Question 1 Asset owners prefer higher rates of return, but their investment policy objectives must account for the level of risk associated with expected return levels. Consider an investment with a return that will increase by 12% with a 40% probability and decrease by 4% with a 60% probability. Its expected return is given by 0.4(0.12) + 0.6(−0.04) = 2.4%. What is the standard deviation of its returns?

a) 5.4% b) 7.8% c) 11.7% d) 12.5%

Question 2 Asset owners prefer higher rates of return, but their investment policy objectives must account for the level of risk associated with expected return levels. Consider two investments, A and B. Investment A has an expected return of 1.6% and a standard deviation of 6.9%. Investment B has a return such that it will increase by 8% with a 40% probability and decrease by 2% with a 60% probability. Its expected return is given by 0.4(0.08) + 0.6(−0.02) = 2.0%. Which investment is preferred by an investor with a risk tolerance parameter of 6?

a) Investment A has a higher expected utility of wealth of 0.004. b) Investment A has a higher expected utility of wealth of 0.016. c) Investment B has a higher expected utility of wealth of 0.014. d) Investment B has a higher expected utility of wealth of 0.016.

Question 3 What is the risk tolerance parameter for an investor that has chosen a portfolio with an expected return of 6% and a standard deviation of 9% if the risk-free rate is 2%?

a) 3.2 b) 4.9 c) 6.1 d) 7.8

Question 4 Assume an investor is allocating to the risk-free asset and just one risky asset and has a risk tolerance parameter of 5. The riskless rate is 3%, and the expected return and standard deviation of the risky asset are 14% and 19%, respectively. What is the optimal weight in the risky asset?

a) 60.9% b) 69.3% c) 75.7% d) 88.6%

Question 5 If the market value of a portfolio with an equity beta of 1.4 is $300 million and the TAA model suggests decreasing the equity beta to 0.9, what size futures position is needed if the futures beta is 1?

a) –$150 million b) –$40 million c) $60 million d) $150 million

Question 6 What is the information coefficient for a manager that has an information ratio of 1.8 and a transfer coefficient of 0.8 and is making 15 active bets in a portfolio of 20 securities?

a) 0.51 b) 0.58 c) 0.65 d) 0.71

Question 7 What is the upper limit of the transfer coefficient (of the expanded version of the fundamental law of active management), and what does it signify? That is, is the upper limit more likely to apply to strategies using traditional assets or alternative assets, and why?

a) The upper limit is 1, or 100%, and it is most relevant for alternative assets because it represents zero limits to implementing the strategy.

b) The upper limit is 0, or 0%, and it is most relevant for traditional assets because it represents zero costs of implementing the strategy.

c) The upper limit is 1, or 100%, and it is most relevant for traditional assets because it represents zero limits to implementing the strategy.

d) The upper limit is 0, or 0%, and it is most relevant for alternative assets because it represents zero costs of implementing the strategy.

Question 8 Which is a mean-variance extension that helps to address the problem of return data series being relatively short for many alternative assets?

a) Liquidity penalty function b) Imposing constraints on factors betas c) Variable reduction d) Robust estimation

Question 9 If the portfolio standard deviation is 20% and the correlation between Asset 1 and the portfolio is 0.6, and the portfolio has 40% invested in Asset 1, what is the risk contribution of Asset 1?

a) 18% b) 24% c) 29% d) 32%

Question 10 Which of the following methods results in unequal asset weights and equal risk contributions, and accounts for diversification?

a) Volatility-weighted allocations b) Equally weighted allocations c) Risk budgeting d) Risk parity

Question 11 A pool of capital was created with a large one-time donation concentrated in a single stock and is designed as a grant-making institution. What structure is this pool of capital most likely to be?

a) Endowment b) Independent foundation c) Operating foundation d) Community foundation

Question 12 Large endowments have six advantages that may explain their recent excellent returns. Which of the following pairs of advantages is/are included among these six advantages?

