is a notch, or two notches, easier...
Replies:
0
Views:
57
4. ### Quiz - T8P2.T8.709. Ang on Factors and Factor Theory

Hi @gwfrm16 The regression shown is a regression of the portfolio's excess returns against the benchmark's excess returns, β(P,B), so that this beta is represented by the regression slope and we can infer correlation, ρ(P,B) = β(P,B)*σ(B)/σ(P) = 0.92204*2.05%/3.03% = 0.6225 (my simulation input was 0.60 so this is the randomly sampled outcome, which is close as expected). On the other hand,...
Hi @gwfrm16 The regression shown is a regression of the portfolio's excess returns against the benchmark's excess returns, β(P,B), so that this beta is represented by the regression slope and we can infer correlation, ρ(P,B) = β(P,B)*σ(B)/σ(P) = 0.92204*2.05%/3.03% = 0.6225 (my simulation input was 0.60 so this is the randomly sampled outcome, which is close as expected). On the other hand,...
Hi @gwfrm16 The regression shown is a regression of the portfolio's excess returns against the benchmark's excess returns, β(P,B), so that this beta is represented by the regression slope and we can infer correlation, ρ(P,B) = β(P,B)*σ(B)/σ(P) = 0.92204*2.05%/3.03% = 0.6225 (my simulation input...
Hi @gwfrm16 The regression shown is a regression of the portfolio's excess returns against the benchmark's excess returns, β(P,B), so that this beta is represented by the regression slope and we...
Replies:
5
Views:
68
5. ### P2.T8.708. Illiquidity risk premium & portfolio choice decision on the inclusion of illiquid assets

Great forum. My two questions were identical....and I see why Ang states that illiquidity premia exist within rather than across asset classes But one observation would be, aligned to the first post in this forum - the fact still remains that a VC trust does have an illiquity premium with regard to US Treasuries so there is a greater expected return for greater illiquidity across asset...
Great forum. My two questions were identical....and I see why Ang states that illiquidity premia exist within rather than across asset classes But one observation would be, aligned to the first post in this forum - the fact still remains that a VC trust does have an illiquity premium with regard to US Treasuries so there is a greater expected return for greater illiquidity across asset...
Great forum. My two questions were identical....and I see why Ang states that illiquidity premia exist within rather than across asset classes But one observation would be, aligned to the first post in this forum - the fact still remains that a VC trust does have an illiquity premium with...
Great forum. My two questions were identical....and I see why Ang states that illiquidity premia exist within rather than across asset classes But one observation would be, aligned to the first...
Replies:
7
Views:
92
6. ### P2.T8.707. The biases of illiquid markets (Ang)

Thank you David for your detailed explanation!
Thank you David for your detailed explanation!
Thank you David for your detailed explanation!
Thank you David for your detailed explanation!
Replies:
6
Views:
111
7. ### P2.T8.706. Alpha, style analysis and the risk anomaly (Ang)

Learning objectives: 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. Questions: 706.1. In order to evaluate the performance of its funds,...
Learning objectives: 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. Questions: 706.1. In order to evaluate the performance of its funds,...
Learning objectives: 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...
Learning objectives: 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...
Replies:
0
Views:
48
8. ### P2.T8.705. Berkshire Hathaway versus its benchmark (Ang)

Thank you very much for your quick reply, @bpdulog . I unfortunately missed that part of the question.
Thank you very much for your quick reply, @bpdulog . I unfortunately missed that part of the question.
Thank you very much for your quick reply, @bpdulog . I unfortunately missed that part of the question.
Thank you very much for your quick reply, @bpdulog . I unfortunately missed that part of the question.
Replies:
5
Views:
86
9. ### P2.T8.704. Alpha and effective benchmarks (Andrew Ang)

@champ123 that's why i love finance and risk: you never stop learning, even concepts that seem basic at first
@champ123 that's why i love finance and risk: you never stop learning, even concepts that seem basic at first
@champ123 that's why i love finance and risk: you never stop learning, even concepts that seem basic at first
@champ123 that's why i love finance and risk: you never stop learning, even concepts that seem basic at first
Replies:
12
Views:
176
10. ### P2.T8.703. Value, size and momentum investing (Andrew Ang)

