P2.T8. Investment Management

Practice questions for investment management and risk management

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  1. Suzanne Evans

    Question 9: Fama-French factor (Jaeger)

    Question: Jaeger argues that even if broad market neutrality is achieved, a manager is potentially exposed to several "beta-type" risk factors. Which of the following is not a Fama-French factor? A. Value stocks (low price to book) B. Small capitalization stocks C. Momentum factors D. Low liquidity factors Answer: D Explanation: While liquidity may indeed by a factor, the...
    Question: Jaeger argues that even if broad market neutrality is achieved, a manager is potentially exposed to several "beta-type" risk factors. Which of the following is not a Fama-French factor? A. Value stocks (low price to book) B. Small capitalization stocks C. Momentum factors D. Low liquidity factors Answer: D Explanation: While liquidity may indeed by a factor, the...
    Question: Jaeger argues that even if broad market neutrality is achieved, a manager is potentially exposed to several "beta-type" risk factors. Which of the following is not a Fama-French factor? A. Value stocks (low price to book) B. Small capitalization stocks C. Momentum factors D. Low...
    Question: Jaeger argues that even if broad market neutrality is achieved, a manager is potentially exposed to several "beta-type" risk factors. Which of the following is not a Fama-French factor? ...
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  2. Suzanne Evans

    Question 99: Metrics

    Question: When risk budgeting across active managers, which metric is most useful (according to Jorion)? A. Standard deviation B. Semi-deviation C. Information ratio D. Sortino ratio Answer: C Explanation: The typical method is to measure managers' tracking error, which is an input into the information ratio (IR = excess return/tracking error). The optimization problem attempts to...
    Question: When risk budgeting across active managers, which metric is most useful (according to Jorion)? A. Standard deviation B. Semi-deviation C. Information ratio D. Sortino ratio Answer: C Explanation: The typical method is to measure managers' tracking error, which is an input into the information ratio (IR = excess return/tracking error). The optimization problem attempts to...
    Question: When risk budgeting across active managers, which metric is most useful (according to Jorion)? A. Standard deviation B. Semi-deviation C. Information ratio D. Sortino ratio Answer: C Explanation: The typical method is to measure managers' tracking error, which is an input...
    Question: When risk budgeting across active managers, which metric is most useful (according to Jorion)? A. Standard deviation B. Semi-deviation C. Information ratio D. Sortino ratio ...
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  3. Suzanne Evans

    Question 98: Risk budgeting

    Question: Which most closely refers to risk budgeting across asset classes? A. Bottom-up B. Top-down C. Loss distribution D. Actuarial Answer: B Explanation: Risk budgeting is a top-down process. (1) First, determine the total value at risk (VaR) which can be “budgeted” to the firm; (2) Second, choose the optimal allocation of assets given the total risk profile
    Question: Which most closely refers to risk budgeting across asset classes? A. Bottom-up B. Top-down C. Loss distribution D. Actuarial Answer: B Explanation: Risk budgeting is a top-down process. (1) First, determine the total value at risk (VaR) which can be “budgeted” to the firm; (2) Second, choose the optimal allocation of assets given the total risk profile
    Question: Which most closely refers to risk budgeting across asset classes? A. Bottom-up B. Top-down C. Loss distribution D. Actuarial Answer: B Explanation: Risk budgeting is a top-down process. (1) First, determine the total value at risk (VaR) which can be “budgeted” to the firm;...
    Question: Which most closely refers to risk budgeting across asset classes? A. Bottom-up B. Top-down C. Loss distribution D. Actuarial Answer: B Explanation: Risk budgeting is a...
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  4. Suzanne Evans

    Question 97: Controlling portfolio risk

    Question: According to Jorion, VaR systems especially improve on (i.e., are better than) which traditional method of controlling portfolio risk? A. Simulations B. Mean-variance optimization C. Asset allocation D. Position/notional limits Answer: D Explanation: Traditional methods include limits on notionals or position limits. These methods do not account for variations in risk;...
    Question: According to Jorion, VaR systems especially improve on (i.e., are better than) which traditional method of controlling portfolio risk? A. Simulations B. Mean-variance optimization C. Asset allocation D. Position/notional limits Answer: D Explanation: Traditional methods include limits on notionals or position limits. These methods do not account for variations in risk;...
    Question: According to Jorion, VaR systems especially improve on (i.e., are better than) which traditional method of controlling portfolio risk? A. Simulations B. Mean-variance optimization C. Asset allocation D. Position/notional limits Answer: D Explanation: Traditional methods...
    Question: According to Jorion, VaR systems especially improve on (i.e., are better than) which traditional method of controlling portfolio risk? A. Simulations B. Mean-variance optimization ...
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  5. Suzanne Evans