I. An aggressive asset allocation and effective investment manager research

II. First-mover advantage and access to a network of talented alumni III. Sophisticated investment staff and board oversight, and low costs

due to use of liquid alternatives

IV. a) I only

b) I and II c) II and III d) I, II, and III

Question 13 The long-term spending rate is 4%. Last year the spending rate was 6%, and the Higher Education Price Index (HEPI) changed by 3%. The CPI is expected to change by 2%. The risk-free rate is 3%. The university endowment follows Swensen's variation of the flexible spending rule. What should be the minimum target return for the endowment?

a) 7.0% b) 7.6% c) 8.6% d) 9.2%

Question 14 Adam spent his entire professional career with one employer, which provides a defined retirement benefit of 1.5% of the average of the final five years’ salary multiplied by the years of service. Adam was making $100,000 in his final year, and he had been receiving annual increases of 3%. Alice, on the other hand, changed employers midway through her career (20 years into her 40-year career) and was making $120,000 annually during her final year. She also received salary increases of 3% throughout her entire career, with a 20% salary increase when she changed employers, and both her employers provide a defined benefit of 1.5% of the average of the final five years’ salary multiplied by the years of service. Does Adam or Alice have a higher annual benefit at retirement?

a) Adam has a higher annual benefit at retirement. b) Alice has a higher annual benefit at retirement. c) The answer depends on the future rate of inflation.

Question 15 Funded status: The duration of projected benefit obligation (PBO) is estimated to be 20 years, the risk-free rate is now 2.5%, the rate of inflation is 3%, and corporate bonds have declined by 2%. What is the percentage change in the value of the PBO?

a) Increase by 40% b) Decrease by 40% c) Increase by 2% d) Decrease by 2%

Question 16 If a country has a decrease in capital accounts of $25 million and a increase of $40 million in its current accounts, what change occurred in the reserve account?

a) $65 million decrease b) $15 million decrease c) $15 million increase d) $65 million increase

Question 17 Which statement(s) regarding stabilization funds is/are true?

I. They tend to invest very conservatively by diversifying across a broad range of asset classes.

II. They collect excess commodity revenues from the government during times of high commodity prices.

III. They distribute saved wealth to the government during times of low commodity prices.

IV. The size of the commodity revenues to be transferred from the government budget to the fund can be determined by using one of three basic types of rules.

V. a) I only

b) II and III only c) II, III, and IV only d) I, II, III, and IV

Question 18 Which type(s) of SWFs is/are likely to be established only after the reserve adequacy standard is met?

I. Reserve funds II. Savings funds

III. Stabilization funds

IV. a) I only

b) II only c) I and II only d) II and III only

Question 19 Which of these options presents an important factor in deciding whether to create either a family office or a multifamily office?

a) Whether or not the family office would need to register as an investment adviser b) The size of the assets that would go into the family office or multifamily office

c) Similarity of financial situation (including age, employment status, size of assets owned by the individuals)

d) Whether the participants are work associates or related family members

Question 20 A newly created family office is likely to be governed by:

a) A board of directors comprised primarily of family members

b) A board of directors comprised primarily of independent professionals (perhaps investment, legal, and tax service providers)

c) The donor or donors who contributed the assets to the family office d) A professional investment adviser hired by the family office

Question 21 Which of the following best describes the buyout strategy of private equity (PE) investing?

a) Buyout firms usually make several small investments, and these often fail, but the

few wins are big; and they sometimes use financial engineering to optimize the structure of the balance sheet.

b) Buyout firms experience few failures and look for consistent, rather than outsized, returns; and they typically use both debt (leverage) and equity, with the assets of the target firm being used as collateral for the debt and its cash flows used to pay off the debt.

c) Buyout firms grow companies, offering expertise and making a series of equity

investments without the use of any leverage. It is necessary to secure follow-on financing for a successful exit.

d) The manager actively assists the management of an emerging company, coaching

teams from the ground up, and sometimes uses financial engineering to optimize the structure of the balance sheet.

Question 22 Which of the following is most consistent with standard limited partnership (LP) agreement terms?

a) Management fees on committed capital are generally 1.5% for smaller fund sizes and 2.5% for funds with larger amounts of committed capital.

b) Carried interest is generally 30% of the fund's net profit and is usually subject to a hurdle or preferred rate.

c) The fund's vintage year is either the first year the fund draws down capital or, in the case of some data providers, when the fund first started operations.

d) Contract life is 10 to 15 years, sometimes with an option to extend for 5 years.

