# P2.T8. Investment Management

Practice questions for investment management and risk management

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1. ### Litterman

Thanks! Shannon
Thanks! Shannon
Thanks! Shannon
Thanks! Shannon
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2
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17
2. ### P2.T8.25. Convertible arbitrage (Stowell)

AIMs: Explain the common arbitrage strategies of hedge funds, including: Fixed income-based arbitrage; Convertible arbitrage; Relative value arbitrage Questions: 25.1. Arbitrage is possible in EACH of the following conditions EXCEPT for when: a. An otherwise identical bond trades at different prices in different markets b. Two assets with identical cash flows patterns trade at different...
AIMs: Explain the common arbitrage strategies of hedge funds, including: Fixed income-based arbitrage; Convertible arbitrage; Relative value arbitrage Questions: 25.1. Arbitrage is possible in EACH of the following conditions EXCEPT for when: a. An otherwise identical bond trades at different prices in different markets b. Two assets with identical cash flows patterns trade at different...
AIMs: Explain the common arbitrage strategies of hedge funds, including: Fixed income-based arbitrage; Convertible arbitrage; Relative value arbitrage Questions: 25.1. Arbitrage is possible in EACH of the following conditions EXCEPT for when: a. An otherwise identical bond trades at different...
AIMs: Explain the common arbitrage strategies of hedge funds, including: Fixed income-based arbitrage; Convertible arbitrage; Relative value arbitrage Questions: 25.1. Arbitrage is possible in...
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0
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71
3. ### P2.T8.23. Hedge funds compared to private equity and mutual funds (Stowell)

AIMs: Discuss the liquidity of hedge fund investments and the usage of lock-ups, gates and side pockets. Compare hedge funds to private equity and mutual funds. Describe what fund of funds are and provide arguments for and against using them as an investment vehicle. Questions: 23.1. Acme Hedge Fund earns an annual performance fee of 20%. During the current year, the valuation of an illiquid...
AIMs: Discuss the liquidity of hedge fund investments and the usage of lock-ups, gates and side pockets. Compare hedge funds to private equity and mutual funds. Describe what fund of funds are and provide arguments for and against using them as an investment vehicle. Questions: 23.1. Acme Hedge Fund earns an annual performance fee of 20%. During the current year, the valuation of an illiquid...
AIMs: Discuss the liquidity of hedge fund investments and the usage of lock-ups, gates and side pockets. Compare hedge funds to private equity and mutual funds. Describe what fund of funds are and provide arguments for and against using them as an investment vehicle. Questions: 23.1. Acme...
AIMs: Discuss the liquidity of hedge fund investments and the usage of lock-ups, gates and side pockets. Compare hedge funds to private equity and mutual funds. Describe what fund of funds are and...
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0
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65
4. ### P2.T8.14. Value at Risk (VaR) in Investment Management (Jorion)

AIMs: Describe how VaR can be used to check compliance, monitor risk budgets and reverse engineer sources of risk. Explain how VaR can be used in the investment process and development of investment guidelines. Describe the risk budgeting process across asset classes and active managers: Define tracking error and information ratio. Questions: 14.1. A portfolio manager has identified two...
AIMs: Describe how VaR can be used to check compliance, monitor risk budgets and reverse engineer sources of risk. Explain how VaR can be used in the investment process and development of investment guidelines. Describe the risk budgeting process across asset classes and active managers: Define tracking error and information ratio. Questions: 14.1. A portfolio manager has identified two...
AIMs: Describe how VaR can be used to check compliance, monitor risk budgets and reverse engineer sources of risk. Explain how VaR can be used in the investment process and development of investment guidelines. Describe the risk budgeting process across asset classes and active managers: Define...
AIMs: Describe how VaR can be used to check compliance, monitor risk budgets and reverse engineer sources of risk. Explain how VaR can be used in the investment process and development of...
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0
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118
5. ### Investment & Risk Management

