category Total| Viewed | incorrect | Used] Score| Risk Management and Investment Management 105) 0 © | 0% | 0% 67: Portfolio Construction 2} 0 0 | 0% | ow 68: Performance Analysis 4] 0 0 | 0% | ow 69: Risk Monitoring and Performance Measurement 2) 0 © | 0% | 0% 70: Portfolio Risk: Analytical Methods a] 0 0 | 0% | 0% 714: VAR and Risk Budgeting in Investment Management oo, 0 | 0% | 0% 72: Risk Budgeting for Pension Funds and Investment Managers Using VAR | ° | © 0 | 0% | 0% 73: Individual Hedge Fund Strategies a] 0 © | 0% | 0% 74: Hedge Funds: Past, Present, and Future a] 0 © | 0% | 0% 75: Funds of Hedge Funds es} o 0 | 0% | 0% 76: Style Drifts: Monitoring, Detection, and Control SHES Ore OME EomKaplan Schweser Printable Exams - Risk Management and Investment Management (Question Part 1) Question 1 - #68083 Based on monthly returns for an actively managed portfolio during the last five years, a benchmark timing regression equation produces an estimate of MTCp (market timing coefficient) equal to 2.3 and a standard error of the estimate equal to 1.8, Based on the estimated t-statistics of we the null hypothesis that true MTCp = 0 (absence of market timing skills) at 99% contidence level. A) 1.27; fal to reject B) 2.67; fal to reject. ©) 1.27; reject D) 3.67; reject Question 2 - #68169 During the last fitteen years, Norma, a portfolio manager, earned excess returns (over risk-tree rate) of 16% with a standard deviation of 12%. During the same time period, excess retums (over risk-free rate) and standard deviation of a benchmark portiolio were 11% and 14% respectively. Norma claims to have beaten the benchmark portfolio at 95% confidence level. Based on our estimation: |. we reject her claim, Il. we fail to reject her claim. Which of the above statements is (are) CORRECT given that the t-statistic for the Sharpe ratio is 1.57 A) Lonly. B) Il only. ©) Both | and Il D) Neither | nor I. Question 3 - #68134 Bonchmark Timing regression (below) is used to evaluate market timing skills of a portfolio manager. A successful market timer will correctly foresee the future directions of the market and will load the portfolio with high beta stocks (low beta stocks) for pending up market (down market) Poy) = Ap + Bp x Royy + MICpAD; x Paya) + Eo Row = realized returns on a portfolio p during time t dp = intercept of the regression equation B> = portfolio betaMTCp = market timing estimated coefficient épyy= regression error terms during time period t D,= a dummy variable that is assigned a value of zero for down market and a value of 1 for up market 4.3 with a standard error af 1.4. These Regression on twelve years of portfalia retums produces an estimate of MTC; results offer an evidence of a market timing strategy |. which is successtul | which produces a t-statistic of 3.07. Ill. which prohibits us from rejecting the null hypothesis of Hy: true, MTC; IV. which enables us to give due credit to the portfolio manager for implementing a successful market timing strategy. Which of the above statements are CORRECT? A) | tl, and il 8B) Ill, and IV, ©) 1, Il, and Iv. Dy I, Il, and IV. Question 4 - #68067 Allof the following statements regarding performance analysis are correct EXCEPT: A) retum-based performance analysis is a method of assessing risk and returns of an investment. B) return-based advanced performance analysis adds statistical and theoretical refinement to the basic model. the term performance analysis refers to return-based performance analysis and portfolio-based performance analysis, D) hedge funds use only return-based performance analysis to evaluate managers’ performance and skill Question 5 - #70711 How many of the following statements, regarding the cross-sectional analysis of fund managers’ performance, are CORRECT? Cross-sectional analysis: |. focuses only on surviving firms. I does not make adjustment for the size of a portfolio. IIL does not make adjustment for the riskiness of a portfolio, IV. offers only a snapshot of performance. A) None of these. B) Three of these, C) Two of these,D) Allof these, Question 6 - #68179 Which of the following statements regarding performance analysis is NOT correct? A) Return regression model assumes that the error terms are uncorrelated over time. CAPM is based on a single factor, the market porttolio, which explains the variations in realized portfolio turns Performance of two portfolio managers cannot be compared based on estimates of IR (information ratio}—excess returns per unit of risk Sharpe ratio of an actively managed portfolio (statistically) significantly greater than the benchmark Sharpe ratio is taken as evidence of superior performance, Question 7 - #68159 Which of the following statements regarding performance analysis are NOT correct? |. Information ratio {IR} is the ratio of risk to annual return ll. CAPM assumes the alpha (regression intercept) is positive. Ill. Significant t-statistic requires a smallor alpha (a) relative to its standard deviation, as well as fewer observations IV. Superior performance as shown by Sharpe ratio implies negative Jenson alpha. Ay I, land Il. B) land I ©) 11 land Iv. D) L only. Question 8 - #68186 Which af the following statements are CORRECT? Various refinements to the basic return-based performance assessment models include: |. using prior knowledge for making ex-post adjustments in regression coefficients. Il. cottecting for serially or auto correlated error terms to draw valid t-test inferences, III assessing market timing skills of portfolio managers by incorporating up and down market betas into a dummy regression. IV. estimating variations in realized portfolio excess retums as a result of vatiations in the benchmark portfolio returns after controling for dividend yield and interest rates. A) Iti, lll and IV,8) Il, ll and IV. ©) I, Hand Ill D) land I Question 9 - #68195 Which of the following statements is (are) CORRECT? Investment returns can be defined as: |. compound returns. |. geometric retuins Ill. arithmetic returns. IV. logarithmic returns, A) Iti, lll and IV, B) lil only. ©) |, Hand Ul D) | and Il Question 10 - #70975 How many of the following statements regarding active systematic returns are NOT correct? |. Active retums are defined as the difference between the manager's portfolio retums and the benchmark returns I Expected active beta return is the return that results from the procluct of average active beta and the long-run expected benchmark excess return, where excess return is defined as the realized return minus the risk-free rate, Ill. Active beta surprise is the product of active beta and the deviation of the benchmark retums from its long-term expected return. IV. Active benchmark timing return is a product of the deviation from the average beta and the deviation from the benchmark retum, ‘A) Four of these. B) Two of these. C) None of these. D) One of these. Question 11 - #38844 Components of the risk-budgeting process include: |. monitoring the risk and making appropriate corrections. II. ensuring that the sum of the risks at each level equals the total risk budget for that levelIll allocating a quantifiable allotment of risk across different components of the investment process. A) Land Il only 8) | and Ill only. ) land Ill only, DI, thand I Question 12 - #117114 Which of the following statements about the use of investment guidelines for risk management is leastaccurate? ‘ay Mtempts to limit speculation with investment guidelines may have the inadvertent consequence of limiting hedging, B) They do not provide tor comparison of the tisk of two porttolios, ©) They are most effective for portfolios that use overlays, D) They have become less effective as securities have become more complex. Question 13 - #117108 Which of the following statements is CORRECT? |. Implementation risk ditfers from tactical asset allocation risk in that implementation risk raters to the risk arising {rom implementation costs to the portfolio and tactical asset allocation risk refers to the difference between the portfolio and the strategic benchmark. Il. Active risk at the plan level refers to the risk that plan assets might underperform the tactical asset allocation. Il Active risk at the manager level refers to the risk that a given manager might underperform the strategic benchmark. A) Lonly. B) Il only. ©) land Il D) | and Il Question 14 - #117107 Which statement about key market risks for pension funds and asset management firms Jeast accurate? ‘A) Surplus risk is a major risk for the plan sponsor of a defined benefit plan. B) The risks to a defined benefit plan are indirect because plan participants take on shortfall risk. C) The risks to fee income are a core risk of an asset management firm and not generally hedged. VAR models are useful tools for managing customer-satistaction risk of an asset management fim because they can help educate customers about the usual types of risks in the firm’s funds.Question 15 - #117110 Major considerations for maintaining a quality VAR measure include: |. Adjusting historical data to suit manager views. Il. Length of the historical data sample, Ill. Consistency in the measurement of risk. A) | and Il B) Hand Il ©) | and Il D) I, Hand Il. Question 16 - #117106 Which statement about VAR is CORRECT? ‘A) The holding period in a VAR forecast must be measured in days or weeks. B) VAR is best suited to forecast worst-case scenarios. C) VAR predictions of losses are most reliable in likely scenarios, D) VAR js not useful in tracking ex ante manager risk. Question 17 - #117109 Which of the following statements least accurately describes the use of downstrearming and dynamic triggers? ‘A) Ensures that risk thresholds are mutually consistent and defined in the same units 8) Two factors that differentiate risk budgeting from asset allacation Automatically signals needed adjustments in the portfolio as soon as a change in risk levels affects performance. Assigns risk to all parties responsible for risk-taking in a way that is consistent with the overall risk tolerance of the pottiolo, Question 18 - #117111 Which of the following is the feast appropriate action to take if the specitied risk tolerance thrashold is exceeded? AA) Active risk at the manager level: replace highly correlated managers with managers having lower correlations. 8) Implementation risk: change the tactical asset allocation C) SAR: change the strategic asset allocation.D) Active risk at the plan level: institute an overlay program. Question 19 - #38820 Quantcept Investment Management decided to test the VAR model for its Treasury Income Portfolio over 10 trading days in September. Trading on the portfolio ceased during the ten days of the test. The backtest provided the following pradicted daily percentage raturns for the portfolio, at a 95% confidence level: Lower Limit UpperLimit Actual 0.21 0.42 0.28 0.16 0.38 O14 0.45 0.89 0.87 0.42 0.42 0.08 -0.10 0.40 0.12 0.15 0.43 oot 0.18 0.42 0.25 0.20 0.43 0.19 0.22 0.48 0.28 0.23 0.42 “O17 Which statement about the backtest is TRUE? A) Ai this confidence level, 16% of the actual results in the backtest should fall outside the predicted range. The backtest is not valid because the portfolio was not traded during the ten days. It is only appropriate to B) backtest a portfolio that has undergone significant changes between calculations because otherwise the results ate not relevant to actual trading situations, At the end of the period, Quantoept will recompute VAR to determine what the upper and lower ranges of the portfolio retum should have been. D) The backtest does not confirm the validity of the model. Question 20 - #46816 Which of the following statements regarding the difterence between hedge funds and mutual funds is TRUE? ‘A) Hedge funds have fewer restrictions on short selling securities compared to mutual funds. B) While anyone can invest in mutual funds, qualified hedge fund investors must have a net worth of $1 millon, ©) Unlike hedge funds, mutual funds are unable to use leverage. D) Mutual funds tend to hold tewer securities than hedge funds.Question 21 - #71442 With respect to the diversification that hedge funds can provide in a larger portfolio, t has been found that hedge funds have A) not provided much diversification in the past, and their effectiveness will probably decline in the future, B) provided diversification in the past, but their effectiveness will probably decline in the future. ) ptovided diversification in the past, and their effectiveness will probably increase in the future. D) not provided much diversification in the past, but their effectiveness will probably increase in the future. Question 22 - #61033 Which of the following statements concerning comparisons between hedge funds and mutual funds is most accurate? ‘A) Hedge funds tend to spread their holdings across more securities than mutual funds. B) Mutual funds tend to invest according to a specific investment approach while hedge funds do not, Mutual funds are restricted from using any leverage in their portfolios, while hedge funds use leverage extensively. Hedge funds cannot advertise in order to solicit new funds, while mutual funds can make advertisements to the general public, Question 23 - #27622 Hedge fund performance data suffers from serious biases that can be attributed to the fact that: A) fund managers tend to submit only favorable performance data. B) hedge funds as an asset class have not been in existence long enough to have meaningful performance data, ) there is not a reliable incex that tracks hedge fund performance. D) hedge funds usually report retums before deducting any fees. Question 24 - #27608 Managers of hedge funds are typically compensated by: A) a management fee, based on the net change in value of the assets during the year. 8) an incentive fee, based upon some performance goal set at the beginning of the fiscal year. ‘¢) 2 base management fo, based onthe value of assets under menagement, plus an ineontve fae, based on profits D) an incentive 188, paid only it performance exceeds a “high water mark” Question 25 - #49375When comparing the historical returns and volatility of the Credit Suisse/Tremont Hedge Fund index to that of the Standard & Poor's 500 over the period 1994 to 2006, the Credit Suisse/Tremont Hedge Fund index returns had a AA) lower return and lower standard deviation B) higher return and lower standard deviation, ©) higher return and higher standard deviation. D) lower return and higher standard deviation. Question 26 - #27623 The fee structure of a hedge fund may lead to biases in performance data because: A) fund managers have incentives to take big risks if past performance has been poor B) hedge fund managers are not required to disclose information regarding fee structures, C) hedge fund managers charge higher fees than managers of traditional funds. D) fund manager compensation can vary widely from year to year. ‘Question 27 - #49370 Which of the following statements is true concerning the compensation paid to a fund manager? A fee based upon A) profits is asymmetric and is the usual fee structure for hedge funds, 8) profits earned is symmetric and is the usual fee structure for hedge funds C) assets under management is asymmetric and the usual fee structure for hedge funds. D) assets under management is asymmetric and is the usual fee structure for mutual funds ‘Question 28 - #27607 Hedge funds operating in the United States that abide by certain guidelines: A) may advertise to “accredited” investors, 8) gain exemption from most SEC regulations. ©) can utilize certain hedging strategies. D) avoid restrictions on making macroeconomic bets. Question 29 - #49372 With respect to cash drag and complying with SEC regulations, hecige funds make restrictions on withdrawing money: A) to avoid cash drag but not to comply with SEC regulations. B) to avoid cash drag and to comply with SEC regulations. C) to comply with SEC regulations but not to avoid cash diag,D) for neither reason. Question 30 - #50433, The amount of risk a particular fund contributes by its position in the portfolio of funds is called: AY liquidity VaR. 8) compenent VaR. ) marginal VaR. Dj stress VaR. Question 31 - #29803 The difference beween marginal value at risk (MVAR) anc incremental value at risk (VAR) is that Al Incremental VAR only captures changes over smalllincrements B) Marginal VAR captures non-linear changes in the portfolio. C Marginal VAR only captures changes over large inorernents Dj Incremental VAR computes actual changes in VAR for any ackltions of seourities, Question 32 - #49306 Apottfolio consists of assats A and B. The volatilities are 10% and 20%, respectively. There are $10 milion and $5 million invested in them, respectively. If we assume they ate uncorrelated with each other, the VAR of the portfoliousing Z = 1.85 would be closest to AN $2475 millon B} $2.88 milion. ©} $1,750 milion. Dj $8.500 milion. ‘Question 33 - #49242 Aitor regressing the retum of a position in the portfolio on the return of the entirs portfolio, the slope cosifioient (betal oan be used in the marginal VAR formula, Whi of the following is the best representation of that formula? Marginal VAR equals _Portfalio Value A) van = VAR 8) MVAR =< x BiVaR 9 MAR; Portfolio Value *' By CVAR, D) MvAR, “6 ‘Question 34 - #49498. Which of the following is NOT a plimary factor affecting the risk of a portfolio? A) Total risk for a large portfolio of diversified assets B) The cegree to whicn assets within the portfolio move together. ©) Ahigh degree of concentration in one asset within the portfolio. D) The volatility of individual assets held within the portfolio, ‘Question 35 - #60995 Which of the following is the best interpretation of incremental VaR? 4) Itis the VaR for the first step into the tal beyond the VaR level B) [tis the VaFitorliquiciating a posttion in increments. ©) Itis marginal VaR where the intial weight is zero. ) Its the amount of tisk particular und contributes te a portollo oftunds, ‘Question 36 - #49350 For a portfolio wih a laiye number of relatively small postions, the component VAR of given position vould probably be closestto: 4A) the position's marginal VAR divided by the value invested in the position BB) the position's margnal VAR multiplied by the beta of the position with the overall porttalio, ©) the position's marginal VAR divided by the bela of the position with the overall portfolio. Dj the posiion’s marginal VAR. mutplied ty the value Invested in the position ‘Question 37 - #49307 Computing component VAR for a position using the position’s beta with respect to the entire portfolio is appropriate for retums that fellow. A) an elliptical distribution but nat a normal distribution. B) a normaldistribution but not an elliptical distribution, (©) neither an eliptical distribution nor a normal distribution. 1) both an elipical distribution ana normal alstibution,Question 38 - #29801 ‘Simply adding the VARs for each security in a portfolio to compute the portfolio value at risk (VAR) implies the assumption of A) perfect and negative correlation. 8) perfect and positive correlation. ©) imperfect and positive correlation D) imperfect and negative correlation Question 39 - #49510 Ina portolio of three currencies, the relationship between the component VAR and the individual VAR for each currency is likely to be what? A) The individual VAR is likely to be equal to the component VAR. 8B) The individual VAR is likely to be less than the component VAR, C) There is no relationship between the component VAR and the individual VAR. D) The component VAR is likely to be less than the individual VAR, Question 40 - #117342 ‘The objectives of a risk management unit (RMU) include which of the following statements? |. Identitying and developing risk measurement and performance attribution analytical tools, Il, Gathering tisk data to be analyzed in making porttolio manager assessments and market environment assessments, IIL Providing the management team with information to better comprehend risk in individual porttolios as well as the source of performance, IV. Assisting the entity in formulating a systematic and rigorous method as to how risks ate identified and dealt with. AY I, Uy Il, andl IV, 8) I, ll, and Il ©) only. D) | and il Question 41 - #117341 ‘Assume that the number of securities of a given stock is 1,000 and the daily trading volume is 200, what is the liquidity duration under the assumption that the dasired maximum daily volume of this security is 50%? A) 10.B) 100, C) 500. Dy 20. ‘Question 42 - #49364 Risk budgeting is AA) top-down process and is forward looking 8) bottom-up process and is forward looking, ) top-down process and is backward looking D) bottom-up process and is backward looking, Question 43 - #49366 Which of the following are properties that hedge funds generally share with “sell-side” institutions in the investment industry? A) Hedge funds use low leverage and have a low turnover, B) Hedge funds have a long horizon and low leverage. C) Hedge funds use high leverage and have a high tumover. D) There are no properties that hedge funds share with sell-side institutions. Question 44 - #70925 Ifthe top management of a large firm finds that the overall risk of the firm's portfolios has changed, which of the following would NOT be a likely reason? AA) Individual managers have exceeded their risk budget B) Many of the managers have unknowingly made very lfferent style bets ©) Rogue traders have made unauthorized trades. D) The overall markets have become more volatile, Question 45 - #49367 In contrast to absolute risk, relative risk is measured by: AA) tracking error, and VAR techniques can apply to tracking error it itis normally distributed, B) total variance, and VAR techniques cannot apply under any circumstances. ) total vatiance, and VAR techniques can apply to tracking error if itis normally distributed. D) tracking error, and VAR techniques cannot apply under any circumstances,Question 46 - #49368 VAR can apply to funding risk: AA) in no way, funding risk is not a type of risk to which VAR can apply. 