Question 23 The limited partnership agreement (LPA) defines the legal framework of a private equity fund and its terms and conditions. Which types of clauses cover management fees and expenses, the contribution by the general partner (GP), and the distribution waterfall?

a) Portfolio clauses b) Investor protection clauses c) Economic terms clauses d) Fee clauses

Question 24 What usually happens when a private equity fund's life is extended?

a) Limited partners become co-investors. b) Management fees are reduced or eliminated. c) Distributions are reinvested until the final exit. d) The fund is no longer a blind pool.

Question 25 What does the J-curve represent in relation to private equity investing?

a) The fee structure for LP investors, which follows an upward-sloping trend during the life of the fund

b) The change in value of returns for a private equity fund c) Potential returns from investing in early-stage companies with a strong growth potential

Question 26 Suppose that the three-year cash flows of a PE investment are −200, +100, and +200, respectively. The net asset value (NAV) of the fund is 50 in year 3. A public equity index had the values 120, 140, and 150 over the same three-year period. What is the public market equivalent (PME) ratio over the three years, and how has this PE investment performed in comparison to the public market index?

a) PME = 1.43; this invested has underperformed in comparison to the public market index.

b) PME = 1.43; this investment has outperformed in comparison to the public market index.

c) PME = 0.42; this investment has underperformed in comparison to the public market index.

d) PME = 1.22; this investment has underperformed in comparison to the public market index.

Question 27 Investors may be motivated to conduct ongoing due diligence for an investment in a private equity venture fund because:

a) Due diligence provides a view into the so-called black box of portfolio investments. b) Due diligence can detect and ward off style drift.

c) Investors should update their views about how a particular fund investment fits into their private equity portfolios.

d) The investor can pressure the PE manager to focus on the most profitable sectors.

Question 28 Which of the options is not an example of style drift?

a) A change in geographical focus.

b) A change in industry concentration. c) A shift from equity investing to lending to start-up companies. d) A shift between VC and buyout investments.

Question 29 Private equity legal structures commonly have various partnership entities, and oftentimes there is a manager that sits between the PE fund and the general partner. What is the term for this intermediary party?

a) Investment adviser b) Managing partner c) Intermediate manager

Question 30 Within an offering memorandum, what are exculpation and indemnification used for?

a) Limited partner education b) Risk disclosure c) Risk assignment d) Assignment of decision-making authority

Question 31 When forming a private equity portfolio using a naive diversification approach, what consideration is important to ensure that performance doesn't suffer due to including lesser-quality funds or being unable to support a dedicated team?

a) Absolute size of the private equity allocation b) Relative size of the PE allocation c) Existing portfolio composition d) Other institutions’ allocations

Question 32 The private equity fund selection process includes which of the following considerations?

I. Access to top performers being paramount. II. Overall commitment levels, contributions, and distributions over

time III. An analysis of current market conditions

IV. a) I only

b) I and II only c) I and III only d) I, II, and III

Question 33 Given that Fund A favors core portfolios over satellite portfolios relative to Fund B, which statement is most likely true?

a) Fund A has a longer time horizon than Fund B. b) Fund A has more resources available than the younger Fund B.

c) Fund A expects the private equity market to be stable, whereas Fund B expects the private equity market to be more volatile.

Question 34 Which of the following types of arbitrage opportunities that private equity investors can pursue is most consistent with the endowment model?

a) Searching for opportunities that few others know about b) Benefiting from restructurings that improve corporate governance c) Harvesting an illiquidity premium

Question 35 One can use the following information to get the distribution of next year's present values under three scenarios (for one private equity fund) to calculate cash flow at risk, ignoring commitment risk.

Scenario 1 has a life of seven years with a present value of $100 million. Scenario 2 has a life of five years with a negative present value of $15 million. Scenario 3 has a life of nine years with a present value of $130 million. The average present value of the three scenarios is $71.666 million.

What is the average dollar rate of growth for scenario 3?

a) $3.542 million b) $6.482 million c) $8.672 million d) $12.420 million

Question 36 One can use the following information to get the distribution of next year's present values under three scenarios (for one private equity fund) to calculate cash flow at risk, ignoring commitment risk.

