FINC 4660 Final, Practice Test

What kind of fees do investors need to consider when investing in ETFs? a. Front-end load fees b. Back-end load fees c. Brokerage fees d. 12-1b fees

c. Brokerage fees

Consider the Sharpe and Treynor performance measures. When a pension fund is large and well diversified in total and it has many managers, the _______ measure is better for evaluating individual managers while the _________ measure is better for evaluating the manager of a small fund with only one manager responsible for all investments that may not be fully diversified. a. Sharpe; Sharpe b. Sharpe; Treynor c. Treynor; Sharpe d. Treynor; Treynor

c. Treynor; Sharpe

Which is biggest? a. World GDP b. World total stock market value c. World total bond market value d. World total currency reserves

c. World total bond market value

The comparison universe in Morningstar rating is ___________. a. a set of all mutual funds in the US b. a set of all mutual funds in the world c. a set of mutual funds with similar investments and risk characteristics d. a set of mutual funds with similar performance over the last 3 years

c. a set of mutual funds with similar investments and risk characteristics

Based on the Madoff scandale, what would make you suspicious about the hedge fund? a. hedge fund uses a non-directional investment strategy b. hedge fund is extremely large c. auditor is a rather unknown auditing firm d. all of the above e. B and C only.

c. auditor is a rather unknown auditing firm

The S&P 500 index is composed of ________________. a. only value stocks b. only growth stocks c. both value and growth stocks

c. both value and growth stocks

Most professionally managed equity funds ____________________. a. outperform the S&P 500 index on both raw and risk-adjusted measures b. outperforms the S&P 500 on raw return measures and underperforms the S&P 500 on risk-adjusted return measures c. underperforms the S&P 500 index on both raw and risk-adjusted return measures d. underperforms the S&P 500 index on raw return measures and outperforms the S&P 500 on risk-adjusted return measures

c. underperforms the S&P 500 index on both raw and risk-adjusted return measures

Typical initial investment in a hedge fund is in the range between __________ and _______________. a. $1,000; $5,000 b. $5,000; $25,000 c. $25,000; $250,000 d. $250,000; $1,000,000

d. $250,000; $1,000,000

Typical lock-up period of a hedge fund is _____________. a. 3 months b. 6 months c. 1 year d. 2 years

d. 2 years

Typical size of the ETF creation unit is ___________________. a. 100 shares b. 1,000 shares c. 10,000 shares d. 50,000 shares or more

d. 50,000 shares or more

Recent analysts indicate that the style of investing is a critical component of fund performance. In fact on average, about ___________ of fund performance is attributable to the asset allocation decision. a. 68% b. 74% c. 88% d. 97%

d. 97%

Which of the following are characteristics of a hedge fund? I. Pooling of assets II. Strict regulatory oversight by the SEC III. Investing in equities, debt instruments, and derivative instruments IV. Professional management of assets a. I and II only b. II and III only c. I, II, III, and IV d. I, III, and IV only

d. I, III, and IV only

Based on the recent study of US large-company mutual funds, majority of these funds __________________. a. outperform the Vanguard 500 Index Fund in the last 25 years b. underperform the Vanguard 500 Index Fund in the last 25 years c. perform comparably to the Vanguard 500 Index Fund in the last 25 years

b. underperform the Vanguard 500 Index Fund in the last 25 years

In the past 10 years, majority of the emerging market ETFs _____________. a. overperformed their benchmark indexes b. underperformed their benchmark indexes c. there are no emerging market ETFs

b. underperformed their benchmark indexes

Hedge fund managers are compensated by ___________________. a. deducting management fees from fund assets and receiving incentive bonuses for beating index benchmarks b. deducting a percentage of any gains in asset value c. selling shares in the trust at a premium to the cost of acquiring the underlying assets d. charging portfolio turnover fees

a. deducting management fees from fund assets and receiving incentive bonuses for beating index benchmarks

