Question 1

Hedge funds are ______ transparent than mutual funds because of ______ strict SEC regulation on hedge funds.

Accepted Answer

A) more; more 
B) more; less 
C) less; less 
D) less; more 
A) more; more 
B) more; less 
C) less; less 
D) less; more C

Question 2

Hedge funds exhibit a pattern known as a

Accepted Answer

A) January effect. 
B) Santa effect. 
C) size effect. 
D) book-to-market. 
E) None of the options 
A) January effect. 
B) Santa effect. 
C) size effect. 
D) book-to-market. 
E) None of the options B

Question 3

Like mutual funds, hedge funds

Accepted Answer

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. 
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. A

Question 4

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).

Accepted Answer

A) selling 1 
B) selling 14 
C) buying 1 
D) buying 14 
E) selling 6 
A) selling 1 
B) selling 14 
C) buying 1 
D) buying 14 
E) selling 6

Question 5

Pairs trading is associated with

Accepted Answer

A) triangular arbitrage. 
B) statistical arbitrage. 
C) data mining. 
D) triangular arbitrage and data mining. 
E) statistical arbitrage and data mining. 
A) triangular arbitrage. 
B) statistical arbitrage. 
C) data mining. 
D) triangular arbitrage and data mining. 
E) statistical arbitrage and data mining.

Question 6

______ are subject to the Securities Act of 1933 and the Investment Company Act of 1940 to protect unsophisticated investors.

Accepted Answer

A) Hedge funds 
B) Mutual funds 
C) ADRs 
D) Hedge funds and ADRs 
E) Mutual funds and ADRs 
A) Hedge funds 
B) Mutual funds 
C) ADRs 
D) Hedge funds and ADRs 
E) Mutual funds and ADRs

Question 7

An example of a ______ strategy is the mispricing of a futures contract that must be corrected by contract expiration.

Accepted Answer

A) market neutral 
B) directional 
C) relative value 
D) divergence 
E) convergence 
A) market neutral 
B) directional 
C) relative value 
D) divergence 
E) convergence

Question 8

A hedge fund pursuing a ______ strategy is attempting to exploit temporary misalignments in relative pricing.

Accepted Answer

A) directional 
B) nondirectional 
C) stock or bond 
D) arbitrage or speculation 
E) None of the options 
A) directional 
B) nondirectional 
C) stock or bond 
D) arbitrage or speculation 
E) None of the options

Question 9

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).

Accepted Answer

A) selling 1 
B) selling 6 
C) buying 1 
D) buying 6 
E) selling 4 
A) selling 1 
B) selling 6 
C) buying 1 
D) buying 6 
E) selling 4

Question 10

Hedge funds ______ engage in market timing ______ take extensive derivative positions.

Accepted Answer

A) cannot; and cannot 
B) cannot; but can 
C) can; and can 
D) can; but cannot 
E) None of the options 
A) cannot; and cannot 
B) cannot; but can 
C) can; and can 
D) can; but cannot 
E) None of the options

Question 11

______ must periodically provide the public with information on portfolio composition.

Accepted Answer

A) Hedge funds 
B) Mutual funds 
C) ADRs 
D) Hedge funds and ADRs 
E) Hedge funds and mutual funds 
A) Hedge funds 
B) Mutual funds 
C) ADRs 
D) Hedge funds and ADRs 
E) Hedge funds and mutual funds

Question 12

The typical hedge fund fee structure is

Accepted Answer

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%. 
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%.

Question 13

Unlike mutual funds, hedge funds

Accepted Answer

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. 
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.

Question 14

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).

Accepted Answer

A) selling 1 
B) selling 8 
C) buying 1 
D) buying 8 
E) selling 6 
A) selling 1 
B) selling 8 
C) buying 1 
D) buying 8 
E) selling 6

Question 15

Hedge funds often have ______ provisions as long as ______, which preclude redemption.