Scenario 1 has a life of seven years with a present value of $100 million. Scenario 2 has a life of five years with a negative present value of $15 million. Scenario 3 has a life of nine years with a present value of $130 million. The average present value of the three scenarios is $81.666 million.

What is the estimated present value next year for scenario 3?

a) $88.149 million b) $84.412 million c) $92.389 million d) $98.896 million

Question 37 Which of the options does not argue for special attention to liquidity issues related to private equity investing?

a) There is a limited secondary market for private equity fund investments.

b) Private equity investments are long-term commitments (generally up to 10 years), so investors don't face significant liquidity issues in the interim.

c) Investors face capital calls at times that are uncertain. d) Investors expect return of principal at times that are uncertain.

Question 38 Which of the options is not typical when a private equity fund investor cannot make a capital call?

a) The investor loses all ownership of the fund linked to prior capital payments. b) The unpaid amount may be converted to a liability.

c) The fund investor's previous capital contributions will be liquidated at the best bid price (and possibly at a discount to fair value).

d) The GP or the fund may lend the capital contribution to the investor.

Question 39 Investors typically overcommit to private equity investments because:

a) They seek to increase return by leveraging their allocation to private equity. b) Unless they overcommit, they would underinvest in the sector. c) They fail to accurately forecast the timing of capital calls and the return of capital.

d) The return of capital on previous private equity investments occurs later than expected.

Question 40 Which of the following is not one of the five common investment attributes of real estate?

a) Its potential to offer absolute returns b) Its potential to hedge against unexpected inflation c) Its potential to provide income tax advantages d) Lumpiness of investments

Question 41 Which of the following statements on mortgages and debt claims on traditional operating firms is most likely to be correct?

a) Unlike mortgages, debt claims on traditional operating firms tend to be more standardized.

b) Debt claims on traditional operating firms tend to have more limited recourse than mortgages.

c) Unlike mortgages, debt claims on traditional operating firms tend to have asset-related covenants.

d) Mortgages that have high levels of credit risk can behave more like equity.

Question 42 Suppose a return series of the form: Rt,reported≈(1−ρ)Rt,true+ρRt−1,reportedwhere ρ is the first-order autocorrelation coefficient. Suppose that ρ is 0.50 and that the smoothed return series for an index for the last five time periods was 0%, 0%, 10%, 5%, and 2.5%. What are the implied true returns?

a) 0%, 0%, 20%, 0%, and 0% b) 0%, 0%, 20%, 10%, and 5%. c) 0%, 0%, 10%, 2.5%, and 0%. d) 0%, 0%, 10%, 0%, and 0%.

Question 43 Which of the following alternatives is least likely to be a correct disadvantage of the hedonic pricing model (HPM)?

a) The HPM may suffer from sample selection bias.

b) The HPM demands a large amount of data on a number of hedonic (internal and external characteristics) variables.

c) The HPM assumes that buyers already know about the potential positive and negative externalities associated with a certain property.

d) The HPM cannot be used to estimate the marginal contribution to property equilibrium prices of either hard-to-measure or unobservable attributes.

Question 44 According to empirical evidence presented in the curriculum, which of the following asset classes suffered the largest drawdown between January 2000 and December 2014?

a) Global stocks b) Global bonds c) Mortgage REITs d) U.S. high yield

Question 45 Suppose a smoothed return series that has a β equal to 0.30. What should be the β of the true but unobservable return series assuming an estimated autocorrelation coefficient of 0.60?

a) The β of the true but unobservable return series should be 0.30. b) The β of the true but unobservable return series should be 0.50. c) The β of the true but unobservable return series should be 0.75. d) The β of the true but unobservable return series should be 1.33.

Question 46 What are dealer sales?

a) Dealer sales are defined as transactions that are taxed unfavorably in the United

States because of indications that the investor is a shorter-term dealer in the assets being sold (rather than a long-term investor).

b) Dealer sales are defined as transactions that are taxed favorably in the United States

because of indications that the investor is a shorter-term dealer in the assets being sold (rather than a long-term investor).

c) Dealer sales are defined as transactions that are taxed unfavorably in the United

States because of indications that the investor is a longer-term dealer in the assets being sold (rather than a short-term investor).

d) Dealer sales are defined as transactions that are taxed favorably in the United States

because of indications that the investor is a longer-term dealer in the assets being sold (rather than a short-term investor).

