fin 400 midterm

the drawdown policy of your hedge fund states that the value at risk (VAR) must be small enough that losses do not push drawdowns (DD) beyond some prespecified maximum acceptable drawdown (MADD) with 99% confidence. Which formula best expresses this policy ?

VaR99% < or = MADD-DDt

1966-2021 geometric return for berkshire

19.76

For the period from 1966 through 2021, calculate the geometric return for Berkshire. Report your return in percent, round to two decimals, and do not enter the percent sign below:

19.76

For the period 1965 through 2021, calculate the geometric return for berkshire. Report your return in percent, round to two decimals, and do not enter the percent sign below.

20.23

For the period from 1965 through 2021, calculate the annual standard deviation for Berkshire (STDEV.S)

33.35

1.) funding liquidity risk 2.) market liquidity risk 3.) news that travels slowly 4.) production of information 5.) providing liquidity to demand pressure 6.) access to information

1.) compensation for liquidity risk 2.) comensation for liquidity risk 3.) compensation for information 4.) compensation for information 5.) compensation for liquidity risk 6.) compensation for information

If you'd invested $1.00 in the S&P 500 at the end of 1965 and kept it in this investment until the end of 2021, to what dollar amount would that $1.00 have grown? Round to the nearest dollar, and do not report the dollar sign below.

271

if youd invested $1.00 in the S&P 500 at the end of 1965 and kept it in this investment until 2021, to what dollar amount would that $1 have grown

271

if you invested $1.00 in the overall MKT at the end of 1965 and kept it in this investment until the end of 2021, to what dollar amount would that $1 have grown

277

The most basic measure of trading performance is, of course, the ______ in a given period.

return

how to solve for what returns investors receive net of the management fee and the performance fee

return - mgmt fee = number whatever performance % of that number is taken off

_____ is the strategys market exposure

beta

performance measures ____ depend on the horizon over which they are measured

do

volatility captures well the risk of crashes for non-normal distributions.

false

1966 through 2021, calculate the "active" information ratio for berkshire based on the third formula on page 30:

0.4113

Based on the annual returns from 1966 through 2021, calculate the "active" Information Ratio for Berkshire based on the third formula on page 30:

0.4113

1966 through 2021, calculate the sharpe ratio for the S&P 500

0.4230

Based on the annual returns from 1966 through 2021, calculate the Sharpe Ratio for the S&P 500. Use the sample standard deviation (STDEV.S) to calculate the denominator. Round your answer to four digits after the decimal point (x.xxxx).

0.4230

Based on the annual returns from 1965 through 2021, calculate the "active" Information Ratio for Berkshire based on the third formula on page 30:

0.4282

Based on the annual returns from 1965 through 2021, calculate the "active" information ratio for Berkshire based on the third formula on page 30:

0.4282

Based on the annual returns from 1966 through 2021, calculate the 'residual' information ratio for berkshire's based on the first formula on page 30

0.4299

Based on the annual returns from 1965 through 2021 calculate the sharpe ratio for the s&p 500

0.4352

Based on the annual returns from 1965 through 2021, calculate the "residual" information ratio for Berkshire based on the first formula on page 30: IR

0.446

Based on the annual returns from 1966 through 2021, calculate the "residual" Information Ratio for Berkshire based on the first formula on page 30:

0.4465

Based on the annual returns from 1966 through 2021, calculate the Sharpe Ratio for Berkshire. Use the sample standard deviation (STDEV.S) to calculate the denominator. Round your answer to four digits after the decimal point (x.xxxx).

0.5936

1966 through 2021, use the capital asset pricing model to estimate berkshire's beta by regressing its return in excess of the risk free rate on the excess return of the market

0.87

For 1966 - 2021, use the Capital Asset Pricing Model (CAPM) to estimate Berkshire's beta by regressing its return in excess of the risk-free rate (BRK-RF) on the excess return of the market (MKT-RF). Report the beta by rounding to two decimals (e.g., x.xx).

0.87

use data from 1065-2021 and the capital asset pricing model (CAPM) to estimate Berkshire's beta by regressing its return in excess of the risk free rate (BKS-RF) on the excess return of the market (MKT-RF).