Accepted Answer

A) crackdown; 2 months 
B) lock-up; 2 months 
C) crackdown; several years 
D) lock-up; several years 
E) None of the options 
A) crackdown; 2 months 
B) lock-up; 2 months 
C) crackdown; several years 
D) lock-up; several years 
E) None of the options

Question 16

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.

Accepted Answer

A) directional 
B) nondirectional 
C) market neutral 
D) arbitrage or speculation 
E) nondirectional and market neutral 
A) directional 
B) nondirectional 
C) market neutral 
D) arbitrage or speculation 
E) nondirectional and market neutral

Question 17

A bet on particular mispricing across two or more securities, with extraneous sources of risk such as general market exposure hedged away, is a

Accepted Answer

A) pure play. 
B) relative play. 
C) long shot. 
D) sure thing. 
E) relative play and sure thing. 
A) pure play. 
B) relative play. 
C) long shot. 
D) sure thing. 
E) relative play and sure thing.

Question 18

Market neutral bets can result in ______ volatility because hedge funds use ______.

Accepted Answer

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 
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

Question 19

______ uses quantitative techniques and often automated trading systems to seek out many temporary misalignments among securities.

Accepted Answer

A) Covered interest arbitrage 
B) Locational arbitrage 
C) Triangular arbitrage 
D) Statistical arbitrage 
E) All arbitrage 
A) Covered interest arbitrage 
B) Locational arbitrage 
C) Triangular arbitrage 
D) Statistical arbitrage 
E) All arbitrage

Question 20

______ bias arises when the returns of unsuccessful funds are left out of the sample.

Accepted Answer

A) Survivorship 
B) Backfill 
C) Omission 
D) Incubation 
E) None of the options 
A) Survivorship 
B) Backfill 
C) Omission 
D) Incubation 
E) None of the options

Exam 26: Hedge Funds

Hedge funds are ______ transparent than mutual funds because of ______ strict SEC regulation on hedge funds.

Hedge funds exhibit a pattern known as a

Like mutual funds, hedge funds

Pairs trading is associated with

______ are subject to the Securities Act of 1933 and the Investment Company Act of 1940 to protect unsophisticated investors.

An example of a ______ strategy is the mispricing of a futures contract that must be corrected by contract expiration.

A hedge fund pursuing a ______ strategy is attempting to exploit temporary misalignments in relative pricing.

Hedge funds ______ engage in market timing ______ take extensive derivative positions.

______ must periodically provide the public with information on portfolio composition.

The typical hedge fund fee structure is

Unlike mutual funds, hedge funds

Hedge funds often have ______ provisions as long as ______, which preclude redemption.

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 bet on particular mispricing across two or more securities, with extraneous sources of risk such as general market exposure hedged away, is a

Market neutral bets can result in ______ volatility because hedge funds use ______.

______ uses quantitative techniques and often automated trading systems to seek out many temporary misalignments among securities.

______ bias arises when the returns of unsuccessful funds are left out of the sample.

The Investment Environment

Asset Classes and Financial Instruments

How Securities Are Traded

Mutual Funds and Other Investment Companies

Risk, Return, and the Historical Record

Capital Allocation to Risky Assets

Optimal Risky Portfolios

Index Models

The Capital Asset Pricing Model

Arbitrage Pricing Theory and Multifactor Models of Risk and Return

The Efficient Market Hypothesis

Behavioral Finance and Technical Analysis

Empirical Evidence on Security Returns

Bond Prices and Yields

The Term Structure of Interest Rates

Managing Bond Portfolios

Macroeconomic and Industry Analysis

Equity Valuation Models

Financial Statement Analysis

Options Markets: Introduction

Option Valuation

Futures Markets

Futures, Swaps, and Risk Management

Portfolio Performance Evaluation

International Diversification

The Theory of Active Portfolio Management

Investment Policy and the Framework of the Cfa Institute

Filters

Hedge funds are transparent than mutual funds because of strict SEC regulation on hedge funds.

Hedge funds engage in market timing take extensive derivative positions.

Hedge funds often have provisions as long as , which preclude redemption.

Market neutral bets can result in volatility because hedge funds use .