Question 1

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 above 
A) bet on; bet on 
B) hedge; hedge 
C) hedge; bet on 
D) bet on; hedge 
E) none of the above

Question 2

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 
E) none of the above 
A) more; advertise 
B) more; do not advertise 
C) less; advertise 
D) less; do not advertise 
E) none of the above

Question 3

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 
E) none of the above 
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 
E) none of the above

Question 4

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 
E) none of the above 
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 above

Question 5

Performance evaluation of hedge funds is complicated by ______.

Accepted Answer

A) liquidity premiums 
B) survivorship bias 
C) unreliable market valuations of infrequently traded assets 
D) unstable risk attributes 
E) all of the above 
A) liquidity premiums 
B) survivorship bias 
C) unreliable market valuations of infrequently traded assets 
D) unstable risk attributes 
E) all of the above

Question 6

________ refers to sorting through huge amounts of historical data to uncover systematic patterns in returns that can be exploited by traders.

Accepted Answer

A) Data mining 
B) Pairs trading 
C) Alpha transfer 
D) Beta shifting 
E) B and C 
A) Data mining 
B) Pairs trading 
C) Alpha transfer 
D) Beta shifting 
E) B and C

Question 7

Assume newly issued 30-year-on-the-run bonds sell at higher yields (lower prices)than 29 ½ year bonds with a nearly identical duration.A hedge fund that sells 29 ½ 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 
E) none of the above 
A) market neutral position 
B) conservative position 
C) bullish position 
D) bearish position 
E) none of the above

Question 8

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 9

Assume that you manage a $2 million portfolio that pays no dividends,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 1300.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 10

Assume newly issued 30-year-on-the-run bonds sell at higher yields (lower prices)than 29 ½ year bonds with a nearly identical duration.A hedge fund that sells 29 ½ 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 
E) none of the above 
A) market neutral position 
B) conservative position 
C) bullish position 
D) bearish position 
E) none of the above

Question 11

Hedge funds differ from mutual funds in terms of ______.

Accepted Answer

A) transparency 
B) investors 
C) investment strategy 
D) liquidity 
E) all of the above 
A) transparency 
B) investors 
C) investment strategy 
D) liquidity 
E) all of the above

Question 12

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

Question 13

If the yield on mortgage-backed securities was abnormally high 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 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 above 
A) short sell the Treasury bonds and short sell the mortgage-backed securities 
B) short sell the Treasury bonds 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 above

Question 14

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 15

______ 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 16

Assume that you manage a $3 million portfolio that pays no dividends,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 1220.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 17

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 above 
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 above

Question 18

The minimum investment in some new hedge funds is as low as $______,compared to a traditional minimum of $______.

Accepted Answer

A) 50,000; 500,000 to 1 million 
B) 25,000; 250,000 to 1 million 
C) 175,000; 400,000 to 1 million 
D) 10,000; 750,000 
E) 5,000; 2 million 
A) 50,000; 500,000 to 1 million 
B) 25,000; 250,000 to 1 million 
C) 175,000; 400,000 to 1 million 
D) 10,000; 750,000 
E) 5,000; 2 million

Question 19

A ________ is an investment fraud in which a manager collects funds from clients,claims to invest those funds on their behalf,reports extremely favorable investment returns,but in fact uses the funds for his own use.

Accepted Answer

A) ponzi scheme 
B) bonsai scheme 
C) statistical arbitrage scheme 
D) pairs trading scheme 
E) none of the above 
A) ponzi scheme 
B) bonsai scheme 
C) statistical arbitrage scheme 
D) pairs trading scheme 
E) none of the above

Question 20

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

Exam 26: Hedge Funds

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

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

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

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

Performance evaluation of hedge funds is complicated by ______.

________ refers to sorting through huge amounts of historical data to uncover systematic patterns in returns that can be exploited by traders.

Assume newly issued 30-year-on-the-run bonds sell at higher yields (lower prices)than 29 ½ year bonds with a nearly identical duration.A hedge fund that sells 29 ½ year bonds and buys 30 year bonds is taking a ______.

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

Assume newly issued 30-year-on-the-run bonds sell at higher yields (lower prices)than 29 ½ year bonds with a nearly identical duration.A hedge fund that sells 29 ½ year bonds and buys 30 year bonds is taking a ______.

Hedge funds differ from mutual funds in terms of ______.

Hedge fund incentive fees are essentially

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

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

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

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

The minimum investment in some new hedge funds is as low as $______,compared to a traditional minimum of $______.

A ________ is an investment fraud in which a manager collects funds from clients,claims to invest those funds on their behalf,reports extremely favorable investment returns,but in fact uses the funds for his own use.

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

The Investment Environment

Asset Classes and Financial Instruments

How Securities are Traded

Mutual Funds and Other Investment Companies

Introduction to Risk,return,and the Historical Record

Risk Aversion and 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

Options Markets: Introduction

Option Valuation

Futures Markets

Futures, swaps, and Risk Management

Macroeconomic and Industry Analysis

Equity Valuation Models

Financial Statement Analysis

Portfolio Performance Evaluation

International Diversification

The Theory of Active Portfolio Management

Investment Policy and the Framework of the CFA Institute Appendices

Filters

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

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

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

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

The minimum investment in some new hedge funds is as low as $,compared to a traditional minimum of $.