Q&A Hero

Q: The Treynor-Black model assumes that A. the objective of security analysis is to form an active portfolio of a limited number of mispriced securities. B. the cost of less than full diversification comes from the nonsystematic risk of the mispriced stock. C. the optimal weight of a mispriced security in the active portfolio is a function of the degree of mispricing, the market sensitivity of the security, and its degree of nonsystematic risk. D. All of the options are correct. E. None of the options are correct.

Q: Consider these two investment strategies: Strategy __________ is the dominant strategy because __________. A. 1; it is riskless B. 1; it has the highest reward/risk ratio C. 2; its return is greater than or equal to the return of Strategy 1 D. 2; it has the highest reward/risk ratio E. Both strategies are equally preferred.

Q: Consider these two investment strategies: Strategy __________ is the dominant strategy because __________. A. 1; it is riskless B. 1; it has the highest reward/risk ratio C. 2; its return is greater than or equal to the return of Strategy 1 D. 2; it has the highest reward/risk ratio E. Both strategies are equally preferred.

Q: A purely passive strategy is defined as A. one that uses only index funds. B. one that allocates assets in fixed proportions that do not vary with market conditions. C. one that is mean-variance efficient. D. one that uses only index funds and allocates assets in fixed proportions that do not vary with market conditions. E. All of the options are correct.

Q: To improve future analyst forecasts using the statistical properties of past forecasts, a regression model can be fitted to past forecasts. The intercept of the regression is a __________ coefficient, and the regression beta represents a __________ coefficient. A. bias; precision B. bias; bias C. precision; precision D. precision; bias

Q: Which of the following are not true regarding the Treynor-Black model? A. It considers both macroeconomic and microeconomic risks. B. It considers security selection only. C. It is nearly impossible to implement. D. It considers both macroeconomic and microeconomic risks, and it is nearly impossible to implement. E. It considers security selection only, and it is nearly impossible to implement.

Q: The Treynor-Black model A. considers both macroeconomic and microeconomic risks. B. considers security selection only. C. is nearly impossible to implement. D. considers both macroeconomic and microeconomic risks and is nearly impossible to implement. E. considers security selection only and is nearly impossible to implement.

Q: There appears to be a role for a theory of active portfolio management because A. some portfolio managers have produced sequences of abnormal returns that are difficult to label as lucky outcomes. B. the "noise" in the realized returns is enough to prevent the rejection of the hypothesis that some money managers have outperformed a passive strategy by a statistically small, yet economic, margin. C.some anomalies in realized returns have been persistent enough to suggest that portfolio managers who identified these anomalies in a timely fashion could have outperformed a passive strategy over prolonged periods. D.some portfolio managers have produced sequences of abnormal returns that are difficult to label as lucky outcomes, and the "noise" in the realized returns is enough to prevent the rejection of the hypothesis that some money managers have outperformed a passive strategy by a statistically small, yet economic, margin. E. All of the options are correct.

Q: Consider the Treynor-Black model. The alpha of an active portfolio is 1%. The expected return on the market index is 16%. The variance of the return on the market portfolio is 4%. The nonsystematic variance of the active portfolio is 1%. The risk-free rate of return is 8%. The beta of the active portfolio is 1.05. The optimal proportion to invest in the active portfolio is A. 48.7%. B. 50.0%. C. 51.3%. D. 100.0%.

Q: Consider the Treynor-Black model. The alpha of an active portfolio is 2%. The expected return on the market index is 16%. The variance of return on the market portfolio is 4%. The nonsystematic variance of the active portfolio is 1%. The risk-free rate of return is 8%. The beta of the active portfolio is 1. The optimal proportion to invest in the active portfolio is A. 0%. B. 25%. C. 50%. D. 100%.

Q: The beta of an active portfolio is 1.36. The standard deviation of the returns on the market index is 22%. The nonsystematic variance of the active portfolio is 1.2%. The standard deviation of the returns on the active portfolio is A. 3.19%. B. 31.86%. C. 42.00%. D. 27.57%. E. 2.86%.

Q: The beta of an active portfolio is 1.20. The standard deviation of the returns on the market index is 20%. The nonsystematic variance of the active portfolio is 1%. The standard deviation of the returns on the active portfolio is A. 3.84%. B. 5.84%. C. 19.60%. D. 24.17%. E. 26.0%.

