Q&A Hero

Q: Employers commonly match at least some portion of employee contributions to: I. 401k plans II.403b plans III. Self-directed retirement plans A. I only B. I and II only C. II only D. I, II, and III

Q: Tilting your retirement savings plan toward your later years should only be done by investors _____________. A. who are sufficiently risk averse B. who are more tolerant of risk C. who are unsure if their income growth will keep up with inflation D. who want to retire early

Q: As you get older, you decide to reduce the risk level of your retirement portfolio because your portfolio is nearing your minimum acceptable level. As the portfolio does better, you reallocate funds into higher-risk categories. You are practicing a form of ____________. A. manipulating tax shelters B. involuntary intergenerational transfers C. excessive savings D. dynamic hedging

Q: You earned 8% on your corporate bond portfolio this year, and you are in a 15% federal tax bracket. If over your holding period inflation was 3%, your real after-tax rate of return was _____. A. 6.8% B. 3.69% C. 4.91% D. 4.25%

Q: It would be costly to provide wage insurance because of the ___________ problem. A. moral hazard B. adverse selection C. Texas hedge D. actuarial error

Q: A person in excellent health with a long life expectancy chooses a lifetime annuity. This is an example of _________. A. moral hazard B. adverse selection C. a Texas hedge D. actuarial error

Q: A person in poor health trying to buy supplemental health insurance is an example of ________. A. moral hazard B. adverse selection C. a Texas hedge D. actuarial error

Q: The solvency of Social Security is threatened by ______________. A. increasing population longevity B. above-replacement growth of the U.S. population C. alternative tax shelters D. the growth of competing defined contribution plans

Q: Total annuity income is positively correlated with: I. Longevity II. Durability of marriage III. Expected length of your base (Social Security) annuity A. I only B. I and II only C. II and III only D. I, II, and III

Q: The Social Security system _______________. A. is financed in a regressive way B. is regressive in the way it allocates benefits C. is progressive in the way it is financed D. is fully funded for the foreseeable future

Q: Social Security is ____________. A. a pension plan only B. an insurance plan only C. a combination of a pension and insurance plan D. an involuntary intergenerational transfer

Q: You can tax-shelter only one-half of your retirement savings. You want to invest one-half of your savings in bonds and one-half in stocks. How much of the bonds and how much of the stocks should you allocate to the tax-sheltered investment? A. Stock and bond investments should be equally invested in both tax-sheltered and nonsheltered accounts. B. You should place all the stocks in tax-sheltered accounts and all the bonds in nonsheltered accounts. C. You should place all the bonds in tax-sheltered accounts and all the stocks in nonsheltered accounts. D. It makes no difference how you allocate your stock and bond investments among tax sheltered and nonsheltered accounts.

Q: You work for Fun-A-Rama Corporation and receive stock options as an incentive for your performance on the job. You are counting on the stock options to provide the funds you'll need for your retirement. This is called _____________. A. adverse selection B. a 529 plan C. a moral hazard D. a Texas hedge

Q: You earn 6% on your corporate bond portfolio this year, and you are in a 25% federal tax bracket and an 8% state tax bracket. Your after-tax return is _____. (Assume that federal taxes are not deductible against state taxes and vice versa).A. 4.5%B. 4.14%C. 4.02%D. 3.12%

Q: No taxes are paid on withdrawals made during retirement from a _________. A. traditional retirement plan B. Roth retirement plan C. 401k D. 403b plan

Q: Contributions to a _____________ are not tax deductible. A. traditional retirement plan B. Roth retirement plan C. 401k plan D. 403b plan

Q: The U.S. income tax code is generally _____. A. regressive B. progressive C. flat D. peaked

Q: The tax effect of a traditional retirement plan is to _____ taxes. A. evade B. postpone C. erase D. avoid

Q: Tax shelters __________________. A. postpone payment of tax liabilities B. decrease investment risk C. increase the pretax rate of return earned D. benefit the government more than the investor

Q: A decrease of 1% in both your tax exemption and your income tax rate would, on net, _______________. A. make you better off B. make you worse off C. make you neither better off nor worse off D. make you either better or worse off depending on your age

