FIN454 Test

If any, which of the following statements is false? A. A greater breadth of active management decisions in a fund contributes more to the information ratio than a higher information coefficient. B. Compared to the synthetic enhanced indexing strategy the stock-based enhanced indexing strategy has greater breadth? C. Active Return is equal to the portfolio return minus the benchmark return. D. None of the above statements is false.

A. A greater breadth of active management decisions in a fund contributes more to the information ratio than a higher information coefficient

If any, which of the following statements is false? A. Buying the same dollar amount of Ford's shares while shorting the same dollar amount of GM's shares is a directional hedge fund strategy. B. Fallen angels are investment grade securities that get downgraded to below investment grade. C. Distressed equities represent a modern alternative asset and consist of deep value stocks. D. All of the above statements are true.

A. Buying the same dollar amount of Ford's shares while shorting the same dollar amount of GM's shares is a directional hedge fund strategy.

Which of the following statements is TRUE? A. Event driven hedge funds sometimes invest in distressed securities and sometimes in merger arbitrage with opposite positions in an acquirer and its target. B. A global macro hedge fund typically has greater volatility risk than an average stock has. C. A relative value hedge fund typically takes tactical long and short positions across various asset classes. D. A diversified portfolio of hedge funds has greater volatility risk than a diversified portfolio of stocks.

A. Event driven hedge funds sometimes invest in distressed securities and sometimes in merger arbitrage with opposite positions in an acquirer and its target.

Which of the following statements is FALSE? A. Event driven hedge funds that focus on mergers and bankruptcies tend to have less total risk than relative value hedge funds like convertible and fixed income arbitrage. B. Energy MLPs often invest in pipelines and can cause investors to be required to file taxes in multiple states. C. Infrastructure funds invest in physical assets such as airports and hospitals. D. Opportunities in distressed equities tend to peak just after macroeconomic recessions.

A. Event driven hedge funds that focus on mergers and bankruptcies tend to have less total risk than relative value hedge funds like convertible and fixed income arbitrage.

Reasons why there might be more price inefficiencies on short side include all of the following EXCEPT A. Long-only limits active overweights to the stock's market weight B. Since few analysts look for overvalued stocks, pessimism is not fully expressed C. Fraud, window-dressing, and negligence have a one-sided nature D. Sell opinions are rare since they are useful primarily to existing holders, anger customers, and risk libel suits and excommunication from companies

A. Long-only limits active overweights to the stock's market weight

Which of the following statements is false? A. PIMCO stands for passive income management company. B. The cheapest way to use leverage with fixed income investments is with repurchase agreements. C. Generally, the lower the Fed Rate, the lower the repo rate. D. A pure indexing strategy in fixed income is costly, holds illiquid securities and trades infrequently.

A. PIMCO stands for passive income management company.

Enhanced indexing strategies in fixed income include all of the following EXCEPT A. Sampling to minimize tracking error risk B. Yield curve positioning such as avoiding 30-year yields under normal conditions C. Tilting toward short-term corporate bonds if default risk can be sufficiently diversified D. Call exposure positioning by estimating the probability of calling or prepayments

A. Sampling to minimize tracking error risk

Which of the following statements is true? A. The arithmetic average is not the appropriate measure to evaluate the return performance of an investment manager. B. The time-weighted geometric average is the appropriate measure to evaluate the return performance of managers who can determine when to request or when to return capital. C. The dollar-weighted IRR is the appropriate measure to evaluate the return performance of an active mutual fund. D. The dollar-weighted IRR is the appropriate measure to evaluate the return performance of an index mutual fund.

A. The arithmetic average is not the appropriate measure to evaluate the return performance of an investment manager.

Which of the following statements is TRUE? A. Tracking risk depends on issuer-specific exposure, event risk, and imperfect diversification. B. In fixed income portfolios, pure indexing is easy and cheap, even moreso than benchmarking equities to the Dow Jones Industrial Average. C. Separate accounts that consist only of large institutional investments have high costs due to administrative requirements. D. Tracking risk is the volatility of portfolio returns.

A. Tracking risk depends on issuer-specific exposure, event risk, and imperfect diversification.

Which of the following statements is false? A. Value biased fund managers search for companies with exceptional future earnings prospects, sufficient to justify higher current price-to-earnings multiples. B. Value stocks have historically earned significantly higher average returns than growth stocks. C. Growth stocks tend to outperform value stocks during the late stages of the business cycle, often predicting an oncoming recession. D. To detect migration from, say, value to growth, holding-based analysis can capture style changes quicker than returns-based analysis.