0.87

Use data from 1965 - 2021 and the Capital Asset Pricing Model (CAPM) to estimate Berkshire's beta by regressing its return in excess of the risk-free rate (BRK-RF) on the excess return of the market (MKT-RF). Report the beta by rounding to two decimals (e.g., x.xx).

0.88

Use data from 1065-2021 and the Fama/French 3-factor model to estimate Berkshire's beta by regressing its return in excess of the risk free rate (BKS-RF) on the excess return of the market (MKT-RF), SMB, and HML.

0.95

1966 through 2021, use the Fama/French 3 factor model to estimate berkshire's beta by regressing its return in excess of the risk free rate on the excess return of the market, SMB, HML

0.97

Side pockets are used by hedge funds that own mostly liquid securities but have a subset of securities that are very liquid. For instance, A hedge fund may place 90% of the investors money in the ____ of liquid investments and the remaining 10% in the _____ of very illiquid investments. Investors can redeem their investments in the _____ , but they will only get their investment in the _____ back when the fund can sell that investment in an orderly fashion.

main pocket side pocket main pocket side pocket

Many trading ideas are simply born bad, and this can be discovered through ____

backtesting

For a long position, a high correlation with other longs is ___, wheras a high correlation with a short position is ____

bad good

Select all the ways that allow you to earn the market liquidity risk premium

become a market maker trade penny stocks

the classic capital asset pricing model (CAPM) states that the expected return on any security or any portfolio is determined solely by ____

beta

if you mix a hedge fund with other investments the ____ risk is not diversified away, while ______ risk largely is

beta idiosyncratic

all backtests suffer from ______

data mining biases

If you trade more patiently, providing liquidity to the market, your transaction costs _____ but your opportunity costs ______

decline rise

many of the corporate events that event-driven hedge fund managers trade on are associated with ______

demand pressure

The term gamblers ruin denots the risk that you end up bankrupt ______

despite having the odds in your favor.

Market impact costs arise if you trade a large number of shares because the process of selling many shares pushes prices ____

down

_______ create a clear plan for how to handle adversity: how much to reduce risk when you are losing money and when to do it

drawdown controls

according to lassie Heje Pederson, the fundamental question concerning financial markets is whether they are ____

efficient

in an_____ market, all prices reflect all relevant information at times

efficient

In an ______ market, competition among professional investors make markets almost efficient, but inefficiencies remain to the extent that they compensate these investors for heir costs and risks

efficiently inefficient

stocks go up more often than they go down because of the

equity risk premium

a hurdle rate is not investor specific true or false

false

hedge fund returns are on average market neutral true or false

false

the drawdown is the cumulative withdrawl of assets by hedge fund investors since losses started

false

volatility is an appropriate measure of risk for strategies with an extreme crash risk true or false

false

an investor in a hedge fund invests in a ____ fund, whose sole purpose is to invest in the _____ fund.

feeder not primary

A hedge fund can have several ___ funds dominated in different currencies, even though the underlying _____ fund is the same

feeder master investment

during liquidity spirals, prices are driven by

forced selling

The risk of being forced to unwind positions as the fund hits a margin constraint or gets uncomfortably close to it is call _____

funding liquidity risk

Match the terms with the correct definition funding liquidity risk market liquidity risk

funding liquidity risk- the risk of running out of cash, especially for a leveraged hedge fund market liquidity risk- the risk of rising transaction costs

short selling means taking a bet that the share price will _____

go down

the word ____ refers to reducing market risk by investing in both long and short positions and the word _____ refers to the pool of money contributed by the manager and investors

hedge fund

A hedge fund typically pays _____ interest rate on the loan that finances its long positions than the interest rate on the cash back on sales

higher

A hedge fund typically pays ____interest rate on the loan that finances its long positions than the interest rate on the cash backing its short sales

higher

securities with high transaction costs are said to be

illiquid

Typically, US taxable investors prefer a feeder fund that is registered _____, while foreign investors and tax exempt US investors prefer a feeder fund that is registered _____-

in the US in an international financial center

For an investor to beat the market, the security market must be _____ enough that active managers can outperform, and the money management market must be _____ enough that the end investor can find a money manager whose fee is below the expected performance

inefficient ineffficient

Lasse Heje Petersen mentions two main sources of repeatable trading profits in chapter 3. what are they?