Q: In a private defined benefit pension plan the ___________ bears the investment risk, and in a private defined contribution plan the ____________ bears the investment risk. A. plan sponsor; employee B. employee; plan sponsor C. U.S. government; plan sponsor D. plan sponsor; U.S. government

Q: Which one of the following represents local consumption smoothing? I. Saving during your working years for retirement II. Borrowing money to buy a car III. Putting off a vacation for a year until you can afford it A. I only B. II and III only C. I and II only D. I, II, and III

Q: If you want to tilt your savings toward later years, you might be well advised to purchase which of the following types of readily available insurance? A. Career failure insurance B. Disability insurance C. Unemployment insurance D. Moral hazard insurance

Q: Inflation has an adverse effect on your savings because: I. It erodes the purchasing power of the dollars you have saved. II. It increases the real rate of return on the dollars you save. III. Unless sheltered, it increases the taxes owed on investment income. A. I only B. II and III only C. I and III only D. I, II, and III

Q: Which one of the following is an example of "global" consumption smoothing? A. Borrowing to buy a car B. Borrowing to buy a home C. Saving to send children to college D. Saving during your working years for retirement

Q: Assume the risk-free interest rate is 10% and is equal to the fund's benchmark, the portfolio's net asset value is $100, and the fund's standard deviation is 20%. Also assume a time horizon of 1 year. Assuming a 2% management fee and a 20% incentive bonus, what is the expected management compensation per share if the fund's net asset value exceeds the stated benchmark? A. $4.24 B. $4 C. $3.84 D. $2.20

Q: Assume the risk-free interest rate is 10% and is equal to the fund's benchmark, the portfolio's net asset value is $100, and the fund's standard deviation is 20%. Also assume a time horizon of 1 year. What is the Black-Scholes value of the call option on the management incentive fee? A. $6.67 B. $8.18 C. $9.74 D. $10.22

Q: Assume the risk-free interest rate is 10% and is equal to the fund's benchmark, the portfolio's net asset value is $100, and the fund's standard deviation is 20%. Also assume a time horizon of 1 year. What is the exercise price on the incentive fee? A. $100 B. $105 C. $110 D. $115

Q: If the risk-free interest rate is rf and equals the fund's benchmark, the portfolio's net asset value is S0, and the hedge fund manager incentive fee is 20% of profit beyond that, the incentive fee is equivalent to receiving ______ call(s) with exercise price ________. A. .2; S0 B. 1; S0(1 + rf) C. 1.2; S0 D. .2; S0(1 + rf)

Q: A high water mark is a limiting factor of hedge fund manager compensation. This means that managers can't charge incentive fees ________. A. when a fund stays flat B. when a fund falls and does not recover to its previous high value C. when a fund falls by 10% or more D. none of these options. (Managers can always charge incentive fees.)

Q: The fastest-growing category of hedge funds is feeder funds. These funds invest in ________. A. other hedge funds B. convertible securities and preferred stock C. equities and bonds D. managed futures and options

Q: A typical hedge fund incentive bonus is usually equal to ________ of investment profits beyond a predetermined benchmark index. A. 5% B. 10% C. 20% D. 25%

Q: Hedge fund managers receive incentive bonuses when they increase portfolio assets beyond a stipulated benchmark but lose nothing when they fail to perform. This is equivalent to __________. A. writing a call option B. receiving a free call option C. writing a put option D. receiving a free put option

Q: Malkiel and Saha (2005) estimate that the survivorship bias for hedge funds equals 4.4%, which is __________ the survivorship bias for mutual funds. A. about the same as B. much lower than C. much higher than D. only slightly lower than

Q: Some argue that abnormally high returns of hedge funds are tainted by __________, which arises when unsuccessful funds cease operations, leaving only successful ones. A. reporting bias B. survivorship bias C. backfill bias D. incentive bias

Q: To attract new clients, hedge funds often include past returns of funds only if they were successful. This is called __________. A. long-short bias B. survivorship bias C. backfill bias D. incentive bias

Q: In a 2011 study, Agarwal, Daniel, and Naik documented that hedge funds tend to report average returns in ____________ that are __________ than their average returns in other months. A. September; lower B. January; higher C. January; lower D. December; higher