When you hedge your stock portfolio with futures contracts (as in example above). Beta of your portfolio is _____________. a. 0 b. 1.0 c. 1.3 d. Beta cannot be determined from information given

a. 0

Sort funds according to their liquidity (highest to lowest) a. ETFs, mutual funds, hedge funds b. Mutual funds, ETFs, hedge funds c. Mutual funds, hedge funds, ETFs d. ETFs, hedge funds, mutual funds

a. ETFs, mutual funds, hedge funds

Which of the following techniques of indexing give the most accurate replication of the underlying index? a. Full replication b. Sampling c. Quadratic optimization d. All of the above e. b and c

a. Full replication

Review the chart for #44 a. Italy b. United States c. Sweden d. Singapore

a. Italy

Active portfolio managers try to construct a risky portfolio with ______________. a. a higher Sharpe measure than a passive strategy b. a lower Sharpe measure than a passive strategy c. the same Sharpe measure as a passive strategy d. very few securities

a. a higher Sharpe measure than a passive strategy

In the recent several years, the net flows to passively managed US stock mutual funds and ETFs _____________ while the net flows into actively managed funds __________________. a. increased; decreased b. decreased; increased c. decreased; decreased d. increased; increased

a. increased; decreased

What was a general market position of LTCM hedge fund? a. short in low-yield liquid bonds and long in high-yield illiquid bonds b. short in high-yield illiquid bonds and long in low-yield liquid bond c. long in both low-yield liquid bonds and high-yield illiquid bonds d. short in both low-yield liquid bonds and high-yield illiquid bonds

a. short in low-yield liquid bonds and long in high-yield illiquid bonds

The M^2 measure is a variant of ________________. a. the Sharpe measure b. the Treynor measure c. Jensen's Alpha d. the Information ratio

a. the Sharpe measure

Suppose that over the same time period two portfolios have the same average return and the same standard deviation of return, but portfolio A has a higher beta than portfolio B. According to the Sharpe measure, the performance of portfolio A ______________. a. is better than the performance of portfolio B b. is the same as the performance of portfolio B c. is poorer than the performance of portfolio B d. cannot be measured since there is no data on the alpha of the portfolio

b. is the same as the performance of portfolio B

Higher risk-adjusted returns of equity hedge funds as compared to the S&P 500 index reflect positive compensation for ___________ risk. a. market b. liquidity c. systematic d. interest rate

b. liquidity

Statistical arbitrage, merger arbitrage, and convertible arbitrage are examples of ____________. a. directional strategies of hedge funds b. non-directional strategies of hedge funds c. risk free strategies often employed by hedge funds d. illegal practices of hedge funds

b. non-directional strategies of hedge funds

Probably the biggest problem with evaluating portfolio performance of actively managed funds is the assumption that ____________________. a. the markets are efficient b. portfolio risk is constant over time c. diversification pays off d. security selection is more valuable than asset allocation

b. portfolio risk is constant over time

Review the chart for #46 a. 0.05360 b. 5.360 c. 18.656 d. 1865.6

b. 5.360

Extremely small premium/discounts of ETFs compared to closed-end funds are due to a. strict regulations of ETFs by the SEC b. Arbitrage pricing mechanism of ETFs c. Sophistication of investors d. There are no significant differences in premiums/discounts of ETFs and closed-end funds

b. Arbitrage pricing mechanism of ETFs

See #13 for the inputs a. A b. B c. C d. S&P 500

b. B

You wish to evaluate these three mutual funds using the Jensen measure (alpha) for performance evaluation. The fund with the highest Jensen measure of performance is _____________. a. Fund A b. Fund B c. Fund C d. S&P 500

b. Fund B

What will arbitrageur do if the net asset value (NAV) of the ETF is larger than its market value? a. He will buy the basket of underlying securities on the open market and short the ETF shares b. He will buy the ETF shares at the open market and short the underlying securities c. He will buy shares of ETFs and the underlying securities at the open market d. Cannot be determined from information given

b. He will buy the ETF shares at the open market and short the underlying securities