    Question 96: Risk management systems

    Question: Which is a primary reason, says Jorion, that money managers are installing risk management systems? A. Add short bets to opportunity set B. Competitive pressure/advantage C. Regulatory mandate D. They aren't, trend is away Answer: B Explanation: Jorion says managers are increasingly under pressure by clients and that a lack of risk management may be a competitive...
    Question: Which is a primary reason, says Jorion, that money managers are installing risk management systems? A. Add short bets to opportunity set B. Competitive pressure/advantage C. Regulatory mandate D. They aren't, trend is away Answer: B Explanation: Jorion says managers are increasingly under pressure by clients and that a lack of risk management may be a competitive...
    Question: Which is a primary reason, says Jorion, that money managers are installing risk management systems? A. Add short bets to opportunity set B. Competitive pressure/advantage C. Regulatory mandate D. They aren't, trend is away Answer: B Explanation: Jorion says managers are...
    Question: Which is a primary reason, says Jorion, that money managers are installing risk management systems? A. Add short bets to opportunity set B. Competitive pressure/advantage C....
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  6. Suzanne Evans

    Question 95: Single global custodian

    Question: Which is NOT TRUE about delegating to single global custodian? A. Consistent with VaR philosophy B. Positions reports can show consolidated exposures C. Trend is away from global custodian D. Large plans may prefer internal system Answer: C Explanation: Jorion says the trend is toward, not away, from the use of a single global custodian.
    Question: Which is NOT TRUE about delegating to single global custodian? A. Consistent with VaR philosophy B. Positions reports can show consolidated exposures C. Trend is away from global custodian D. Large plans may prefer internal system Answer: C Explanation: Jorion says the trend is toward, not away, from the use of a single global custodian.
    Question: Which is NOT TRUE about delegating to single global custodian? A. Consistent with VaR philosophy B. Positions reports can show consolidated exposures C. Trend is away from global custodian D. Large plans may prefer internal system Answer: C Explanation: Jorion says the...
    Question: Which is NOT TRUE about delegating to single global custodian? A. Consistent with VaR philosophy B. Positions reports can show consolidated exposures C. Trend is away from global...
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  7. Suzanne Evans

    Question 94: VaR

    Question: If a manager observes a large jump in value at risk (VaR) of a fund, which is the least likely according to Jorion? A. Higher confidence level B. Manager(s) taking more risk C. Different managers making similar bets D. More volatile markets Answer: A Explanation: Jorion gives the following three possible explanations for a jump in fund VaR: 1. A manager takes more risk:...
    Question: If a manager observes a large jump in value at risk (VaR) of a fund, which is the least likely according to Jorion? A. Higher confidence level B. Manager(s) taking more risk C. Different managers making similar bets D. More volatile markets Answer: A Explanation: Jorion gives the following three possible explanations for a jump in fund VaR: 1. A manager takes more risk:...
    Question: If a manager observes a large jump in value at risk (VaR) of a fund, which is the least likely according to Jorion? A. Higher confidence level B. Manager(s) taking more risk C. Different managers making similar bets D. More volatile markets Answer: A Explanation: Jorion...
    Question: If a manager observes a large jump in value at risk (VaR) of a fund, which is the least likely according to Jorion? A. Higher confidence level B. Manager(s) taking more risk C....
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  8. Suzanne Evans

    Question 93: Risk

    Question: A plan sponsor is able to absorb fluctuations (high volatility) in its defined benefit plan's surplus because it can fund contributions easily and its own operating profits tend to be inversely correlated to pension plan performance (i.e., operating profits are high when surplus falls). Which of the following sets of risk are likely to be lowest? A. Surplus and cash flow B....
    Question: A plan sponsor is able to absorb fluctuations (high volatility) in its defined benefit plan's surplus because it can fund contributions easily and its own operating profits tend to be inversely correlated to pension plan performance (i.e., operating profits are high when surplus falls). Which of the following sets of risk are likely to be lowest? A. Surplus and cash flow B....
    Question: A plan sponsor is able to absorb fluctuations (high volatility) in its defined benefit plan's surplus because it can fund contributions easily and its own operating profits tend to be inversely correlated to pension plan performance (i.e., operating profits are high when surplus...
    Question: A plan sponsor is able to absorb fluctuations (high volatility) in its defined benefit plan's surplus because it can fund contributions easily and its own operating profits tend to be...
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  9. Suzanne Evans