Q: Active portfolio managers try to construct a risky portfolio with A. a higher Sharpe measure than a passive strategy. B. a lower Sharpe measure than a passive strategy. C. the same Sharpe measure as a passive strategy. D. very few securities.

Q: The Treynor-Black model requires estimates of A. alpha/beta. B. alpha/beta/residual variance. C. beta/residual variance. D. alpha/residual variance.

Q: The critical variable in the determination of the success of the active portfolio is A. alpha/systematic risk. B. alpha/nonsystematic risk. C. gamma/systematic risk. D. gamma/nonsystematic risk.

Q: Passive portfolio management consists of A. market timing. B. security analysis. C. indexing. D. market timing and security analysis. E. None of the options are correct.

Q: Active portfolio management consists of A. market timing. B. security analysis. C. indexing. D. market timing and security analysis. E. None of the options are correct.

Q: If a portfolio manager consistently obtains a high Sharpe measure, the manager's forecasting ability A. is above average. B. is average. C. is below average. D. does not exist. E. cannot be determined based on the Sharpe measure.

Q: The Treynor-Black model is a model that shows how an investment manager can use security analysis and statistics to construct A. a market portfolio. B. a passive portfolio. C. an active portfolio. D. an index portfolio. E. a balanced portfolio.

Q: The tracking error of an optimized portfolio can be expressed in terms of the ____________ of the portfolio, and thus reveals ____________. A. return; portfolio performance B. total risk; portfolio performance C. beta; portfolio performance D. beta; benchmark risk E. relative return; benchmark risk

Q: Tracking error is defined as A. the difference between the returns on the overall risky portfolio versus the benchmark return. B. the variance of the return of the benchmark portfolio. C. the variance of the return difference between the portfolio and the benchmark. D. the variance of the return of the actively-managed portfolio.

Q: Alpha forecasts must be ____________ to account for less-than-perfect forecasting quality. When alpha forecasts are ____________ to account for forecast imprecision, the resulting portfolio position becomes A. shrunk; shrunk; far less moderate B. shrunk; shrunk; far more moderate C. grossed up; grossed up; far less moderate D. grossed up; grossed up; far more moderate E. None of the options are correct.

Q: The Black-Litterman model is geared toward ____________ while the Treynor-Black model is geared toward A. security analysis; security analysis B. asset allocation; asset allocation C. security analysis; asset allocation D. asset allocation; security analysis E. None of the options are correct.

Q: The Black-Litterman model and Treynor-Black model are A. nice in theory but practically useless in modern portfolio management. B. complementary tools that should be used in portfolio management. C. contradictory models that cannot be used together. Therefore, portfolio managers must choose which one suits their needs. D. not useful due to their complexity. E. None of the options are correct.

Q: The ____________ model allows the private views of the portfolio manager to be incorporated with market data in the optimization procedure. A. Black-Litterman B. Treynor-Black C. Treynor-Mazuy D. Black-Scholes

Q: Even low-quality forecasts have proven to be valuable because R-squares of only ____________ in regressions of analysts' forecasts can be used to substantially improve portfolio performance. A. 0.656 B. 0.452 C. 0.258 D. 0.153 E. 0.001

Q: ____________ can be used to measure forecast quality and guide in the proper adjustment of forecasts. A. Regression analysis B. Exponential smoothing C. ARIMA D. Moving average models E. GAUSS

Q: Benchmark risk A. is inevitable and is never a significant issue in practice. B. is inevitable and is always a significant issue in practice. C. cannot be constrained to keep a Treynor-Black portfolio within reasonable weights. D. can be constrained to keep a Treynor-Black portfolio within reasonable weights.

Q: Benchmark risk is defined as A. the return difference between the portfolio and the benchmark. B. the standard deviation of the return of the benchmark portfolio. C. the standard deviation of the return difference between the portfolio and the benchmark. D. the standard deviation of the return of the actively-managed portfolio.

Q: If you begin with a ______ and obtain additional data from an experiment, you can form a ______. A. posterior distribution; prior distribution B. prior distribution; posterior distribution C. tight posterior; Bayesian analysis D. tight prior; Bayesian analysis E. None of the options are correct.

Q: Absent research, you should assume the alpha of a stock is A. zero. B. positive. C. negative. D. not zero. E. zero or positive.