8) by showing how to construct the surplus so that it goes up when the VAR loss occurs, ) by calculating the level af VAR associated with a zero surplus, D) by calculating the fall in surplus when the pottfolio's VAR loss occurs. Question 47 - #49365 ‘Compared to banks, the “sell side", investors on the “buy side” have: A) a shorter horizon and slower turnover B) a longer horizon and faster tumover. ) a longer horizon and slower turnover. D) a shorter horizon and faster tumover. Question 48 - #50562 ‘The process of defining risk and allocating that risk across a portfolio is known as: A) risk budgeting. B) tactical allocation. C) asset allocation. D) market timing. Question 49 - #49369 Trends in risk management systems by money managers include(s) A) an increased use of such systems and efforts to differentiate themselves by the type of management used. B) a decreased use of such systems in a fairly homogenous fashion ©) a decreased use of such systems and efforts to differentiate themselves by the type of management used. D) an increased use of such systems in a fairly homogenous fashion. Question 50 - #27617 Which of the following statements best describes the fund-of-funds (FOF) class of hedge funds? A fund of funds: AA) is an open-end mutual fund that primarily invests in other open-end funds. B) is open to institutional investors for the purpose of seeking arbitrage situations in hedge fund pricing ©) allows smaller investors to access the hedge funds marketD) allows smaller investors to participate in the venture capital market, Question 51 - #49460 Fullan Capital Management recently started a convertible bond arbitrage hedge fund and is looking to market the fund to investors with traditional stock and bond portiolios. Based on the characteristics of similar funds, Fullen expects his hedge fund to have high returns and a relatively high correlation with a traditional stock and bond portfolio. In his marketing materials, Fullen would most accurately categorize the fund as a: A\ total diversifier. B) risk reducer. ©) pure diversitier D) return enhancer. Question 52 - #47363 ‘Style drift and survivorship bias are often mentioned in the analysis of hadge fund performance. Which of the following statements is most accurate? Fund of funds can serve as better indicators of aggragate hedge fund performance than hedge fund indices because they tend to have a lower level of A) style drift only 8) both survivorship bias and style dit. neither style drift nor survivorship bias, and! fund of funds do not serve as good indicators of aggregate hedge fund performances. D) survivorship bias only. Question 53 - #47361 Willam Jones, CFA, has a client who wants to invest in a hedge fund, Jones might recommend a fund of funds instead of a single {und for all of the following reasons EXCEPT a fund of funds: A) would have a lower correlation with equity markets. B) would be more liquid. ©) otters diversitication D) may serve as a better indicator of aggregate performance of hedge funds. Question 54 - #49626 Which of the following is an example of structural risk associated with hedge fund investments? A) Market risk. B) Operational risk©) Credit risk D) Liquidity risk Question 55 - #49619 A risk reducer hedge fund is characterized by: ‘A) high returns and high positive correlation with traditional assot classes. BB) low returns and low positive correlation with tracitional asset classes. ©) high retums and negative correlation with traditional asset classes D) low returns and negative correlation with traditional asset classes. Question 56 - #38829 In distinguishing between strategy risks and structural risks that stem from a fund of hedge funds, which of the following would be considered strategy risk(s)? |. Trading liquidity risk. II. The extent and form of management oversight II. The risk of poor information reporting systems IV. The risk of high ownershin concentration of hedge fund shares. A) Lonly. By I Ill and Iv. ©) land Ill D) land IV. Question 57 - #27615 (One of the main advantages to investing in a fund of funds (FOF) is that FOF provide: A) lower management tees. B) improved diversification of assets, ©) a proven track record, D) higher expected returns. Question 58 - #117340 Which of the following inputs into the portfolio construction process cantains the least amount of uncertainty? A) transactions costs.B) position alphas. ©) current portlio. D) active risk aversion. Question 59 - #117339 Which of the following porttolio construction techniques simply chooses assets based on raw alpha? A) Stratification. B) Screens. ©) Linear Programming, D) Quadratic Programming Question 60 - #49467 Which of the following are ways to detect hedge fund style drift? I, Holdings-based analysis. II. Analyze changes in the market environment. Ill, Performance attribution analysis. IV. Compare hedge fund performance to the fund's peer group. A) 1h Ill and IV. B) | and IV only. ©) Hand it only. D) | and ill only. Question 61 - #98831 The Peyton Formika Fund is a global macro asset allocation hedge fund designed to provide low correlations with U.S. assets, Dominic James is a fund of hedge funds manager that is analyzing the Peyton Formika Fund for signs of style dif. James makes note of the following findings about the fund. |. The R? of the fund versus the global macro peer group has changed from 0.72 to 0.78 over the past 12 months. Il, Due to outstanding returns, assets in the fund have increased from $70 milion to $430 milion over the past 12 months. Ill, The fund made @ major shitt in allocation by moving 40 percent ofits holdings from Eastern European equities to Asian equities. IV. After a recent trip to India, the fund manager gained confidence in his existing Indian equity holdings and levered his ‘existing 5% weighting in India by a 10 to 1 ratio. Which of James’ findings are indicators that the Peyton Formika Fund is at risk for style drift? A) | and Il B) land Il ©) land IV,Dy I, lll and IV. Question 62 - #49459 Which of the following statements concerning hedge fund style analysis is TRUE? ‘A) Hedge fund investment style is best defined as the risk factors to which the fund is exposed. 8) Style attributes capture the majority of the characteristics of a particular hedge fund strategy. ) The most effective way to analyze the style of a hedge fund is to review an up-to-date list of the funds holdings. D) Because of the nature of their investments, style analysis is not appropriate for hedge funds. Question 63 - #49606 Equity market neutral strategios involve being both long and short in matched stack positions, thus taking advantage af an ‘expected outpertormance of the long position. There are two sub-classitications of equity market neutral strategies, which are: A) merger arbitrage and statistical arbitrage tracing, 8) market neutral long/short equity and statistical arbitrage trading ©) fair valuation and long/short matching D) convertible arbitrage and market neutral long’short equity Question 64 - #43427 Global macro hedge fund strategies generally have significant exposures to: 1 Credit risk. Liquidity risk I, Term structure risk. IV. Foreign exchange risk A) I, Il, and IV only. B) Ill and IV only. ©) III, and IV only D) I, il, and IV. Question 65 - #43426 Event-driven hedge fund strategies leave the: 1 Unystomatic sk of indvidual postions unitedgod, so thatthe inividual postions havo low corolations with each other,g) tnsystemaic tsk of individual positions unhedged, so that the incvidual positions have high correlations with each other. systematic risk of individual positions unhedgad, so that the individual positions have low correlations with each other py *¥stemaic risk of inividual positions unhecged, so thatthe individual postions have high correlations with each other. ‘Question 66 - #49607 Which of the following statements regarding pair trading is INCORRECT? Pair trading A) is a form of statistical arbitrage, B) involves taking long and short position in two stocks that are related. ) identifies overvalued and undervalued stocks of firms that are related. D) heavily relies on fundamental analysis. ‘Question 67 - #27614 Which of the following statements regarding hedge funds is Jeast accurate? AA) Market-neutral hedge funds may have long andlor short positions. B) Event-driven hedge funds seek to capitalize on a unique opportunity in the market. ©) Long/short funds have a net market neutral position. D) Global macra funds make bets on the diraction of a market, currency or interest rate ‘Question 68 - #28923 Abhedge fund that takes perfectly offsetting long and short positions is best described as a(n}: AA) longishort fund, B) market-neutral fund, ©) event-driven fund, D) global macro fund Question 69 - #49613 Which type of arbitrage strategy seeks to take advantage of discrepancies in the movements of an individual firm's equity and bond prices? A) Event-driven strategy. B) Volatility arbitrage strategy. ©) Capital structure arbitrage strategy.D) Opportunistic merger arbitrage strategy. Question 70 - #47353 ‘A hedge fund that takes postions in convertible bonds or convertible preterred stock and then takes other positions in the underlying stock would be most accurately placed in the style category A) equity market neutral 8) fixed income arbitrage, ©) convertible arbitrage. D) distressed securities. Question 71 - #47352 Wiliam Jones, CFA, has a cliont who wants to invest in a hedge fund that has the strategy of investing in equities and has among its goals the elimination of systematic risk. Jonas has found two funds that he thinks are well run: the Marius Fund that uses an equity market noutral strategy and the Hera Fund that uses a hedged equity stratagy. Given the cliont's stated preferences, Jones should recommend: A) the Hera Fund only 8) the Marius Fund only, ) neither the Hera nor the Marius Fund, D) either fund. Question 72 - #47354 ‘A hedge fund that focuses on earning retums from mergers, spin-offs, and takeovers would be most accurately placed in which style category? A) Equity market neutral B) Hedged equity €) Global macro. D) Merger arbitrage. Question 73 - #43425 Capital structure arbitrage strategies attempt to capitalize on relative price-movement discrepancies observed between the debt and equity securities of an individual company, Such strategies are most effective during periods of AA) high volatility andi rising equity markets 8) low volatility and falling equity markets, ) low volatility and rising equity markets.D) high volatility and falling equity markets, Question 74 - #48614 ‘A manager is considering acing a new position to a portiolio. The size of the position will be 1% of the portfolio. The manager computes the derivative of the portfolio’s VaR with respect to the change in the weight of the position. Muttiplying the value of the derivative times 1% will yield ‘A) marginal VaR 8) component VaR. ©) incremental VaR D) Monte Carlo VaR. Question 75 - #49610 Which of the following activities has the greatest influence when determining a short-selling manager's success? A) Psychological bartiers of others, 8) Technical analysis. ) Regulatory oversight. D) Security selection, Question 76 - #68113 Nazik, a porttolio manager, claims to have consistently produced excessive returns (over and above the benchmark. returns) 95% of the time due to her skill and not luck. To support her claim, she presents regression results based on 72 monthly observations as follows: alpha = 0.68%, standard error of alpha = 0.282% Would you reject the null hypothesis of true a= 0 and accept her claim of superior performance 95% of the time due to her skill? A) t= 2.50; rojact the null hypothesis; reject her claim B) ¢= 2.39; fail to reject the null hypothesis; accept her claim. ©) t= 2.50; reject the null hypothesis; accept her claim: D) t= 2.39; reject the null hypothesis; accept her claim. Question 77 - #60994With respect to marginal VaR (MVaR), which of the following is FALSE? ‘A) MVaR is the amount of risk a fund contributes to a porttolio. B) MVaR is an approximation based upon a small change in a fund's portfolio weight ©) MVaR can be positive or negative D) MVaf is a rate of change measure. Question 78 - #49617 Which of the following statements correctly describe characteristics of a systematic managed futures hedge fund strategy? ‘Systematic managed futures strategies: |. include trend following that utiizes a high volume of trades, many of which are unprofitable. II, base trading decisions on fundamental changes such as an anticipated disequilibrium in commodity prices. Ill are exposed to the risk of over-fiting the optimization model used to select trades. IV, select trades based on computer models that incorporate technical factors. Ay I, thand Il. B) | and I. ©), Illand IV. D) lonly. ‘Question 79 - #43424 Hedge fund managers following a convertible arbitrage strategy are said to be: A) long gamma and short vega. BB) short gamma and short vega. ) short gamma and long vega. D) long gamma and long vega. Question 80 - #27613 The largest category of hedge funds in terms of asset size is’ A) marketsneutral funds. 8) global macro funds. ©) long/short funds. D) event-driven funds. Question 81 - #5462‘An investor has two stocks, Stock Rand Stock $ in her portfolio, Given the following information on the two stocks, the portfolio's standard devialion is closest to: + On= 34% © os= 16% * tas=067 © Wa= 20% + We = 20% A) 8.7%, 8) 20.4% ©) 2.1%, D) 7.8%, Question 82 - #43423 Which of the following statements regarding equity market timing strategies as applied by hedge funds is FALSE? A) The strategy is usually based on fundamental analysis. 8B) The strategy often focuses on one particular sector, industry, or geographic region, ) The strategy involves switching between holdings of money market securities and a long equity portfolio. D) A key part of the strategy is keeping transactions costs low. Question 83 - #50541 Marginal VaR is bestdescribed as the change in VaR that results from: AA) subtracting idiosyncratic VaR from total VaR. 8) removing an existing asset from a fund C) changing the weight on an existing position by one unit. D) adding a new asset to a fund. Question 84 - #27633 ‘The securities of companies that are either close to bankruptey or have already filed for bankruptcy protection are called: A) inactively traded securities, B) distressed securities, ©) illiquid securities. D) discount securities.Question 85 - #49615 Which of the following would most likely NOT be a reason that a merger arbitrage strategy might fall? A) Lack of agreement between senior management and line staff B) Negative earnings report from target firm. C) Uncooperative regulatory agencias, D) Failure to obtain shareholder approval. Question 86 - #68182 Refinements to the basic return-based performance assessment models include: |. Bayesian correction, benchmark timing, Ill. apriori beta estimates. IV. correction for serial correlation, A) I lll and IV, 8) |, land Ill ©) |, hand Iv, Dy I, lil ancl IV. Question 87 - #68191 Which of the following statements regarding portfolio attribution and portfolio performance analysis are CORRECT? |. Performance analysis is used to determine the statistical significance of information ratios (IR). Il. Performance attribution analysis focuses on portfolio returns over a single period. Ill. Returns-based performance analysis is based on a top-down approach IV. Portfolio-based analysis involves a three step process: cross-sectional analysis, portfolio attribution, and performance analysis, A) Lh lll and IV, 8) |, Hand Ill ©) |, land Iv, Dy Ii, tl and IV. Question 88 - #43422Hedge fund managers that follow equity market neutral strategies generally try to profit from market inefficiencies related to: A pricing discrepancies due to mispriced volatility, B) value or momentum factors, ©) pricing discrepancies between the stocks of the parties to a merger. D) the January effect. Question 89 - #49374 ‘The serial correlation of a hedge fund's returns is usually ‘A) negative and is considered evidence of managers massaging their returns data B) positive and is caused by low liquidity ) positive and is considered evidence of managers massaging their returns data D) negative and is caused by lowr liquidity. ‘Question 90 - #27621 Which of the following statements regarding hedge fund performance is FALSE? A) Hedge funds have demonstrated a lower risk profile than traditional equity investments. B) The Sharpe ratio for hedge funds has been consistently higher than for most traditional equity investments. ) Thera is a low correlation between the performance of hadge funds and traditional investments. D) Hedge funds have historically underperformed the S&P 500, Question 91 - #49612 Which of the following would NOT likely be a suitable market neutral, fixed-income arbitrage spread trade? A) Butterfly, or yield-curve arbitrage. B) Arbitrage between dissimilar bonds. C) Asset swap trade. D) T-bill and Eurodollar futures spread trade. Question 92 - #27635 Atypical distressed security investment strategy would involve purchasing: A) the debt of a distressed company, allowing the company to utilize the infusion of capital to avoid bankruptcy. gy 172 debt of a struggling company, with the goal of ending up with an equlty postion inthe reorganized ) company.) 2 controling equity postion in a company experiencing financial cificultes and replacing management with a team of turnaround specialists. D) an equity position in order to dilute the position of the company's creditors, Question 93 - #49616 What is the most common maturity range associated with private placement convertibles negotiated as part of a Regulation D strategy? A) 3-6 months. B) 30-90 months. ©) 30-90 days, D) 18-60 months. Question 94 - #49604 A popular hedge fund strategy is a long/short equity strategy. What would be the typical target “net” exposure in such a hedge fund strategy? A) net shor. B) net long, ©) close to perfectly hedged, D) core long positions with a near total hedge overlay using short index futures. Question 95 - #49614 Which of the following combinations of investment positions is @ hedge fund manager utilizing a merger arbitrage stratagy ‘most likely to establish? A) Long position in the acquirer; short position in the acquisition target. 