    Question 92: Negative surplus

    Question: A pension plan has $1 billion in assets and $950 million in liabilities. The expected return on surplus, scaled by assets, is 5% and the volatility of the surplus is 10%. At the 99% confidence level, what is the negative surplus associated with a VaR level of loss? A. -$78 million B. -$92 million C. -$133 million D. -$156 million Answer: C Explanation: Return on surplus =...
    Question: A pension plan has $1 billion in assets and $950 million in liabilities. The expected return on surplus, scaled by assets, is 5% and the volatility of the surplus is 10%. At the 99% confidence level, what is the negative surplus associated with a VaR level of loss? A. -$78 million B. -$92 million C. -$133 million D. -$156 million Answer: C Explanation: Return on surplus =...
    Question: A pension plan has $1 billion in assets and $950 million in liabilities. The expected return on surplus, scaled by assets, is 5% and the volatility of the surplus is 10%. At the 99% confidence level, what is the negative surplus associated with a VaR level of loss? A. -$78 million ...
    Question: A pension plan has $1 billion in assets and $950 million in liabilities. The expected return on surplus, scaled by assets, is 5% and the volatility of the surplus is 10%. At the 99%...
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  10. Suzanne Evans

    Question 91: Tracking error

    Question: Which if the following risks is often measured with tracking error (TE)? A. Absolute risk B. Relative risk C. Policy-mix risk D. Active-management risk Answer: B Explanation: Absolute risk is the risk of a dollar loss over the horizon (a.k.a., asset risk). Relative risk is the risk of a dollar loss in a fund relative to its benchmark. The shortfall is measured as the...
    Question: Which if the following risks is often measured with tracking error (TE)? A. Absolute risk B. Relative risk C. Policy-mix risk D. Active-management risk Answer: B Explanation: Absolute risk is the risk of a dollar loss over the horizon (a.k.a., asset risk). Relative risk is the risk of a dollar loss in a fund relative to its benchmark. The shortfall is measured as the...
    Question: Which if the following risks is often measured with tracking error (TE)? A. Absolute risk B. Relative risk C. Policy-mix risk D. Active-management risk Answer: B Explanation: Absolute risk is the risk of a dollar loss over the horizon (a.k.a., asset risk). Relative risk is...
    Question: Which if the following risks is often measured with tracking error (TE)? A. Absolute risk B. Relative risk C. Policy-mix risk D. Active-management risk Answer: B Explanation:...
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  11. Suzanne Evans

    Question 90: Special risk measurement problems

    Question: Jorion cites several reasons that hedge funds pose special risk measurement problems. Which of the following is NOT one of those reasons? A. Asymmetric compensation B. Heterogeneous population C. Leverage D. Illiquid investments Answer: A Explanation: Hedge funds do have asymmetric compensation plans (and, indeed, this complicates performance attribution net-of-fees), but...
    Question: Jorion cites several reasons that hedge funds pose special risk measurement problems. Which of the following is NOT one of those reasons? A. Asymmetric compensation B. Heterogeneous population C. Leverage D. Illiquid investments Answer: A Explanation: Hedge funds do have asymmetric compensation plans (and, indeed, this complicates performance attribution net-of-fees), but...
    Question: Jorion cites several reasons that hedge funds pose special risk measurement problems. Which of the following is NOT one of those reasons? A. Asymmetric compensation B. Heterogeneous population C. Leverage D. Illiquid investments Answer: A Explanation: Hedge funds do have...
    Question: Jorion cites several reasons that hedge funds pose special risk measurement problems. Which of the following is NOT one of those reasons? A. Asymmetric compensation B. Heterogeneous...
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  12. Suzanne Evans

    Question 8: Strategies (Jaeger)

    Question: A manager takes a simultaneous long position in Google and short position in Yahoo, believing them to both have similar market exposure. This typifies which strategy? A. Long/short equity B. Equity market neutral C. Equity market timing D. Short selling Answer: B Explanation: Equity market neutral tries to exploit price discrepancies without exposure to the broad market...
    Question: A manager takes a simultaneous long position in Google and short position in Yahoo, believing them to both have similar market exposure. This typifies which strategy? A. Long/short equity B. Equity market neutral C. Equity market timing D. Short selling Answer: B Explanation: Equity market neutral tries to exploit price discrepancies without exposure to the broad market...
    Question: A manager takes a simultaneous long position in Google and short position in Yahoo, believing them to both have similar market exposure. This typifies which strategy? A. Long/short equity B. Equity market neutral C. Equity market timing D. Short selling Answer: B ...
    Question: A manager takes a simultaneous long position in Google and short position in Yahoo, believing them to both have similar market exposure. This typifies which strategy? A. Long/short...
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  13. Suzanne Evans