information advantages compensation for liquidity risk

Lasse Heje Peterson mentions two main sources of repeatable trading profits in chapter 3. What are they

information advantages and compensation for liquidity risk

1966-2021, estimate the fama/french 3 factor model by regressing its return in excess of the risk free rate on the excess return of the market, SMB, HML. Match each of the four variable with the corresponding regression coefficient

intercept- 9.55SMB - 0.18MKT-RF - 0.97HML- 0.61

If you only invest in biotech stocks rather than the overall market, then your idiosyncratic is the relative outperformance of your biotech stocks vis-a-vis the market. The idiosyncratic risk ___ and is independent of market moves

is always zero

if you only invest in biotech stocks rather than the overall market, then your idiosyncratic is the relative outperformance of your biotech stocks vis-a-vis the market. The idiosyncratic risk _____ and is independent of market moves.

is zero on average

the evidence suggests that the biases in many estimates of hedge fund returns are

large

The optimal portfolio derived using mean-variance analysis is characterized by taking large positions for securities with _____ expected retruns, _____ variance, and _______correlation to other positions.

large low low

______ is an important reason why the standard capital asset pricing model (CAPM) does not work well in practice.

liquidity risk

Liquidity spirals start when some kind of shock to the market causes leveraged traders to lose money. Identify all elements of a liquidity spiral, as described in Section 5.10 of "Efficiently Inefficient":

liquidity spiral higher margins reduced positions tighter risk management prices moving away from fundamentals losses on positions funding problems redemption of capital

adjusting a backtest for transaction costs is less important the ______ the turnover of the trading strategy

lower

the risk that you cannot get out of a security or that you will have to pay large transaction, costs is called _______

market liquidity risk

Lasse Heje Peterson mentions three main sources of compensation for liquidity risk in chapter three what are they?

market liquidity risk providing liquidity to demand pressure funding liquidity risk

adjusting a backtest for transaction costs is _____ important the higher the turnover of the trading strategy

more

dedicated short bias managers often have _____ short positions than long positions

more

If a hedge fund has different schedules (e.g., one option with a high management fee and no performance fee and another option with a low management fee and a high performance fee), the funds track record ____ fee schedule.

must be reported using the most conservative

An investor should ____ in the sense that she should do what is optimal on a going-forward basis, regardless of how she got into the current position. An investor should ____ in the sense that all his or her experiences and data should help make the best possible forecasts of risk and expected return.

no memory forget nothing

For normal distributions two-standard deviation returns ______ and five standard deviation events _______, this is not true for real world hedge fund returns since they are not normally distributed. For hedge fund strategies, two standard deviation events _______ and five standard deviation events _______

not are common almost never happen not are uncommon not almsot never happen

It is ____ to define what hedge funds are.

notoriously difficult

1966 through 2021, calculate the sharpe ratio for berkshire. use the sample standard deviation (STDEV.S) to calculate the dominator

o.5936

typically, the US taxable investors prefer a feeder fund that is registered ______ while foreign investors and tax expempt US investors prefer a feeder fund that is registered as _____

offshore feeder fund (double check) international

If you trade faster, your transaction costs ___ but your opportunity costs _____

rise decline

strategic risk target definition

the average level of risk that the fund intends to take over the long term

tactical risk target definition

the desired level of risk that the fund intends to take at a given time

position limit definition

the largest notional exposure (regardless of how low the risk is estimated to be)

risk limit definition

the largest risk the hedge fund will ever take overall, or for an asset class or a strategy