Q: Portfolio A has a beta of 1.3 and an expected return of 21%. Portfolio B has a beta of .7 and an expected return of 17%. The risk-free rate of return is 9%. If a hedge fund manager wants to take advantage of an arbitrage opportunity, she should take a short position in portfolio __________ and a long position in portfolio __________. A. A; A B. A; B C. B; A D. B; B

Q: Higher 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

Q: Research by Aragon (2007) indicates that lock-up restrictions tend to hold ____________ portfolios. A. less liquid B. more liquid C. event-driven D. shorter-maturity

Q: According to a model that was estimated using monthly excess returns from January 2005 through November 2011, average returns of equity hedge funds are __________ the S&P 500 Index. A. equal to B. considerably higher than C. slightly lower than D. slightly higher than

Q: Portfolio A has a beta of .2 and an expected return of 14%. Portfolio B has a beta of .5 and an expected return of 16%. The risk-free rate of return is 10%. If you manage a long-short equity fund and want to take advantage of an arbitrage opportunity, you should take a short position in portfolio ______ and a long position in portfolio __________. A. A; A B. A; B C. B; A D. B; B

Q: Unlike market-neutral hedge funds, which have betas near ________, directional long funds exhibit highly _______ betas. A. zero; positive B. positive; negative C. positive; zero D. negative; positive

Q: A hedge fund owns a $15 million bond portfolio with a modified duration of 11 years and needs to hedge risk, but T-bond futures are available only with a modified duration of the deliverable instrument of 10 years. The futures are priced at $105,000. The proper hedge ratio to use is ______. A. 143 B. 157 C. 196 D. 218

Q: You pay $216,000 to the Capital Hedge Fund, which has a price of $18 per share at the beginning of the year. The fund deducted a front-end commission of 4%. The securities in the fund increased in value by 15% during the year. The fund's expense ratio is 2% and is deducted from year-end asset values. What is your rate of return on the fund if you sell your shares at the end of the year? A. 5.35% B. 7.23% C. 8.19% D. 10%

Q: A hedge fund has $150 million in assets at the beginning of the year and 10 million shares outstanding throughout the year. Throughout the year assets grow at 12%. The fund charges a 3% management fee on the assets. The fee is imposed on year-end asset values. What is the end-of-year NAV for the fund? A. $15 B. $15.60 C. $16.30 D. $17.55

Q: Market-neutral hedge funds may experience considerable volatility. The source of volatile returns is the use of _________. A. pure play B. leverage C. directional bests D. net short positions

Q: Consider a hedge fund with $400 million in assets, $60 million in debt, and 16 million shares at the start of the year and with $500 million in assets, $40 million in debt, and 20 million shares at the end of the year. During the year, investors have received an income dividend of $.75 per share. Assuming that the total expense ratio is 2.75%, what is the rate of return on the fund? A. 6.45% B. 8.52% C. 8.95% D. 9.46%

Q: Consider a hedge fund with $200 million at the start of the year. The benchmark S&P 500 Index was up 16.5% during the same period. The gross return on assets is 21%, and the expense ratio is 2%. For each 1% above the benchmark return, the fund managers receive a .1% incentive bonus. What was the annual return on this fund? A. 16.5% B. 18.04% C. 18.55% D. 21%

Q: Consider a hedge fund with $200 million at the start of the year. The benchmark S&P 500 Index was up 16.5% during the same period. The gross return on assets is 21%, and the expense ratio is 2%. For each 1% above the benchmark return, the fund managers receive a .1% incentive bonus. What was the management cost for the year? A. $4,877,000 B. $4,900,000 C. $5,929,000 D. $6,446,000

Q: Consider a hedge fund with $250 million in assets at the start of the year. If the gross return on assets is 18% and the total expense ratio is 2.5% of the year-end value, what is the rate of return on the fund? A. 15.05% B. 15.5% C. 17.25% D. 18%

Q: Which of the following investment styles could be the best description of the Long Term Capital Management market-neutral strategies? A. Convergence arbitrage B. Statistical arbitrage C. Pairs trading D. Convertible arbitrage