Q: In the Treynor-Black model, A. portfolio weights are sensitive to large alpha values, which can lead to infeasible long or short positions for many portfolio managers. B. portfolio weights are not sensitive to large alpha values, which can lead to infeasible long or short positions for many portfolio managers. C. portfolio weights are sensitive to large alpha values, which can lead to the optimal portfolio for most portfolio managers. D. portfolio weights are not sensitive to large alpha values, which can lead to the optimal portfolio for most

Q: Sadka (2010) shows that exposure to unexpected declines in ________ is an important determinant of average hedge fund returns, and that the spreads in average returns across funds with the highest and lowest ________ may be as much as 6% annually. A. market risk; systematic risk B. market liquidity; liquidity risk C. unsystematic risk; unique risk D. default risk; default risk

Q: A ________ is an investment fraud in which a manager collects funds from clients, claims to invest those funds on their behalf, and reports extremely favorable investment returns, but in fact uses the funds for his or her own use. A. Ponzi scheme B. bonsai scheme C. statistical arbitrage scheme D. pairs trading scheme E. None of the options are correct.

Q: Hedge fund performance may reflect significant compensation for ________ risk. A. liquidity B. systematic C. unsystematic D. default E. unsystematic and default

Q: ________ refers to sorting through huge amounts of historical data to uncover systematic patterns in returns that can be exploited by traders. A. Data mining B. Pairs trading C. Alpha transfer D. Beta shifting

Q: Pairs trading is associated with A. triangular arbitrage. B. statistical arbitrage. C. data mining. D. triangular arbitrage and data mining. E. statistical arbitrage and data mining.

Q: Hedge funds often employ ______ that require investors to provide ________ notice of their desire to redeem funds. A. redemption notices; several weeks to several months B. redemption notices; several hours to several days C. redemption notices; several days to several weeks D. lock-up; several years E. lock-up; several hours

Q: Regarding hedge fund incentive fees, hedge fund managers ______ if the portfolio return is very large and ______ if the portfolio return is negative. A. get nothing; get nothing B. refund the fee; get the fee C. get the fee; lose nothing except the incentive fee D. get the fee; lose the management fee E. None of the options are correct.

Q: Hedge fund incentive fees are essentially A. put options on the portfolio with a strike price equal to the current portfolio value. B. put options on the portfolio with a strike price equal to the expected future portfolio value. C. call options on the portfolio with a strike price equal to the expected future portfolio value. D. call options on the portfolio with a strike price equal to the current portfolio value times one plus the benchmark return. E. straddles.

Q: The typical hedge fund fee structure is A. a management fee of 1% to 2%. B. an annual incentive fee equal to 20% of investment profits beyond a stipulated benchmark performance. C. a 12-b1 fee of 1%. D. a management fee of 1% to 2% and an annual incentive fee equal to 20% of investment profits beyond a stipulated benchmark performance. E. a management fee of 1% to 2% and a 12-b1 fee of 1%.

Q: The previous value of a portfolio that must be reattained before a hedge fund can charge incentive fees is known as a A. benchmark. B. water stain. C. water mark. D. high water mark. E. low water mark.

Q: Performance evaluation of hedge funds is complicated by A. liquidity premiums. B. survivorship bias. C. unreliable market valuations of infrequently-traded assets. D. merger arbitrage. E. All of the options are correct.

Q: ______ bias arises when the returns of unsuccessful funds are left out of the sample. A. Survivorship B. Backfill C. Omission D. Incubation E. None of the options are correct.

Q: ______ bias arises because hedge funds only report returns to database publishers if they want to. A. Survivorship B. Backfill C. Omission D. Incubation E. None of the options are correct.