8) Short position in both the acquirer and the acquisition target ©) Long position in both the acquirer and the acquisition target D) Short position in the acquiter; long position in the acquisition target. Question 96 - #49371 With respect to requiring @ 80-day notice and only being able to make withdrawals on only specific days per year, which of the following is (are) usual restrictions on hedge funds? A) Being able to make withdrawals on only specific days per year. 8) Both requiting a 30-day notice and being able to make withdrawals on only specitic days per year. ) Requiring a 30-day notice onlyD) Neither requiring a 30-day notice nor being able to make withdrawals on only specific days per year. Question 97 - #68188 ‘The fundamental goal of investment performance analysis is A) to develop non-paramettic estimates 8) to compare past performance with future performance, C) to estimate residual variance. D) to distinguish skil from luck. Question 98 - #71127 Which of the following statoments regarcing various hedge fund strategies Jeast accurately reflects a souree of return for the strategy? Equity long/short strategies earn etums from their exposure to systematic risk factors related to value and small-cap stocks Volatity arbitrage strategies ear retums trom mispricings on fixec-income options resuiting in accurate implied volatility estimates. Event-driven strategies eam returns trom their exposure to unsystematic risk factors such as an expected merger or the expected outcome of a lawsuit Regulation D strategies earn retums from their exposure to unsystematic risk factors related to credit and liquidity risk resutting from private placement. Question 99 - #49609 Managers following a short-selling hedge fund strategy commonly search global equity markets in an attempt to find firms that AA) ate the target of an acquisition proposal B) ate emerging from Chapter 11 bankruptoy. ) use aggressive accounting methods. D) can profit from operational efficiencies. Question 100 - #49611 Which of the following combinations of investment positions reflects the most common form of convertible arbitrage strategy? ‘A) Short position in a firm's stock; long position in a convertible issued by the same firm. 8) Short position in a convertible; long position in put options on the issuer's stock.C) Long position in a convertible bond; long position in put options on stock of a similar firm.Kaplan Schweser Printable Exams - Risk Management and Investment Management (Answer Part 1) Question 1 - #68083 Your answer: A was correct! In order to reject the null hypothesis of Hy: rue MTCp = 0 versus Hy = true MTCp # 0, at 99% contidence level, we need an estimated tstatistics of 2.67 or larger. Since the t-statistic equals 1.27, we fail to reject the null hypothesis and conclude that there is no evidence of market timing skills ‘This quection tasted from Module 8, Topic 68, AIM 5 Question 2 - #68169 Your answer: A was correct! 5 <2 (critical tat 95%), so we fail to reject the null hypothesis: Ho: difference in Sharpe ratios is zero. Thus, we can reject her claim to have beaten the benchmark portfolio at 95% confidence level ‘This question tested from Modul 8, Topic 88, AIM 5 Question 3 - #68134 The correct answer was D) I, Il, and IV. ait 07. We rejected the Hy: true, MTCp = 0 in favor of Hy: true, MTCp # 0, at least at 95% confidence leval (a 08). So statement Ill is incorrect. ‘This queetion tested from Module 6, Tope 68, AIMS Question 4 - #68067 ‘The correct answer was D) hedge funds use only retum-based performance analysis to evaluate managers’ performance and skill Hedge funds use both return-based and portiolio-based performance analysis to evaluate managerial performance and skill ‘This question tested from Module 8, Topic 68, AIMS Question 5 - #70711The correct answer was D) All of these, All of those statements are correct, ‘This question tested from Madu 6, Tope 68, AIMS Question 6 - #68179 ‘The correct answer was C) Performance of two porttolio managers cannot be compared based on estimates of IR {information ratio} excess returns per unit of risk A higher information ratio will indicate a better performance. Thus, the performance of two portfolio managers can be compared using information ratio, ‘This question tosted from Module Topic 68, AIMS Question 7 - #68159 The correct answer was C) |, Il Ill and IV. Information ratio is the ratio of annual return to risk. As per the CAPM model, alpha should be zero. Significant t statistic requires a higher aloha relative to its standard deviation and many observations, Superior performance, as per the Sharpe. ratio, implies positive Jensen alpha, So, all statements are incorrect. ‘This question tested from Modul 6, Topic 68, AIM 5 Question 8 - #68186 Your answer: A was correct! ‘Statement | refers to Bayesian correction; statement II refers to correction for serial correlation; statement Ill refers to benchmark timing: and finally, the statement IV raters to controlling for public information ‘This quection tested from Modula Topic 68, AIMS Question 9 - #68195 Your answer: A was correct! All the stated retums are examples of investment returns: ‘This question tested from Modul 8, Topic 88, AIM 7Question 10 - #70975 ‘Tha correct answer was C) None of these. All of these statements are correct. ‘This queetion tested from Module 6, Topic 68, AIM & Question 11 - #38844 The correct answer was B) | and Ill only. Item Il is incorrect because the sum of the risks at each level is likely to equal more than the total risk budget for that level because of less than perfect correlation among risks. ‘This question tested from Module 8, Topic 72, AIM 4 Question 12 - #117114 ‘The correct answer was C) They are most effective for portfolios that use overlays. Investment guidelines can be largely ineffective in portfolios that use short selling or overlays or that trade in complex investments such as convertibles, derivatives, or securities with embedded options. ‘This question tested fom Madu 6, Topie 72, AIM @ Question 13 - #117108 ‘The correct answer was 8) I! only, lis incorrect because implementation risk and tactical asset allocation risk are the same thing. They both refer to the risk that the plan porttolio's actual asset allocation might underperform the strategic asset allocation. Ill is incorrect because active risk at the manager level refers to the risk that a given manager might underperform his benchmark, not the strategic benchmark, ‘This question tested from Module 6, Topic 72, AIM 4 Question 14 - #117107 ‘The correct answer was B) The risks to a defined benefit plan are indirect because plan patticipants take on shortfall risk. In defined-contribution plans, the risks to the fund are indirect because the individual, not the plan, takes on the shortfall tisk‘This question tested from Modul 8, Topic 72, AIM 3 Question 15 - #117110 ‘The correct answer was D) I, Il and Il ‘Thare are three major considerations for maintaining a quality VAR measure: ‘+ Consistency in the measurement of risk ‘+ Length of the historical data sample. ‘+ Adjusting historical data to suit manager views, ‘This quection tested from Module 8, Topic 72, AIM 7 Question 16 - #117106 ‘The correct answer was C) VAR predictions of losses are most reliable in likely scenarios. Since markets tend not to react in usual ways during market crashes, VAR predictions are not as reliable for worst-case scenarios as they are for more likely scenarios. ‘This question tested from Modul 8, Topic 72, AIM 2 Question 17 - #117109 ‘The correct answer was C) Automatically signals needed adjustments in the portiolio as soon as a change in risk levels affects pertormance. Dynamic triggers refers to the automatic aspect af risk budgeting in which risk of the portfolio automatically triggors adjustments in the portfolio betore they aftect performance, not as soon as they affect performance ‘This queetion tested fom Module 6, Topic 72, AIM 6 Question 18 - #117111 Your answer: A was correct! (One potential remedy for exceeding the tolerance threshold for active risk at the plan level is to replace highly corelated managers with managers having lower correlations. That does not apply if the threshold for active risk at the manager level is exceeded, ‘This question tested from Module 8, Topic 72, AIM 8Question 19 - #38820 ‘Tha correct answer was D) The backtest does nat confirm the validity of the model. ‘At a 95% confidence lavel, no more than 1 observation should have ‘allen outside the predicted range, (The expected value is only one-half observation.) In this model, two observations ate outside the predicted range, which is not consistent with a 95% confidence lavel. The model does not confirm the backtest. [tis only appropriate to backtast a portfolio that has not undergone signiticant changes between calculations. ‘This queetion tested fom Modula 6, Topic 72, AIM 10 Question 20 - #46816 Your answer: A was correct! Hedge funds have no constraints on short selling. The other statements are all incorrect. Hedge fund portfolios are more concentrated, which implies that they tend to hold fewer securities. Mutual funds are able to use leverage, but the application of leverage is limited. Qualified hedge fund investors must have a net worth of $6 milion, This question tested from Module 8, Topic 74, AIM 1 Question 21 - #71442 ‘The correct answer was B) provided diversification in the past, but their effectiveness will probably decline in the future. ‘As hadge funds become more institutionalized, their correlation with the market will increase, ‘This question tested from Madua 6, Tope 74, AIM 2 ‘Question 22 - #61033 ‘The correct answer was D) Hedge funds cannot advertise in order to solicit new funds, while mutual funds can make advertisements to the general public. Hedge funds are private investment vehicles for qualified investors. Being private allows the hedge fund to escape regulatory oversight, but means the hedge fund cannot advertise to attract new funds. In contrast, mutual funds can advertise to the general public. Note that the other statements are false. Hedge fund portfolios tend to be more concentrated than mutual funds, both hedge funds and mutual funds tend to invest according to a specific approach, and both hedge funds and mutual funds are permitted to use leverage, although mutual funds are typically limited in the amount of leverage they can use (i.e., up to 88% of net assets}. ‘This question tosted from Module 8, Topic 74, AIM 1Question 23 - #27622 Your answer: A was correct! Hedge funds have been in existence since the early 1990's, long enough to compile meaningful data, There are several reliable indexes designed to track hedge funds. Fund managers, when they do submit data, would report performance net of fees. One of the primary reasons why performance data has bases is that submission is strictly voluntary, so managers tend to only submit impressive performance information. ‘This question tested from Module 8, Topic 74, M6 Question 24 - #27608 ‘The correct answer was C) a base management fee, based on the value of assets under management, plus an incentive fee, based on profits, Typical arrangements pay the manager a base fee, usually around 1% of assets, plus an incentive fee proportional to profits This question tested from Module 8, Topic 74, AIM 2 Question 25 - #49375 The correct answer was B) higher return and lower standard deviation Net of fees, the average annualized hedge fund index and stock index returns were 10.8% and 10.3%, respectively. The standard deviations were 7.8% and 14.5%. ‘This question tested from Madu 6, Tope 74, AIM 6 Question 26 - #27623 Your answer: A was correct! Hedge fund managers would report performance net of fees if at all. Hedge fund managers have the potential to eam more than managers of traditional funds, but this does not bias performance data, Hedge fund managers typically receive a modest base fee (19) and then a large incentive fee based upon performance. If past performance has been poor, then fund managers feel they have “nothing to lose” and may invest more aggressively. ‘This question tested from Module 6, Topic 74, AIM 2 Question 27 - #49370Your answer: A was correct! This is the only true statement. Fees based upon profits are asymmetric and are usually the fee structure for hedge funds. ‘This question tested from Madu 6, Tope 74, AIM 2 ‘Question 28 - #27607 ‘The correct answer was 8) gain exemption from most SEC regulations, Hedge funds may not engage in advertising of any kind, Hedge funds may or may not utilize hedging strategies. Hedge funds may make macroeconomic bets, but this is not because of their agreement to adhere to certain guidelines, The main reason for hedge funds to organize under section 3 {c) (1) is to gain exemption trom most SEC regulations. ‘This question tosted from Module 6, Topic 74, AIM 1 Question 29 - #49372 Your answer: A was correct! Without restrictions on withdrawals, funds would have to have cash available to meet the demand for withdrawals. Cash has a lower return than other investments, The SEC does not have restrictions on withdrawals ‘This question tested from Module 6, Topic 74, AIM 2 Question 30 - #50433 The correct answer was 8) component VaR. This is the defintion of component VaR. It will generally be less than the VaR of the fund by itselt because of the diversification of some of the funds risk at the portfolio level ‘This quection tested rom Modul 8, Topic 70, AIM 4 Question 31 - #29803 ‘The correct answer was D) Incremental VAR computes actual changes in VAR for any additions of securities, Marginal VAR is an approximation of the changes in the VAR of the portfolio, in response to the addition of one unit (dollar) of a security, and is based on a linear relationship. Like duration, this linear relationship is only accurate for small additions. Incremental VAR computes the actual changes in portfolio VAR for any size additions to the portfolio, Incremental VAR. involves the calculation of an entirely new VAR for the portfolio and is used when the changes in VAR cannot be described by a linear funtion.‘This questi tasted trom Module Topic 70, AIMS Question 32 - #49306 ‘The correct answer was B) $2.238 milion Weecan use mattix notation to derive the dollar variance ¢f the portfolio: Irae b This values in (§ millions)*. VAR is then the square root cf this value times 1.65: VAR = 1.65 x ($1,414,214) = $2,988,452 ‘This questic tasted trom Module Tonic 70, AIM Question 33 - #49242 The correct answer was C) Mvar =— VAR __ '” Porffalia Value B This Is the correct ramuta, ‘This questi tastad trom Module Topic 70, AIM Question 34 - #49498 ‘Your answer: was correct! in adiversified portfolio with a large number of assets, themost relevant risk is systematic risk since the unsystematic (L¢. inrr-speoitc risk) ges diversitisd away. Ih other words, the unsystemate risks of the individual assets offset each other ‘Tis quastion tasted tom Meru 6 Tomi= 70, AIM2 Question 35 - #60995 The correct answer was C) It is marginal VaR whete the intial weight is zero. incremental VaR ([VaRj) is an astimate cf the amount of risk a proposed naw position in Fund /will addi to the tetal VaR of an existing pertfali.‘This question tested from Module 8, Topic 70, AIM 1 Question 36 - #49350 ‘The correct answer was D) the position’s marginal VAR muttiplied by the value invested in the position In a large portfolio with many positions, the approximation is simply the marginal VAR multiplied by the dollar weight in position ‘i": CVARi = (MVARI) x (wi x P) where P is the value of the portfolio, wiis the weight in the portfolio, ‘This quection tasted rom Modul 8, Topic 70, AIM 4 Question 37 - #49307 ‘The correct answer was D) both an elliptical distribution and a normal distribution. It is appropriate for elliptical distributions, and normal distributions are a subset of elliptical distributions. ‘This question tested from Module 8, Topic 70, AIM 4 Question 38 - #29801 ‘The correct answer was B) perfect and positive correlation ‘Simply adding the VARs of individual securities to compute the portfolio VAR assumes that thete is a correlation of between all the securities. A correlation value of “1”, is perfect and positive. This is called the undiversitid VAR. ‘This queetion tested from Module 6, Topic 70, AIM 3 Question 39 - #49510 ‘The correct answer was D) The component VAR is likely to be less than the individual VAR. Unless assets are pertectly correlated, component VAR will be less than individual VAP. ‘This question tested from Module 6, Topic 70, AIM 4 Question 40 - #117342 Your answer: A was correct! ‘The RMU objectives encompass all of these statements as well as several more including: gathering, monitoring, analyzing, and distributing risk data to managers, clients, and senior management‘This question tested from Modul 8, Topic 89, AIM 6 Question 41 - #117341 Your answer: A was correct! LD = number of shares of the security / (max daily volume percentage » daily volume of the security). LD = 1,000/ (0.5 « 200) = 10. This value is an approximation of the number of days necessary to dispose of a porttolio’s holdings without a significant market impact. ‘This quection tasted from Module 8, Topic 69, AIM 8 Question 42 - #49364 Your answer: A was correct! Risk budgeting is a top-down process that involves choosing and managing exposures to risk. It builds upon the VAR, measure, is forward-looking, and can apply to asset managers, classes of assets, and individual securities. This question tested from Module 8, Topic 71, AIM 1 Question 43 - #49366 ‘Tha correct answer was C) Hedge funds use high leverage and have a high tumnover. ‘Thase are properties that hedge funds share with the sall side. ‘This queetion tested fom Module 6, Tepe 71, AIM 4 Question 44 - #70925 ‘The correct answer was 8) Many of the managers have unknowingly made vaty different style bets Making citferent style bets would increase the diversification and lower risk. ‘This question tested from Module 6, Topic 71, AIM 6 Question 45 - #49367 Your answer: A was correct! Absolute risk refers to the total possible losses over a horizon, Relative risk is measured by tracking error, which is the dollar loss relative to a benchmark return. VAR techniques can apply to tracking error i itis normally distributed‘This question tested from Modul 8, Topic 71, AIM 5 Question 46 - #49368 ‘The correct answer was D) by calculating the fall in surplus when the pottiolio’s VAR loss occurs. This is the usual application of VAR to funding risk. ‘This quection tested from Modul 8, Topic 71, AIMS Question 47 - #49365 The correct answer was C) a longer horizon and slower turnover. Compared to banks on the “sell side", investors on the “buy side" have a longer horizon, slower turnover, and lower leverage. This question tested from Module 8, Topic 71, AIM 2 Question 48 - #50562 Your answer: A was correct! The process of defining risk and allocating that risk across a portfolio is known as risk budgeting. The risk budgeting process allows a manager to set targot risk levels acrass her portiolio. ‘This queetion tested from Modula 6, Topie 71, AIM Question 49 - #49369 Your answer: A was correct! Money managers who are not increasing their use of risk management systems will probably find themselves at a competitive disadvantage. ‘This question tested from Module 6, Topic 71, AIM 6 Question 50 - #27617 ‘The correct answer was C) allows smaller investors to access the hedge funds market. ‘A FOF is a fund that invests in hedge funds. They are apen to both individual and institutional investors.