    Question 89: Investment process

    Question: Which are the two basic steps in the investment process, according to Jorion? A. Active manager selection and performance attribution B. Active manager selection and rebalancing C. Asset allocation study and active manager selection D. Asset allocation study and rebalancing Answer: C Explanation: Two basic steps of the investment process: 1. A consultant provides a...
    Question: Which are the two basic steps in the investment process, according to Jorion? A. Active manager selection and performance attribution B. Active manager selection and rebalancing C. Asset allocation study and active manager selection D. Asset allocation study and rebalancing Answer: C Explanation: Two basic steps of the investment process: 1. A consultant provides a...
    Question: Which are the two basic steps in the investment process, according to Jorion? A. Active manager selection and performance attribution B. Active manager selection and rebalancing C. Asset allocation study and active manager selection D. Asset allocation study and rebalancing ...
    Question: Which are the two basic steps in the investment process, according to Jorion? A. Active manager selection and performance attribution B. Active manager selection and rebalancing C....
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  14. Suzanne Evans

    Question 88: Risk Characteristic

    Question: In regard each of the following characteristics, respectively, is the risk characteristic more reflective of the sell-side ("sell";) or the buy-side ("buy";)? (i) Annual time horizon, (ii) rapid turnover, (iii) high leverage, (iv) VaR risk metric, (v) tracking error risk metric, (vi) reliance on benchmarks as risk control, and (vii) reliance on position limits as risk control ...
    Question: In regard each of the following characteristics, respectively, is the risk characteristic more reflective of the sell-side ("sell";) or the buy-side ("buy";)? (i) Annual time horizon, (ii) rapid turnover, (iii) high leverage, (iv) VaR risk metric, (v) tracking error risk metric, (vi) reliance on benchmarks as risk control, and (vii) reliance on position limits as risk control ...
    Question: In regard each of the following characteristics, respectively, is the risk characteristic more reflective of the sell-side ("sell";) or the buy-side ("buy";)? (i) Annual time horizon, (ii) rapid turnover, (iii) high leverage, (iv) VaR risk metric, (v) tracking error risk metric,...
    Question: In regard each of the following characteristics, respectively, is the risk characteristic more reflective of the sell-side ("sell";) or the buy-side ("buy";)? (i) Annual time...
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  15. Suzanne Evans

    Question 87: Jorion's risk budgeting

    Question: Which is not an essential feature of Jorion's risk budgeting process A. Bottom-up B. Asset allocation C. Manager allocation D. Forward-looking Answer: A Explanation: The three basic steps are: 1. Set the appropriate level of risk, 2. Develop a strategic allocation bases on the risk target, and 3. Create a manager allocation consistent with asset class risk targets....
    Question: Which is not an essential feature of Jorion's risk budgeting process A. Bottom-up B. Asset allocation C. Manager allocation D. Forward-looking Answer: A Explanation: The three basic steps are: 1. Set the appropriate level of risk, 2. Develop a strategic allocation bases on the risk target, and 3. Create a manager allocation consistent with asset class risk targets....
    Question: Which is not an essential feature of Jorion's risk budgeting process A. Bottom-up B. Asset allocation C. Manager allocation D. Forward-looking Answer: A Explanation: The three basic steps are: 1. Set the appropriate level of risk, 2. Develop a strategic allocation bases on...
    Question: Which is not an essential feature of Jorion's risk budgeting process A. Bottom-up B. Asset allocation C. Manager allocation D. Forward-looking Answer: A Explanation: The...
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  16. Suzanne Evans

    Question 86: Trades

    Hi srinivas, This is from the (difficult) section 7.5.2 in Chapter 7 of Jorion (Portfolio Risk: Analytical Methods). He says it comes from CAPM where: Return(i) - RF = [Return (Market) - RF]*beta(i), Excess return (i) = Excess return (market) * beta(i), such that Excess return (i) / beta(i) = Excess return (market) = constant The use of marginal VaR follows as they are so nearly...
    Hi srinivas, This is from the (difficult) section 7.5.2 in Chapter 7 of Jorion (Portfolio Risk: Analytical Methods). He says it comes from CAPM where: Return(i) - RF = [Return (Market) - RF]*beta(i), Excess return (i) = Excess return (market) * beta(i), such that Excess return (i) / beta(i) = Excess return (market) = constant The use of marginal VaR follows as they are so nearly...
    Hi srinivas, This is from the (difficult) section 7.5.2 in Chapter 7 of Jorion (Portfolio Risk: Analytical Methods). He says it comes from CAPM where: Return(i) - RF = [Return (Market) - RF]*beta(i), Excess return (i) = Excess return (market) * beta(i), such that Excess return (i) /...
    Hi srinivas, This is from the (difficult) section 7.5.2 in Chapter 7 of Jorion (Portfolio Risk: Analytical Methods). He says it comes from CAPM where: Return(i) - RF = [Return (Market) -...
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  17. Suzanne Evans