A. Value biased fund managers search for companies with exceptional future earnings prospects, sufficient to justify higher current price-to-earnings multiples.

Which of the following statements is FALSE? A. Warren Buffett's approach is best characterized as passive because Berkshire Hathaway owns so many companies. B. When an index is equally weighted rather than value weighted, small stocks have more impact. C. As a price-weighted index, the Dow Jones Industrials is skewed toward how stocks with the highest prices perform. D. Passive indexing methods include full replication, stratified sampling and optimization.

A. Warren Buffett's approach is best characterized as passive because Berkshire Hathaway

Which of the following statements is FALSE? A. When added to a portfolio of stocks and bonds, alternative investments tend to shift the efficient frontier up and to the right. B. Investments in MLPs can cause investors to be required to file taxes in multiple states. C. A common investment for energy MLPs is pipelines. D. Infrastructure funds invest in physical assets such as schools and roads.

A. When added to a portfolio of stocks and bonds, alternative investments tend to shift the efficient frontier up and to the right.

Which of the following statements is TRUE? A. When focused on income risk, investors who prefer stable and dependable income streams may prefer to benchmark their portfolios to long-term bond indexes. B. When focused on market value risk, the price of bonds with shorter durations will fluctuate more with interest rate changes. C. Regardless of an investor's horizon and objective, short term bond indexes are safer. D. Holding short term assets helps reduce the risk on long term liabilities.

A. When focused on income risk, investors who prefer stable and dependable income streams may prefer to benchmark their portfolios to long-term bond indexes.

Which of the following statements is false? A. Modern alternative investment strategies expose investors to specialized trading strategies. B. Traditional alternative investment strategies generally avoid leverage. C. Alternative investments are typically illiquid, but they can improve diversification. D. Compared to bonds and stocks, benchmarking the performance of alternative investments is often more difficult.

B. Traditional alternative investment strategies generally avoid leverage.

Which of the following statements is true? A. High dividend yield and low P/E ratios are characteristics of growth style investing. B. Value indexes have historically earned higher average returns than growth indexes. C. Those who believe that markets are relatively efficient tend to prefer active management strategies. D. For the market as a whole, analysts average the same amount of buy and sell recommendations for the stocks they analyze.

B. Value indexes have historically earned higher average returns than growth indexes.

Which of the following statements is false? A. When yields rise, bond prices fall, but not as much as predicted by duration. B. When yields fall, bond prices rise, but not as much as predicted by duration. C. Bond investors prefer bonds with greater convexity D. Bonds that can be called or prepaid can have negative convexity.

B. When yields fall, bond prices rise, but not as much as predicted by duration.

Which of the following statements is FALSE? A. 12b-1 represents a marketing fee for funds, and some have described it as a "legal kickback" to investment advisors and brokers. B. Because historical return performance is easily calculated, mean returns are easier to forecast than return volatility. C. The style dimensions of fixed income funds are across maturities (short, intermediate, long) and across credit quality (low, medium, high). D. Reported 'betas' in fixed income analysis depend strongly on the benchmark index.

B. Because historical return performance is easily calculated, mean returns are easier to forecast than return volatility.v

If any, which of the following indicate that a fund follows a growth strategy rather than a value strategy: A. If returns-based style analysis shows a larger regression coefficient on a value index's returns than on a growth index's returns. B. If holdings-based style analysis shows a relatively high Price-to-Book ratio, a high PE multiple, a low dividend yield, and a high EPS growth. C. If the fund overweights sectors like utilities and underweights sectors like information technology. D. None of the above indicates that a fund follows a growth strategy rather than a value strategy.

B. If holdings-based style analysis shows a relatively high Price-to-Book ratio, a high PE multiple, a low dividend yield, and a high EPS growth.

Which of the following statements is TRUE? A. Investors who are particularly averse to income risk and prefer stable and dependable income streams should benchmark their portfolios to short-term bond indexes. B. Investors who are particularly averse to market value risk and prefer stable prices should avoid bonds with long durations. C. Regardless of an investor's horizon and objective, short term bond indexes are safer. D. Holding short term assets helps reduce the risk on long term liabilities.

B. Investors who are particularly averse to market value risk and prefer stable prices should avoid bonds with long durations.