‘This question tested From Module 8, Topic 75, AIM 1 Question 51 - #49460 ‘The correct answer was D) return enhancer. Hedge funds classified as return enhancers have high retums and high correlations with traditional stock and bond portfolios, ‘This quection tasted from Module 8, Topic 76, AIM 2 Question 52 - #47363 The correct answer was D) survivorship bias only. A fund of funds may serve as a better indicator of aggregate performance of hedge funds (ie., a better benchmark) because they suffer from less survivorship bias. Ifa fund of funds includes a fund that dissolves, the fund of funds includes the effect ofthat failure in the return of the fund of funds; however, an index may simply drop the failed fund. A fund of funds can suffer trom style drift. This can produce problems in that the investor may not know what he/she is getting. Over time, managers may tlt their respective portfolios in different directions. It is not uncommon that two fund of funds who claim to be of the same style to have retums with a very low correlation This question tested from Module 8, Topic 75, AIM 1 Question 53 - #47361 Your answer: A was correct! Fund of funds are usually considered good choices for individual investors because they offer diversification, usually offer ‘more liquidity, and suffer from less survivorship bias thus they may serve as a better indicator of aggregate performance of hedge funds, One problem with fund of funds is that they are usually more correlated with equity markets than an individual {und, and this lowers their abilty to diversity the overall portfolio. ‘This question tested from Modula 6, Tope 75, AIM 1 Question 54 - #49626 ‘The correct answer was 8) Operational risk, Structural risk focuses on risks stemming from a hedge fund's operations and is therefore associated with operational risk. Market risk, credit risk, and liquidity risks, while important, are examples of strategy risks. ‘This question tosted from Module 8, Topic 75, AIM 1Question 55 - #49619 ‘The correct answer was B) low returns and low positive correlation with traditional asset classes A risk reducer hedge fund is characterized by lower returns, and low correlations with traditional stock/bond asset classes. (One example is a long/short equity fund, ‘This quection tested from Module 6, Tope 75, AIM 2 Question 56 - #38829 Your answer: A was correct! Hedge funds face structural risks that stem from a hedge fund's operations, These risks include the potential for deterioration in a firm's reputation, poor information reporting systems, inadequate management oversight, etc, Strategy risks derive from a hedge fund's investment strategy. They include a fund's exposure to price swings from different asset classes (market risk}, the tisk of non-performance by counterparties credit risk), the risk of price impact from executing large trades (trading liquidity risk), and the risk of not being able to meet interim cash flows obligations betore strategies are able to become profitable (funding liquidity risk) This question tested from Module 8, Topic 75, AIM 1 Question 57 - #27615 The correct answer was B) improved diversification of assets. FOF will actually have higher management fees because the FOF will charge a fee in addition to the fee charged by the hedge fund manager. Hedge funds selected by the FOF may have a good track record, but itis no indication of future performance. FOF actually have lower expected returns because of increased diversification. FOF can diversify across many hedge funds strategias to dactease risk ‘This question tested fom Modula 6, Topie 75, AIM 1 Question 58 - #117340 ‘The correct answer was C) current porttoli. The assets and weights in the current portfolio. Relative to the other inputs, the current portfolio input can be measured with the most certainty ‘This question tosted from Module 8, Topic 67, AIM 1Question 59 - #117339 ‘The correct answer was 8) Screens. Screens are accomplished by ranking the assets by alpha, choosing the top performing assets, and composing elther an equally weighted or capitalization-based weighted portfolio. ‘This quection tested from Module 6, Topie 67, AIM & Question 60 - #49467 Your answer: A was correct! All of the listed items can help detect hedge fund style drift. Analyzing a fund's holdings cannot prevent style drifts, but it may help any drifts to be detected more quickly. Both a change in market environment or a dramatic under- or overperformance versus a fund's peers is a likely signal of style drift. Performance attribution assesses a manager's performance against vatious dimensions of risk and can verify i the performance is commensurate with the risks of a manager's strategy. ‘This question tested from Module 8, Topic 76, AIM 3 Question 61 - #38831 The correct answer was C) Il and IV. Hedge fund style drift occurs when there are changes in the risk factor exposures of the fund or changes in the overall risk of the fund, notably through leverage. Using leverage only for his Indian equity position would defintely be an indicator of style drift, Even though the intial position is small, a 10 to 1 leverage ratio would significantly change the risk of the fund Excessive cash inflows which may be more money than the manager can sustain is also a potential indicator of style drift. The change in allocation ftom Eastem European equities to Asian equities is within the objectives of a global allocation fund, so that would not indicate style drift. Also, style drift would be a concem with a decrease, not an increase in the R-squared measure against the peer group. ‘This question tested fom Madu 6, Topic 76, AIM 3 ‘Question 62 - #49459 Your answer: A was correct! Because hedge fund managers can use a wide array of asset classes and strategies such as short positions and leverage, hedge fund investment style is best defined as the risk factors to which the fund is exposed. Because a hedge fund manager can use holdings in different ways to create a desired risk exposure, holdings-based analysis is not as effectiveas itis for traditional long-only managers. Although style does not explain the majority of a hedge fund's performance (studies show about 20%), style analysis is still important for hedge fund investors. ‘This question tested from Module 6, Topic 78, AIM 2 Question 63 - #49606 ‘The correct answer was 8) market neutral long/short equity and statistical arbitrage trading ‘These are both sub-classifications of equity market neutral strategies. Statistical arbitrage is short-term trading based on modeling, and market neutral long/short strategies involve longer holding periods, during which time pricing disparities presumably correct themselves, ‘This quection tested From Module 6, Topic 72, AIM 4 Question 64 - #43427 The correct answer was B} Ill and IV only. Global macro strategies bear systematic tisk exposure to term structure risk and foreign exchange risk. They generally do not have significant exposure to crecit or liquidity risk. ‘This question tested from Module 8, Topic 73, AIM 1 Question 65 - #43426 Your answer: A was correct! Event-driven strategies are based on company specitic events that will impact the values of securities. Risks unrelated to the events are hedged, leaving only unsystematic risk in the positions. Since the remaining risks are company specific, the individual positions should have low correlations with each other. ‘This queetion tested from Modula 6, Topic 72, AIM 4 Question 66 - #49607 ‘The correct answer was D) heavily relies on fundamental analysis. Pair trading relies more on technical, quantitative analysis than “fundamental” analysis. Some criticize this technical approach as being a “black box' in the sense that investors are not given details regarding the statistical model used to create the strategy. ‘This question tested From Module 6, Topic 73, AIMQuestion 67 - #27614 ‘The correct answer was C) Long/short funds have a net market neutral position. Long/short funds, by definition, are not market-neutral and usually maintain a net positive or net negative markat exposure. ‘This queetion tested from Modula 6, Topic 72, AIM 4 Question 68 - #28923 ‘The correct answer was 8) market-neutral fund. Market-neutral funds take long and short positions but attempt to offset them to hedge against market moves. Long/short funds take both long and short positions but do not try to offset them. Global macro funds bet on the direction of a market, currency, interest rate, or other factor; they don't try to offset positions to cancel out market effects, Event-driven funds focus on unique market opportunities, not offsetting positions. This question tested from Module 8, Topic 73, AIM 1 Question 69 - #49613 The correct answer was C) Capital structure arbitrage strategy. Capital structure arbitrage involves exploiting pricing inefficiencies on the right side of a fimm’s actual balance sheet ‘This question tested fom Modula 6, Tope 72, AIM 1 ‘Question 70 - #47353 The correct answer was C) convertible arbitrage. Convertible arbitrage usually takes positions in convertible bonds or preferred stock as well as warrants, etc... and then takes other positions in the underlying stock. ‘This question tosted from Module 8, Topic 73, AIM 1 Question 71 - #47352 The correct answer was B) the Marius Fund only. Equity market neutral is usually the attempt to exploit price discrepancies through long and short positions. This strategy alsa has the goal of the systematic risks canceling because of the long and short positions. Hedged equity strategies takeJong and short positions in under and overvalued securities, respectively, ike equity market neutral strategies. The difference is that hedged equity strategies do not focus on balancing the positions to eliminate systematic risks ‘This question tested from Module 6, Topic 73, AIM 1 Question 72 - #47354 ‘The correct answer was D) Merger arbitrage. Merger arbitrage focuses on returns from mergers, spin-otts, takeovers, etc... For example, it company X announces it will acquire company Y, the manager might buy shares in Y and short X ‘This quection tested from Modula 8, Topic 73, AIM 1 Question 73 - #43425 ‘The correct answer was D) high volatility and falling equity markets. During periods of high volatility and falling equity markets, debt holders tend to realize the gravity of a company's debt load before equity holders and! adjust the prices of the company's bonds before equityholders adjust the company's stock price. ‘This question tested from Module 8, Topic 73, AIM 1 Question 74 - #48614 ‘The correct answer was C) incremental VaR. Incremental VaR, or IVaR,, is an estimate of the amount of risk a proposed new postion in fund i will add to the total VaR of an existing portfolio. ‘This queetion tested from Module 6, Tepe 70, AIM 4 Question 75 - #49610 ‘The correct answer was D) Security selection Selection of the correct security itself is the most important contributing factor to the short seller's return. While others have a psychological aversion to short selling, and many banks and other portfolio managers are restricted from short selling, the short seller helps contribute to efficient capital allocation within an economy, This question tested from Module 8, Topic 73, AIM 1Question 76 - #68113 The correct answer was C) f= 2.50; reject the null hypothesis; accept her claim alpha / standard error of alpha 0058 / 0.00282 = 2.5 Since tis greater than 2, we reject the null hypothesis at 95% confidence level and accept her claim of producing skill-based superior performance ‘This quection tasted from Module 8, Topic 68, AIM 5 Question 77 - #60994 Your answer: A was correct! MVaR is defined as the change in the portfolia VaR per unit change in the weight in a fund. The amount of risk a fund contributes to a portiolio is the definition of component VaR (CVaR). ‘This question tested from Module 8, Topic 70, AIM 1 Question 78 - #49617 ‘The correct answer was C) |, Ill and IV. ‘Systematic managed futures strategies use computer-based optimization models that incorporate technical factors and indicators to select @ high number of trades across many different markets. The high volume results in diversification for the fund and is profitable overall even though it may generate many unprofitable individual trades. Discretionary managed futures strategies base trading decisions on fundamental factors such as anticipated disequilibrium in commodity prices. ‘This queetion tested from Modula 6, Topic 72, AIM 4 Question 79 - #43424 The correct answer was D) long gamma and long vega. Convertible arbitrage managers hedge their equity exposure by shorting stocks using the delta hedge ratio. Because they are exposed to changes in the hedge ratio, they are said to be long gamma, They are also exposed to changes in the price Volatility of the stock underlying the option embedded in the convertible security, so they are said to be long vega. This question tested from Module 8, Topic 73, AIM 1Question 80 - #27613 The correct answer was C) long/short funds. Long/short funds are considerad to be the "traditional" type of hedge funds, anc they represent the largest category of hedge funds. “This question tested fram edule & Tonic 73, AIM Question 81 - #5462 The correst answer was B) 294%, The formula for the standard deviation of 2 -staok porifalia is [Wp2sn2 + WePa®+ 2WaWosasarael”® 9 = [(0.88 + 0.249) + (0.225 0.184 + (24 08 ¥0.2x 0.84 0.18 067]= 0.08687 14" = 0.2944, or approximately 29.4%. “This question tested fram Medile 6 Topic 70, AIMS Question 82 - #43423 Your answer: A was cortent! [0.073984 + 0.001024 + 0.011e634]" = Equity merket timing strategies use stook-soreening models based on simple technical trading models. “This question tested fram edule & Tonic 73, AIM Question 83 - #50541 The correst anewer was C) changing the weight on an oxisting postion by one unit Marginal VaR or MVaR,, is the chengein the portfclio VaR per unit change in the weight in Fund i The following is an expression that represents the marginal VaR of a portfolio, AVaRp MvaR, = bw “This question tested fram edule & Topic 7, AIM Question 84 - #27633‘The correct answer was B) distressed securities, Inactively traded securities are infrequently traded, but the name “inactively traded” does not imply anything about the financial condition of the company. “lliquid’ and “discount” are descriptions that may be applied to any of number of investment vehicles available, Distressed securities are the securities of companies in the midst of financial difficulties. ‘This question tested rom Modula 6, Tope 72, AIM 1 Question 85 - #49615 Your answer: A was correct! A merger arbitrage strategy would more likely fal due to a lack of agreement between senior managers. Line staff is typically not consulted. There are many more reasons a merger arbitrage strategy may fal, including time to completion and miscalculation of overall merger likelihood and conditions. ‘This question tosted from Module Topic 78, AIM 1 Question 86 - #68182 Your answer: A was correct! All of the above are refinements introduced to the basic return-based performance assessment models. ‘This question tested from Module 6, Topic 68, AIM 6 Question 87 - #68191 ‘The correct answer was 8) | Il and I Portfolio-based analysis involves a two-step process: portfolio attribution and portfolio performance analysis. ‘This quection tested rom Modula Topic 88, AIM 7 Question 88 - #43422 ‘The correct answer was B) value or momentum factors. Market neutral strategies that exploit market inefficiencies are generally based on the findings of academic research which demonstrates that value stocks and momentum strategies earn positive excess retums ‘This question tested from Module 8, Topic 73, AIM 1Question 89 - #49374 ‘Tha correct answer was C) positive and is considered evidence of managers massaging their returns data. The positive serial correlation is considered evidence of managers massaging their reported returns in that they are probably trying to reduce the petiod-to-period variability of the returns ‘This queetion tested from Module 6, Tope 74, AIM 7 ‘Question 90 - #27621 ‘The correct answer was D) Hedge funds have historically underperformed the S&P 500. Hedge funds have demonstrated a lower risk profile than equities when measured by standard deviation. The Sharpe ratio, which is a reward:to-risk ratio, has been higher for hedge funds than for equities, There has been a low correlation between the performance of hedge funds and that of traditional investments. Hedge funds have historically outperformed the S&P 500, This question tested from Module 8, Topic 74, AIM 6 Question 91 - #49612 ‘The correct answer was B) Arbitrage between dissimilar bonds. ‘The correct “market neutral” spread trade, or fixed-income arbitrage trade, is an arbitrage between similar bonds. The other choices are all examples of different forms of spread trades, Other market-neuttal, fixectincome arbitrage trades include basis traces and yiold-spread trades between on-the-run and off-the-run bonds ‘This question tested fom Modula 6, Tope 72, AIM 1 Question 92 - #27635 ‘The correct answer was 8) the debt of a struggling company, with the goal of ending up with an equity position in the reorganized company. Atypical strategy is to invest in the debt of a company, continue to hold the position throughout the bankruptey negotiations, and ultimately end up with equity in the new, revitalized operation, ‘This question tosted from Module 8, Topic 73, AIM 1 Question 93 - #49616 ‘The correct answer was D) 18 ~ 60 monthsRegulation D invesiments are macte possible through an SEC registration exemption as part of the U.S. Securities Act of 1933, The most common maturity range of privately placed convertible bonds negotiated as part of a Regulation D strategy is 1.5 to 5 years, or, equivalently, 18 to 60 months ‘This question tested from Module 6, Topic 73, AIM 1 Question 94 - #49604 ‘The correct answer was 8) net long, While this is not always the cases, most managers would maintain a net long position, or at least have a long bias. It is not as common, but some hedge fund managers have core long positions with a partiathedge overlay using short index futures, long puts (out-of-the-money}, or short covered calls ‘This quection tested from Modula 8, Topic 73, AIM 1 Question 95 - #49614 ‘The correct answer was D) Short position in the acquirer; long position in the acquisition target. While there is deal risk in the sense that the proposed merger may never happen, the combination of a short position in the acquirer and long position in the acquisition target has the best chance of positive net return, assuming careful fundamental analysis has been performed, ‘This question tested from Module 8, Topic 73, AIM 1 Question 96 - #49371 ‘The correct answer was 8) Both requiring a 30-day notice and being able to make withdrawals on only specific days par year. Both are usual restrictions. ‘This question tested from Module 8, Topi 74, Question 97 - #68188 The correct answer was D) to distinguish skill from luck. The remaining statements are not the goals of investment performance analysis, ‘This question tested from Module 8, Topic 68, AIM 7Question 98 - #71127 ‘The correct answer was D) Regulation D strategies earn returns from their exposure to unsystematic risk factors related to credit and liquidity risk resulting from private placement Regulation D stratagias are exposed systematic risk factors related to credit risk and liquiity risk, These risks arise as a result of the lower ctedit quality of private convertible debt issuers and the fact that private convertible debt securities are not tradable in the public markat for some time alter the issuance ‘This queetion tested from Modula 6, Topic 72, AIM 4 Question 99 - #49609 The correct answer was C) use aggressive accounting methods. ‘Seeking firms that use aggressive accounting techniques is a frequent short-seller theme, The short seller would also look at something additional, such as weak fundamentals. This question tested from Module Topic 78, AIM 1 Question 100 - #49611 Your answer: A was correct! This is the most “basic” convertible arbitrage strategy. ‘This question tested from Module ‘Topic 73, AIM 4Kaplan Schweser Printable Exams - Risk Management and Investment Management (Question Part 2) Question 1 - #49605 Abhedge fund manager generally has more flexibilty and freedom to make investment “bets” and uses this flexibility to sell short and thus create opportunities for gains, Which of the following would NOT be a purpose for taking short positions? A) To hedge overall broad market risk. B) To earn the short rebate interest ©) To eam significant beta, D) To earn a profit when the stack declines. Question 2 - #43456 Which of the following statements regarding fixed-income arbitrage strategies is NOT correct?” iy TH® statogy attomps to trade the spread relationship betwoon similar fhrectincome secures and thelr derivatives: B) The strategy is always neutral with respect to duration and credit risk. C) Leverage is typically high, D) Profits are from positive carry returns or from relative changes in the prices of long and short positions. Question 3 - #43457 Which of the following is NOT a category of pricing inefficiencies that are likely to be exploited through fixed-income arbitrage strategies? A) Agency biases. 8) Segmentation biases ) Structural biases. D) Economic biases. Question 4 - #49373 AAs a percent of the money invested in hedge funds, funds-of-funds account for AA) well over half, but not near 100%. 8) about 100%, ) about 30%, D) anegiigible amount that is near zero.Question 5 - #49608 Which of the following strategies involves purchasing equities of small-cap firms and simultaneously selling equities of large-cap firms? A) SUE, 8) HML, c) SMB. D) UMD.Kaplan Schweser Printable Exams - Risk Management and Investment Management (Answer Part 2) Question 1 - #49605 ‘The correct answer was C) To earn significant beta, To hedge overall broad market risk, to eam the short rebate interest, and to eam a profit when the stock declines are all legitimate, citferent purposes for taking short positions. Such “shorting” is generally not available to traditional investment managers who may have regulatory constraints or internal compliance rules, particularly within financial institutions. The term “short rebate’ is interest eamied on the proceeds from short selling. To ean signiticant beta is not a legitimate purpose of taking short positions. In fact, the majority of long/ short equity managers also claim to retum a large amount of alpha, ‘This quection tested From Module 6, Topic 72, AIM 4 Question 2 - #43456 ‘The correct answer was B) The strategy is always neutral with respect to duration and oredit risk. Fixed-income arbitrage strategies may be market neutral or non-market neutral, Market neutral strategies are neutral with respect to duration and credit risk. Non-market neutral strategies are formad around expactations of yield curve or credit spread changes, so they are exposed to duration andor credit risk, ‘This question tested from Module 8, Topic 73, AIM 1 Question 3 - #43457 ‘The correct answer was D) Economic biases. ‘Agency biases result from money managers who, on behalt of their clients, invest in securities with recant positive performance. Structural biases occur when tax concerns, regulatory issues, and accounting rules motivate investor purchases of certain secutities. Segmentation biases are the result of institutional investors’ liquidity preferences and tracing restrictions that cause pricing relationships between securities to temporarily break clown. ‘This queetion tested from Modula 6, Topic 72, AIM 4 Question 4 - #49373 ‘The correct answer was C) about 30%. This is the number studies have found.