My interpretation is that Ang makes a distinction between selling volatility via derivatives (short straddle/strangle) and reaping the long run volatility premium via rebalancing in "fundamental asset positions". In my view Ang defines rebalancing as buying when asset prices fall and selling when asset prices rise to keep a certain factor mix. That's a typical mean reversion strategy and the...
My interpretation is that Ang makes a distinction between selling volatility via derivatives (short straddle/strangle) and reaping the long run volatility premium via rebalancing in "fundamental asset positions". In my view Ang defines rebalancing as buying when asset prices fall and selling when asset prices rise to keep a certain factor mix. That's a typical mean reversion strategy and the...
My interpretation is that Ang makes a distinction between selling volatility via derivatives (short straddle/strangle) and reaping the long run volatility premium via rebalancing in "fundamental asset positions". In my view Ang defines rebalancing as buying when asset prices fall and selling...
My interpretation is that Ang makes a distinction between selling volatility via derivatives (short straddle/strangle) and reaping the long run volatility premium via rebalancing in "fundamental...
Replies:
8
Views:
98
11. ### P2.T8.702. Macroeconomic risk factors including growth, inflation and volatility (Andrew Ang)

Hi @gwfrm16 Yes, indeed, our mistake. Thank you for noticing. I have corrected the answer to reflect the true version of the statement (ie, that all asset classes are worse under high inflation): "702.1. C. False. To be true, this should instead read: During periods of high inflation, all five asset classes perform significantly WORSE than during periods of low inflation." and added the...
Hi @gwfrm16 Yes, indeed, our mistake. Thank you for noticing. I have corrected the answer to reflect the true version of the statement (ie, that all asset classes are worse under high inflation): "702.1. C. False. To be true, this should instead read: During periods of high inflation, all five asset classes perform significantly WORSE than during periods of low inflation." and added the...
Hi @gwfrm16 Yes, indeed, our mistake. Thank you for noticing. I have corrected the answer to reflect the true version of the statement (ie, that all asset classes are worse under high inflation): "702.1. C. False. To be true, this should instead read: During periods of high inflation, all five...
Hi @gwfrm16 Yes, indeed, our mistake. Thank you for noticing. I have corrected the answer to reflect the true version of the statement (ie, that all asset classes are worse under high inflation):...
Replies:
2
Views:
63
12. ### P2.T8.701. Multifactor models (Andrew Ang)

Hi @Roddefeller That is just awesome Terrific, thank you! That's solid ... In the same vein, I opened up the Cochrane book and I see what you are saying about the crucial assumption--and initially counterintutive to me--that R(i)*m = 1.0 In chapter 1, he sets up his basic pricing equation given by E(m*R) = 1 as "by far the most important special case of the basic formula p = E(m*R)" (page...
Hi @Roddefeller That is just awesome Terrific, thank you! That's solid ... In the same vein, I opened up the Cochrane book and I see what you are saying about the crucial assumption--and initially counterintutive to me--that R(i)*m = 1.0 In chapter 1, he sets up his basic pricing equation given by E(m*R) = 1 as "by far the most important special case of the basic formula p = E(m*R)" (page...
Hi @Roddefeller That is just awesome Terrific, thank you! That's solid ... In the same vein, I opened up the Cochrane book and I see what you are saying about the crucial assumption--and initially counterintutive to me--that R(i)*m = 1.0 In chapter 1, he sets up his basic pricing equation given...
Hi @Roddefeller That is just awesome Terrific, thank you! That's solid ... In the same vein, I opened up the Cochrane book and I see what you are saying about the crucial assumption--and...
Replies:
7
Views:
147
13. ### P2.T8.700. Theory of factor risk premiums (Andrew Ang)

Thx so much David.......
Thx so much David.......
Thx so much David.......
Thx so much David.......
Replies:
9
Views:
109
14. ### P2.T8.414. Hedge fund due diligence, continued (Mirabile)

@bpdulog great point! Your interpretation ("the ability of the investor to pull out their money" would make a lot more sense (at least to me) than the phrasing suggested by Mirabile ...
@bpdulog great point! Your interpretation ("the ability of the investor to pull out their money" would make a lot more sense (at least to me) than the phrasing suggested by Mirabile ...
@bpdulog great point! Your interpretation ("the ability of the investor to pull out their money" would make a lot more sense (at least to me) than the phrasing suggested by Mirabile ...
@bpdulog great point! Your interpretation ("the ability of the investor to pull out their money" would make a lot more sense (at least to me) than the phrasing suggested by Mirabile ...
Replies:
6
Views:
129
15. ### P2.T8.413. Hedge fund due diligence (Mirabile)