Which of the following statements is false? A. Mutual Funds trade once daily at the net asset value based on the recent market close. B. Like mutual funds, exchanged traded funds must hold cash to meet investors' redemptions. C. The main benefit of a market neutral long-short portfolio is its absence from a long only constraint. D. 130/30 refers to active strategies that are long and short stocks, but roughly match the total market exposure to stock returns and risk.

B. Like mutual funds, exchanged traded funds must hold cash to meet investors' redemptions.

Which of the following statements is TRUE? A. Coinciding with the peak in bankruptcy filings, opportunities for distressed equity funds peak at the beginning stage of a recession. B. Managed futures are trading strategies, some based on momentum and some based on mean reversion. C. Distressed equities are stocks that in the past were in financial distress. D. Generally speaking, pinksheet stocks are highly correlated with stock market indexes.

B. Managed futures are trading strategies, some based on momentum and some based on mean reversion.

Which of the following statements is TRUE? A. Investors do not like convexity. B. The prices of callable bonds and mortgage-backed securities with prepayment risk can turn concave, with negative convexity, across yields, especially as yields fall. C. Investing in international bonds has no additional risks than investing in domestic bonds. D. The goal of sampling is to produce a portfolio that is perfectly exact match to the benchmark portfolio, which is expensive due to liquid, infrequent trading.

B. The prices of callable bonds and mortgage-backed securities with prepayment risk can turn concave, with negative convexity, across yields, especially as yields fall.

Which of the following statements is FALSE? A. The 4 P's for evaluating fund managers are People, Process, Performance, and Price. B. The people and organizations that make up the team and the investment philosophy/process are important qualitative factors of investment managers. C. A fund's information ratio is more strongly impacted by doubling its breadth than by doubling its information coefficient. D. The auditors of fraudulent funds are often implicated in illegal activities.

C. A fund's information ratio is more strongly impacted by doubling its breadth than by doubling its information coefficient.

Which of the following statements is TRUE? A. Warren Buffett's approach is best characterized as passive because Berkshire Hathaway owns so many companies. B. When an index is value weighted rather than equal weighted, small stocks have more impact. C. As a price-weighted index, the Dow Jones Industrials is skewed toward how stocks with the highest prices perform. D. Fundamentally weighted indexes tend to be more biased toward highly valued companies than valued weighted indexes are.

C. As a price-weighted index, the Dow Jones Industrials is skewed toward how stocks with the highest prices perform.

It is feasible for a bond portfolio manager to do all of the following, except to A. Reduce or eliminate duration risk by shorting Treasury Bond futures contracts B. Reduce or eliminate duration risk by swapping fixed for floating rates on a notional amount C. Avoid the risk of yields rising, while keeping the upside potential if yields fall, by writing call options on Treasury Bonds D. Protect from the risk of a bond issuer defaulting by paying an upfront or regular fee to the seller of an OTC credit default swap

C. Avoid the risk of yields rising, while keeping the upside potential if yields fall, by writing call options on Treasury Bonds

Compared to holdings-based style analysis, returns-based style analysis A. Can capture style drift more quickly B. Is more data intensive C. Can represent a normal benchmark D. None of the above

C. Can represent a normal benchmark

Which of the following statements is TRUE? A. Mutual Funds trade typically trade throughout the day at their net asset value. B. Unlike mutual funds, exchanged traded funds must hold cash to meet investors' redemptions. C. Closed end funds often trade at prices that substantially differ from their NAVs and frequently at a discount particularly for established funds. D. Positions in futures and swaps hinder funds from managing risks, shifting allocations quickly, and reducing taxes.

C. Closed end funds often trade at prices that substantially differ from their NAVs and frequently at a discount particularly for established funds.

8.21. The best metric to evaluate past performance is with A. Arithmetic average returns for fixed income mutual funds B. Investment multiples for equity mutual funds C. Dollar-weighted internal rates of return for private equity funds D. Time-weighted geometric returns for distressed equity private partnerships

C. Dollar-weighted internal rates of return for private equity funds

Which of the following statements is false? A. Bond prices respond nonlinearly to maturity, sector, and quality risks. B. Enhanced indexing strategies in fixed income focus on estimating credit quality. C. Enhanced indexing strategies in fixed income do not take risk factor timing positions. D. Active strategies in fixed income take levered positions in market-wide and liquidity risk premiums.

C. Enhanced indexing strategies in fixed income do not take risk factor timing positions.

If any, which of the following statements is false? A. Traditional alternative investments represent exposure to returns and risks of various asset classes. B. Modern alternative investments represent exposure to specialized trading strategies. C. Returns to traditional alternative investments exist based on market inefficiencies. D. All of the above statements are true.