‘This question tested from Modul 8, Topic 74, AIM 2 Question 5 - #49608 The correct answer was C) SMB. ‘SMB (small minus big’) strategy involves purchasing small firms’ stock and also selling large-cap stocks. HML is “high minus low'—buying value stocks and shorting growth stocks. UMD (*up minus down’) is investing in recent winners and shorting recent losers. ‘This quoction tasted from Module 8, Tople 73, AIM 1Kaplan Schweser Printable Exams - Risk Management and Investment Management (Q & A Part 1) Question 1 - #68083 Based on monthly returns for an actively managed portfolio during the last five years, a benchmark timing regression equation produces an estimate of MTC» (market timing coefficient) equal to 2.3 and a standard error of the estimate equal 10 1.8, Basod on the estimated statistics of wo the null hypothesis that true MTC» = 0 (absence of market timing skills) at 99% contidence level. A) 1.27; fal to reject B) 2.67; fal to reject. ©) 1.27; reject D) 3.67; reject Your answer: A was correct! In order to reject the null hypothesis of Hy: true MTCp = 0 versus Hy = true MTCp # 0, at 99% contidence level, we need an estimated tstatistics of 2.67 or larger. Since the t-statistic equals 1.27, we fail to reject the null hypothesis and conclude that there is no evidence of market timing skills ‘This question tested fom Module 6, Tepe 68, AIMS Question 2 - #68169 During the last fifteen years, Norma, a portfolio manager, earned excess returns (over risk-tree rate) of 16% with a standard deviation of 12%. During the same time period, excess retums (over risk-free rate) and standard deviation of a benchmark portfolio were 11% and 14% respectively. Norma claims to have beaten the benchmark portfolio at 95% confidence level. Based on our estimation |. we reject her claim. Il, we fail to reject her claim, Which of the above statements is (are) CORRECT given that the t-statistic for the Sharpe ratio is 1.5? A\ only, B) Hlonly. ©) Both | and I D) Neither | nor I. Your answer: A was correct! 5 <2 (critical tat 95%), so we fail to reject the null hypothesis: Hy: difference in Sharpe ratios is zero, Thus, we can reject her claim to have beaten the benchmark portfolio at 95% confidence level‘This question tested from Modul 8, Topic 68, AIMS Question 3 - #68134 Bonchmark Timing regression (below) is used to evaluate market timing skills of a portfolio manager. A successful market timer will correctly foresee the future directions of the market and will load the portfolio with high beta stocks (low beta stocks) for pending up market (down market) Ry = Op + Bp x Poyy + MICo(D, « Roy) + £9 oy = realized retums on a portfolio p during time t ap tercept of the regression equation Bp = portfolio beta MTCp = market timing estimated cootticient Eq) = regression error tarms during time period t y= a dummy variable that is assigned a value of zero for down market and a value of 1 for up market Regression on twelve years of portfolio retums produces an estimate of MTCp = 4.3 with a standard error of 1.4. These results offer an evidence of a market timing strategy: |. which is successtul Il. which produces a t-statistic of 3.07. Ill. which prohibits us from rejecting the null hypothesis of Hy: true, MTC» = 0. IV. which enables us to give due credit to the portfolio manager for implementing a successful market timing strategy. Which of the above statements are CORRECT? A) I, and Il 8) 1, and IV, ©) 1, Il, and IV. D) I, Ul, andl IV. ‘The correct answer was D) |, Il, and IV. 8/ 1.4 = 8.07. We rejected the Hy: true, MTC» =0 in favor of Hy: true, MTC» #0, at least at 95% confidence level (a =.08). So statement Ill is incorrect. ‘This question tasted from Modul 8, Topic 68, AIMS Question 4 - #68067 All of the following statements regarding performance analysis are correct EXCEPT: A) return-based performance analysis is a method of assessing risk and returns of an investment 8B) return-based advanced performance analysis adds statistical and theoretical refinement to the basic model.¢) tn#fo1m performance analysis refers o rturn-based performance analysis and potfoli-based performance analysis, D) hedge funds use only retum-based performance analysis to evaluate managers’ performance and skill ‘The correct answer was D) hedge funds use only return-based performance analysis to evaluate managers’ performance and skil Hedge funds use both return-based and porttolio-based performance analysis to evaluate managerial performance and skill ‘This question tested from Module 6, Topic 68, AIMS Question 5 - #70711 How many of the following statements, regarding the cross-sectional analysis of fund managers’ performance, are CORRECT? Cross-sectional analysis: |. focuses only on surviving firms, I does not make adjustment for the size of a portfolio. Ill, does not make adjustment for the riskiness of a portfolio, IV. offers only a snapshot of performance. A) None of these. B) Three of these. €) Two of these. D) Allof these, The correct answer was D) All of these, All of these statements are correct, ‘This question tested from Module 8, Topic 68, AIM S Question 6 - #68179 Which of the following statements regarding performance analysis is NOT correct? ‘A) Return regression modal assumes that the error terms are uncarrelated over time. ip) CAPM is based on a single factor, the market portfolio, which explains the variations in realized portoio returns Performance of two portfolio managers cannot be compared based on estimates of IR (information ratio}—excess returns per unit of risk py Statpe rato ofan actively managed portolo (statistical) signiticanly greater than the benchmark Sharpe ratio is taken as evidence of superior performance.‘The correct answer was C) Performance of two portfolio managers cannot be compared based on estimates of IR {information ratio) excess returns per unit of risk: A higher information ratio will indicate a better performance. Thus, the performance of two portfolio managers can be compared using information ratio, ‘This question tested from Madu 6, Tope 68, AIMS Question 7 - #68159 Which of the following statements regarding performance analysis are NOT correct? |. Information ratio (IR) is the ratio of risk to annual return | CAPM assumes the aloha (regression intercept) is positive. lll, Significant tstatistie requires a smaller alpha (ap) relative to its standard deviation, as well as fewer observations. IV. Superior performance as shown by Sharpe ratio implies negative Jensen alpha. AL Hand Il. B) land I ©) 1, land V, D) I only. The correct answer was ©) | I Ill and W. Information ratio is the ratio of annual retum to risk. As per the CAPM model, alpha should be zero. Significant t statistic requires a higher alpha relative to its standard deviation and many observations. Superior performance, as per the Sharpe ratio, implies positive Jensen alpha. So, all statements are incorect. ‘This question tested from Module 8, Topic 68, AIMS Question 8 - #68186 Which of the following statements are CORRECT? Various refinements to the basic return-based performance assessment models include: |. using prior knowledge for making ex-post adjustments in regression costticients Il. cottecting for serialy or auto cortelated error terms to draw valid test inferences. Ill, assessing market timing skills of portfolio managers by incorporating up and down market betas into a dummy regression. IV. estimating variations in realized portfolio excess retums as a result of vatiations in the benchmark portfolio returns after controling for dividend yield and interest rates. A) Lt lll and IV, 8) Il, Ill and IV.©) I, Mand. D) and It Your answer: A was correct! ‘Statement | refers to Bayesian correction; statement II eters to correction for serial correlation; statement Ill refers to benchmark timing; and finally, the statement IV refers to controlling for public information ‘This question tasted from Module 6, Topic 68, AIM 6 Question 9 - #68195 Which af the following statements is (are) CORRECT? Investment returns can be defined as: |. compound returns. I. geometric retuns ML agithmetic returns. IV. logarithmic returns. A) L.A ill and IV, B) Ill only ©) 1, Hand It D) I and il Your answer: A was correct! All the stated retums are examples of investment returns: ‘This question tested from Module 8, Topic 68, AIM 7 Question 10 - #70975 How many of the following statements regarding active systematic returns are NOT correct? |. Active returns are defined as the difference between the manager's portfolio retums and the benchmark returns. | Expected active beta return is the return that results from the product of average active beta and the long-run expected benchmark excess return, where excess retum is defined as the realized return minus the risk-free rate. Ill. Active beta surprise is the product of active beta and the deviation of the benchmark returns from its long-term expected return IV. Active benchmark timing return is a product of the deviation from the average beta and the deviation from the benchmark retum, ‘A) Four of these. B) Two of these,©) None of these, D) One of these ‘The correct answer was C) None of these. All of these statements are correct ‘This question tested from Module 6, Topic 68, AIM & Question 11 - #38844 Components of the risk-budgeting process include: |. monitoring the risk and making appropriate corrections. II ensuring that the sum of the risks at each level equals the total risk budget for that level lil allocating a quantifiable allotment of risk across different components of the investment process. A) | and Il only. B) | and Ill only. ©) Hand Ill only. Dd) {Hand i. The correct answer was 8) | and Ill only. ltem Ils incorrect because the sum of the risks at each level is likely to equal more than the total risk budget for that level because of loss than perfect correlation among risks. ‘This question tested from Modul 6, Tope 72, AIN 4 Question 12- #117114 Which of the following statements about the use of investment guidelines for risk management is feast accurate? Attempts to limit speculation with investment guidelines may have the inadvertent consequence of limiting hedging. B) They do not provide for comparison of the tisk of two portfolios, ) They are most effective for portfolios that use overlays, D) Thay have become less effective as securities have become more complex ‘The correct answer was C) They are most effective for portfolios that use overlays. Investment guidelines can be largely ineffective in portfolios that use short selling or overiays or that trade in complex investments such as convertibles, derivatives, or securities with embedded options, ‘This question tested from Module 8, Topic 72, AIM 9Question 13 - #117108 Which af the following statements is CORRECT? Implementation risk differs from tactical asset allocation risk in that implementation risk refers to the risk arising {rom implementation costs to the portfolio and tactical asset allocation risk refers to the difference between the portfolio and the strategic benchmark, Active risk at the plan level refers to the risk that plan assets might underperform the tactical asset allocation Active risk at the manager level refers to the risk that a given manager might underperform the strategic benchmark. A) Lonly. B) Il only. ©) land Il D) | and Il The correct answer was 8) II only lis incorrect because implementation tisk and tactical asset allocation risk are the same thing. They both refer to the risk that the plan porttolio’s actual asset allocation might underperform the strategic asset allocation. Ill is incorrect because active risk at the manager level refers to the risk that a given manager might underperform his benchmark, not the strategic benchmark, ‘This quoction tasted rom Module 8, Topic 72, AIM 4 Question 14 - #117107 Which statement about key market risks for pension funds and asset management firms /east accurate? ‘A) Surplus risk is a major risk for the plan sponsor of a defined benefit plan. BB) The risks to a defined benefit plan are indirect because plan participants take on shortiall risk. C) The risks to fee income are a core risk of an asset management firm and not generally hedged. VAR models are useful tools for managing customer-satistaction risk of an asset management fim because they can help educate customers about the usual types of risks in the firm’s funds. ‘The correct answer was 8) The risks to a defined benefit plan are indirect because plan patticipants take on shortfall risk In defined-contribution plans, the risks to the fund are indirect because the individual, not the plan, takes on the shortfall risk ‘This question tasted from Module 6, Topic 72, AIM 3 Question 15 - #117110Major considerations for maintaining a quality VAR measure include: |. Adjusting historical data to suit manager views. Hl. Length of the historical data sample. Ill. Consistency in the measurement of risk A) Land I 8) land Il ©) Land Ill DI, and I The correct answer was D) I, Il and II, ‘There are three major considerations for maintaining a quality VAR measure + Consistency in the measurement of risk ‘Length of the historical data sample, + Adjusting historical data to suit manager views. ‘This quection tasted from Module 8, Topic 72, AIM 7 Question 16 - #117106 Which statement about VAR is CORRECT? ‘A) The holding period in a VAR forecast must be measured in days or weeks. B) VAR is best suited to forecast worst-case scenarios. ©) VAR predictions of losses are most reliable in likely scenarios, D) VAR is not usetul in tracking ex ante manager risk, ‘The correct answer was ©) VAR predictions of losses are most reliable in likely scenarios. Since markets tend not to react in usual ways during market crashes, VAR predictions are not as reliable for worst-case scenarios as they are for more likaly scenarios. ‘This question tasted fom Module 6, Topic 72, AIM 2 Question 17 - #117109 Which of the following statements least accurately describes the use of downstreaming and dynamic triggers? AA) Ensures that risk thresholds are mutually consistent and defined in the same units B) Two factors that differentiate risk budgeting from asset allocation. C) Automatically signals needed adjustments in the portfolio as soon as a change in risk levels attectsperformance, Assigns risk to all patties responsible for risk-taking in a way that is consistent with the overall risk tolerance of the portfolio. ‘The correct answer was C) Automatically signals needed adjustments in the portfolio as soon as a change in risk levels affects performance. Dynamic triggers refers to the automatic aspect af risk budgeting in which risk of the portfolio automatically triggers adjustments in the portfolio betore they aftect performance, not as soon as they aftect performance. ‘This question tested from Module 6, Topic 72, AIM 6 Question 18 - #117111 Which af the following is the /east appropriate action to take if the specified risk tolerance threshold is exceeded? A) Active risk at the manager level: replace highly correlated managers with managers having lower correlations B) Implementation risk: change the tactical asset allocation, ©) SAR: change the strategic asset allocation. D) Active risk at the plan level: institute an overlay program. Your answer: A was correct! One potential remedy for exceeding the tolerance threshold for active risk at the plan level is to replace highly correlated managers with managers having lower correlations, That does not apply ifthe threshold for active risk at the manager level is exceeded, ‘This quastion tested from Module 8, Topic 72, AIM 8 Question 19 - #38820 Quanteept Investment Management decided to test the VAR model for its Treasury Income Portfolio over 10 trading days. in September. Trading on the portfolio ceased during the ten days of the test. The backtest provided the following predicted daily percentage returns for the portfolio, at a 95% confidence level: Lower Limit UpperLimit Actual 0.21 0.42 0.28 0.16 0.38 O14 O15 0.89 0.37 0.12 0.42 0.08 0.40 0.40 012 0.15 0.43 oot 0.18 0.42 0.250.20 0.48 0.19 0.22 0.43 0.28 0.28 0.42 017 Which statement about the backtest is TRUE? A) Ai this confidence level, 16% of the actual results in the backtest should fall outside the predicted range. ‘The backtest is not valid because the portfolio was not traded during the ten days. Itis only appropriate to 8) backtest a portfolio that has undergone significant changes between calculations because otherwise the results are not relevant to actual trading situations. At the end of the period, Quanteept will recompute VAR to determine what the upper and lower ranges of the portfolio return should have been. D) The backtest does not confirm the validity of the model ‘The correct answer was D) The backtest does not confirm the validity of the model ‘At a 95% confidence level, no more than 1 observation should have fallen outside the predicted range. (The expected value is only one-half observation.) In this model, two observations are outside the predicted range, which is not consistent with a 95% confidence level. The model does not confirm the backtest. Itis only appropriate to backtest a portfolio that has not undergone significant changes between calculations, ‘This question tosted rom Module 6, Topic 72, AIM 10, Question 20 - #46816 Which af the following statements regarding the difference between hedge funds and mutual funds is TRUE? ‘A) Hodge funds have fewer restrictions on short selling securities compared to mutual funds. 