Question 47 What are the two assumptions on which the belief that U.S. commercial real estate equity can serve as a powerful diversifier to a portfolio of U.S. equities is based?

a) The correlation between commercial real estate property values and U.S. equities

is high, and prices of equity REITs do not accurately reflect the value of their underlying real estate assets.

b) The correlation between commercial real estate property values and U.S. equities

is low, and prices of equity REITs accurately reflect the value of their underlying real estate assets.

c) The correlation between commercial real estate property values and U.S. equities

is low, and prices of equity REITs do not accurately reflect the value of their underlying real estate assets.

d) The correlation between commercial real estate property values and U.S. equities

is high, and prices of equity REITs accurately reflect the value of their underlying real estate assets.

Question 48 Suppose that a real estate investment company based in Germany has just invested £10 million in property in the United Kingdom. The net operating income (NOI) arising from this property in the first year is estimated to be £700,000 (for simplicity, assume that this amount is received at the end of the year). The current exchange rate £/€ is 1.40. The German company has decided not to hedge the currency risk of this investment. Ignore taxes for simplicity. What is the estimated return on the first year to the German company, assuming that the property value is expected to be the same a year from now (when expressed in British pounds) and that the euro is expected to appreciate 5% with respect to the British pound during the first year? Note: The domestic currency of the German company is the euro.

a) 5.00% b) 6.65%

c) 7.35% d) 12.00%

Question 49 Suppose that a real estate investment company based in Germany has just invested £10 million in property in the United Kingdom. The net operating income (NOI) arising from this property in the first year is estimated to be £700,000 (for simplicity, assume that this amount is received at the end of the year). The current exchange rate £/€ is 1.40. The German company has decided not to hedge the currency risk of this investment. Ignore taxes for simplicity. What is the estimated return on the first year to the German company, assuming now that the property value is expected to be the same a year from now but the euro is expected to depreciate 9% with respect to the British pound during the first year? Note: The domestic currency of the German company is the euro.

a) 2.00% b) 6.51% c) 7.63% d) 18.00%

Question 50 Which of the following is not one of the three main approaches to classifying the economic nature of infrastructure assets but rather helps more to explain the risk-return characteristics of infrastructure projects?

a) End user pays versus government and taxpayers pay for use b) Brownfield versus greenfield c) Regulated versus unregulated d) Economic versus social

Question 51 What is the term for when there are a number of investors (or sponsors) that provide loans, which are normally nonrecourse loans that are secured by the infrastructure assets (including the revenue-producing contracts), while the financing costs are covered completely by infrastructure cash flows?

a) Public-private partnerships (PPPs) b) Project finance c) Privatization d) Public finance

Question 52 Which statement about attributes of most infrastructure assets is most accurate?

a) The real value of cash flows will suffer if there is an increase in inflation.

b) The low operating costs and stable cash flows of mature infrastructure businesses result in the payment of relatively low dividend yields.

c) Elastic demand. d) Monopolistic market positions.

Question 53 What do results of a Granger-causality analysis suggest about farmland?

I. Institutional flows do not lead farmland income or capital appreciation.

II. Farmland capital appreciation does lead income. III. Institutional flows are contemporaneous with farmland income. IV. Institutional flows are not contemporaneous with capital

appreciation.

V. a) I only

b) I and II only c) II and III only d) III and IV only

Question 54 An analysis was conducted on the factors that drive U.S. farmland returns, as proxied by the U.S. Department of Agriculture (USDA) $/Acre series (1973–2009). Regression analysis suggests which of the following significant relationships?

a) U.S. Consumer Price Index (CPI): The returns to U.S. farmland have been a significant hedge against inflation risk.

b) Interest rates: Lower interest rates are associated with lower farmland returns. c) Industrial production: Land prices are countercyclical.

d) The U.S. Dollar Index (USDX or DXY): A stronger dollar is associated with decreases in land prices.

