# P2.T8. Investment Management

Practice questions for investment management and risk management

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1. ### 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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2. ### 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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3. ### 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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4. ### 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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5. ### 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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6. ### 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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7. ### 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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8. ### 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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9. ### 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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10. ### 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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11. ### 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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12. ### 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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13. ### 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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14. ### 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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15. ### 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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16. ### 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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17. ### 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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18. ### 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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19. ### Question 72: Short positions

Question: According to Jaeger, short positions (short selling) has three purposes. Which of the following is not one of them? 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...
Question: According to Jaeger, short positions (short selling) has three purposes. Which of the following is not one of them? 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...
Question: According to Jaeger, short positions (short selling) has three purposes. Which of the following is not one of them? 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:...
Question: According to Jaeger, short positions (short selling) has three purposes. Which of the following is not one of them? A. Generating positive returns B. Hedging market risk C. Earning...
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20. ### Question 71: Bond decomposition strategy

Question: Which bond decomposition strategy emphasizes, respectively, the following: (i) stage in the management process, (ii) exposure to international markets, and (iii) Yield curve factors A. Lehman Brothers, APT, Solnik's IPA B. Barra, Khoury, APT C. Kuberek's, Solnik's IPA, and Lehman Brothers D. Lehman Brothers, McLaren, and Barra Answer: C Explanation: The Lehman Brothers...
Question: Which bond decomposition strategy emphasizes, respectively, the following: (i) stage in the management process, (ii) exposure to international markets, and (iii) Yield curve factors A. Lehman Brothers, APT, Solnik's IPA B. Barra, Khoury, APT C. Kuberek's, Solnik's IPA, and Lehman Brothers D. Lehman Brothers, McLaren, and Barra Answer: C Explanation: The Lehman Brothers...
Question: Which bond decomposition strategy emphasizes, respectively, the following: (i) stage in the management process, (ii) exposure to international markets, and (iii) Yield curve factors A. Lehman Brothers, APT, Solnik's IPA B. Barra, Khoury, APT C. Kuberek's, Solnik's IPA, and Lehman...
Question: Which bond decomposition strategy emphasizes, respectively, the following: (i) stage in the management process, (ii) exposure to international markets, and (iii) Yield curve factors ...
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21. ### Question 70: Investment strategies

Question: All of the following are investment strategies for managing fixed-income portfolios EXCEPT FOR: A. Barra B. Duration C. Sector D. Maturity distribution Answer: A Explanation: The strategies include active (e.g., forecast rates, forecast spreads), passive (index replication), duration, sector, and maturity distribution. The Barra model is a multifactor model used to...
Question: All of the following are investment strategies for managing fixed-income portfolios EXCEPT FOR: A. Barra B. Duration C. Sector D. Maturity distribution Answer: A Explanation: The strategies include active (e.g., forecast rates, forecast spreads), passive (index replication), duration, sector, and maturity distribution. The Barra model is a multifactor model used to...
Question: All of the following are investment strategies for managing fixed-income portfolios EXCEPT FOR: A. Barra B. Duration C. Sector D. Maturity distribution Answer: A Explanation: The strategies include active (e.g., forecast rates, forecast spreads), passive (index...
Question: All of the following are investment strategies for managing fixed-income portfolios EXCEPT FOR: A. Barra B. Duration C. Sector D. Maturity distribution Answer: A Explanation:...
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22. ### Question 69: Explanatory factors

Question: The Litterman and Scheinkman model contains which three explanatory factors? A. Parallel yield curve shifts, slope changes, and curvature B. Yield curve shift, default risk and market risk C. Default, duration, and market risk D. Duration, convexity, and curvature Answer: A Explanation: The TWO PRIMARY RISKS that explain bond returns are DEFAULT RISK and MARKET RISK. In...
Question: The Litterman and Scheinkman model contains which three explanatory factors? A. Parallel yield curve shifts, slope changes, and curvature B. Yield curve shift, default risk and market risk C. Default, duration, and market risk D. Duration, convexity, and curvature Answer: A Explanation: The TWO PRIMARY RISKS that explain bond returns are DEFAULT RISK and MARKET RISK. In...
Question: The Litterman and Scheinkman model contains which three explanatory factors? A. Parallel yield curve shifts, slope changes, and curvature B. Yield curve shift, default risk and market risk C. Default, duration, and market risk D. Duration, convexity, and curvature Answer: A ...
Question: The Litterman and Scheinkman model contains which three explanatory factors? A. Parallel yield curve shifts, slope changes, and curvature B. Yield curve shift, default risk and...
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23. ### Question 68: Dynamic interest rate models