Hedge funds can earn alpha returns as compensation for risks other than stock market exposure true or false

true

It is important to understand why certain strategies can make money true or false

true

Liquidity spirals change correlations across securities true or false

true

a high water mark is investor specific

true

fees are income to asset managers but costs for investors true or false

true

hedge fund investors must be accredited investors true or false

true

if a manager does not deviate from the benchmark the fee should be very small T or F

true

no trading strategies are guaranteed to always make money

true

the drawdown is the cumulative loss since losses started true or false

true

there are many avoidable biases that experienced traders and researchers fight hard to eliminate when back testing their strategies

true

trading strategies exist that have made profits more often than losses over extensive time periods true or false

true

volatility does not capture well the risk of crashes for non-normal distribution true or false

true

you need to understand who is taking the other side of your trade and why true or false

true

the expected shortfall is the expected loss, given that you are losing more than the

value at risk VaR

One of the _____ of the mean-variance analysis is that risk and return estimates from different sources often lead the optimizer to suggest extremely large long and short positions.

weaknesses

based on the annual returns from 1965 through 2021, calcullate the sharpe ratio for Berkshire.

0.5962

Why does lasse heje pedersons book focus on hedge fund strategies?

-invest in long and sell short -its the least restrictive -its made up of sophisticated investors

For the period from 1965 through 2021, calculate the annual arithmetic return for Berkshire.

24.45

The implementation shortfall is the ____ of the transaction cost (TC) and the opportunity cost (OC) associated with changing your trading pattern.

you add them together

geometric mean formula

((1+r)x(1+r))^(1/t) - 1

the two biggest differences between running a paper portfolio in a backtest and running a real portfolio in a big hedge fund are

-real world portfolios need to be funded -real world portfolios incur transaction costs

six investment styles that are part of the main theme "efficiently inefficient

-value investing -trend following investing -liquidity provision -carry trading -low risk investing -quality investing

If a hedge fund is market neutral, what is the value of its beta?

0

For the period from 1965 through 2021, calculate the geometric return for the S&P 500.

10.51

1966-2021 geometric return for the S&P 500

10.52

For the period from 1965 through 2021, calculate the annual arithmetic return for the S&P 500

11.89

1966-2021 annual arithmetic return for the S&P 500

11.92

1966- 2021 use the capital asset pricing model (CAPM) to estimate berkshires annual alpha by regressing its return in excess return of the market (MKT-RF)

12.90

Use data from 1065-2021 and the Capital Asset Pricing Model (CAPM) to estimate Berkshire's annual alpha by regressing its return in excess of the risk-free rate (BBK-RF) on the excess return of the market (MKT-RF).

13.21

Forthe period from 1965 through 2021, calculate the annual sample standard deviation for the S&P 500 (STDEV.S).

16.84

1966-2021 calculate the annual sample standard deviation for the S&P 500

16.99

For the period from 1966 through 2021, calculate the annual sample standard deviation for the S&P 500 (STDEV.S). Report your return in percent, round to two decimals, and do not enter the percent sign below:

16.99

If youd invested $1 in berkshire hathaway at the end of 1965 and kept it in this investment until the end of 2021, to what dollar amount would the $1 have grown?

24,299

1966-2021 calculate the annual arithmetic return for berkshire

24.00

If you'd invested $1.00 in the S&P 500 at the end of 1964 and kept it in this investment until the end of 2021, to what dollar amount would that $1.00 have grown?

298

If you'd invested $1.00 in the S&P 500 at the end of 1964 and kept it in this investment until the end of 2021, to what dollar amount would that $1.00 have grown? Round to the nearest dollar, and do not report the dollar sign below.

298

If you'd invested $1.00 in the overall market (MKT) at the end of 1964 and kept it in this investment until the end of 2021, to what dollar amount would that $1.00 have grown?

317

If you'd invested $1.00 in the overall market (MKT) at the end of 1964 and kept it in this investment until the end of 2021, to what dollar amount would that $1.00 have grown? Round to the nearest dollar, and do not report the dollar sign below.