    Question 85: Porfolio risk

    Question: When does portfolio risk reach a global minimum? A. Marginal VaRs are equal B. Marginal VaRs = 1.0 C. Highest Sharpe ratio D. (expected return/beta) is constant Answer: A Explanation: Keep in mind the EFFICIENT FRONTIER STARTS at the minimum risk portfolio (i.e., the portfolio with the lowest volatility) which here is the GLOBAL MINIMUM. Answers (C) and (D) refer to...
    Question: When does portfolio risk reach a global minimum? A. Marginal VaRs are equal B. Marginal VaRs = 1.0 C. Highest Sharpe ratio D. (expected return/beta) is constant Answer: A Explanation: Keep in mind the EFFICIENT FRONTIER STARTS at the minimum risk portfolio (i.e., the portfolio with the lowest volatility) which here is the GLOBAL MINIMUM. Answers (C) and (D) refer to...
    Question: When does portfolio risk reach a global minimum? A. Marginal VaRs are equal B. Marginal VaRs = 1.0 C. Highest Sharpe ratio D. (expected return/beta) is constant Answer: A Explanation: Keep in mind the EFFICIENT FRONTIER STARTS at the minimum risk portfolio (i.e., the...
    Question: When does portfolio risk reach a global minimum? A. Marginal VaRs are equal B. Marginal VaRs = 1.0 C. Highest Sharpe ratio D. (expected return/beta) is constant Answer: A ...
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  18. Suzanne Evans

    Question 84: Component VaR

    Question: What is Jorion's recommendation to compute component VaR when the distribution is not elliptical? A. Use sample beta coefficient B. Use marginal VaR C. Uses positions linked to selected portfolio return D. You cannot (must at least be elliptical) Answer: C Explanation: The idea is to identify a portfolio return (based on sorted historical portfolio returns) that...
    Question: What is Jorion's recommendation to compute component VaR when the distribution is not elliptical? A. Use sample beta coefficient B. Use marginal VaR C. Uses positions linked to selected portfolio return D. You cannot (must at least be elliptical) Answer: C Explanation: The idea is to identify a portfolio return (based on sorted historical portfolio returns) that...
    Question: What is Jorion's recommendation to compute component VaR when the distribution is not elliptical? A. Use sample beta coefficient B. Use marginal VaR C. Uses positions linked to selected portfolio return D. You cannot (must at least be elliptical) Answer: C Explanation: The...
    Question: What is Jorion's recommendation to compute component VaR when the distribution is not elliptical? A. Use sample beta coefficient B. Use marginal VaR C. Uses positions linked to...
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  19. Suzanne Evans

    Question 83: Component VaR and percentage contribution

    Question: A $100 million portfolio has a portfolio value at risk (VaR) of $30 million. A trader has a $10 million position where the beta of the trader's return with the portfolio's return is 0.8 and the position's marginal VaR is 0.24. What is the (i) the position's component VaR and (ii) the percentage contribution of the position to portfolio VaR? A. 1.2 millon and 4.0% B. 2.4 million...
    Question: A $100 million portfolio has a portfolio value at risk (VaR) of $30 million. A trader has a $10 million position where the beta of the trader's return with the portfolio's return is 0.8 and the position's marginal VaR is 0.24. What is the (i) the position's component VaR and (ii) the percentage contribution of the position to portfolio VaR? A. 1.2 millon and 4.0% B. 2.4 million...
    Question: A $100 million portfolio has a portfolio value at risk (VaR) of $30 million. A trader has a $10 million position where the beta of the trader's return with the portfolio's return is 0.8 and the position's marginal VaR is 0.24. What is the (i) the position's component VaR and (ii) the...
    Question: A $100 million portfolio has a portfolio value at risk (VaR) of $30 million. A trader has a $10 million position where the beta of the trader's return with the portfolio's return is 0.8...
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  20. Suzanne Evans