8) While anyone can invest in mutual funds, qualified hedge fund investors must have a net worth of $1 million. C) Unlike hedge funds, mutual funds are unable to use leverage, D) Mutual funds tend to hold fewer securities than hedge funds. Your answer: A was correct! Hedge funds have no constraints on short selling, The other statements are all incorrect. Hedge fund portfolios are more concentrated, which implies that they tend to hold fewer securities. Mutual funds are able to use leverage, but the application of leverage is limited, Qualified hedge fund investors must have a net worth of $5 million. ‘This question tested fom Modula 8, Topic 74, AIM 1 Question 21 - #71442 With respect to the diversification that hedge funds can provide in a larger portfolio, t has been found that hedge funds have:‘A) not provided much diversification in the past, and their effectiveness will probably decline in the future, B) provided diversification in the past, but their effectiveness will probably decline in the future. ©) provided diversification in the past, and their effectiveness will probably increase in the future. D) not provided much diversification in the past, but their effectiveness will probably increase in the future. ‘The correct answer was B) provided diversification in the past, but their effectiveness will probably decline in the future. As hedge funds become more institutionalized, their correlation with the market will increase. ‘This quastion tested from Module 8, Topic 74, AIM 2 Question 22 - #61033 Which of the following statements concerning comparisons betwaen hedge funds and mutual funds is most accurate? ‘A) Hedge funds tand to spread their holdings across more securities than mutual funds, B) Mutual funds tend to invest according to a specific investment approach while hedge funds do not. Mutual funds are restricted from using any leverage in their portfolios, while hedge funds use leverage extensively. Hedge funds cannot advertise in order to solicit new funds, while mutual funds can make advertisements to the general public ‘The correct answer was D) Hedge funds cannot advertise in order to solicit new funds, while mutual funds can make advertisements to the general public. Hedge funds are private investment vehicles for qualified investors. Being private allows the hedge fund to escape regulatory oversight, but means the hedge fund cannot advertise to attract new funds. In contrast, mutual funds can advertise to the general public. Note that the other statements are false. Hedge fund portfolios tend to be more concentrated than mutual funds, both hedge funds and mutual funds tend to invest according to a specific approach, and both hedge funds and mutual funds are permitted to use leverage, although mutual funds are typically limited in the amount of leverage they can use (i | Up to 38% of net assets) ‘This question tested from Module 8, Topic 74, AIM 1 Question 23 - #27622 Hedge fund performance data suffers from seriaus biases that can be altributed to the fact that AA) fund managers tend to submit only favorable performance data. BB) hedge funds as an asset class have not been in existence long enough to have meaningful performance data, ) there is not a reliable incex that tracks hedge fund performance. D) hedge funds usually report retums before deducting any fees. Your answer: A was correct!Hedge funds have been in existence since the early 1990's, long enough to compile meaningful data, There are several reliable indexes designed to track hedge funds. Fund managers, when they do submit data, would report performance net of fees, One of the primary reasons why performance data has biases is that submission is strictly voluntary, so managers tend to only submit impressive performance information ‘This question tested from Module 6, Topic 74, AIM 6 Question 24 - #27608 Managers of hedge funds are typically compensated by: A) a management fee, based on the net change in value of the assets during the year. B) an incentive fee, based upon some performance goal set at the beginning of the fiscal year. a base management fee, based on the value of assets under management, plus an incentive fee, based on profits D) an incentive fee, paid only if performance exceeds a “high water mark’, ‘The correct answer was C) a base management fee, based on the value of assets under management, plus an incentive foe, based on profits, Typical arrangements pay the manager a base fee, usually around 1% of assets, plus an incentive fee proportional to profits ‘This question tested from Module 6, Topic 74, AIM 2 Question 25 - #49375 When comparing the historical returns and volatility of the Credit Suisse/Tremont Hedge Fund index to that of the Standard & Poor's 500 over the period 1994 to 2006, the Credit Suisse/Tremont Hedge Fund index returns had a: AA) lower retum and lower standard deviation BB) higher return and lower standard deviation ©) higher return and higher standard deviation. D) lower return and higher standard deviation. ‘The correct answer was 8) higher return and lower standard deviation Net of fees, the average annualized hedge fund index and stock index returns were 10.8% and 10.8%, respactively. The standard deviations were 7.8% and 14.5%, ‘This question tested fom Module 8, Topic 74, AIM 6 ‘Question 26 - #27623‘The fee structure of a hedge fund may lead to biases in performance data because: AA) fund managers have incentives to take big risks if past performance has been poor 8) hedge fund managers are nat required to disclose information regarding fee structures, ) hedge fund managers charge higher fees than managers of traditional funds. D) fund manager compensation can vary widely from year to year. Your answer: A was correct! Hedge fund managers would report performance net of fees if at all. Hedge fund managers have the potential to eam more than managers of traditional funds, but this does not bias performance data. Hedge fund managers typically receive & modest base fee (19%) and then a large incentive fee based upon performance. If past performance has been poor, then fund managers feel they have “nothing to lose” and may invest more aggressively. ‘This question tested from Module 8, Topic 74, AIM 2 Question 27 - #49370 Which of the following statements is true concerning the compensation paid to a fund manager? A fee based upon AA) profits is asymmetric and is the usual fee structure for hedge funds. B) profits earned is symmetric and is the usual fee structure for hedge funds. C) assets under management is asymmetric and the usual fee structure for hedge funds. D) assets under management is asymmetric and is the usual fee structure for mutual funds Your answer: A was correct! This is the only true statement. Fees based upon profits are asymmetric and are usually the fee structure for hedge funds. ‘This question tested from Modul 8, Topic 74, AIM 2 Question 28 - #27607 Hedge funds operating in the United States that abide by certain guidelines: ‘A) may advertise to “accredited! investors. B) gain exemption from most SEC regulations. C) can ullize certain hedging strategies. D) avoid restrictions on making macroeconomic bets. ‘The correct answer was 8) gain exemption from most SEC regulations, Hedge funds may not engage in advertising of any kind. Hedge funds may or may not utilize hedging strategies. Hedge funds may make macroeconomic bets, but this is not because of their agreement to adhere to certain guidelines, The main reason for hedge funds to organize under section 3 {¢) (1) is to gain exemption trom most SEC regulations.‘This question tested from Module 8, Topic 74, AIM 1 Question 29 - #49372 With respect to cash drag and complying with SEC regulations, hecge funds make restrictions on withdrawing monay: AA) to avoid cash drag but not to comply with SEC regulations. B) to avoid cash drag and to comply with SEC regulations. ) to comply with SEC regulations but not to avoid cash drag D) for neither reason. ‘Your answer: A was correct! Without restrictions on withdrawals, funds would have to have cash available to meet the demand for withdrawals. Cash has a lower return than other investments, The SEC does not have restrictions on withdrawals, ‘This quection tasted from Module 8, Topic 74, AIM 2 Question 30 - #50433 ‘The amount of risk a particular fund contributes by its position in the portfolio of funds is called A liquidity VaR. B} component VaR. ©) marginal VaR, D) stress VaR. The correct answer was B) component VaR This is the defintion of component VaR. It will generally be less than the VaR of the fund by itself because of the diversification of some of the funcfs risk at the portfolio level. ‘This question tasted from Module 6, Topic 70, AIM 4 Question 31 - #29803 ‘The difference between marginal value at risk (MVAR) and incremental value at risk (IVAR) is that A) Incremental VAR only captures changes over small increments. B) Marginal VAR captures non-linear changes in the porttolio C) Marginal VAR only captures changes over large increments. D) Incremental VAR computes actual changes in VAR for any additions of securities, ‘The correct answer was D) Incremental VAR computes actual changes in VAR for any additions of securities,Marginal VAR is an approximation of the changas in the VAR of the portfolio, in response tothe actition of one unit (ddllar of a soourily, and is based on linear relationship. Like duration, this linearrolationstip is only accurate for small actitions. Inciemental VA computes the actual ctianges in portfolio VAR fot any size adilions to the pottfcllo. Incremental VAR involves the calculation of an entirely new VAR for the portfolo and is used when thechangas in VAR.cannot be described by a linear function ‘This quastion tata tom Modul 6 Topic 70, AIME ‘Question 32 - #49306 A portfolio consists of assets A and B, The volailitias are 10% and 20%, respsctively. There ate $10 millon and $5 milion invested in thom, respectively. If wo sssume they ato uncorrelated with each other, tne VAR of the pertfolio using Z = 1.65 would be closestto. A) $2475 milion B) $2.88 milion, ©) $1.750 million 1D) $8.509 milion. The correct answer Was B) $2,388 million Wecan use mattix notation to derive the dollar variance ¢f the portfolio: This values in (§ millions)’ VAR. then the square root ef this valua times 1.65: VAR = 1.65 ($1,414,214) = $2,988,452 ‘This questi tasted trom Module 6 Tonic 70, AIM ‘Question 33 - #49242 After regressing the return of a position in the portfolio on the return of the entire portfolio, the slope ovetticient (beta) can be used in the marginal VAR formula, Which of the following is the best representation of that formula? Marginal VAR equals: Portfolio Value A My VAR, TVAR, * B) MVAR, Bi VAR 9 MAR; “Portfolio Value By VAR, D) MvAR, fi‘The correct answer was C} VAR, MvaR = AR __ Portfalio Value B This isthe correct formula, This questi tastad trom Module Topic 70, AIM Question 34 - #49498, Which of the following is NOT a ptimary factor affeoting the risk of a portfolio? A) Total risk for a large portfolio of diversified assats B) The cegree to whicn assets within the portiolio move together. ©) Ahigh degree cf concentration in one asset within the portfolio. 1D) The votatiity of incivicual assets held within the porto ‘Your answer: A wascortect! in adiersitied portfolio with a larga number of assets, themost relevant risk is systematic risk since the unsystematic (6. irn-speciic risk) gels diversified avy. In oiher words, the unsystemate risks of the indiviual assets offset each othe ‘This questic tasted trom Module 6 Tonic 70, AIMS ‘Question 35 - #60905 Which of the following Is the best interpretation of incremental VaR? A) Itis the VaR for the frst step into the tal beyond the VaR level. B) It is the VaR tor liquicating a posttion in inorements. C) tis marginal VaR where the intial weight is zero. D) Itis the amount of risk a partioular fund contributes to a portfolio of funds, The correct answer was C) It is marginal VaR whete the intial weight is Zero. Incremental VaR (I\VaRij is an estimate of the amount of risk a proposed new position in Fund i will add to the tetal VaR of an existing perttalio, Thiscuestic tasted trom Mule Tone 70, AIMQuestion 36 - #49350 For a pottfolio with a large number of relatively small positions, the component VAR of a given position would probably be closest to: AA) the position’s marginal VAR divided by the value invested in the position. 8) the position's marginal VAR multiplied by the beta of the position with the overall portfolio, ) the positian's marginal VAR divided by the beta of the position with the overall portfolio. D) the position’s marginal VAR muttiplied by the value invested in the position ‘The correct answer was D) the position’s marginal VAR multiplied by the value invested in the position Ina large portiolio with many positions, the approximation is simply the marginal VAR multiplied by the dollar weight in position “i”: CVARI = (MVARI) « (wi » P) whore P is the value of the portfolio, wi is the weight in the portfolio. ‘This queetion tested from Module 6, Tepe 70, AIM 4 Question 37 - #49307 ‘Computing component VAR for a position using the position’s beta with respect to the entire portfolio is appropriate for returns that follow: AA) an elliptical distribution but not a normal distribution, B) a normal distribution but not an elliptical distribution. C) neither an elliptical distribution nor a normal distribution, D) both an elliptical distribution and a normal distribution, ‘The correct answer was D) both an elliptical distribution and @ normal distribution, It is appropriate for elliptical distributions, and normal distributions are a subset of elliptical distributions, ‘This question tested from Module 8, Topic 70, AIM 4 Question 38 - #29801 ‘Simply adding the VARs for each security in a portfolio to compute the portfolio value at risk (VAR) implies the assumption of A) perfect and negative correlation, B) pertect and positive correlation. ) imperfect and positive correlation D) imperfect and negative correlation ‘The correct answer was 8) perfect and positive correlation.Simply adding the VARs of individual securities to compute the portiolio VAR assumes that there is a correlation of "1 between all the securities. A correlation value of “1”, is perfect and positive. This is called the undiversitiad VAR. ‘This question tested from Module 6, Topic 70, AIM 3 Question 39 - #49510 Ina portolio of three currencies, the relationship between the component VAR and the individual VAR for each currency is likely to be what? ‘A) The individual VAR is likely to be equal to the component VAR. B) The individual VAR is likely to be less than the component VAR. ) There is no relationship between the component VAR and the individual VAR. D) The component VAR is likely to be less than the individual VAR, ‘The correct answer was D) The component VAR is likely to be less than the individual VAR, Unless assets are pertectly correlated, component VAR will be less than individual VAR. ‘This question tested from Module 6, Topic 70, AIM 4 Question 40 - #117342 ‘The objectives of a risk management unit (RMU) include which of the following statements? |. Identifying and developing risk measurement and performance attribution analytical tools. Il, Gathering risk data to be analyzed in making portfolio manager assessments and market environment assessments, IIL Providing the management team with information to better comprehend risk in individual portfolios as well as the source of performance. IV. Assisting the entity in formulating a systematic and rigorous method as to how risks are identified and dealt with, A) I ll, and IV. B) I, and It ©) IV only. D) Fang Il Your answer: A was correct! ‘The RMU objectives encompass all of these statements as well as several more including: gathering, monitoring, analyzing, and distributing risk data to managers, clients, and senior management ‘This question tested from Module 8, Topic 69, AIM 6 Question 41 - #117341Assume that the number of securities of a given stock is 1,000 and the daily trading volume is 200, what is the liquidity duration under the assumption that the dasired maximum daily volume of this security is 50%? A 10, 8) 100, ) 500, D) 20. Your answer: A was correct! LD = number of shares of the security / (max daily volume percentage » daily volume of the security). LD = 1,000 / (0.5 x 200) = 10. This value is an approximation of the number of days necessary to dispose of a portfolio's holdings without a significant market impact ‘This question tested from Module 8, Topic 69, AIM 8 Question 42 - #49364 Risk budgeting is a: ‘A) top-down process and is forward looking B) bottom-up process and is forward looking ) top-down process and is backward! looking. D) bottom-up process and is backward looking, Your answer: A was correct! Risk budgeting is a top-down process that involves choosing and managing exposures to risk. It builds upon the VAR. measure, is forward-looking, and can apply to asset managers, classes of assets, and individual securtties, ‘This question tested from Module 8, Topic 71, AIM 1 Question 43 - #49366 Which of the following are properties that hedge funds generally share with “sell-side” institutions in the investment industry? AA) Hedge funds use low leverage and have a low turnover. B) Hedge funds have a long horizon and low leverage, C) Hedge funds use high leverage and have a high tumover. D) There are no properties that hedge funds share with sell-side institutions. ‘The correct answer was C) Hedge funds use high leverage and have a high tumover. ‘Thase are properties that hedge funds share with the sall side.‘This question tested from Modul 8, Topic 71, AIM 4 Question 44 - #70925 It the top management of a large firm finds that the overall risk of the fimm’s portfolios has changed, which of the following would NOT be a likely reason? AA) Individual managers have exceeded their risk budget. B) Many of the managers have unknowingly made very different style bets C) Rogue traders have made unauthorized trades. D) The overall markets have become more volatile. ‘The correct answer was B) Many of the managers have unknowingly made very different style bets Making different style bots would increase the diversification and lower risk. ‘This quection tested from Modul 8, Topic 71, AIM 6 Question 45 - #49367 In contrast to absolute risk, relative risk is measured by: AA) tracking error, and VAR techniques can apply to tracking error it itis normally distributed, B) total variance, and VAR techniques cannot apply under any circumstances. ©) total variance, and VAR techniques can apply to tracking error itt is normally distributed. D) tracking error, and VAR techniques cannot apply under any circumstances. Your answer: A vas correct! Absolute risk refers to the total possible losses over a horizon, Relative risk is measured by tracking error, which is the dollar loss relative to a benchmark return. VAR techniques can apply to tracking error if itis normally distributed ‘This question tasted from Module 8, Topic 71, AIMS Question 46 - #493 VAR can apply to funding risk: AA) in no way, funding risk is not a type of risk to which VAR can apply. B) by showing how to construct the surplus so that it does up when the VAR loss occurs, ) by calculating the level of VAR associated with a zero surplus, D) by calculating the fal in surplus when the porttolio’s VAR loss occurs. ‘The correct answer was D) by calculating the fall in surplus when the pottiolio's VAR loss occurs.This is the usual application of VAR to funding risk ‘This question tested from Module 6, Topic 71, AIM 5 Question 47 - #49365 ‘Compared to banks, the “sell side”, investors on the “buy side” have’ AA) a shorter horizon and slower turnover. B) a longer horizon and faster turnover. ©) a longer horizon and slower turnover. D) a shorter horizon and faster tumover. ‘The correct answer was C) a longer horizon and slower turnover. Compared to banks on the “sell side’, investors on the “buy side” have a longer horizon, slower turnover, and lower leverage. ‘This question tested from Module 6, Topic 71, AIM 2 Question 48 - #50562 ‘The process of defining risk and allocating that risk across a portfolio is known as: AA) risk budgeting, B) tactical allocation. ©) asset allocation. D) market timing, Your answer: A was correct! ‘The process of defining tisk and allocating that risk across a portfolio is known as risk budgeting. The risk budgeting process allows a manager to set target risk levels acrass her portfolio, ‘This question tested fom Modula 8, Topic 71, AIM 1 Question 49 - #49369 Trends in risk management systems by money managers include(s). A an increased use of such systems and efforts to differentiate themselves by the type of management used. B) a decreased use of such systems in a fairly homogenous fashion. C) a decreased use of such systems and ettorts to citferentiate thamselves by the type of management usedD) an increased use of such systems in a fairly homogenous fashion. Your answer: A was correct! Money managers who are not increasing their use of risk management systems will probably find themselves at a competitive disadvantage. ‘This question tested from Modul 6, Topic 71, AIM 6 Question 50 - #27617 Which of the following statements best describes the fund-of-funds (FOF) class of hedge funds? A fund of funds: AA) is an open-end mutual fund that primarily invests in other open-end funds. B) is open to institutional investors for the purpose of seeking arbitrage situations in hedge fund pricing. ©) allows smaller investors to access the hedge funds market, D) allows smaller investors to parlicipate in the venture capital market, ‘The correct answer was C) allows smaller investors to access the hedge funds market. ‘AFOF is a fund that invests in hedge funds. They are open to both individual and institutional investors. ‘This question tosted from Module 8, Topic 75, AIM 1 Question 51 - #49460 Fullen Capital Management recently started a convertible bond arbitrage hedge fund and is looking to market the fund to investors with traditional stock and bond portfolios. Based on the characteristics of similar funds, Fullen expects his hedge fund to have high returns and a relatively high correlation with a traditional stock and bond portolio. In his marketing materials, Fullen would most accurately categorize the fund as a: A) total civersifier B) risk reducer. ©) pure diversitier. D) return enhancer. ‘The correct answer was D) return enhanoer. Hedge funds classified as return enhancers have high retuins and high correlations with traditional stock and bond portfolios. ‘This question tested fom Module 8, Topic 75, AIM 2 Question 52 - #47363Style drift and survivorship bias are often mentioned in the analysis of