C. Returns to traditional alternative investments exist based on market inefficiencies.

Which of the following is not an accurate description of the components of commodity total returns? A. Collateral yield represents the risk-free rate earned from holding 100% margin. B. Spot return is the change in the commodity price in the spot or cash market. C. Roll yield is the convergence of futures prices toward spot prices and tends to be negative when forward prices are backwardated. D. All of the above are components of commodity total returns and are true.

C. Roll yield is the convergence of futures prices toward spot prices and tends to be negative when forward prices are backwardated.

If any, which of the following statements is TRUE? A. Since style indexes distinguish holdings as growth, core, or value, they rarely need to adjust their components. B. Growth indexes have historically earned roughly 6% higher average returns than value indexes. C. Small cap stocks have historically outperformed large cap stocks but underperformed micro cap stocks. D. All of the above statements are false.

C. Small cap stocks have historically outperformed large cap stocks but underperformed micro cap stocks.

Which of the following statements is FALSE? A. Each risk premium is compensation for a market-wide risk, if markets are efficient. B. Shorter durations make bond prices fluctuate less with interest rate changes. C. Spread duration measures the percent increase in value for a parallel 100 basis point increase in the credit spread over the Treasury benchmark. D. Mortgage-backed securities are sensitive to prepayment risk but not to credit risk.

C. Spread duration measures the percent increase in value for a parallel 100 basis point increase in the credit spread over the Treasury benchmark.

Which of the following statements is FALSE? A. Mutual Funds trade once daily at the net asset value based on the recent market close. B. Unlike mutual funds, exchanged traded funds do not need to hold cash to meet investors' redemptions. C. The main benefit of a market neutral long-short portfolio is that it can have two alphas if its long and short positions diverge and move in the opposite directions than anticipated. D. 130/30 refers to active strategies that are long and short stocks, but roughly match the total market exposure to stock returns and risk.

C. The main benefit of a market neutral long-short portfolio is that it can have two alphas if its long and short positions diverge and move in the opposite directions than anticipated.

Which of the following statements is FALSE? A. Bonds have four major types of market risk, which are sensitivities to changes in interest rates, yield curve shape, credit quality, and bond sectors. B. Higher yields increase future reinvestment income. C. When yields increase sharply, bonds show strongly positive returns. D. If yields change significantly in either direction, a fixed income portfolio with high convexity will show better performance than one without.

C. When yields increase sharply, bonds show strongly positive returns.

If any, which of the following statements is TRUE? A. The Dow Jones Industrial Average is an example of an equal-weighted portfolio. B. The Russell 2000 represents the 2,000 smallest companies in the U.S. C. Fundamental weighted indexes are based on outstanding shares rather than freely traded shares. D. All of the above statements are false.

D. All of the above statements are false.

If any, which of the following statements is FALSE? A. Investors who are averse to market value fluctuations can reduce risk by investing in shorter term bonds. B. Investors who are averse to income fluctuations can reduce risk by investing in longer term bonds with fixed coupons. C. Investors who must satisfy long-term liabilities can reduce risk by investing in long-term bonds. D. All of the above statements are true.

D. All of the above statements are true.

If any, which of the following statements is false? A. Duration measures effective maturity, weighted by cash flows. B. Duration measures approximately how bond prices change when interest rates change. C. Because of duration, long-term bonds bear more interest rate risk than short-term bonds. D. All of the above statements are true.

D. All of the above statements are true.

If any, which of the following statements is false? A. High water marks and fee caps are both used to avoid encouraging portfolio managers from taking excessive risks. B. With regard to hedge funds' fee structures, drawdowns must be recouped before any incentive fee is charged. C. Gates and lock-up periods are two characteristics of hedge funds that make them more illiquid that a standard mutual fund. D. All of the above statements are true.

D. All of the above statements are true.

If any, which of the following statements is false? A. Leverage magnifies a portolio's returns and its risk. B. Duration risk can be fully neutralized with a position in either interest rate futures or swaps, but not with either a call or a put. C. A repo is an agreement to sell a set of securities and buy them back at a predetermined date and price. D. All of the above statements are true.

