Q&A Hero

Q: Withdrawals from a traditional retirement plan prior to age ________ are taxable and must pay a ________ tax penalty. A) 59; 10% B) 62; 5% C) 65; 7 % D) 63; 5%

Q: A tax shelter that allows for tax-exempt saving for higher education is called a ________. A) Roth savings plan B) 403b C) 401k D) 529 plan

Q: In 2018, the income cap on Social Security taxes was set at ________ with an exemption of ________. A) $200,000; $10,000 B) $153,600; $7,600 C) $128,400; $0 D) $96,000; $10,000

Q: Under current rules most workers will have ________ of their salary deducted to pay for Social Security retirement benefits and ________ toward Medicare. A) 1.45%; 6.2% B) 6.2%; 1.45% C) 7.65%; 1.45%% D) 15.3%; 4.9%

Q: How many years of Social Security contributions count for determination of benefits? A) 25 B) 35 C) 45 D) All yearly contributions count.

Q: Contributions to a traditional retirement plan are ________, and contributions to a Roth retirement plan are ________. A) not tax deductible; not tax deductible B) tax deductible; tax deductible C) tax deductible; not tax deductible D) not tax deductible; tax deductible

Q: An investor wants to retire when she has $3,000,000 in savings, after-taxes. Given a 20% tax rate at retirement, how much money, per year, must she save in order to retire in 30 years, given an 11% annual return? Assume she uses a traditional IRA and liquidates the entire portfolio at retirement. A) $12,827 B) $13,903 C) $15,074 D) $18,842

Q: An investor may deposit $2,000 into a traditional or Roth IRA. After 30 years, given a 9% annual return and a 20% tax rate, how much more or less money will the investor have if all investments are liquidated after 30 years? A) Roth value is $5,307 higher B) Roth value is $4,907 higher C) traditional value is $4,907 higher D) traditional value is $5,307 higher

Q: Which one of the following is not likely to be subject to adverse selection? A) Health insurance providers B) Lifetime annuity providers C) Life insurance providers D) social security

Q: One feasible way to hedge labor income is to ________. A) diversify your investment portfolio away from the industry in which you work B) save for retirement only from investment income C) change careers every 7 years D) invest heavily in the stock options provided by your firm

Q: Taxes are applied to the ________. A) real value of sheltered investment income B) nominal value of unsheltered investment income C) nominal value of sheltered investment income D) real value of unsheltered investment income

Q: The practice of trying to buy life insurance upon diagnosis of a terminal illness is an example of ________. A) estate planning B) profit maximization C) adverse selection D) insurance fraud

Q: A retirement plan that offers a tax shelter will defer ________ taxes on contributions and investment earnings. A) income B) sales C) property D) estate

Q: A saver who expects to have a higher tax rate after retirement would prefer a ________. A) Roth retirement plan B) traditional retirement plan C) 401k plan D) 403b plan

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: 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 use of a Roth IRA versus a traditional IRA will allow you to ________. A) retire with less money in your savings account B) select more sophisticated investments C) avoid relying as much upon social security D) protect your spouse from a decline in income upon death

Q: The calculation of a standard annuity, using the PMY function of Excel or a financial calculator, will produce an insufficient income because that approach fails to consider ________. A) variable interest rates B) retiree income needs C) market volatility D) inflation

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 non-sheltered accounts. B) You should place all the stocks in tax-sheltered accounts and all the bonds in non-sheltered accounts. C) You should place all the bonds in tax-sheltered accounts and all the stocks in non-sheltered accounts. D) It makes no difference how you allocate your stock and bond investments among tax sheltered and non-sheltered accounts.

Q: You earn 6% on your corporate bond portfolio this year, and you are in a 24% federal tax bracket and an 9% 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: What strategy might a hedge fund use to take advantage of positive alpha in a long equity position? A) short sell the security with positive alpha B) leverage and use the proceeds to go long in the alpha security C) create a neutral position and gain from the alpha value increase D) reduce reliance on margin

Q: A market neutral hedge fund is likely to have ________. A) various derivative strategies designed to create stability B) a low beta compared to other equity only investments C) a beta well above 1.0 compared to other equity investments D) a beta near 1.0

Q: If a long-short hedge fund were banned by government regulation from short selling, which statement would no longer be true? A) they are not market neutral. B) they may establish a concentrated focus on economic regions. C) they are equity oriented. D) derivatives may be used.

Q: You manage a hedge fund with $300 million in assets. Your fee structure provides for a 1% annual management fee with a 20% incentive on returns over a 12% benchmark. If the fund value, before fees, is $345 million at the end of the year, what is the net return to the investors? A) 13.33% B) 13.40% C) 14.00% D) 14.42%

Q: You manage a hedge fund with $400 million in assets. Your fee structure provides for a 1% annual management fee with a 20% incentive on returns over an 8% benchmark. If the fund value is $445 million at the end of the year, what is your fee? A) $2,600,000 B) $4,000,000 C) $6,600,000 D) $8,400,000

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: According to a model that was estimated using monthly excess returns over a 5 year period, ending in October of 2014, 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 $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: 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: 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: 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) $500,000; $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 A) I only B) I and II only C) I, II, and III only D) I, II, III, and IV Answer: D