LOMA 357

Chapter 5
Reference: c. 5, p. 3
Guaranteed investment contracts typically provide institutional investors with a
guaranteed fixed rate of interest.

A. True
B. False
Reference: c. 5, pp. 4, 5
The Hampton Insurance Company holds many different types of funds that consist
of various assets, including mortgage-backed securities, bonds, common stock,
and bank loans. All of these assets are in the broad asset class known as the
fixed-income asset class EXCEPT for

A. mortgage-backed securities
B. bonds
C. common stock
D. bank loans
Reference: c. 5, p. 6
Investment fund classifications include value funds and growth funds. In
comparing these two types of funds, it is correct to say that (value / growth) funds
often pay significant dividends. With regard to volatility, (value / growth) funds
typically have greater volatility.

A. value / value
B. value / growth
C. growth / value
D. growth / growth
Reference: c. 5, pp. 4-6
Two broad categories of funds are based on the primary asset type within a fund:
equity funds and fixed-income funds. Of the following funds, examples of equity funds
include

A) Emerging market funds

B) Junk bond funds
C) Small-cap funds
D) Sector funds

A. A, B, and C only
B. A, C, and D only
C. A and C only
D. B and D only
Reference: c. 5, p. 7
Sometimes investment funds are classified by such characteristics as the primary
investment goal that a fund pursues. An absolute return fund is a fund that seeks to

A. offer fixed, minimum-guaranteed returns, plus a potential for excess interest

crediting
B. produce a pattern of performance similar to that of a specified market index
C. invest in various asset classes and automatically change the asset allocation over
a period of time in order to accumulate assets to support a person's retirement at
a specified date
D. achieve positive returns in all market conditions by investing in alternative
investments and derivatives, and employing alternative investment management
techniques
Reference: c. 5, p. 7
Investment funds may be classified by such characteristics as the primary investment
goal that a fund pursues—such as growth of capital, production of income, or capital
protection. For example, one type of investment fund offers fixed, minimum guaranteed
returns, plus a potential for excess interest crediting. This type of fund corresponds to
the fixed guaranteed fund option under a variable annuity or variable life insurance
contract. By definition, this type of fund is known as

A. an absolute return fund

B. a value fund
C. a stable value fund
D. a high-yield bond fund
Reference: c. 5, p. 9
A market index is a statistical measurement system for recording and publishing
performance data for a large grouping of similar investments. In managing funds,
market indexes are applied for the following purposes:

A) To ensure that funds conform to their specified fund style

B) To serve as a reference for average market performance in a given asset class

I. Both A and B
II. A only
III. B only
IV. Neither A nor B
Reference: c. 5, pp. 12-14
Investment analysts can use scorecards for analyzing or comparing various funds.
The following statements are about scorecards. Three of the statements are true,
and one of the statements is false. Select the answer choice containing the
FALSE statement

A. Scorecards apply mathematical routines to data inputs and automatically

award points for various characteristics.
B. Investment analysts can assign only numerical ranking on scorecards.
C. Investment analysts periodically repeat the scoring and ranking process.
D. Investment analysts use scorecards for analysis of a company's existing fund
options and for screening new funds for possible inclusion in a company's
menu of fund options.
Reference: c. 5, pp. 14-15
Investment professionals typically avoid investing in funds whose portfolio
managers invest personal assets in the fund.

A. True
B. False
Reference: c. 5, p. 16
Attribution analysis describes which of a portfolio manager's strategies were
successful in adding value to a portfolio. One typical attribution factor refers to the
tendency for a security that is gaining in market value to continue moving in the
same direction. This factor is known as

A. sector selection
B. security selection
C. momentum
D. portfolio concentration
Reference: c. 5, p. 17
An investment's attribution analysis shows the investment's total investment return
and total return. With regard to these two types of returns, it is correct to say that
operating income is included in

A. both total investment return and total return

B. total investment return only
C. total return only
D. neither total investment return nor total return
Reference: c. 5, p. 17
The performance attributes of an equity fund include security selection, sector
selection, and momentum. With regard to these attributes, it generally is correct to
say that repeatable performance attributes include

A. security selection, sector selection, and momentum

B. security selection and sector selection only
C. sector selection and momentum only
D. security selection only
Reference: c. 5, pp. 15-17
An investment analyst is compiling an attribution analysis report for two funds, the Himalayan Fund and the Satin
Fund. The analyst has discovered the following about the two funds:

● The main contributor to the success of the Himalayan Fund is that its portfolio manager generated higher
returns than the established benchmark index by selecting and overweighting securities having a higher
expected return than those in the benchmark allocation.
● The main contributor to the success of the Satin Fund is that its portfolio manager allocated a significant
share of the portfolio to a few securities, rather than following the broader allocation established by the
strategic allocation plan.

