P2.T8. Investment Management

Practice questions for investment management and risk management

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1. Question 95: 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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2. Question 94: 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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3. Question 93: 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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4. Question 92: 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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5. Question 91: 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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6. Question 90: 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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7. Question 89: 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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8. Question 88: 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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9. Question 87: Future strategies

Question: Jaeger claims that most systematic managed futures strategies are: A. Trend-followers B. Mean-reversion plays C. Volatility basis D. Basis risk based Answer: A Explanation: Trend-following is the dominant trading style for systematic manager futures strategies. The manager relies on technical indicators (e.g., momentum, relative size of moving averages, or break-out...
Question: Jaeger claims that most systematic managed futures strategies are: A. Trend-followers B. Mean-reversion plays C. Volatility basis D. Basis risk based Answer: A Explanation: Trend-following is the dominant trading style for systematic manager futures strategies. The manager relies on technical indicators (e.g., momentum, relative size of moving averages, or break-out...
Question: Jaeger claims that most systematic managed futures strategies are: A. Trend-followers B. Mean-reversion plays C. Volatility basis D. Basis risk based Answer: A Explanation: Trend-following is the dominant trading style for systematic manager futures strategies. The manager...
Question: Jaeger claims that most systematic managed futures strategies are: A. Trend-followers B. Mean-reversion plays C. Volatility basis D. Basis risk based Answer: A Explanation:...
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10. Question 86: Model globe macro strategies

Question: Jaeger says the key distinction between modern global macro strategies is: A. Fundamental versus technical B. Sector versus style C. Directional versus market-neutral D. Discretionary versus systematic Answer: D Explanation: Discretionary managers employ various "opportunistic" strategies (style drift is built-in); Systematic managers use well-defined trading models
Question: Jaeger says the key distinction between modern global macro strategies is: A. Fundamental versus technical B. Sector versus style C. Directional versus market-neutral D. Discretionary versus systematic Answer: D Explanation: Discretionary managers employ various "opportunistic" strategies (style drift is built-in); Systematic managers use well-defined trading models
Question: Jaeger says the key distinction between modern global macro strategies is: A. Fundamental versus technical B. Sector versus style C. Directional versus market-neutral D. Discretionary versus systematic Answer: D Explanation: Discretionary managers employ various...
Question: Jaeger says the key distinction between modern global macro strategies is: A. Fundamental versus technical B. Sector versus style C. Directional versus market-neutral D....
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11. Question 85: Risks

Question: A manager who employs a "Regulation D" strategy is exposed primarily to which risks: A. Credit and liquidity B. Liquidity and regulatory C. Regulatory and Market D. Market and operational Answer: A Explanation: Regulation D managers tend to invest in small companies with limited means to raise capital. The investment is illiquid before registration and limited in...
Question: A manager who employs a "Regulation D" strategy is exposed primarily to which risks: A. Credit and liquidity B. Liquidity and regulatory C. Regulatory and Market D. Market and operational Answer: A Explanation: Regulation D managers tend to invest in small companies with limited means to raise capital. The investment is illiquid before registration and limited in...
Question: A manager who employs a "Regulation D" strategy is exposed primarily to which risks: A. Credit and liquidity B. Liquidity and regulatory C. Regulatory and Market D. Market and operational Answer: A Explanation: Regulation D managers tend to invest in small companies with...
Question: A manager who employs a "Regulation D" strategy is exposed primarily to which risks: A. Credit and liquidity B. Liquidity and regulatory C. Regulatory and Market D. Market and...
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12. Question 84: 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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13. Question 83: Key exposure

Question: What is the key exposure (risk factor) in merger arbitrage? A. Deal risk premium B. Regulatory risk premium C. Model risk D. Spread risk Answer: A Explanation: The "deal risk premium" subsumes most of the other risks; "deal risk" includes everything that affects the deal's completion or its timing.
Question: What is the key exposure (risk factor) in merger arbitrage? A. Deal risk premium B. Regulatory risk premium C. Model risk D. Spread risk Answer: A Explanation: The "deal risk premium" subsumes most of the other risks; "deal risk" includes everything that affects the deal's completion or its timing.
Question: What is the key exposure (risk factor) in merger arbitrage? A. Deal risk premium B. Regulatory risk premium C. Model risk D. Spread risk Answer: A Explanation: The "deal risk premium" subsumes most of the other risks; "deal risk" includes everything that affects the deal's...
Question: What is the key exposure (risk factor) in merger arbitrage? A. Deal risk premium B. Regulatory risk premium C. Model risk D. Spread risk Answer: A Explanation: The "deal risk...
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14. Question 82: 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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15. Question 80: Key metric

Question: Which key metric enables a volatility arbitrageur to determine that volatility is "cheap" or "expensive?" A. Historical volatility patterns B. Recent change in volatility C. Implied volatility D. It is not model determined; "implied" means subjective Answer: C Explanation: The market price of the instrument "implies" a volatility (such that the volatility produces a model...
Question: Which key metric enables a volatility arbitrageur to determine that volatility is "cheap" or "expensive?" A. Historical volatility patterns B. Recent change in volatility C. Implied volatility D. It is not model determined; "implied" means subjective Answer: C Explanation: The market price of the instrument "implies" a volatility (such that the volatility produces a model...
Question: Which key metric enables a volatility arbitrageur to determine that volatility is "cheap" or "expensive?" A. Historical volatility patterns B. Recent change in volatility C. Implied volatility D. It is not model determined; "implied" means subjective Answer: C Explanation:...
Question: Which key metric enables a volatility arbitrageur to determine that volatility is "cheap" or "expensive?" A. Historical volatility patterns B. Recent change in volatility C. Implied...
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16. Question 79: Pricing inefficiencies

