Question 1

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 2

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 3

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 4

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

Question 5

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 6

Hedge fund performance may reflect significant compensation for ________ risk.

Accepted Answer

A)  liquidity 
B)  systematic 
C)  unsystematic 
D)  default 
E)  unsystematic and default 
A)  liquidity 
B)  systematic 
C)  unsystematic 
D)  default 
E)  unsystematic and default

Question 7

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

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

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

Hedge funds are prohibited from investing or engaging in

Hedge fund performance may reflect significant compensation for ________ risk.

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

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

Exam 26: Hedge Funds

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

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

Hedge funds are prohibited from investing or engaging in

Hedge fund performance may reflect significant compensation for ________ risk.

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

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

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