Q: Market neutral bets can result in ______ volatility because hedge funds use ______. A. very low; hedging techniques to eliminate risk B. low; risk management techniques to reduce risk C. considerable; risk management techniques to reduce risk D. considerable; considerable leverage

Q: Assume that you manage a $2 million portfolio that pays no dividends and has a beta of 1.3 and an alpha of 2% per month. Also, assume that the risk-free rate is 0.05% (per month) and the S&P 500 is at 1,500. If you expect the market to fall within the next 30 days, you can hedge your portfolio by ______ S&P 500 futures contracts (the futures contract has a multiplier of $250). A. selling 1 B. selling 7 C. buying 1 D. buying 7 E. selling 11

Q: Assume that you manage a $2 million portfolio that pays no dividends and has a beta of 1.25 and an alpha of 2% per month. Also, assume that the risk-free rate is 0.05% (per month) and the S&P 500 is at 1,300. If you expect the market to fall within the next 30 days, you can hedge your portfolio by ______ S&P 500 futures contracts (the futures contract has a multiplier of $250). A. selling 1 B. selling 8 C. buying 1 D. buying 8 E. selling 6

Q: Assume that you manage a $1.3 million portfolio that pays no dividends and has a beta of 1.45 and an alpha of 1.5% per month. Also, assume that the risk-free rate is 0.025% (per month) and the S&P 500 is at 1,220. If you expect the market to fall within the next 30 days, you can hedge your portfolio by ______ S&P 500 futures contracts (the futures contract has a multiplier of $250). A. selling 1 B. selling 6 C. buying 1 D. buying 6 E. selling 4

Q: Assume that you manage a $3 million portfolio that pays no dividends and has a beta of 1.45 and an alpha of 1.5% per month. Also, assume that the risk-free rate is 0.025% (per month) and the S&P 500 is at 1,220. If you expect the market to fall within the next 30 days, you can hedge your portfolio by ______ S&P 500 futures contracts (the futures contract has a multiplier of $250). A. selling 1 B. selling 14 C. buying 1 D. buying 14 E. selling 6

Q: ______ uses quantitative techniques, and often automated trading systems, to seek out many temporary misalignments among securities. A. Covered interest arbitrage B. Locational arbitrage C. Triangular arbitrage D. Statistical arbitrage E. All arbitrage

Q: Statistical arbitrage is a version of a ______ strategy. A. market neutral B. directional C. relative value D. divergence E. convergence

Q: If the yield on mortgage-backed securities was abnormally low compared to Treasury bonds, a hedge fund pursuing a relative value strategy would A. short sell the Treasury bonds and short sell the mortgage-backed securities. B. short sell the Treasury bonds and buy the mortgage-backed securities. C. buy the Treasury bonds and buy the mortgage-backed securities. D. buy the Treasury bonds and short sell the mortgage-backed securities.

Q: A bet on particular mispricing across two or more securities with extraneous sources of risk, such as general market exposure hedged away, is a A. pure play. B. relative play. C. long shot. D. sure thing. E. relative play and sure thing.

Q: Assume newly-issued 30-year on-the-run bonds sell at higher yields (lower prices) than 29-year bonds with a nearly identical duration. A hedge fund that sells 29-year bonds and buys 30-year bonds is taking a A. market neutral position. B. conservative position. C. bullish position. D. bearish position.

Q: If the yield on mortgage-backed securities was abnormally high compared to Treasury bonds, a hedge fund pursuing a relative value strategy would A. short sell the Treasury bonds and short sell the mortgage-backed securities. B. short sell the Treasury bonds and buy the mortgage-backed securities. C. buy the Treasury bonds and buy the mortgage-backed securities. D. buy the Treasury bonds and short sell the mortgage-backed securities. E. None of the options are correct.

Q: A hedge fund attempting to profit from a change in the spread between mortgages and Treasuries is using a ______ strategy. A. market neutral B. directional C. relative value D. divergence E. convergence

Q: An example of a ______ strategy is the mispricing of a futures contract that must be corrected by contract expiration. A. market neutral B. directional C. relative value D. divergence E. convergence

Q: A hedge fund pursuing a ______ strategy is trying to exploit relative mispricing within a market but is hedged to avoid taking a stance on the direction of the broad market. A. directional B. nondirectional C. market neutral D. arbitrage or speculation E. nondirectional and market neutral

Q: A hedge fund pursuing a ______ strategy is attempting to exploit temporary misalignments in relative pricing. A. directional B. nondirectional C. stock or bond D. arbitrage or speculation E. None of the options are correct.

Q: A hedge fund pursuing a ______ strategy is betting one sector of the economy will outperform other sectors. A. directional B. nondirectional C. stock or bond D. arbitrage or speculation E. None of the options are correct.

Q: Hedge fund strategies can be classified as A. directional or nondirectional. B. stock or bond. C. arbitrage or speculation. D. stock or bond and arbitrage or speculation. E. directional or nondirectional and stock or bond.