Q: The collapse of the Long Term Capital Management hedge fund in 1998 was a case of an extremely unlikely statistical event called ________. A. statistical arbitrage B. an unhedged play C. a tail event D. a liquidity trap

Q: When a short-selling hedge fund advertises in a prospectus that it is a 120/20 fund, this means that the fund may sell short up to ______ for every $100 in net assets and increase the long position to __________ of net assets. A. $120; $20 B. $20; $120 C. $20; $20 D. $120; $120

Q: Hedge funds that change strategies and types of securities invested and also vary the proportions of assets invested in particular market sectors according to the fund manager's outlook are called ____________________. A. asset allocation funds B. multistrategy funds C. event-driven funds D. market-neutral funds

Q: You manage a $15 million hedge fund portfolio with beta = 1.2 and alpha = 2% per quarter. Assume the risk-free rate is 2% per quarter and the current value of the S&P 500 Index is 1,200. You want to exploit the positive alpha, but you are afraid that the stock market may fall and you want to hedge your portfolio by selling 3-month S&P 500 future contracts. The S&P contract multiplier is $250. Hedging this portfolio by selling S&P 500 futures contracts is an example of ___________. A. statistical arbitrage B. pure play C. a short equity hedge D. fixed-income arbitrage

Q: You manage a $15 million hedge fund portfolio with beta = 1.2 and alpha = 2% per quarter. Assume the risk-free rate is 2% per quarter and the current value of the S&P 500 Index is 1,200. You want to exploit the positive alpha, but you are afraid that the stock market may fall and you want to hedge your portfolio by selling 3-month S&P 500 future contracts. The S&P contract multiplier is $250. How much is the portfolio expected to be worth 3 months from now? A. $15,000,000 B. $15,450,000 C. $15,600,000 D. $16,000,000

Q: You manage a $15 million hedge fund portfolio with beta = 1.2 and alpha = 2% per quarter. Assume the risk-free rate is 2% per quarter and the current value of the S&P 500 Index is 1,200. You want to exploit the positive alpha, but you are afraid that the stock market may fall and you want to hedge your portfolio by selling 3-month S&P 500 future contracts. The S&P contract multiplier is $250. What is the expected quarterly return on the hedged portfolio? A. 0% B. 2% C. 3% D. 4%

Q: You manage a $15 million hedge fund portfolio with beta = 1.2 and alpha = 2% per quarter. Assume the risk-free rate is 2% per quarter and the current value of the S&P 500 Index is 1,200. You want to exploit the positive alpha, but you are afraid that the stock market may fall and you want to hedge your portfolio by selling 3-month S&P 500 future contracts. The S&P contract multiplier is $250. When you hedge your stock portfolio with futures contracts, the value of your portfolio beta is __________. A. 0 B. 1 C. 1.2 D. The answer cannot be determined from the information given.

Q: You manage a $15 million hedge fund portfolio with beta = 1.2 and alpha = 2% per quarter. Assume the risk-free rate is 2% per quarter and the current value of the S&P 500 Index is 1,200. You want to exploit the positive alpha, but you are afraid that the stock market may fall and you want to hedge your portfolio by selling 3-month S&P 500 future contracts. The S&P contract multiplier is $250. How many S&P 500 contracts do you need to sell to hedge your portfolio? A. 25 B. 35 C. 50 D. 60

Q: Which of the following are not managed investment companies? A. Hedge funds B. Unit investment trusts C. Closed-end funds D. Open-end funds

Q: Assume that you have invested $500,000 to purchase shares in a hedge fund reporting $800 million in assets, $100 million in liabilities, and 70 million shares outstanding. Your initial lockout period is 3 years.What is your annualized return over the 3-year holding period? A. 14.45%B. 15.18%C. 16%D. 17.73%

Q: Assume that you have invested $500,000 to purchase shares in a hedge fund reporting $800 million in assets, $100 million in liabilities, and 70 million shares outstanding. Your initial lockout period is 3 years. If the share price after 3 years increases to $15.28, what is the value of your investment? A. $553,600 B. $625,000 C. $733,800 D. $764,000