Question: Fixed income markets display various pricing inefficiencies due to all of the following EXCEPT: A. Agency biases B. Structural reasons C. Market segmentation D. Lack of an equity risk premium Answer: D Explanation: Exploitable fixed-income inefficiencies: (1) Agency biases: fiduciaries purchase yesterday's winners; (2) Structural: tax, accounting, or regulatory; (3)...
Question: Fixed income markets display various pricing inefficiencies due to all of the following EXCEPT: A. Agency biases B. Structural reasons C. Market segmentation D. Lack of an equity risk premium Answer: D Explanation: Exploitable fixed-income inefficiencies: (1) Agency biases: fiduciaries purchase yesterday's winners; (2) Structural: tax, accounting, or regulatory; (3)...
Question: Fixed income markets display various pricing inefficiencies due to all of the following EXCEPT: A. Agency biases B. Structural reasons C. Market segmentation D. Lack of an equity risk premium Answer: D Explanation: Exploitable fixed-income inefficiencies: (1) Agency biases:...
Question: Fixed income markets display various pricing inefficiencies due to all of the following EXCEPT: A. Agency biases B. Structural reasons C. Market segmentation D. Lack of an equity...
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17. Question 78: Static return

Question: An example of a static return is: A. A higher bond coupon B. An arbitrage opportunity between a "cheap" convertible and "expensive" stock C. A gamma trade on volatility D. A mispricing Answer: A Explanation: Static returns are one of the three sources of return for a convertible arbitrage strategy (1. static returns, 2. gamma trading on stock volatility, 3. price...
Question: An example of a static return is: A. A higher bond coupon B. An arbitrage opportunity between a "cheap" convertible and "expensive" stock C. A gamma trade on volatility D. A mispricing Answer: A Explanation: Static returns are one of the three sources of return for a convertible arbitrage strategy (1. static returns, 2. gamma trading on stock volatility, 3. price...
Question: An example of a static return is: A. A higher bond coupon B. An arbitrage opportunity between a "cheap" convertible and "expensive" stock C. A gamma trade on volatility D. A mispricing Answer: A Explanation: Static returns are one of the three sources of return for a...
Question: An example of a static return is: A. A higher bond coupon B. An arbitrage opportunity between a "cheap" convertible and "expensive" stock C. A gamma trade on volatility D. A...
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18. Question 77: Convertible strategies

Question: Managers pursuing convertible strategies earn returns from all of the following EXCEPT: A. The conversion feature on the bond B. Static returns from coupon income and short stock rebates C. Gamma trading D. Exploiting price inefficiencies Answer: A Explanation: The conversion feature is not itself a source of return.
Question: Managers pursuing convertible strategies earn returns from all of the following EXCEPT: A. The conversion feature on the bond B. Static returns from coupon income and short stock rebates C. Gamma trading D. Exploiting price inefficiencies Answer: A Explanation: The conversion feature is not itself a source of return.
Question: Managers pursuing convertible strategies earn returns from all of the following EXCEPT: A. The conversion feature on the bond B. Static returns from coupon income and short stock rebates C. Gamma trading D. Exploiting price inefficiencies Answer: A Explanation: The...
Question: Managers pursuing convertible strategies earn returns from all of the following EXCEPT: A. The conversion feature on the bond B. Static returns from coupon income and short stock...
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19. Question 76:Short-selling strategies

Question: According to Jaeger, short-selling strategies involve additional issues (i.e., above long only strategies) that primarily relate to: A. Uncapped loss potential B. Challenging investor psychology C. Twice the opportunity (long + short) D. The process of borrowing stocks Answer: D Explanation: The problems that relate to borrowing include: share availability, stability of...
Question: According to Jaeger, short-selling strategies involve additional issues (i.e., above long only strategies) that primarily relate to: A. Uncapped loss potential B. Challenging investor psychology C. Twice the opportunity (long + short) D. The process of borrowing stocks Answer: D Explanation: The problems that relate to borrowing include: share availability, stability of...
Question: According to Jaeger, short-selling strategies involve additional issues (i.e., above long only strategies) that primarily relate to: A. Uncapped loss potential B. Challenging investor psychology C. Twice the opportunity (long + short) D. The process of borrowing stocks Answer:...
Question: According to Jaeger, short-selling strategies involve additional issues (i.e., above long only strategies) that primarily relate to: A. Uncapped loss potential B. Challenging...
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20. Question 75: Market timing strategies

Question: Which are the two main types of market timing strategies: A. Sector and time zone arbitrage B. Currency and sector C. Interest rate and industry D. Exchanges (NYSE vs. NASDAQ) and time zone Answer: A Explanation: Sector timing aims to profit from micro upward trends in single industry sectors; time zone arbitrage exploits pricing inefficiencies based on "conditional price...
Question: Which are the two main types of market timing strategies: A. Sector and time zone arbitrage B. Currency and sector C. Interest rate and industry D. Exchanges (NYSE vs. NASDAQ) and time zone Answer: A Explanation: Sector timing aims to profit from micro upward trends in single industry sectors; time zone arbitrage exploits pricing inefficiencies based on "conditional price...
Question: Which are the two main types of market timing strategies: A. Sector and time zone arbitrage B. Currency and sector C. Interest rate and industry D. Exchanges (NYSE vs. NASDAQ) and time zone Answer: A Explanation: Sector timing aims to profit from micro upward trends in...
Question: Which are the two main types of market timing strategies: A. Sector and time zone arbitrage B. Currency and sector C. Interest rate and industry D. Exchanges (NYSE vs. NASDAQ) and...
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21. Question 74: Fama-French factor

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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22. Question 73: 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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23. Question 72: 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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24. Question 71: 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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25. Question 70: 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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26. Question 69: 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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27. Question 68: 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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28. Question 67: 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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29. Question 66: 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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30. Question 65: 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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