Question 1

If the yield on mortgage-backed securities was abnormally low compared to Treasury bonds, a hedge fund pursuing a relative value strategy would

Accepted Answer

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. 
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.

Question 2

Assume newly issued 30-year-on-the-run bonds sell at higher yields (lower prices) than 29½-year bonds with a nearly identical duration.A hedge fund that sells 29½-year bonds and buys 30-year bonds is taking a

Accepted Answer

A) market neutral position. 
B) conservative position. 
C) bullish position. 
D) bearish position. 
A) market neutral position. 
B) conservative position. 
C) bullish position. 
D) bearish position.

Question 3

______ are the dominant form of investing in securities markets for most individuals, but ______ have enjoyed a far greater growth rate in the last decade.

Accepted Answer

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 
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

Question 4

A hedge fund attempting to profit from a change in the spread between mortgages and Treasuries is using a ______ strategy.

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 5

Statistical arbitrage is a version of a ______ strategy.

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 6

Hedge funds differ from mutual funds in terms of

Accepted Answer

A) transparency. 
B) investors. 
C) investment strategy. 
D) liquidity. 
E) All of the options 
A) transparency. 
B) investors. 
C) investment strategy. 
D) liquidity. 
E) All of the options

Question 7

The previous value of a portfolio that must be reattained before a hedge fund can charge incentive fees is known as a

Accepted Answer

A) benchmark. 
B) water stain. 
C) water mark. 
D) high water mark. 
E) low water mark. 
A) benchmark. 
B) water stain. 
C) water mark. 
D) high water mark. 
E) low water mark.

Question 8

Hedge funds often employ ______ that require investors to provide ________ notice of their desire to redeem funds.

Accepted Answer

A) redemption notices; of several weeks to several months 
B) redemption notices; of several hours to several days 
C) redemption notices; of several days to several weeks 
D) lock-up; several years 
E) lock-up; several hours 
A) redemption notices; of several weeks to several months 
B) redemption notices; of several hours to several days 
C) redemption notices; of several days to several weeks 
D) lock-up; several years 
E) lock-up; several hours

Question 9

The risk profile of hedge funds ______, making performance evaluation ______.

Accepted Answer

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 
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

Question 10

______ bias arises because hedge funds only report returns to database publishers if they want to.

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

Question 11

Hedge funds are prohibited from investing or engaging in

Accepted Answer

A) distressed firms. 
B) convertible bonds. 
C) currency speculation. 
D) merger arbitrage. 
E) None of the options 
A) distressed firms. 
B) convertible bonds. 
C) currency speculation. 
D) merger arbitrage. 
E) None of the options

Question 12

Hedge funds are typically set up as ______ and provide ______ information about portfolio composition and strategy to their investors.

Accepted Answer

A) limited liability partnerships; minimal 
B) limited liability partnerships; extensive 
C) investment trusts; minimal 
D) investment trusts; extensive 
A) limited liability partnerships; minimal 
B) limited liability partnerships; extensive 
C) investment trusts; minimal 
D) investment trusts; extensive

Question 13

Shares in hedge funds are priced

Accepted Answer

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 
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

Question 14

Hedge funds traditionally have ______ than 100 investors and ______ to the general public.

Accepted Answer

A) more; advertise 
B) more; do not advertise 
C) less; advertise 
D) less; do not advertise 
A) more; advertise 
B) more; do not advertise 
C) less; advertise 
D) less; do not advertise

Question 15

Alpha seeking hedge funds typically ______ relative mispricing of specific securities and ______ broad market exposure.

Accepted Answer

A) bet on; bet on 
B) hedge; hedge 
C) hedge; bet on 
D) bet on; hedge 
E) None of the options 
A) bet on; bet on 
B) hedge; hedge 
C) hedge; bet on 
D) bet on; hedge 
E) None of the options

Question 16

Regarding hedge fund incentive fees, hedge fund managers ______ if the portfolio return is very large and ______ if the portfolio return is negative.

Accepted Answer

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 
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

Question 17

Hedge funds may invest or engage in

Accepted Answer

A) distressed firms. 
B) convertible bonds. 
C) currency speculation. 
D) merger arbitrage. 
E) All of the options 
A) distressed firms. 
B) convertible bonds. 
C) currency speculation. 
D) merger arbitrage. 
E) All of the options

Question 18

Assume newly issued 30-year-on-the-run bonds sell at higher yields (lower prices) than 29½-year bonds with a nearly identical duration.A hedge fund that sells 29½-year bonds and buys 30-year bonds is taking a

Accepted Answer

A) market neutral position. 
B) conservative position. 
C) bullish position. 
D) bearish position. 
A) market neutral position. 
B) conservative position. 
C) bullish position. 
D) bearish position.

Question 19

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).

Accepted Answer

A) selling 1 
B) selling 7 
C) buying 1 
D) buying 7 
E) selling 11 
A) selling 1 
B) selling 7 
C) buying 1 
D) buying 7 
E) selling 11

Question 20

Hedge fund incentive fees are essentially

Accepted Answer

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. 
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.

Exam 26: Hedge Funds

If the yield on mortgage-backed securities was abnormally low compared to Treasury bonds, a hedge fund pursuing a relative value strategy would

Assume newly issued 30-year-on-the-run bonds sell at higher yields (lower prices) than 29½-year bonds with a nearly identical duration.A hedge fund that sells 29½-year bonds and buys 30-year bonds is taking a

______ 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 fund attempting to profit from a change in the spread between mortgages and Treasuries is using a ______ strategy.

Statistical arbitrage is a version of a ______ strategy.

Hedge funds differ from mutual funds in terms of

The previous value of a portfolio that must be reattained before a hedge fund can charge incentive fees is known as a

Hedge funds often employ ______ that require investors to provide ________ notice of their desire to redeem funds.

The risk profile of hedge funds ______, making performance evaluation ______.

______ bias arises because hedge funds only report returns to database publishers if they want to.

Hedge funds are prohibited from investing or engaging in

Hedge funds are typically set up as ______ and provide ______ information about portfolio composition and strategy to their investors.

Shares in hedge funds are priced

Hedge funds traditionally have ______ than 100 investors and ______ to the general public.

Alpha seeking hedge funds typically ______ relative mispricing of specific securities and ______ broad market exposure.

Regarding hedge fund incentive fees, hedge fund managers ______ if the portfolio return is very large and ______ if the portfolio return is negative.

Hedge funds may invest or engage in

Assume newly issued 30-year-on-the-run bonds sell at higher yields (lower prices) than 29½-year bonds with a nearly identical duration.A hedge fund that sells 29½-year bonds and buys 30-year bonds is taking a

Hedge fund incentive fees are essentially

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

are the dominant form of investing in securities markets for most individuals, but have enjoyed a far greater growth rate in the last decade.

Hedge funds often employ that require investors to provide __ notice of their desire to redeem funds.

The risk profile of hedge funds , making performance evaluation .

Hedge funds are typically set up as and provide information about portfolio composition and strategy to their investors.

Hedge funds traditionally have than 100 investors and to the general public.

Alpha seeking hedge funds typically relative mispricing of specific securities and broad market exposure.

Regarding hedge fund incentive fees, hedge fund managers if the portfolio return is very large and if the portfolio return is negative.