Question: As dynamic interest rate models, what is the difference between the Cox-Ingersoll-Ross (CIR) model and the Vasicek model? A. Mean reversion B. Short-term rate C. Stochastic process D. Heteroskedastic interest rate volatility Answer: D Explanation: Both models share (A), (B), and (C) in common. They both model rates as reverting toward a mean, given a speed of reversion...
Question: As dynamic interest rate models, what is the difference between the Cox-Ingersoll-Ross (CIR) model and the Vasicek model? A. Mean reversion B. Short-term rate C. Stochastic process D. Heteroskedastic interest rate volatility Answer: D Explanation: Both models share (A), (B), and (C) in common. They both model rates as reverting toward a mean, given a speed of reversion...
Question: As dynamic interest rate models, what is the difference between the Cox-Ingersoll-Ross (CIR) model and the Vasicek model? A. Mean reversion B. Short-term rate C. Stochastic process D. Heteroskedastic interest rate volatility Answer: D Explanation: Both models share (A),...
Question: As dynamic interest rate models, what is the difference between the Cox-Ingersoll-Ross (CIR) model and the Vasicek model? A. Mean reversion B. Short-term rate C. Stochastic process ...
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24. ### Question 67: Indirect method

Question: What is the most acute risk created under the INDIRECT METHOD for estimating a range of zero-coupon rates given yields to maturity? A. Reinvestment risk B. Model risk C. Yield curve risk D. Coupon risk Answer: B Explanation: The indirect methods adjust the market data to fit a specified shape of the yield curve. The suffer therefore from "specification" or model risk...
Question: What is the most acute risk created under the INDIRECT METHOD for estimating a range of zero-coupon rates given yields to maturity? A. Reinvestment risk B. Model risk C. Yield curve risk D. Coupon risk Answer: B Explanation: The indirect methods adjust the market data to fit a specified shape of the yield curve. The suffer therefore from "specification" or model risk...
Question: What is the most acute risk created under the INDIRECT METHOD for estimating a range of zero-coupon rates given yields to maturity? A. Reinvestment risk B. Model risk C. Yield curve risk D. Coupon risk Answer: B Explanation: The indirect methods adjust the market data to...
Question: What is the most acute risk created under the INDIRECT METHOD for estimating a range of zero-coupon rates given yields to maturity? A. Reinvestment risk B. Model risk C. Yield curve...
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25. ### Question 66: Term structure of interest rates

Question: If we want to construct a term structure of interest rates, which is the better method? A. Yield to maturity, because the data is available for all maturities B. Yield to maturity, because it is a recognized standard C. Zero-coupon, because it assumes a single rate at each maturity D. Zero-coupon because is allows for direct estimates Answer: C Explanation: The yield to...
Question: If we want to construct a term structure of interest rates, which is the better method? A. Yield to maturity, because the data is available for all maturities B. Yield to maturity, because it is a recognized standard C. Zero-coupon, because it assumes a single rate at each maturity D. Zero-coupon because is allows for direct estimates Answer: C Explanation: The yield to...
Question: If we want to construct a term structure of interest rates, which is the better method? A. Yield to maturity, because the data is available for all maturities B. Yield to maturity, because it is a recognized standard C. Zero-coupon, because it assumes a single rate at each...
Question: If we want to construct a term structure of interest rates, which is the better method? A. Yield to maturity, because the data is available for all maturities B. Yield to maturity,...
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26. ### Question 65: Returns based and portfolio-based style analysis

Question: In a comparison between returns-based style analysis and portfolio-based style analysis models, to which do the following statements, respectively, refer? I. Simpler to implement, II. More informative for evaluation, III. Better suited to external (index or peer-based) performance comparisons A. Returns-based, Portfolio-based, Returns-based B. Returns-based, Portfolio-based,...
Question: In a comparison between returns-based style analysis and portfolio-based style analysis models, to which do the following statements, respectively, refer? I. Simpler to implement, II. More informative for evaluation, III. Better suited to external (index or peer-based) performance comparisons A. Returns-based, Portfolio-based, Returns-based B. Returns-based, Portfolio-based,...
Question: In a comparison between returns-based style analysis and portfolio-based style analysis models, to which do the following statements, respectively, refer? I. Simpler to implement, II. More informative for evaluation, III. Better suited to external (index or peer-based) performance...
Question: In a comparison between returns-based style analysis and portfolio-based style analysis models, to which do the following statements, respectively, refer? I. Simpler to implement, II....
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27. ### Question 64: Performance indicator