    Question 82: Formula

    Question: If W is the portfolio value, (i) is an asset with a single risk factor, and (b) is the beta between the position's and the portfolio's returns, what is the formula for the best hedge? A. -W x [COV(i, portfolio) / variance of i] B. -W x [COV(i, portfolio) / standard deviation of i] C. -W x [variance of I / COV(i, portfolio)] D. (variance of i) x [COV(i, portfolio) / W] ...
    Question: If W is the portfolio value, (i) is an asset with a single risk factor, and (b) is the beta between the position's and the portfolio's returns, what is the formula for the best hedge? A. -W x [COV(i, portfolio) / variance of i] B. -W x [COV(i, portfolio) / standard deviation of i] C. -W x [variance of I / COV(i, portfolio)] D. (variance of i) x [COV(i, portfolio) / W] ...
    Question: If W is the portfolio value, (i) is an asset with a single risk factor, and (b) is the beta between the position's and the portfolio's returns, what is the formula for the best hedge? A. -W x [COV(i, portfolio) / variance of i] B. -W x [COV(i, portfolio) / standard deviation of i] ...
    Question: If W is the portfolio value, (i) is an asset with a single risk factor, and (b) is the beta between the position's and the portfolio's returns, what is the formula for the best hedge? ...
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  21. Suzanne Evans

    Question 81: Incremental VaR

    Question: A $20 million portfolio consists of only two equally-weighted and uncorrelated positions in Assets A & B. Asset A ($10 million) has a volatility of 10% and Asset B (also $10 million) has a volatility of 20%. At 99% confidence, what is an approximation of the incremental VaR given an additional investment of $1 million in Asset B? A. $233,000 B. $298,000 C. $333,000 D. $416,000 ...
    Question: A $20 million portfolio consists of only two equally-weighted and uncorrelated positions in Assets A & B. Asset A ($10 million) has a volatility of 10% and Asset B (also $10 million) has a volatility of 20%. At 99% confidence, what is an approximation of the incremental VaR given an additional investment of $1 million in Asset B? A. $233,000 B. $298,000 C. $333,000 D. $416,000 ...
    Question: A $20 million portfolio consists of only two equally-weighted and uncorrelated positions in Assets A & B. Asset A ($10 million) has a volatility of 10% and Asset B (also $10 million) has a volatility of 20%. At 99% confidence, what is an approximation of the incremental VaR given an...
    Question: A $20 million portfolio consists of only two equally-weighted and uncorrelated positions in Assets A & B. Asset A ($10 million) has a volatility of 10% and Asset B (also $10 million) has...
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  22. Suzanne Evans

    Question 80: Marginal VaR

    Question: Which are true statements about marginal value at risk (VaR)? I. Marginal VaR = (critical value)[Covariance between position and portfolio returns/portfolio volatility]; II. Marginal VaR is a first-order partial derivative; III. Marginal VaR = (Portfolio VaR/Portfolio size)(beta of position's return with portfolio's return); IV. Marginal VaR approximates incremental VaR for small...
    Question: Which are true statements about marginal value at risk (VaR)? I. Marginal VaR = (critical value)[Covariance between position and portfolio returns/portfolio volatility]; II. Marginal VaR is a first-order partial derivative; III. Marginal VaR = (Portfolio VaR/Portfolio size)(beta of position's return with portfolio's return); IV. Marginal VaR approximates incremental VaR for small...
    Question: Which are true statements about marginal value at risk (VaR)? I. Marginal VaR = (critical value)[Covariance between position and portfolio returns/portfolio volatility]; II. Marginal VaR is a first-order partial derivative; III. Marginal VaR = (Portfolio VaR/Portfolio size)(beta of...
    Question: Which are true statements about marginal value at risk (VaR)? I. Marginal VaR = (critical value)[Covariance between position and portfolio returns/portfolio volatility]; II. Marginal VaR...
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  23. Suzanne Evans

    Question 7: Short selling (Jaeger)

    Question: According to Jaeger, which is not a purpose of short selling: A. Generating positive returns B. Hedging market risk C. Earning the short rebate D. Useful threat to promote changes at target company Answer: D Explanation: (D) is not cited; the others are advantages to shorting. The long/short equity manager does not hug a benchmark; she/he is can employ long positions in...
    Question: According to Jaeger, which is not a purpose of short selling: A. Generating positive returns B. Hedging market risk C. Earning the short rebate D. Useful threat to promote changes at target company Answer: D Explanation: (D) is not cited; the others are advantages to shorting. The long/short equity manager does not hug a benchmark; she/he is can employ long positions in...
    Question: According to Jaeger, which is not a purpose of short selling: A. Generating positive returns B. Hedging market risk C. Earning the short rebate D. Useful threat to promote changes at target company Answer: D Explanation: (D) is not cited; the others are advantages to...
    Question: According to Jaeger, which is not a purpose of short selling: A. Generating positive returns B. Hedging market risk C. Earning the short rebate D. Useful threat to promote changes...
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  24. Suzanne Evans