hedge fund performance, Which of the following statements is most accurate? Fund of funds can serve as better indicators of aggregate hedge fund performance than hedge fund indices because they tend to have a lower level of A\ style drift only 8) both survivorship bias and style dit. neither style drift nor survivorship bias, and! fund of funds do not serve as good indicators of aggregate hedge fund performances. D) survivorship bias only. The correct answer was D) survivorship bias only ‘Afund of funds may serve as a better indicator of aggregate performance of hedge funds (Le., a better benchmark) because they suffer from less survivorship bias. Ifa fund of funds includes a fund that dissolves, the fund of funds includes the effect ofthat failure in the return of the fund of funds; however, an index may simply drop the failed fund. A fund of funds can suffer from style dit. This ean produce problems in that the investor may not know what he/she is getting. Over time, managers may til their respective portfolios in different directions. Its not uncommon that two fund of funds who claim to be of the same style to have returns with a very low correlation, ‘This quastion tested from Module 8, Topic 75, AIM 1 Question 53 - #47361 Wiliam Jones, CFA, has a client who wants to invest in a hedge fund, Jones might recommend a fund of funds instead of a single fund for all of the following reasons EXCEPT a fund of funds: ‘A) would have a lower correlation with equity markets. B) would be more liquid. ©) offers diversification D) may serve as a better indicator of aggregate performance of hedge funds. Your answer: A was correct! Fund of funds are usually considered good choices for individual investors because they offer diversification, usually offer ‘more liquidity, and suffer from less survivorship bias thus they may serve as a better indicator of aggregate performance of hedge funds. One problem with fund of funds is that they are usually more correlated with equity markets than an individual fund, and this lowers their ability to diversify the overall portfolio. ‘This question tested from Module 8, Topic 75, AIM 1 Question 54 - #49626 Which of the following is an example of structural risk associated with hedge fund investments?A) Market risk, B) Operational risk ©) Credit risk, D) Liquidity risk. ‘The correct answer was B) Operational risk, Structural risk focuses on risks stemming from a hedge fund's operations and is therefore associated with operational risk Market risk, credit risk, and liquidity risks, while important, are examples of strategy risks. ‘This quastion tested from Module 8, Topic 75, AIM 1 Question 55 - #49619 AA risk reducer hadge fund is characterized by: ‘A) high returns and high positive correlation with traditional asset classes. B) low returns and low positive correlation with tracitional asset classes. ) high returns and negative correlation with traditional asset classes. D) low returns and negative correlation with traditional asset classes ‘The correct answer was B) low returns and low positive correlation with traditional asset classes. Arisk reducer hedge fund is characterized by lower retums, and low correlations with traditional stock/bond asset classes. (One example is @ long/short equity fund, ‘This question tested from Module 8, Topic 75, AIM 2 Question 56 - #38829 In distinguishing between strategy risks and structural risks that stem from a fund of hedge funds, which of the following would be considered strategy risk(s)? |. Trading liquidity risk. II. The extent and form of management oversight. IIL The tisk of poor information reporting systems. IV. The risk of high ownership concentration of hedge fund shares. A\ Lonly. B) I, Ill and IV. ©) land itl D) land IV. Your answer: A was correct!Hedge funds face structural risks that stem from a hedge fund's operations, These risks include the potential for deterioration in a firm's reputation, poor information reporting systems, inadequate management oversight, etc. Strategy risks derive from a hedge fund's investment strategy. They include a fund's exposure to price swings from different asset classes (market risk), the tisk of non-performance by counterparties (credit risk), the risk of price impact from executing large trades (trading liquidity risk), and the risk of not being able to meet interim cash flows obligations before strategies are able to become profitable (funding liquidity risk) ‘This question tested from Module 6, Topic 75, AIM 1 Question 57 - #27615 (One of the main advantages to investing in a fund of funds (FOF) is that FOF provide: AA) lower management tees. B) improved diversification of assets, ©) a proven track record. D) higher expected returns, ‘The correct answer was B) improved diversification of assets. FOF will actually have higher management fees because the FOF will charge a fee in addition to the fee charged by the hedge fund manager. Hedge funds selected by the FOF may have a good track record, but itis no indication of future performance. FOF actually have lower expected returns because of increased diversification. FOF can diversify across many hedge funds strategies to decrease risk ‘This question tosted from Module 8, Topic 75, AIM 1 Question 58 - #117340 Which of the following inputs into the portfolio construction process contains the least amount of uncertainty? AA) transactions costs. B) position alphas. ©) current portfolio, D) active risk aversion. The correct answer was C) current portfolio. The assets and weights in the current portfolio. Relative to the other inputs, the current portfolio input can be measured with the most certainty. ‘This question tested fom Modula 8, Topic 67, AIM 1Question 59 - #117339 Which of the following portfolio construction techniques simply chooses assets based on raw alpha? A) Stratification, 8) Screens. ©) Linear Programming, D) Quadratic Programming. ‘The correct answer was B) Screens. Screens are accomplished by ranking the assets by alpha, choosing the top performing assets, and composing either an equally weighted or capitalization-based weighted portfolio. ‘This queetion tested fom Module 6, Topie 67, AIM & Question 60 - #49467 Which of the following are ways to detect hedge fund style drift? I, Holdings-based analysis. II. Analyze changes in the market environment. Ill, Performance attribution analysis. IV. Compare hedge fund performance to the fund's peer group. A) I th Ill, and IV. B) | and IV only, ) land Il! only, D) | and Ill only, Your answer: A was correct! All of the listed items can help detect hedge fund style drift. Analyzing a fund's holdings cannot prevent style drifts, but it may help any drifts to be detected more quickly. Both a change in market environment or a dramatic under- or overperformance versus a fund's peers is a likely signal of style drift. Performance attribution assesses a manager's performance against vatious dimensions of risk and can verify ithe performance is commensurate with the risks of a manager's strategy. This question tested from Module 8, Topic 78, AIM 3 Question 61 - #38831 ‘The Peyton Formika Fund is a global macro asset allocation hedge fund designed to provide low correlations with U.S. assets, Dominic James is a fund of hedge funds manager that is analyzing the Peyton Formika Fund for signs of style dri. James makes note of the following findings about the fund! |. The R? of the fund versus the global macro peer group has changed from 0.72 to 0.78 over the past 12 months.Il, Due to outstanding returns, assets in the fund have increased from $70 million to $430 million over the past 12 months. Ill The fund made a major shitt in allocation by moving 40 percent of its holdings from Eastern European equities to Asian equities IV. After a recent trip to India, the fund manager gained confidence in his existing Indian equity holdings and levered his ‘existing 5% weighting in India by a 10 to 1 ratio. Which of James’ findings are indicators that the Peyton Formika Fund is at risk for style dit? A) | and Il 8) Hand Il ©) land IV, D) I, lil andl IV. ‘The correct answer was C) Il and IV. Hedge fund style drift occurs when there are changes in the risk factor exposures of the fund or changes in the overall risk of the fund, notably through leverage. Using leverage only for his Indian equity position would definitely be an indicator of style drift, Even though the initial position is small, a 10 to 1 leverage ratio would significantly change the risk of the fund, Excessive cash inflows which may be more money than the manager can sustain is also a potential indicator of style dri ‘The change in allocation from Eastem European equities to Asian equities is within the objectives of a global allocation fund, 50 that would not indicate style ditt. Also, style drift would be a concem with a decrease, not an increase in the Rsquared measure against the peer group. ‘This question tested from Module 6, Topic 76, AIMS Question 62 - #49459 Which of the following statements concerning hedge fund style analysis is TRUE? A) Hedge fund investment style is best defined as the risk factors to which the fund is exposed, 8) Style attributes capture the majority of the characteristics of a particular hedge fund strategy. ©) The most effective way to analyze the style of a hedge fund is to review an up-to-date list of the fund's holdings. D) Because of the nature of their investments, style analysis is not appropriate for hedge funds. Your answer: A was correct! Because hedge fund managers can use a wide array of asset classes and strategies such as short positions and leverage, hedge fund investment style is best defined as the risk factors to which the fund is exposed. Because a hedge fund manager can use holdings in different ways to create a desired risk exposure, holdings-based analysis is not as effective as itis for traditional long-only managers. Although style does not explain the majority of a hedge fund's performance {studies show about 20%), style analysis is still important for hedge fund investors. ‘This question tested fom Module 8, Topic 76, AIM 2Question 63 - #49606 Equity market neutral strategias involve being both long and short in matched stock positions, thus taking advantage af an expected outperformance of the long position. There are two sub-classifications of equity market neutral strategies, which are: A) merger arbitrage and statistical arbitrage trading, 8) market neutral long/short equity and statistical arbitrage trading ) fair valuation and long/short matching, D) convertible arbitrage and market neutral long’short equity ‘The correct answer was B) market neutral long/short equity and statistical arbitrage trading ‘These are both sub-classitications of equity market neutral strategies. Statistical arbitrage is short-term trading based on ‘modeling, and market neutral long/short strategies involve longer holding periods, during which time pricing disparities presumably correct themselves. ‘This queetion tested from Modula 6, Topic 72, AIM 4 Question 64 - #43427 Global macro hedge fund strategies generally have significant exposures to: 1 Credit risk. Liquidity risk. Il. Term structure risk. IV. Foreign exchange risk A) I, Il, and IV only. B) Ill and IV only, ©) | Ill, and IV only, D) I, Ul, Il, and IV, ‘The correct answer was B) Ill and IV only. Global macro strategies bear systematic risk exposure to term structure risk and foreign exchange risk. They generally do not have significant exnosure to credit or liquidity risk This question tested from Module 8, Topic 73, AIM 1 Question 65 - #43426 Event-driven hedge fund strategies leave the:unsystematic risk of individual positions unhedged, so that the individual positions have low correlations with each other. g) Unsystematc tisk of ncividual positions unhedged, so thatthe incvidual positions have high correlations with each other. systematic risk of individual positions unhedged, so that the individual positions have low correlations with each other. systematic risk of individual positions unhedged, so that the individual positions have high correlations with each other, Your answer: A was correct! Event-criven strategies ate based on company specific events that will impact the values of securities. Risks unrelated to the events are hedged, leaving only unsystematic risk in the positions, Since the remaining risks are company specifi, the individual positions should have low correlations with each other ‘This quastion tested from Module 8, Topic 73, AIM 1 Question 66 - #49607 Which of the following statements regarding pair trading is INCORRECT? Pair trading} A) is a form of statistical arbitrage B) involves taking long and short position in two stocks that are related. C) identifies overvalued and undervalued stocks of firms that are related. D) heavily relies on fundamental analysis. ‘The correct answer was D) heavily relies on fundamental analysis. Pair trading relies more on technical, quantitative analysis than “fundamental” analysis. Some criticize this technical approach as being a “black box" in the sense that investors are not given details regarding the statistical model used to create the strategy. ‘This question tested from Module 8, Topic 79, AIM 1 Question 67 - #27614 Which of the following statements regarding hedge funds is least accurate? A) Market-neutral hedge funds may have long and/or short positions B) Event-driven hedge funds seek to capitalize on a unique opportunity in the market ©) Long/short funds have a net market neutral position. D) Global macro funds make bets on the direction of a market, currency or interest rate ‘Tha correct answer was C) Long/short funds have a net market neutral position.Longishort funds, by definition, are not market-neutral and usually maintain a net positive or net negative market exposure. ‘This question tested from Module 6, Topic 73, AIM 1 Question 68 - #28023 ‘A hedge fund that takes perfectly offsetting long and short posttions is best described as a(n): AA) longishort fund, B) market-neutral fund, ©) event-driven fund, D) global macro fund The correct answer was B) market-neutral fund, Matket-neutral funds take long and short positions but attempt to oftset them to hedge against market moves. Long/short funds take both long and short positions but do not try to offset them. Global macro funds bet on the direction of a market, currency, interest rate, or other factor: they don't try to offset positions to cancel out market effects, Event-driven funds focus on unique market opportunities, not offsetting positions. ‘This question tosted from Module 8, Topic 73, AIM 1 Question 69 - #49613 Which type of arbitrage strategy seeks to take advantage of discrepancies in the movements of an individual firm's equity and bond prices? A) Event-driven strategy. B) Volatility arbitrage strategy. ©) Capital structure arbitrage strategy. D) Opportunistic merger arbitrage strategy. ‘The correct answer was C) Capital structure arbitrage strategy. Capital structure arbitrage involves exploiting pricing inefficiencies on the right side of a firm's actual balance sheet ‘This question tested fom Modula 8, Topic 73, AIM 1 ‘Question 70 - #47353 A hedge fund that takes positions in convertible bonds or convertible preterred stock and then takes other positions in the underlying stock would be mast accurately placed in the style category: A) equity market neutralB) fixed income arbitrage, ©) convertible arbitrage. D) distressed securities. The correct answer was C) convertible arbitrage. Convertible arbitrage usually takes positions in convertible bonds or preferred stock as well as warrants, etc... and then takes other positions in the underlying stock. ‘This quastion tested from Module 8, Topic 73, AIM 1 Question 71 - #47352 William Jones, CFA, has a client who wants to invest in a hedge fund that has the strategy of investing in equities and has among its goals the elimination of systematic risk, Jones has found two funds that he thinks are well run: the Marius Fund that uses an equity market neutral strategy and the Hera Fund that uses a hedged equity strategy. Given the client's stated preferences, Jones should recommend: A) the Hera Fund only, B) the Marius Fund only, ) neither the Hera nor the Marius Fund. D) eithar fund, The correct answer was B) the Marius Fund only. Equity market neutral is usually the attempt to exploit price discrepancies through long and short positions. This strategy also has the goal of the systematic risks canceling because of the long and short positions. Hedged ecuity strategies take long and short positions in under and overvalued securities, respectively, like equity market neutral strategies. The difference is that hedged equity strategies do not focus on balancing the positions to eliminate systematic risks. ‘This question tested from Module 8, Topic 73, AIM 1 Question 72 - #47354 ‘A hedge fund that focuses on earning retums from mergers, spin-offs, and takeovers would be most accurately placed in which style category? A) Equity market neutral B) Hedged equity. ) Global macro. D) Merger arbitrage. ‘The correct answer was D) Merger arbitrage.Merger arbitrage focuses on returns from mergers, spin-offs, takeovers, etc... For example, if company X announces it wil acquire company Y, the manager might buy shares in Y and short X ‘This question tested from Module 6, Topic 73, AIM 1 Question 73 - #43425 Capital structure arbitrage stratagios attempt to capitalize on relative price-movement discrepancies observed between the debt and equity securties of an individual company. Such strategies are most effective during periods of: AA) high volatility andl rising equity markets, B) low volatility and falling equity markets ©) low volatility and rising equity markets. D) high volatility and falling equity markets. ‘The correct answer was D) high volatility and falling equity markets. During periods of high volatility and falling equity markets, debt holders tend to realize the gravity of a company's debt load before equity holders and adjust the prices of the company's bonds before equityholders adjust the company's stock price. ‘This question tosted from Module 8, Topic 73, AIM 1 Question 74 - #48614 ‘A manager is considering adding a new position to a portiolio. The size of the position will be 1% of the portfolio. The manager computes the derivative of the portfolio's VaR with respect to the change in the weight of the position, Muttiolying the value of the derivative times 1% will yield A) marginal VaR 8) component VaR. ©) incremental VaR D) Monte Carlo VaR, ‘The correct answer was C) incremental VaR. Incremental VaR, or IVaR,, is an estimate of the amount of risk a proposed new position in fund i will add to the total VaR of an existing portfolio, ‘This question tested fom Module 8, Topic 70, AIM 4 Question 75 - #49610 Which of the following activi has the greatest influence when determining a short-selling manager's success?A) Psychological barriers of others, B) Technical analysis. ©) Regulatory oversight. D) Security selection, ‘The correct answer was D) Security selection Selection of the correct security itself is the most important contributing factor to the short seller's return. While others have a psychological aversion to short selling, and many banks and other portfolio managers are restricted from short selling, the short seller helps contribute to efficient capital allocation within an economy, ‘This quastion tested rom Module 8, Topic 73, AIM 1 Question 76 - #68113 Nazik, a portfolio manager, claims to have consistently produced excessive returns (over and above the benchmark. returns) 95% of the time due to her skill and not luck, To support her claim, she presents regression results based on 72 monthly observations as follows: alpha = 0.58%, standard error of alpha = 0.282% Would you reject the null hypothesis of true a = skill? and accept her claim of superior performance 95% of the time due to her A) t= 2.50; reject the null hypothesis; reject her claim, B) t= 2.39; fail to reject the null hypothesis; accept her claim. ©) t= 2.50; reject the null hypothesis; accept her claim: D) t= 2.39; reject the null hypothesis; accept her claim. ‘The correct answer was C) f= 2.50; reject the null hypothesis; acoept her claim. pha / standard error of alpha 0.0088 / 0.00292 = 2.5 Since tis greater than 2, we reject the null hypothesis at 95% confidence level and accept her claim of producing skill-based superior performance. ‘This quastion tested from Module 8, Topic 68, AIMS Question 77 - #60994 With respect to marginal VaR (MVaR}, which of the following is FALSE?