I was thinking the same thing. I obviously saw A as an issue but C seemed to me like management was trying to hide something with vague wording.
I was thinking the same thing. I obviously saw A as an issue but C seemed to me like management was trying to hide something with vague wording.
I was thinking the same thing. I obviously saw A as an issue but C seemed to me like management was trying to hide something with vague wording.
I was thinking the same thing. I obviously saw A as an issue but C seemed to me like management was trying to hide something with vague wording.
Replies:
7
Views:
195
16. ### P2.T8.412. Hedge funds as diversifiers and agents (Constantinides)

Thank you David for the fast reply! I thought this statement is not to 100% true because there is a possibility to mitigate principal-agent problem in the way that the agent could invest a certain amount of own wealth in his fund. However it is not an easy solution for the manager I think . But it would be a solution for the principal to search such a fund in which the manager invest too. So...
Thank you David for the fast reply! I thought this statement is not to 100% true because there is a possibility to mitigate principal-agent problem in the way that the agent could invest a certain amount of own wealth in his fund. However it is not an easy solution for the manager I think . But it would be a solution for the principal to search such a fund in which the manager invest too. So...
Thank you David for the fast reply! I thought this statement is not to 100% true because there is a possibility to mitigate principal-agent problem in the way that the agent could invest a certain amount of own wealth in his fund. However it is not an easy solution for the manager I think . But...
Thank you David for the fast reply! I thought this statement is not to 100% true because there is a possibility to mitigate principal-agent problem in the way that the agent could invest a certain...
Replies:
3
Views:
104
17. ### P2.T8.411. Hedge funds strategies (Constantinides)

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:
106
18. ### P2.T8.410. Fung and Hsieh on hedge funds: industry and biases (Constantinides)

Thanks for the award, @David Harper CFA FRM! I have to confess that I did not resort to the original Fung & Hsieh reading as these two guys are also covered within the CAIA curriculum (e.g. the Fung & Hsieh 7-factor model) and for all the hedge-fund related topics I think there is no better source than the original CAIA readings which discusses all sorts of biases in great detail.
Thanks for the award, @David Harper CFA FRM! I have to confess that I did not resort to the original Fung & Hsieh reading as these two guys are also covered within the CAIA curriculum (e.g. the Fung & Hsieh 7-factor model) and for all the hedge-fund related topics I think there is no better source than the original CAIA readings which discusses all sorts of biases in great detail.
Thanks for the award, @David Harper CFA FRM! I have to confess that I did not resort to the original Fung & Hsieh reading as these two guys are also covered within the CAIA curriculum (e.g. the Fung & Hsieh 7-factor model) and for all the hedge-fund related topics I think there is no better...
Thanks for the award, @David Harper CFA FRM! I have to confess that I did not resort to the original Fung & Hsieh reading as these two guys are also covered within the CAIA curriculum (e.g. the...
Replies:
4
Views:
106
19. ### P2.T8.409. Litterman on performance measurement

This reading my be outdated - it conflicts with current ERM practices
This reading my be outdated - it conflicts with current ERM practices
This reading my be outdated - it conflicts with current ERM practices
This reading my be outdated - it conflicts with current ERM practices
Replies:
13
Views:
203
20. ### P2.T8.408. Risk planning and budgeting (Litterman)

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
Views:
90
21. ### PQ-T8P2.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:
266
22. ### PQ-T8P2.T8.406. Equity market neutral hedge funds (topic review)

Thanks @emilioalzamora1
Thanks @emilioalzamora1
Thanks @emilioalzamora1
Thanks @emilioalzamora1
Replies:
9
Views:
361
23. ### PQ-T8P2.T8.405. Style analysis and market timing (topic review)

