P2.T8. Investment Management

Practice questions for investment management and risk management

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  1. David Harper CFA FRM

    P2.T8.6. Event-driven and opportunistic hedge fund strategies

    AIMs: Describe the underlying characteristics, sources of returns and risk exposures of various event-driven and opportunistic hedge fund strategies including: distressed securities, merger arbitrage, global macro, Regulation D, Managed futures, and Fund of Funds. Questions: 6.1. Each of the following is a typical or common feature of distressed securities hedge fund strategy EXCEPT: a....
    AIMs: Describe the underlying characteristics, sources of returns and risk exposures of various event-driven and opportunistic hedge fund strategies including: distressed securities, merger arbitrage, global macro, Regulation D, Managed futures, and Fund of Funds. Questions: 6.1. Each of the following is a typical or common feature of distressed securities hedge fund strategy EXCEPT: a....
    AIMs: Describe the underlying characteristics, sources of returns and risk exposures of various event-driven and opportunistic hedge fund strategies including: distressed securities, merger arbitrage, global macro, Regulation D, Managed futures, and Fund of Funds. Questions: 6.1. Each of the...
    AIMs: Describe the underlying characteristics, sources of returns and risk exposures of various event-driven and opportunistic hedge fund strategies including: distressed securities, merger...
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  2. David Harper CFA FRM

    P2.T8.5. Relative value hedge fund strategies

    AIMs: Describe the underlying characteristics, sources of returns and risk exposures of various Relative Value hedge fund strategies including: Market-neutral; Statistical arbitrage; Market timing; Convertible Arbitrage; Fixed-income arbitrage; Volatility arbitrage; and Capital structure arbitrage Questions: 5.1. An equity market-neutral hedge fund manager is LEAST LIKELY to employ which of...
    AIMs: Describe the underlying characteristics, sources of returns and risk exposures of various Relative Value hedge fund strategies including: Market-neutral; Statistical arbitrage; Market timing; Convertible Arbitrage; Fixed-income arbitrage; Volatility arbitrage; and Capital structure arbitrage Questions: 5.1. An equity market-neutral hedge fund manager is LEAST LIKELY to employ which of...
    AIMs: Describe the underlying characteristics, sources of returns and risk exposures of various Relative Value hedge fund strategies including: Market-neutral; Statistical arbitrage; Market timing; Convertible Arbitrage; Fixed-income arbitrage; Volatility arbitrage; and Capital structure...
    AIMs: Describe the underlying characteristics, sources of returns and risk exposures of various Relative Value hedge fund strategies including: Market-neutral; Statistical arbitrage; Market...
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  3. Suzanne Evans

    Question 81: Capital structure arbitrage

    T.Flockhert: Agreed, supposed to be (A). Thank for the noting the error. Fixed - David
    T.Flockhert: Agreed, supposed to be (A). Thank for the noting the error. Fixed - David
    T.Flockhert: Agreed, supposed to be (A). Thank for the noting the error. Fixed - David
    T.Flockhert: Agreed, supposed to be (A). Thank for the noting the error. Fixed - David
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  4. Suzanne Evans

    Question 99: 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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  5. Suzanne Evans

    Question 112: 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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  6. Suzanne Evans

    Question 111: 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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  7. Suzanne Evans

    Question 110: 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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  8. Suzanne Evans

    Question 109: 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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  9. Suzanne Evans

    Question 108: 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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  10. Suzanne Evans

    Question 107: 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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  11. Suzanne Evans

    Question 106: 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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  12. Suzanne Evans

    Question 105: 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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  13. Suzanne Evans

    Question 104: 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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  14. Suzanne Evans

    Question 103: 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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  15. Suzanne Evans

    Question 102: 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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  16. Suzanne Evans

    Question 101: 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 A....
    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 A....
    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)...
    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)...
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  17. Suzanne Evans

    Question 100: 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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  18. Suzanne Evans

    Question 98: 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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  19. Suzanne Evans

    Question 97: 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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  20. Suzanne Evans

    Question 96: 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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