D. All of the above statements are true.

Which of the following derivative strategies would not be appropriate for a fixed income portfolio manager who believes that interest rates will increase? A. Short interest rate futures contracts B. Swap fixed for floating rates C. Buy puts on bonds D. Buy calls on bonds

D. Buy calls on bonds

Which of the following statements is TRUE? A. Traditional alternative investments expose investors to returns and risks of various asset classes and generally avoid leverage. B. Modern alternative investment strategies expose investors to specialized trading strategies and generally avoid leverage. C. Alternative investments typically are liquid, are transparent, improve diversification, but have unclear performance benchmarks. D. Decision risk, or the risk that investors will change strategies at the point of maximum loss, creates concerns particularly for alternative assets that investors may not fully understand.

D. Decision risk, or the risk that investors will change strategies at the point of maximum loss, creates concerns particularly for alternative assets that investors may not fully understand.

Which of the following statements is FALSE? A. The NCREIF index is an appropriate benchmark for direct real estate investment. B. Real estate has low correlations with stocks and bonds which is why real estate helps diversify portfolios. C. An example of an indirect real estate investment is purchasing stocks of homebuilder companies. D. Direct real estate investments tend to be more liquid than indirect real estate investments.

D. Direct real estate investments tend to be more liquid than indirect real estate investments.

The best metric to evaluate past performance is with A. Time-weighted geometric returns for leveraged buyout private equity funds B. Arithmetic average returns for event driven hedge funds C. Investment multiples for commodity futures based mutual funds D. Dollar-weighted internal rates of return for distressed equity private partnerships

D. Dollar-weighted internal rates of return for distressed equity private partnerships

If any, which of the following statements about hedge fund indexes is false? A. Survivor bias occurs when returns of managers who have failed or exited the market are not included in the analyzed data, overestimating historical returns by 1.5% to 3.0%. B. Value-weighted indexes, when compared to equal-weighted indexes, tend to take on the characteristics of the best-performing funds and the more popular strategies. C. Lack of security trading leads to the stale price bias which tends to cause underestimating of standard deviations and correlations. D. None of the above statements is false.

D. None of the above statements is false.

If any, which of the following statements is FALSE? A. Decision risk, which is the risk that investors will change strategies at the point of maximum loss, creates concerns particularly for alternative assets that investors may not fully understand. B. Common features of alternative investments include illiquidity, diversifying power, and a lack of transparency. C. The key questions when evaluating any alternative investment is to determine what is the market opportunity, why it exists, and will it continue to exist. D. None of the above statements is false.

D. None of the above statements is false.

If any, which of the following statements is true? A. The Dow Jones Industrial Average is an example of a value-weighted portfolio. B. The Russell 2000 represents the 2,000 largest companies in the U.S. C. Fundamental weighted indexes are based on freely traded shares rather than outstanding shares. D. None of the above statements is true.

D. None of the above statements is true.

Which of the following statements is FALSE? A. All mutual funds trade at the net asset value only at the market close. B. One of the biggest problems with the optimization method for passive indexing is that it often under predicts tracking risk, which many analysts fail to account for. C. By replicating a market index entirely, investors can achieve zero tracking risk and limited rebalancing. D. Several reasons suggest that there tend to be more price inefficiencies available on the long side than the short side.

D. Several reasons suggest that there tend to be more price inefficiencies available on the long side than the short side.

Which of the following statements is FALSE? A. The 4 P's for evaluating fund managers are People, Process, Performance, and Price. B. The people and organizations that make up the team and the investment philosophy/process are important qualitative factors of investment managers. C. The information ratio is equal to average active return divided by tracking error. D. The auditors of fraudulent funds are rarely implicated in illegal activities.

D. The auditors of fraudulent funds are rarely implicated in illegal activities.

Which of the following statements is FALSE? A. Investors like positive convexity because bond values rise more than duration predicts when yields fall and bond values fall less than duration predicts when yields rise. B. The prices of callable bonds and mortgage-backed securities with prepayment risk can turn concave, with negative convexity, across yields, especially as yields fall. C. Investing in international bonds has additional risks than investing in domestic bonds. D. The goal of sampling is to create a bond portfolio that closely mimics the benchmark index, since pure indexing is inexpensive due to liquid and frequent trading in bonds.

D. The goal of sampling is to create a bond portfolio that closely mimics the benchmark index, since pure indexing is inexpensive due to liquid and frequent trading in bonds.

Common features of alternative investments include all of the following EXCEPT A. They are illiquid and investors often require a risk premium for their illiquidity B. They diversify stocks and bonds due to low correlations with them C. They are often complex, specialized, and lack transparency D. They tend to have clear performance benchmarks

D. They tend to have clear performance benchmarks