    Question 79: Marginal VaR and component VaR

    Question: A trader has a $10 million position in a $100 million portfolio where the beta of the trader's return with the portfolio's return is 1.5 and the portfolio value at risk (VaR) is $30 million. What is the (i) marginal VaR and (ii) component VaR? A. 0.2 and 2.0 million B. 0.2 and 2.8 million C. 0.45 and 4.5 million D. 1.2 and 2.4 million Answer: C Explanation: Marginal VaR =...
    Question: A trader has a $10 million position in a $100 million portfolio where the beta of the trader's return with the portfolio's return is 1.5 and the portfolio value at risk (VaR) is $30 million. What is the (i) marginal VaR and (ii) component VaR? A. 0.2 and 2.0 million B. 0.2 and 2.8 million C. 0.45 and 4.5 million D. 1.2 and 2.4 million Answer: C Explanation: Marginal VaR =...
    Question: A trader has a $10 million position in a $100 million portfolio where the beta of the trader's return with the portfolio's return is 1.5 and the portfolio value at risk (VaR) is $30 million. What is the (i) marginal VaR and (ii) component VaR? A. 0.2 and 2.0 million B. 0.2 and 2.8...
    Question: A trader has a $10 million position in a $100 million portfolio where the beta of the trader's return with the portfolio's return is 1.5 and the portfolio value at risk (VaR) is $30...
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  25. Suzanne Evans

    Question 78: Portfolios standard deviation

    Question: A portfolio has five (5) positions with equal weights, standard deviations and correlations between them. If the standard deviation for each is 10% and the correlation between each pair of returns is 0.5, what is the portfolio's standard deviation? A. 5.0% B. 6.25% C. 7.75% D. 10.0% Answer: C Explanation: Under these circumstances, portfolio volatility = (asset...
    Question: A portfolio has five (5) positions with equal weights, standard deviations and correlations between them. If the standard deviation for each is 10% and the correlation between each pair of returns is 0.5, what is the portfolio's standard deviation? A. 5.0% B. 6.25% C. 7.75% D. 10.0% Answer: C Explanation: Under these circumstances, portfolio volatility = (asset...
    Question: A portfolio has five (5) positions with equal weights, standard deviations and correlations between them. If the standard deviation for each is 10% and the correlation between each pair of returns is 0.5, what is the portfolio's standard deviation? A. 5.0% B. 6.25% C. 7.75% D....
    Question: A portfolio has five (5) positions with equal weights, standard deviations and correlations between them. If the standard deviation for each is 10% and the correlation between each pair...
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  26. Suzanne Evans

    Question 77: Portfolio VaR

    Question: Assume a two-asset portfolio with a portfolio value of $20 million. Each asset weighs 50% of the portfolio. Asset A has a volatility of 10% and asset B has a volatility of 20%. If the desired confidence is 99%, what is the portfolio VaR if (i) the assets are uncorrelated [i.e.., correlation = 0] and (ii) the assets are perfectly correlated [i.e., correlation = -1] A. $2.56 and...
    Question: Assume a two-asset portfolio with a portfolio value of $20 million. Each asset weighs 50% of the portfolio. Asset A has a volatility of 10% and asset B has a volatility of 20%. If the desired confidence is 99%, what is the portfolio VaR if (i) the assets are uncorrelated [i.e.., correlation = 0] and (ii) the assets are perfectly correlated [i.e., correlation = -1] A. $2.56 and...
    Question: Assume a two-asset portfolio with a portfolio value of $20 million. Each asset weighs 50% of the portfolio. Asset A has a volatility of 10% and asset B has a volatility of 20%. If the desired confidence is 99%, what is the portfolio VaR if (i) the assets are uncorrelated [i.e..,...
    Question: Assume a two-asset portfolio with a portfolio value of $20 million. Each asset weighs 50% of the portfolio. Asset A has a volatility of 10% and asset B has a volatility of 20%. If the...
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  27. Suzanne Evans