Which of the investment strategies is consistent with market efficiency? a. Active management b. Passive management c. Investment in firms with high P/E Ratios d. Investment in firms with low to moderate P/E ratios

b. Passive Management

A mutual fund invests in large-capitalization stocks. Its performance should be measured against which one of the following? a. Russel 2000 index b. S&P 500 index c. Wilshire 5000 index d. Dow Jones Industrial Average

b. S&P 500 index

#17, see #17 for graph a. Sharpe, Fund A b. Sharpe, Fund B c. Treynor, Fund A d. Treynor, Fund B

b. Sharpe, Fund B

Why do many investors distrust GDP numbers? a. They often contain mathematical errors b. They are calculated and reported by a country's own government c. There are too many factors involved to even roughly estimate a country's GDP

b. They are calculated and reported by a country's own government

A restriction where investors cannot withdraw their funds for as long as several months or years is called ________________. a. transparency b. a lock up period c. a back end load d. convertible arbitrage

b. a lock up period

The bogey portfolio refers to _______________. a. the S&P 500 index b. a representative portfolio of a typical client of the fund c. a representative portfolio of a U.S. investor d. The Russel 2000 index e. a portfolio consisting of 20% in the risk free asset and 80% in large cap equity

b. a representative portfolio of a typical client of the fund

Hedging your portfolio by selling S&P 500 futures contracts is an example of _____________. a. statistical arbitrage b. alpha transfer c. short equity hedge d. fixed income arbitrage

b. alpha transfer

The highest peak in value that a hedge fund has reached is called _______________. a. hurdle rate b. high water mark c. hot point d. none of the above

b. high water mark

Imagine that you are a hedge fund manager. You identify a security X that you think is underpriced. You want to take advantage of this mispricing but do not want to be exposed to the market risk. This security has a beta of 1.3, the risk free rate is 2%. What will you do? a. Buy $1,000,000 of the security X and short $1,000,000 of the S&P 500 futures b. buy $1,000,000 of the security X and short $1,000,000 of the S&P 500 futures and invest $1,000,000 in treasuries c. buy $1,000,000 of Security X and short $1,300,000 of the S&P 500 futures d. buy $1,000,000 of the security X and short $1,300,000 of the S&P 500 futures and invest $1,300,000 in treasuries e. none of the above

d. buy $1,000,000 of the security X and short $1,300,000 of the S&P 500 futures and invest $1,300,000 in treasuries

When a currency weakens, what often happens to business in that country? a. products become more expensive to foreigners, who buy less and reduce company sales b. products become more expensive to foreigners and citizens, who buy less and reduce company sales c. products become cheaper to citizens, who buy more and boost company sales d. products become cheaper to foreigners, who buy more and boost company sales

d. products become cheaper to foreigners, who buy more and boost company sales

Morningstar's RAR produce results, which are similar but not identical to _______. a. Jensen's alpha b. M2 c. the Treynor ratio d. the Sharpe ratio

d. the Sharpe ratio

What would be the best measure to evaluate how successfully manager replicated the S&P 500 index? a. Jensen's alpha b. the Sharpe measure c. the Treynor measure d. the tracking error

d. the tracking error

The arbitrage pricing mechanism of ETFs is based on ____________. a. diverisification b. SEC regulation c. CAPM d. transparency of ETF holdings

d. transparency of ETF holdings

Barclays Capital Aggregate Bond ETF trades usually at a slight premium of 0.2% to its NAV. In late 2008-early 2009 it traded at unusually large premiums of 1-4%. This was caused y the _____________. a. low liquidity in the bond markets b. low transparency of bond ETFs c. higher than usual risk associated with holding underlying bonds in volatile market of late 2008-early 2009 d. all of the above e. A and C only

e. A and C only