One true statement about this situation is that the portfolio manager for the

A. Himalayan Fund used the performance attribute known as momentum to achieve the fund’s success
B. Himalayan Fund used a repeatable performance attribute to achieve the fund’s success
C. Satin Fund used the performance attribute known as sector selection to achieve the fund’s success
D. Satin Fund used a repeatable performance attribute to achieve the fund’s success
Reference: c. 5, pp. 21-22
Beta is a measure of market volatility that highlights both return and risk. The
following statements are about beta. Select the answer choice containing the
correct statement.

A. Beta values of less than 1 indicate more risk than the broad stock market.
B. Beta is a measure of interest rate risk.
C. A large-cap fund with a portfolio beta of 1.40 would generate a higher return
than the S&P 500 index.
D. Beta has far greater usefulness for fixed-income investments than for equity
investments.
Reference: c. 5, p. 22
Beta is a measure of market volatility that highlights both return and risk. The
baseline beta for the stock market is (0 / 1). Beta has relatively greater usefulness
for (fixed-income investments / equities).

A. 0 / fixed-income investments
B. 0 / equities
C. 1 / fixed-income investments
D. 1 / equities
Reference: c. 5, p. 22
Excess return, tracking error, the information ratio, and the Sharpe ratio are
measures of fund performance. All of these measures consider risks EXCEPT

A. excess return
B. tracking error
C. the information ratio
D. the Sharpe ratio
Reference: c. 5, p. 23
The information ratio is calculated by dividing a fund's excess return over its
benchmark total return by the (portfolio total return / tracking error). All other
factors being equal, a fund with a (lower / higher) result for the information ratio is
better at using risk to generate returns.

A. portfolio total return / lower

B. portfolio total return / higher
C. tracking error / lower
D. tracking error / higher
Reference: c. 5, p. 23
An investment analyst has compiled the following information on two funds, the Delta Fund and the
Omega Fund:

● The Delta Fund has an excess return of 1% and a tracking error of 5%.
● The Omega Fund has an excess return of 2% and a tracking error of 25%.

The analyst used this information to calculate the information ratios for the two funds. The analyst
determined that, of the two funds, the (Delta / Omega) Fund is the better performing fund, in part
because it has a (lower / higher) information ratio than the other fund.

A. Delta / lower
B. Delta / higher
C. Omega / lower
D. Omega / higher
Reference: c. 5, p. 24
Aurora Growth Fund has published the following information about its
performance over the past year:

Total return: 9%; Risk-free rate of return: 4%; Standard Deviation: 2%

This information indicates that the Sharpe ratio of Aurora Growth was equal to

A. 2.0
B. 2.5
C. 4.0
D. 5.0
Reference: c. 5, p. 24
An investment analyst has compiled the following information about the Mango Growth Fund and its
benchmark portfolio:

Mango Growth Fund Benchmark Portfolio

Portfolio Total Return 8% 8%
Risk-Free Rate of Return 2% 2%
Standard Deviation 6% 10%

In calculating the Sharpe ratios for the Mango Growth Fund and its benchmark portfolio, the analyst
determined that the

A. Mango Growth Fund underperformed the benchmark portfolio on a risk-adjusted basis

B. Mango Growth Fund has a Sharpe ratio of 0.60
C. benchmark portfolio has greater risk than does the Mango Growth Fund
D. benchmark portfolio has a Sharpe ratio of 1.00
Reference: c. 5, p. 25
Analysts evaluate a fund's expenses using the fund's portfolio turnover rate. The
following statement(s) can correctly be made about portfolio turnover:

A) In general, analysts assign higher scores or ratings to funds that have substantially
lower portfolio turnover rates than do other members of the peer group.
B) Actively managed funds have a significantly lower portfolio turnover rate than do
passively managed funds.

I. Both A and B
II. A only
III. B only
IV. Neither A nor B
Reference: c. 5, p. 25
Last year, the Lagomorph Fund bought $125 million of securities and sold $100
million of securities. The fund’s average total asset value for the year was $500
million. This information indicates that Lagomorph’s portfolio turnover rate for last
year was equal to

A. 5%
B. 20%
C. 25%
D. 45%
Reference: c. 5, p. 27
During the selection or analysis of fund options, investment analysts may observe
style drift. The following statement(s) can correctly be made about style drift as it
applies to types of funds:

A) For large-cap equity funds, an increasing fund size typically leads to style drift.
B) Actively managed stock funds are generally more susceptible to style drift than
are bond funds, money market funds, and passively managed funds.

A. Both A and B
B. A only
C. B only
D. Neither A nor B
Reference: c. 5, pp. 26-27
For this question, if answer choices (1) through (3) are all correct, select answer choice (4).
Otherwise, select the one correct answer choice.

During the selection or analysis of fund options, investment analysts often observe style drift.
The following statement(s) can correctly be made about style drift:

A. For small-cap and mid-cap equity funds, an increasing fund size can lead to style drift.
B. Actively managed stock funds are generally more susceptible to style drift than are
bond funds, money market funds, and passively managed funds.
C. Analysts seek to understand the degree of style drift more than to detect its presence.
D. All of the above statements are correct.