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