Q: Hedge funds often have ______ provisions as long as ______, which preclude redemption. A. crackdown; 2 months B. lock-up; 2 months C. crackdown; several years D. lock-up; several years E. None of the options are correct.

Q: Hedge funds are prohibited from investing or engaging in A. distressed firms. B. convertible bonds. C. currency speculation. D. merger arbitrage. E. None of the options are correct.

Q: Hedge funds may invest or engage in A. distressed firms. B. convertible bonds. C. currency speculation. D. merger arbitrage. E. All of the options are correct.

Q: Hedge funds differ from mutual funds in terms of A. transparency. B. investors. C. investment strategy. D. liquidity. E. All of the options are correct.

Q: Hedge funds traditionally have ______ than 100 investors and ______ to the general public. A. more; advertise B. more; do not advertise C. less; advertise D. less; do not advertise

Q: ______ are subject to the Securities Act of 1933 and the Investment Company Act of 1940 to protect unsophisticated investors. A. Hedge funds B. Mutual funds C. ADRs D. Hedge funds and ADRs E. Mutual funds and ADRs

Q: ______ must periodically provide the public with information on portfolio composition. A. Hedge funds B. Mutual funds C. ADRs D. Hedge funds and ADRs E. Hedge funds and mutual funds

Q: Hedge funds are ______ transparent than mutual funds because of ______ strict SEC regulation on hedge funds. A. more; more B. more; less C. less; less D. less; more

Q: Hedge funds are typically set up as ______ and provide ______ information about portfolio composition and strategy to their investors. A. limited liability partnerships; minimal B. limited liability partnerships; extensive C. investment trusts; minimal D. investment trusts; extensive

Q: Shares in hedge funds are priced A. at NAV. B. a significant premium to NAV. C. a significant discount from NAV. D. a significant premium to NAV or a significant discount from NAV. E. None of the options are correct.

Q: The risk profile of hedge funds ______, making performance evaluation ______. A. can shift rapidly and substantially; challenging B. can shift rapidly and substantially; straightforward C. is stable; challenging D. is stable; straightforward E. None of the options are correct.

Q: Hedge funds ______ engage in market timing ______ take extensive derivative positions. A. cannot; and cannot B. cannot; but can C. can; and can D. can; but cannot E. None of the options are correct.

Q: Alpha-seeking hedge funds typically ______ relative mispricing of specific securities and ______ broad market exposure. A. bet on; bet on B. hedge; hedge C. hedge; bet on D. bet on; hedge E. None of the options are correct.

Q: Unlike mutual funds, hedge funds A. allow private investors to pool assets to be managed by a fund manager. B. are commonly organized as private partnerships. C. are subject to extensive SEC regulations. D. are typically only open to wealthy or institutional investors. E. are commonly organized as private partnerships and are typically only open to wealthy or institutional investors.

Q: Like mutual funds, hedge funds A. allow private investors to pool assets to be managed by a fund manager. B. are commonly organized as private partnerships. C. are subject to extensive SEC regulations. D. are typically only open to wealthy or institutional investors. E. are commonly organized as private partnerships and are typically only open to wealthy or institutional investors.

Q: ______ are the dominant form of investing in securities markets for most individuals, but ______ have enjoyed a far greater growth rate in the last decade. A. Hedge Funds; hedge funds B. Mutual funds; hedge funds C. Hedge Funds; mutual funds D. Mutual funds; mutual funds E. None of the options are correct.

Q: Suppose the 1-year risk-free rate of return in the U.S. is 4% and the 1-year risk-free rate of return in Britain is 6%. The current exchange rate is 1 pound = U.S. $1.67. A 1-year future exchange rate of __________ for the pound would make a U.S. investor indifferent between investing in the U.S. security and investing in the British security. A. 1.6385 B. 2.0411 C. 1.7500 D. 2.3369

Q: You are a U.S. investor who purchased British securities for 4,000 pounds one year ago when the British pound cost $1.50. No dividends were paid on the British securities in the past year. Your total return based on U.S. dollars was __________ if the value of the securities is now 4,400 pounds and the pound is worth $1.62. A. 16.7% B. 18.8% C. 28.0% D. 40.0% E. None of the options