Q: Assume that you have invested $500,000 to purchase shares in a hedge fund reporting $800 million in assets, $100 million in liabilities, and 70 million shares outstanding. Your initial lockout period is 3 years. How many shares did you purchase? A. 13,333 B. 25,000 C. 50,000 D. 66,000

Q: A 1-year oil futures contract is selling for $74.50. Spot oil prices are $68, and the 1-year risk-free rate is 3.25%. Based on the above data, which of the following sets of transactions will yield positive riskless arbitrage profits? A. Buy oil in the spot market with borrowed money, and sell the futures contract. B. Buy the futures contract, and sell the oil spot and invest the money earned. C. Buy the oil spot with borrowed money, and buy the futures contract. D. Buy the futures contract, and buy the oil spot using borrowed money.

Q: A 1-year oil futures contract is selling for $74.50. Spot oil prices are $68, and the 1-year risk-free rate is 3.25%. The arbitrage profit implied by these prices is _____________. A. $6.50 B. $5.44 C. $4.29 D. $3.25

Q: A 1-year oil futures contract is selling for $74.50. Spot oil prices are $68, and the 1-year risk-free rate is 3.25%. The 1-year oil futures price should be equal to __________. A. $68 B. $70.21 C. $71.25 D. $74.88

Q: You believe that the spread between the September S&P 500 future and the S&P 500 Index is too large and will soon correct. This is an example of ______________. A. pairs trading B. convergence play C. statistical arbitrage D. a long-short equity hedge

Q: You believe that the spread between the September S&P 500 future and the S&P 500 Index is too large and will soon correct. To take advantage of this mispricing, a hedge fund should ______________. A. buy all the stocks in the S&P 500 and write put options on the S&P 500 Index B. sell all the stocks in the S&P 500 and buy call options on the S&P 500 Index C. sell S&P 500 Index futures and buy all the stocks in the S&P 500 D. sell short all the stocks in the S&P 500 and buy S&P 500 Index futures

Q: An example of a neutral pure play is _______. A. pairs trading B. statistical arbitrage C. convergence arbitrage D. directional strategy

Q: Assuming positive basis and negligible borrowing cost, which of the following transactions could yield positive arbitrage profits if pursued by a hedge fund? A. Buy gold in the spot market, and sell the futures contract. B. Buy the futures contract, and sell the gold spot and invest the money earned. C. Buy gold spot with borrowed money, and buy the futures contract. D. Buy the futures contract, and buy the gold spot using borrowed money.

Q: Convertible arbitrage hedge funds _________. A. attempt to profit from mispriced interest-sensitive securities B. hold long positions in convertible bonds and offsetting short positions in stocks C. establish long and short positions in global capital markets D. use derivative products to hedge their short positions in convertible bonds

Q: The difference between market-neutral and long-short hedges is that market-neutral hedge funds _________. A. establish long and short positions on both sides of the market to eliminate risk and to benefit from security asset mispricing whereas long-short hedges establish positions only on one side of the market B. allocate money to several other funds while long-short funds do not C. invest in relatively stable proportions of stocks and bonds while the proportions may vary dramatically for long-short funds D. invest only in equities and bonds while long-short funds use only derivatives

Q: A typical traditional initial investment in a hedge fund generally 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

Q: Hedge funds can invest in various investment options that are not generally available to mutual funds. These include: I. Futures and options II. Merger arbitrage III. Currency contracts IV. Companies undergoing Chapter 11 restructuring and reorganization A. I only B. I and II only C. I, II, and III only D. I, II, III, and IV

Q: Management fees for hedge funds typically range between _____ and _____. A. .5%; 1.5% B. 1%; 2% C. 2%; 5% D. 5%; 8%

Q: 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

Q: A restriction under which 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

Q: As of 2012, hedge funds had approximately _____ under management. A. $.5 trillion B. $1.6 trillion C. $2 trillion D. $3.2 trillion

Q: Which of the following typically employ(s) significant amounts of leverage? I. Hedge funds II. Equity mutual funds III. Money market funds IV. Income mutual funds A. I only B. I and II only C. III and IV only D. I, II, and III only