317

For the period from 1966 through 2021, calculate the annual sample standard deviation for Berkshire (STDEV.S). Report your return in percent, round to two decimals, and do not enter the percent sign below:

33.48

how much does the strategy go up? beta = 8.6 market goes up by 7.4% 7.4% X 8.6

63.34

1966-2021 use the fama/french 3 factor model to estimate berkshire annual alpha by regressing its return in excess of the risk free rate on the excess return of the market, SMB, HML

9.55

Practitioners often use a 95 % value at risk, meaning that ____% of returns will exceed the VaR and ____% will be worse

95 5

Many hedge funds invest in illiquid securities that often do not trade for days, and therefore month-end price can be "stale." This problem can be especially severe for securities traded in over-the-counter (OTC) markets with no public price transparency, but it is also an issue for illiquid exchange-traded securities. Lasse Haje Pedersen suggests that we can adjust performance measures for illiquid holdings by using multivariate regressions. How?

By regressing on the market return during the same period and also during lagged time periods

for 1966 -2021 estimate the fama/french 3 factor model by regressing berkshire hathaway's annual return in excess of the risk free rate on the excess return of the market, SMB, HML. Select all variables with coefficients that are statistically significant at the 5 % level

HML MKT-RF

for 1966-2021 estimate the fama/french 3 factor model by regressing berkshire hathaway's annual return in excess of the risk free rate on the excess return of the market, SMB, HML. Select all variables with coefficients that are statistically significant at the 1 % level

MKT-RF

For 1966 - 2021, estimate the Fama/French 3-factor model by regressing Berkshire Hathaway's annual return in excess of the risk-free rate (BRK-RF) on the excess return of the market (MKT-RF), SMB, and HML. Select all variables with coefficients that are statistically significant at the 1%-level:

Mkt-RF

For 1966 - 2021, estimate the Fama/French 3-factor model by regressing its return in excess of the risk-free rate (BRK-RF) on the excess return of the market (MKT-RF), SMB, and HML. Match each of the four variable with the corresponding regression coefficient:

Mkt-RF = 097 SMB= 0.18 HML = 0.61 Intercept= 9.55

backtests typically look _____ the real world trading performance that is realized after the trade is put on

a lot better than

a margin call is

a notice to add cash to your account or to reduce your short positions

The implementation shortfall is the difference in performance of

a paper portfolio and your actual live portfolio

The best risk measure to capture the risk of a liquidity spiral is

a stress test

Often hedge funds only charge performance fees on the profits ___ their HWM

above

three main sources of compensation

access to information production of information news that travels slowly

To compute the volatility of a large portfolio, hedge funds need to

account for correlations across assets.

A liquidity spiral is an ____ feedback loop that makes capital disappear

adverse

A hedge funds track record is its realized performance ______ over its life

after all fees and costs

The classic capital asset pricing model (CAPM) predicts that ____ is equal to zero for any investment.

alpha

____ measures the strategys value added above and beyond the market exposure due to the hedge funds trading skill

alpha

_____ is clearly the sexiest term in the regression. It is the holy grail all active managers seek.

alpha

______ measures the strategys value added above and beyond the market exposure due to the hede funds trading skill (or luck, given that it is estimate based on realized reutrns.)

alpha

the expected return in excess of the risk free rate and the exposure to the market is given by ____

alpha

_______ can be subdivided into fixed income, convertible bond, and event driven.

arbitrage strategies

The _____ price is the price at which you can buy shares

ask

The bid-ask spread arises because the ____ price is above the ____ price

ask bid

math for - how much does the strategy group

b* market

A hedge fund's high water mark (HWM) is the highest price it has achieved in the ____

past

hedge funds frequently review what factors are driving their returns, a process called

performance attribution

A position limit is a _____ risk control mechanism while drawdown control is a ____ risk control mechanism

prospective reactive

A hedge funds leverage is measure as the ____ of its investments to its net asset value

ratio

TOTO question

short shares before glenda sells

dedicated short bias managers use ____ techniques as equity long-short managers

similar

Large stock with high trading volume tend to have _______ transaction costs than small stocks

smaller

if you line up past returns, sort them by magnitude, and find a return that has 5% worse days and 95% better days you are estimating ____

something else other than idiosyncratic risk

One of the ____ of portfolio optimization is that it systematically helps reduce a traders own behavioral biases

strengths

One of the _____ of portfolio optimization is that it systematically adjust positions based on the time-varying risk and expected returns

strengths