Thanks, your point is important, especially w.r.t. T8 investment: for three reasons (recency, churn, and GARP methodology), the questions cannot be predicted with satisfaction. My judgement does NOT eliminate that fact. That is why I do agree with you. T8 is not where I think it should be, yet. Thanks,
Thanks, your point is important, especially w.r.t. T8 investment: for three reasons (recency, churn, and GARP methodology), the questions cannot be predicted with satisfaction. My judgement does NOT eliminate that fact. That is why I do agree with you. T8 is not where I think it should be, yet. Thanks,
Thanks, your point is important, especially w.r.t. T8 investment: for three reasons (recency, churn, and GARP methodology), the questions cannot be predicted with satisfaction. My judgement does NOT eliminate that fact. That is why I do agree with you. T8 is not where I think it should be, yet....
Thanks, your point is important, especially w.r.t. T8 investment: for three reasons (recency, churn, and GARP methodology), the questions cannot be predicted with satisfaction. My judgement does...
EIA
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3
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27
6. ### P2.T8.10. Private Equity (Kaplan and Stromberg, Part 2)

AIMs: Describe the sets of changes that the private equity firms apply to the firms in which they invest. Describe boom and bust cycles in private equity. 10.1. According to Kaplan and Stromberg, private equity firms apply each of the following changes to their portfolio companies EXCEPT: a. Granting (or selling) large equity stakes and/or stock options to management b. Control by way of...
AIMs: Describe the sets of changes that the private equity firms apply to the firms in which they invest. Describe boom and bust cycles in private equity. 10.1. According to Kaplan and Stromberg, private equity firms apply each of the following changes to their portfolio companies EXCEPT: a. Granting (or selling) large equity stakes and/or stock options to management b. Control by way of...
AIMs: Describe the sets of changes that the private equity firms apply to the firms in which they invest. Describe boom and bust cycles in private equity. 10.1. According to Kaplan and Stromberg, private equity firms apply each of the following changes to their portfolio companies EXCEPT: a....
AIMs: Describe the sets of changes that the private equity firms apply to the firms in which they invest. Describe boom and bust cycles in private equity. 10.1. According to Kaplan and Stromberg,...
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0
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57
7. ### P2.T8.7. VaR for hedge funds (Andrew Lo)

AIMs: Compare and contrast the investment perspectives between institutional investors and hedge fund managers. Explain how proper risk management can itself be a source of alpha for a hedge fund. Explain the limitations of the VaR measure in capturing the spectrum of hedge fund risks. Questions: 7.1. Which of following is MOST LIKELY to reflect the perspective of a hedge fund manager rather...
AIMs: Compare and contrast the investment perspectives between institutional investors and hedge fund managers. Explain how proper risk management can itself be a source of alpha for a hedge fund. Explain the limitations of the VaR measure in capturing the spectrum of hedge fund risks. Questions: 7.1. Which of following is MOST LIKELY to reflect the perspective of a hedge fund manager rather...
AIMs: Compare and contrast the investment perspectives between institutional investors and hedge fund managers. Explain how proper risk management can itself be a source of alpha for a hedge fund. Explain the limitations of the VaR measure in capturing the spectrum of hedge fund...
AIMs: Compare and contrast the investment perspectives between institutional investors and hedge fund managers. Explain how proper risk management can itself be a source of alpha for a hedge fund....
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0
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86
8. ### 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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0
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57
9. ### 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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0
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63
10. ### 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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2
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15

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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2
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10
12. ### Defined Contribution Pension Plans vs. Defined Benefit Pension Plan

ktm - Thanks, good luck on exam!! David
ktm - Thanks, good luck on exam!! David
ktm - Thanks, good luck on exam!! David
ktm - Thanks, good luck on exam!! David
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3
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5
13. ### 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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0
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8
14. ### 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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0
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15. ### 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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0
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16. ### 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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17. ### 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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0
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18. ### 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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19. ### 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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0
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20. ### 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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17