Question: The examples of multifactor performance analysis models (e.g., Elton, Gruber et al) tend to generalize which performance indicator? A. Sharpe B. Treynor C. Jensen D. Information ratio Answer: C Explanation: The multifactor models decompose portfolio performance into factors. The share of return that is not explained by the factors constitutes the residual return. As such,...
Question: The examples of multifactor performance analysis models (e.g., Elton, Gruber et al) tend to generalize which performance indicator? A. Sharpe B. Treynor C. Jensen D. Information ratio Answer: C Explanation: The multifactor models decompose portfolio performance into factors. The share of return that is not explained by the factors constitutes the residual return. As such,...
Question: The examples of multifactor performance analysis models (e.g., Elton, Gruber et al) tend to generalize which performance indicator? A. Sharpe B. Treynor C. Jensen D. Information ratio Answer: C Explanation: The multifactor models decompose portfolio performance into...
Question: The examples of multifactor performance analysis models (e.g., Elton, Gruber et al) tend to generalize which performance indicator? A. Sharpe B. Treynor C. Jensen D. Information...
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28. ### Question 63: Models

Question: What type of models are, respectively, Barra's risk model, Quantal risk model, and Advanced Portfolio Technology model? A. Implicit, implicit, implicit B. Explicit, Implicit, implicit C. Explicit, implicit, explicit D. Explicit, Explicit, Explicit Answer: B Explanation: The Barra model is a fundamental (explicit) model; the factors belong to two categories: factors linked...
Question: What type of models are, respectively, Barra's risk model, Quantal risk model, and Advanced Portfolio Technology model? A. Implicit, implicit, implicit B. Explicit, Implicit, implicit C. Explicit, implicit, explicit D. Explicit, Explicit, Explicit Answer: B Explanation: The Barra model is a fundamental (explicit) model; the factors belong to two categories: factors linked...
Question: What type of models are, respectively, Barra's risk model, Quantal risk model, and Advanced Portfolio Technology model? A. Implicit, implicit, implicit B. Explicit, Implicit, implicit C. Explicit, implicit, explicit D. Explicit, Explicit, Explicit Answer: B Explanation: The...
Question: What type of models are, respectively, Barra's risk model, Quantal risk model, and Advanced Portfolio Technology model? A. Implicit, implicit, implicit B. Explicit, Implicit,...
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29. ### Question 62: Multifactor model

Question: If we want to employ a multifactor model, where our goal is to incorporate the asset- (or company-) specific risks, which model will we tend to prefer? A. Macroeconomic factor B. Implicit C. Principal component factor D. Fundamental factor Answer: D Explanation: The three categories here are macroeconomic (explicit factors), fundamental (explicit) and principal component...
Question: If we want to employ a multifactor model, where our goal is to incorporate the asset- (or company-) specific risks, which model will we tend to prefer? A. Macroeconomic factor B. Implicit C. Principal component factor D. Fundamental factor Answer: D Explanation: The three categories here are macroeconomic (explicit factors), fundamental (explicit) and principal component...
Question: If we want to employ a multifactor model, where our goal is to incorporate the asset- (or company-) specific risks, which model will we tend to prefer? A. Macroeconomic factor B. Implicit C. Principal component factor D. Fundamental factor Answer: D Explanation: The three...
Question: If we want to employ a multifactor model, where our goal is to incorporate the asset- (or company-) specific risks, which model will we tend to prefer? A. Macroeconomic factor B....
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30. ### Question 61: Implicit factor model

Question: Which is arguably the biggest drawback to an implicit factor model? A. Must first identify factors B. No economic interpretation of factors C. Inferior to principal component analysis D. Unwieldy with large datasets Answer: B Explanation: Under implicit (a.k.a., endogenous) factor model, the factors are extracted from the returns. They do not lend themselves to economic...
Question: Which is arguably the biggest drawback to an implicit factor model? A. Must first identify factors B. No economic interpretation of factors C. Inferior to principal component analysis D. Unwieldy with large datasets Answer: B Explanation: Under implicit (a.k.a., endogenous) factor model, the factors are extracted from the returns. They do not lend themselves to economic...
Question: Which is arguably the biggest drawback to an implicit factor model? A. Must first identify factors B. No economic interpretation of factors C. Inferior to principal component analysis D. Unwieldy with large datasets Answer: B Explanation: Under implicit (a.k.a., endogenous)...
Question: Which is arguably the biggest drawback to an implicit factor model? A. Must first identify factors B. No economic interpretation of factors C. Inferior to principal component...
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