    Question 76: VaR

    Question: Assume a two-asset portfolio with a portfolio value of $10 million. Each asset weighs 50% of the portfolio. Asset A has a volatility of 10% and asset B has a volatility of 20%. The correlation between Asset A & B is 0.5. What is the individual VaR of Asset B? A. $822,000 B. $1.645 million C. $2.16 million D. $2.33 million Answer: B Explanation: The individual VaR of Asset...
    Question: Assume a two-asset portfolio with a portfolio value of $10 million. Each asset weighs 50% of the portfolio. Asset A has a volatility of 10% and asset B has a volatility of 20%. The correlation between Asset A & B is 0.5. What is the individual VaR of Asset B? A. $822,000 B. $1.645 million C. $2.16 million D. $2.33 million Answer: B Explanation: The individual VaR of Asset...
    Question: Assume a two-asset portfolio with a portfolio value of $10 million. Each asset weighs 50% of the portfolio. Asset A has a volatility of 10% and asset B has a volatility of 20%. The correlation between Asset A & B is 0.5. What is the individual VaR of Asset B? A. $822,000 B. $1.645...
    Question: Assume a two-asset portfolio with a portfolio value of $10 million. Each asset weighs 50% of the portfolio. Asset A has a volatility of 10% and asset B has a volatility of 20%. The...
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  28. Suzanne Evans

    Question 75: Diversified portfolio VaR

    Question: Assume a two-asset portfolio with a portfolio value of $10 million. Each asset weighs 50% of the portfolio. Asset A has a volatility of 10% and asset B has a volatility of 20%. The correlation between Asset A & B is 0.5. What is the diversified portfolio VaR under 95% confidence? A. $1.96 million B. $2.18 million C. $2.82 million D. $3.16 million Answer: B Explanation:...
    Question: Assume a two-asset portfolio with a portfolio value of $10 million. Each asset weighs 50% of the portfolio. Asset A has a volatility of 10% and asset B has a volatility of 20%. The correlation between Asset A & B is 0.5. What is the diversified portfolio VaR under 95% confidence? A. $1.96 million B. $2.18 million C. $2.82 million D. $3.16 million Answer: B Explanation:...
    Question: Assume a two-asset portfolio with a portfolio value of $10 million. Each asset weighs 50% of the portfolio. Asset A has a volatility of 10% and asset B has a volatility of 20%. The correlation between Asset A & B is 0.5. What is the diversified portfolio VaR under 95% confidence? A....
    Question: Assume a two-asset portfolio with a portfolio value of $10 million. Each asset weighs 50% of the portfolio. Asset A has a volatility of 10% and asset B has a volatility of 20%. The...
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  29. Suzanne Evans

    Question 74: Distressed securities strategy

    Question: Challenges of employing a distressed securities strategy include all of the following except: A. Less liquidity B. Unfavorable image as "vultures" C. Require much expertise and extensive analysis D. Legal issues Answer: B Explanation: Distressed securities tend to be less liquid; require specialist expertise with much analytical pre-work involved; tend to be confronted...
    Question: Challenges of employing a distressed securities strategy include all of the following except: A. Less liquidity B. Unfavorable image as "vultures" C. Require much expertise and extensive analysis D. Legal issues Answer: B Explanation: Distressed securities tend to be less liquid; require specialist expertise with much analytical pre-work involved; tend to be confronted...
    Question: Challenges of employing a distressed securities strategy include all of the following except: A. Less liquidity B. Unfavorable image as "vultures" C. Require much expertise and extensive analysis D. Legal issues Answer: B Explanation: Distressed securities tend to be less...
    Question: Challenges of employing a distressed securities strategy include all of the following except: A. Less liquidity B. Unfavorable image as "vultures" C. Require much expertise and...
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  30. Suzanne Evans

    Question 73: Risk in the CAPM

    Question: If the capital asset pricing model (CAPM) were applied against a portfolio that employed an event-driven strategy, which risk in the CAPM would correspond to the manager's focus area: A. Equity premium B. Beta C. Idiosyncratic risk D. Quantity of risk Answer: C Explanation: Event-driven strategies are company-specific or idiosyncratic. Theoretically, as idiosyncratic...
    Question: If the capital asset pricing model (CAPM) were applied against a portfolio that employed an event-driven strategy, which risk in the CAPM would correspond to the manager's focus area: A. Equity premium B. Beta C. Idiosyncratic risk D. Quantity of risk Answer: C Explanation: Event-driven strategies are company-specific or idiosyncratic. Theoretically, as idiosyncratic...
    Question: If the capital asset pricing model (CAPM) were applied against a portfolio that employed an event-driven strategy, which risk in the CAPM would correspond to the manager's focus area: A. Equity premium B. Beta C. Idiosyncratic risk D. Quantity of risk Answer: C Explanation:...
    Question: If the capital asset pricing model (CAPM) were applied against a portfolio that employed an event-driven strategy, which risk in the CAPM would correspond to the manager's focus area: ...
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