@Tania Pereira At the end of Bodie Chapter 24 (Topic 8) emphasis mine:
@Tania Pereira At the end of Bodie Chapter 24 (Topic 8) emphasis mine:
@Tania Pereira At the end of Bodie Chapter 24 (Topic 8) emphasis mine:
@Tania Pereira At the end of Bodie Chapter 24 (Topic 8) emphasis mine:
Replies:
19
Views:
504
24. ### PQ-T8P2.T8.404. Information ratio, M-squared and the significance of performance (topic review)

@NadyaRedd I've been there, many times!
@NadyaRedd I've been there, many times!
@NadyaRedd I've been there, many times!
@NadyaRedd I've been there, many times!
Replies:
18
Views:
557
25. ### PQ-T8P2.T8.403. Time-weighted versus dollar-weighted returns (topic review)

Hi @dbansal I think that's mostly okay, I don't know exactly what you mean by not taking the mean of the arithmetic/geometric returns, I don't think my answer alters the fundamental definitions of these terms. So I'd probably be more focused on what is the correct definition of (eg) an time-weighted return, but it looks okay to me to use a cumulative perspective for comparison, where they...
Hi @dbansal I think that's mostly okay, I don't know exactly what you mean by not taking the mean of the arithmetic/geometric returns, I don't think my answer alters the fundamental definitions of these terms. So I'd probably be more focused on what is the correct definition of (eg) an time-weighted return, but it looks okay to me to use a cumulative perspective for comparison, where they...
Hi @dbansal I think that's mostly okay, I don't know exactly what you mean by not taking the mean of the arithmetic/geometric returns, I don't think my answer alters the fundamental definitions of these terms. So I'd probably be more focused on what is the correct definition of (eg) an...
Hi @dbansal I think that's mostly okay, I don't know exactly what you mean by not taking the mean of the arithmetic/geometric returns, I don't think my answer alters the fundamental definitions of...
Replies:
13
Views:
492
26. ### PQ-T8P2.T8.402. Performance evaluation (FRM handbook) (topic review)

Just in case anyone was unsure of how to do this, i used the data / stat feature on my BA2 to calculate the variance and it worked like a charm.
Just in case anyone was unsure of how to do this, i used the data / stat feature on my BA2 to calculate the variance and it worked like a charm.
Just in case anyone was unsure of how to do this, i used the data / stat feature on my BA2 to calculate the variance and it worked like a charm.
Just in case anyone was unsure of how to do this, i used the data / stat feature on my BA2 to calculate the variance and it worked like a charm.
Replies:
16
Views:
416
27. ### PQ-T8P2.T8.401. Component and marginal value at risk (VaR) calculations (topic review)

Hi @bpdulog I think your first is pretty close: You can retrieve "component volatility" (or volatility contribution) in (%) terms with Portfolio volatility 26.2% * 25% weight * 0.4834 β(B, P) = 3.1669%, which represents the Bond's (B) contribution to the portfolio volatility of 26.2%. So that's fairly straightforward: component % = Portfolio vol% * w% * β(B,P). The scale the volatility (%) to...
Hi @bpdulog I think your first is pretty close: You can retrieve "component volatility" (or volatility contribution) in (%) terms with Portfolio volatility 26.2% * 25% weight * 0.4834 β(B, P) = 3.1669%, which represents the Bond's (B) contribution to the portfolio volatility of 26.2%. So that's fairly straightforward: component % = Portfolio vol% * w% * β(B,P). The scale the volatility (%) to...
Hi @bpdulog I think your first is pretty close: You can retrieve "component volatility" (or volatility contribution) in (%) terms with Portfolio volatility 26.2% * 25% weight * 0.4834 β(B, P) = 3.1669%, which represents the Bond's (B) contribution to the portfolio volatility of 26.2%. So that's...
Hi @bpdulog I think your first is pretty close: You can retrieve "component volatility" (or volatility contribution) in (%) terms with Portfolio volatility 26.2% * 25% weight * 0.4834 β(B, P) =...
Replies:
6
Views:
332
28. ### PQ-T8P2.T8.400. Diversified portfolio Value at Risk (VaR) (topic review)

Awww. Ok! That makes sense. Thanks a lot!
Awww. Ok! That makes sense. Thanks a lot!
Awww. Ok! That makes sense. Thanks a lot!
Awww. Ok! That makes sense. Thanks a lot!
Replies:
34
Views:
724
29. ### 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
Views:
129
30. ### 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:
146