Question 1

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

Question 2

______ 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 are correct. 
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.

Question 3

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 are correct. 
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.

Question 4

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 are correct. 
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.

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

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 7

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

Question 8

A hedge fund pursuing a ______ strategy is betting one sector of the economy will outperform other sectors.

Accepted Answer

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

Question 9

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 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. 
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.

Question 10

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 are correct. 
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.

Question 11

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 12

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.

Accepted Answer

A)  Ponzi scheme 
B)  bonsai scheme 
C)  statistical arbitrage scheme 
D)  pairs trading scheme 
E)  None of the options are correct. 
A)  Ponzi scheme 
B)  bonsai scheme 
C)  statistical arbitrage scheme 
D)  pairs trading scheme 
E)  None of the options are correct.

Question 13

Hedge fund strategies can be classified as

Accepted Answer

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. 
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.

Question 14

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 15

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 16

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 17

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

Question 18

______ 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 19

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 20

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

Exam 26: Hedge Funds

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

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

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

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

Statistical arbitrage is a version of a ______ strategy.

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.

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

A hedge fund pursuing a ______ strategy is betting one sector of the economy will outperform other sectors.

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

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

Pairs trading is associated with

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.

Hedge fund strategies can be classified as

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

Hedge fund incentive fees are essentially

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

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

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

Hedge funds may invest or engage in

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.

The risk profile of hedge funds , making performance evaluation .

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

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

Hedge funds engage in market timing take extensive derivative positions.