‘A) MVaR is the amount of risk a fund contributes to a porttolio. B) MVaR is an approximation based upon a small change in a fund's portfolio weight ©) MVaR can be positive or negative D) MVaf is a rate of change measure. Your answer: A was correct! MVaR is defined as the change in the portfolio VaR per unit change in the weight ina fund. The amount of risk a fund contributes to a portiolio is the definition of component VaR (CVaR). ‘This quastion tested rom Module 8, Topic 70, AIM 1 Question 78 - #49617 Which of the following statements correctly describe characteristics of a systematic managed futures hedge fund strategy? ‘Systematic managed futures strategies: |. include trend following that utilizes a high volume of trades, many of which are unprofitable, Il, base trading decisions on fundamental changes such as an anticipated disequilibrium in commodity prices. Il are exposed to the risk of over-fiting the optimization model used to select trades. IV, select trades based on computer models that incorporate technical factors. A) I, Hand Ih B) land I, ©) land Iv. D) Lonly. The correct answer was C) I, Ill and IV. ‘Systematic managed futures strategies use computer-based optimization models that incorporate technical factors and indieators to select a high number of trades actoss many different markets. The high volume results in diversification for the fund and is profitable overall even though it may generate many unprofitable individual trades. Discretionary managed futures strategios base trading decisions on fundamental factors such as anticipated disequilibrium in commodity prices. ‘This quastion tested from Module 8, Topic 79, AIM 1 Question 79 - #43424 Hedge fund managers following a convertible arbitrage strategy are said to be: ‘A) long gamma and short vega. B) short gamma and short vega. ) short gamma and long vega. D) long gamma and long vega. ‘The correct answer was D) long gamma and long vega.Convertible arbitrage managers hedge their equity exposure by shorting stocks using the delta hedge ratio, Because they are exposed to changes in the hedge ratio, they are said to be long gamma, They are also exposed to changes in the price Volatility of the stock underlying the option embedded in the convertible security, so they are said to be long vega. ‘This question tested from Module 6, Topic 73, AIM 1 Question 80 - #27613 The largest category of hedge funds in terms of asset size is: AA) merket-nautral funds B) global macro funds ©) longishort funds. D) event-driven funds The correct answer was C) long/short funds, Long/short funds are considered to be the “traditional” type of hedge funds, and they represent the largest category of hedge funds, ‘This question tosted from Module 8, Topic 73, AIM 1 Question 81 - #5462 An investor has two stocks, Stock R and Stock S in her portfolio. portfolio's standard deviation is closest to: Given the following information on the two stocks, the © oq= 34% © os= 16% * tng =0.87 + Wr= 80% + We= 20% A) 8.7%, B) 29.4%, ©) 2.1%. D) 7.8%, ‘The correct answer was 8) 29.4%. ‘The formula for the standard deviation of a 2-stock portfolio is [Wa'sa? + We'su + WaWesesefan]'?(0.87 0.344} (027s 0.16) + (Zn 08 xO.2 x 0.34 0.16 x O67] = [0.078984 + 0.001024 + 0.01 16634)" = ooseer 14? = 0.2944, or approximately 29.4%, “Tis quasticn tasted from Merle 6 Topic 70, AIM2 Question 82 - #43423 Which of the following statements regarding equity market timing strategies as applied by hadge furds is FALSE? Al The strategy is usually based on fundamental analysis. B) The strategy often foouses on one particular sestor, industry, or geographic region. ©) The stiateay involves awitching between heldings of money market securities ard along equity portfolio. Dj Akay part of the strategy is keeping transactions ccsts low. Your answer: A was correct! Equity market timing strategies use stock-seresning models based on simple technical trading models, “This question tested fram edule & Tonic 73, AIM Question 83 - #50541 Marginal YaRtis best described as the change in VaR that resutts trom: Al subtracting idlosynoratis VaR? fromn total VaR. Bj removing an existing asset from a fund C) changing the weight on an existing postion by one unit D) adding anew asset to a fund. The correst answer was C) changing the weight on an existing postion by one unit Marginal VaR or MVaR,, is the chenge in the portfolio VaR per unit ohangein the weight in Fund The following is an expression that represents the marginal VaR of a portfolio: “Tis question eerea tram Neale Tome 70, AIM Question 24. #27632 The seoutities of companias that are either close to bankruptoy or have already filed for bankruptoy protection ate called! Al inotivaly traded seourites.B) distressed securities, ©) illiquid securities. D) discount securities ‘The correct answer was 8) distressed securities, Inactively traded securities are infrequently traded, but the name “inactively traded” does not imply anything about the financial condition of the company. “liquid” and “discount” are descriptions that may be applied to any of number of investment vehicles avallable, Distressed securities are the securities of companies in the midst of financial difficulties ‘This quastion tested from Module 8, Topic 73, AIM 1 Question 85 - #49615 Which of the following would most likely NOT be a reason that a merger arbitrage strategy might fail? A) Lack of agreement between senior management and line staff 8B) Negative earnings report trom target firm C) Uncooperative regulatory agencies, D) Failure to obtain shareholder approval. Your answer: A was correct! A merger arbitrage strategy would more likely fail due to a lack of agreement between senior managers, Line staff is typically not consulted. There are many more reasons a merger arbitrage strategy may fal, including time to completion and miscalculation of overall merger likelihood and conditions ‘This question tested from Module 8, Topic 73, AIM 1 Question 86 - #68182 Refinements to the basic raturn-based performance assessment models include: |. Bayesian correction. | benchmark timing, lll. priori beta estimates. IV. cortection for serial correlation A) |, lll and IV, 8) |, Hand Ill ) |, Hand iv. D) I, Ill and IV. ‘Your answer: A was correct!All of the above are refinements introduced to the basic return-based performance assessment models, ‘This question tested from Module 6, Topic 68, AIM 6 Question 87 - #68191 Which of the following statements regarding porttolio attribution and portfolio performance analysis are CORRECT? |. Performance analysis is used to determine the statistical significance of information ratios (IR). Il. Performance attribution analysis focuses on portfolio returns over a single period. Ill. Retums-based pertormance analysis is based on a top-down approach. IV. Portfolio-based analysis involves a three step process: cross-sectional analysis, portfolio attribution, and performance analysis. A) Lt, lll and IV, 8) |, Hand Ill ©) |, Hand iv. Dy Ii, tl and IV, ‘The correct answer was B) I, Il and Il, Portfolio-based analysis involves a two-step process: portfolio attribution and portfolio performance analysis, ‘This question tested from Module 8, Topic 68, AIM 7 Question 88 - #43422 Hedge fund managers that follow equity market neutral strategies generally try to profit from market inefficiencies related 10: A pricing discrepancies due to mispriced volatility, B) value or momentum factors, ©) pricing discrepancies between the stocks of the parties to a merger, D) the January effect ‘The correct answer was 8) value or momentum factors. Market neutral strategies that exploit market inefficiencies are generally based on the findings of academic research which demonstrates that value stocks and momentum strategies earn positive excess retums ‘This quastion tested rom Module 8, Topic 73, AIM 1 Question 89 - #49374‘The serial correlation of a hedge fund's returns is usually A) negative and is considered evidence of managers massaging their returns data. 8) positive and is caused by low liquidity. C) positive and is considered evidence of managers massaging their returns data. D) negative and is caused by lowr liquidity. ‘The correct answer was C) positive and is considered evidence of managers massaging their retums data, ‘The positive serial correlation is considered evidence of managers massaging their reported returns in that they are probably trying to reduce the period-to-period variabilty of the retums. ‘This question tested from Module 8, Topic 74, AIM 7 Question 90 - #27621 Which of the following statements regarding hedge fund performance is FALSE? ‘A) Hedge funds have demonstrated a lower risk profile than traditional equity investments. B) The Shatpe ratio for hedge funds has been consistently higher than for most traditional equity investments. C) There is a low correlation between the performance of hedge funds and traditional investments. D) Hedge funds have historically underperformed the S&P 500, ‘The correct answer was D) Hedge funds have historically underperformed the S&P 500, Hedge funds have demonstrated a lower risk profile than equities when measured by standard deviation. The Sharpe ratio, Which is a reward-to-risk ratio, has been higher tor hedge funds than for equities. There has been a low correlation between the performance of hedge funds and that of traditional investments. Hedge funds have historically outperformed the S&P 500, ‘This question tested from Modul 8, Topic 74, AIM 6 Question 91 - #49612 Which of the following would NOT likely be a suitable market neutral, fixed-income arbitrage spread trade? A) Butterfly, or yield-curve arbitrage. B) Arbitrage between dissimilar bonds, ) Asset swap trade, D) T-bill and Eurodollar futures spread trade, ‘The correct answer was B) Arbitrage batween dissimilar bonds.‘The correct “market neutral” spread trade, or fixed-income arbitrage trade, is an arbitrage between similar bonds. The other choices are all examples of different forms of spread trades, Other market-neuttal, fixectincome arbitrage trades include basis trades and yield-spread trades between on-the-run and off-the-run bonds ‘This question tested from Module 6, Topic 73, AIM 1 Question 92 - #27635 Atypical distressed security investment strategy would involve purchasing: AA) the debt of a distressed company, allowing the company to utilize the infusion of capital to avoid bankruptcy jg) Me debt ofa struggling company, with the goal of ending up with an equity postion inthe reorganized company. gy 2 controling ecuity postion in a company experiencing financial cificultes and replacing management wih a team of turnaround specialists. D) an equity position in order to dilute the position of the company’s creditors, ‘The correct answer was 8} the debt of a struggling company, with the goal of ending up with an equity position in the reorganized company. Atypical strategy is to invest in the debt of a company, continue to hold the position throughout the bankruptey negotiations, and ultimately end up with equity in the new, revitalized operation, ‘This question tested from Module 6, Topic 73, AIM 1 Question 93 - #49616 What is the most common maturity range associated with private placement convertibles negotiated as part of a Regulation D strategy? A) 3-6 months, 8) 30-90 months. ©) 30-90 days D) 18-60 months. ‘The correct answer was D) 18-60 months Regulation D investments are made possible through an SEC registration exemption as part of the U.S. Securities Act of 1933. The most common maturity range of privately placed convertible bonds negotiated as part of a Regulation D strategy is 1.5 to5 years, or, equivalently, 18 to 60 months. ‘This question tested fom Modula 8, Topic 73, AIM 1Question 94 - #49604 ‘A popular hedge fund strategy is a long/short ecuity strategy. What would be the typical target “net” exposure in such a hedge fund strategy? A) net short 8) net long, C) close to pertectly hedged, D) core long positions with a near total hedge overlay using short index futures. The correct answer was B) net long. While this is not always the cases, most managers would maintain a net long position, or at least have a long bias. It is not as common, but some hedge fund managers have core long positions with a partiafhedge overlay using short index futures, long puts (out-of-the-money), or short covered calls, ‘This queetion tested from Modula 6, Topic 72, AIM 4 Question 95 - #49614 Which of the following combinations of investment positions is a hedge fund manager utilizing a merger arbitrage strategy ‘most likely to establish? ‘A) Long position in the acquirer; short position in the acquisition target. B) Short position in both the acquirer and the accuisition target. ) Long position in both the acquirer and the acauisition target. D) Short position in the acquirer; long position in the acquisition target, ‘The correct answer was D) Short position in the acquirer; long position in the acquisition target. While there is deal risk in the sense that the proposed merger may never happen, the combination of a short position in the acquirer and long position in the acquisition target has the best chance of positive net return, assuming careful fundamental analysis has been performed. This question tested from Module 8, Topic 73, AIM 1 Question 96 - #49371 With respect to requiring a 80-day notice and only being able to make withdrawals on only specific days per year, which of the following Is (are) usual restrictions on hedge funds? A) Being able to make withdrawals on only specific days per year. B) Both requiting a 30-day notice and being able to make withdrawals on only specific days per year. ) Requiring a 30-day notice onlyD) Neither requiring a 30-day notice nor being able to make withdrawals on only specific days per year. ‘The correct answer was 8) Both requiring a 30-day notice and being able to make withdrawals on only specific days per year. Both are usual restrictions. ‘This question tested from Module 6, Topic 74, AIM 2 Question 97 - #68188 ‘The fundamental goal of investment performance analysis is A) to develop non-parametric estimates, 8) to compare past performance with future performance, C) to estimate residual variance, D) to distinguish skill from luck. ‘The correct answer was D) to distinguish skill from luck, ‘The remaining statements are not the goals of investment performance analysis. ‘This question tested from Module 6, Topic 68, AIM 7 Question 98 - #71127 Which ofthe following statements regarding various hedge fund strategies /east accurately reflects a source of return for the strategy? ay Edt long/shot strategies earn retums from their exposure to systematic risk factors related to value and small-cap stocks. Volatility arbitrage strategies earn returns from mispricings on fixed-income options resulting in accurate implied volatility estimates Event-driven strategies earn retums from their exposure to unsystematic risk factors such as an expected merger or the expected outcome of a lawsuit Regulation D stratagias earn retums from their exposure to unsystematic risk factors related to credit and liquidity risk resutting trom private placement. ‘The correct answer was D) Regulation D strategies earn retums from their exposure to unsystematic risk factors related to credit and liquidity risk resulting from private placement Regulation D strategies are exposed systematic risk factors related to credit risk and liquidity risk. These risks arise as a result of the lower credit quality of private convertible debt issuers and the fact that private convertible debt securities are not tradable in the public market for some time after the issuance.‘This question tested from Module 8, Topic 73, AIM 1 Question 99 - #49609 Managers following a short-selling hedge fund strategy commonly search global equity markets in an attempt to find firms that AA) ate the target of an acquisition proposal. B) ate emerging from Chapter 11 bankruptoy. C) use aggressive accounting methods. D) can profit from operational efficiencies. ‘The correct answer was C) use aggressive accounting methods. ‘Soaking firms that uso aggressive accounting techniques is a frequent short-seller theme, The short seller would also look at something additional, such as weak fundamentals. ‘This quection tested from Modula 8, Topic 73, AIM 1 Question 100 - #49611 Which of the following combinations of investment positions reflects the most common form of convertible arbitrage strategy? ‘A) Short position in a firm's stock; long position in a convertible issued by the same firm. B) Short position in a convertible; long position in put options on the issuer's stock. ©) Long position in @ convertible bond long position in put options on stock of a similar firm, D) Short position in a firm's stock; long position in futures on the same stock. Your answer: A vas correct! This is the most “basic” convertible arbitrage strategy ‘This question tested from Module 6, Topic 73, AIM 1Kaplan Schweser Printable Exams - Risk Management and Investment Management (Q & A Part 2) Question 1 - #49605 A hedge fund manager generally has more floxibilty and freedom to make investment “bets” and uses this flexibility to sell short and thus create opportunities for gains. Which of the following would NOT be a purpose for taking short positions? A) To hedge overall broad market risk. B) To earn the short rebate interest ©) To eam significant beta, D) To earn a profit when the stock declines, ‘The correct answer was C) To earn significant beta, To hedge overall broad market risk, to eam the short rebate interest, and to earn a profit when the stock declines are all legitimate, citferent purposes for taking short positions, Such "shorting" is generally not available to traditional investment managers who may have regulatory constraints or intemal compliance rules, particularly within financial institutions. Tho term “short rebate’ is interest earned on the proceeds from short selling. To ean significant beta is not a legitimate purpose of taking short positions. In fact, the majority of long/ short equity managers also claim to return a large amount of alpha. ‘This question tosted from Module 8, Topic 79, AIM 1 Question 2 - #43456 Which of the following statements regarding fixed-income arbitrage strategies is NOT correct? ‘The strategy attempts to trade the spread relationship between similar fixed-income securities and their derivatives, B) The strategy is always neutral with respect to duration and eredit risk. ©) Leverage is typically high. D) Profits are from positive carry returns or from relative changes in the prices of long and short positions, ‘The correct answer was 8) The strategy is always neutral with respect to duration and credit risk Fixechincome arbitrage strategies may be market neutral or non-market neutral, Market neutral strategies are neutral with respect to duration and credit risk. Non-market neutral stratagies are formad around expectations of yield curve ar crecit spread changes, so they are exposed to duration and/or credit risk, ‘This question tested fom Modula 8, Topic 73, AIM 1 ‘Question 3 - #43457Which of the following is NOT a category of pricing inefficiencies that are likely to be exploited through fixed-income arbitrage strategies? A) Agency biases. 8) Segmentation biases. ©) Structural biases. D) Economie biases. The correct answer was D) Economic biases. Agency biases result from money managers who, on behalf oftheir clients, invest in securities with recent positive performance. Structural biases occur when tax concerns, regulatory Issues, and accounting rules motivate investor purchases of certain secutities. Segmentation biases are the result of institutional investors’ liquidity preferences and trading restrictions that cause pricing relationships between securities to temporarily break down. ‘This quastion tested from Module 8, Topic 73, AIM 1 Question 4 - #49373 ‘As a percent of the money invested in hedge funds, funds-of-funds account for: ‘A) woll over half, but not near 100%. B) about 100%, ©) about 30%, D) a negligible amount that is near zero, ‘The correct answer was C) about 30%. This is the number studies have found. ‘This question tested from Modul 8, Topic 74, AIM 2 Question 5 - #49608 Which of the following strategies involves purchasing equities of small-cap firms and simultaneously selling equities of large-cap firms? A) SUE, B) HML, C) SMB. D) UMD. ‘The correct answer was C) SMB.‘SMB (small minus big’) strategy involves purchasing small firms’ stock and also selling large-cap stocks. HML is “high minus low'—buying value stocks and shorting growth stocks, UMD (“up minus down’) is investing in recent winners and shorting recent losers. ‘This question tested fom Modula 8, Topic 73, AIM 1