Question 55 With sufficient nutrients, and in the absence of either scarcity of water or temperature extremes, there are four determinants of crop yield: E = photosynthetic efficiency, S = total solar radiation over the area per period, I = fraction of solar radiation captured by the crop canopy, and H = harvest index (fraction of total dry matter than is harvestable). Given these four variables, what is the formula for determining crop yield (Y)?

a) Y = E/S + I × H b) Y = E × S + I × H c) Y = E/S × I × H d) Y = E × S ×I × H

Question 56 Based on what is understood about the distribution of returns on intellectual property (IP) investments in film production, which of the options is not true?

a) The average return is fairly high compared to many alternative investment strategies. b) The distribution of returns is skewed right. c) The distribution is platykurtic (small tails).

Question 57 Which of the options accurately describes IP investments in visual arts?

a) Art investments on average earn a liquidity premium because art investing requires a long holding period.

b) IP investments trade at prices consistent with the “rule of one price.”

c) Returns on IP visual arts investments appear to be weakly correlated with returns on traditional assets.

d) The highest returns on IP investments in the visual arts typically occur on unknown or unpopular works that rise in prominence over time.

Question 58 Which of the options is not a way to monetize a patent?

a) A sale-leaseback transaction b) Using a patent as loan collateral c) Revaluing the patent on the balance sheet and reporting the increase in net income d) Licensing

Question 59 Which theory or hypothesis states that prices of exhaustible commodities, such as various forms of energy and metals, should increase at the prevailing interest rate—or, more specifically, the real increase in the net price of the commodity (e.g., oil) should increase at the real rate of interest?

a) The commodity storage hypothesis b) The commodity extraction hypothesis c) The Hotelling theory d) None of the above

Question 60 Given a spot price per bushel of $15.00, a financing rate per month of 0.20%, a spoilage rate per month of 0.185%, a convenience yield per month of 0.20%, and a storage cost per bushel of $0.03 per month, what is the break-even futures price for a contract that expires in three months?

a) $14.25 b) $15.00

c) $15.11 d) $16.10

Question 61 When a price does not reflect true value, arbitrage activity creates the supply and demand that drive the price to its equilibrium. This can be done with cash-and-carry arbitrage and reverse cash-and-carry arbitrage strategies. Which option describes the correct situation and corresponding strategy?

I. If the futures price is higher than the spot price with costs, it is overpriced and therefore should be shorted with an offsetting long position in the spot market. This is called cash-and-carry arbitrage.

II. If the futures price is higher than the spot price with costs, it is overpriced and therefore should be shorted with an offsetting long position in the spot market. This is called reverse cash-and-carry arbitrage.

III. If the futures price is lower than the spot price with costs, it should be purchased with an offsetting short position in the spot market. This is called cash-and-carry arbitrage.

IV. If the futures price is lower than the spot price with costs, it should be purchased with an offsetting short position in the spot market. This is called reverse cash-and-carry arbitrage.

V. a) I and III

b) II and IV c) I and IV d) II and III

Question 62 When are commodity markets most likely to be in backwardation?

I. Cost of carry is negative. II. Convenience yield is lower than other costs of carry.

III. Inventories are low. IV. Volatility is high.

V. a) I and II

b) I, II, and III c) II, III, and IV d) I, III, and IV

Question 63 Consider a commodities market in contango where the near-term price is $20 and the distant contract price is $30. The spread narrows such that the near-term contract has moved up to $22 and the distant contract has moved down to $28. Which strategy will make a positive profit, and what is the profit?

a) Bull calendar spread; $10 + $6 = $16 b) Bull calendar spread; $10 – $6 = $4 c) Bear calendar spread; $10 + $6 = $16 d) Bear calendar spread; $10 – $6 = $4

Question 64 Consider a commodities market in contango where the near-term price is $20 and the distant contract price is $30. The spread narrows such that the near-term contract has moved up to $22 and the distant contract ha moved down to $28. Now assume that the spread widens such that the near-term contract has moved down to $18 and the distant contract has moved up to $31. Which strategy would have made a positive profit from inception, and what is the profit?

a) Bull calendar spread; $31 – $18 = $13 b) Bull calendar spread; $13 – $10 = $3 c) Bear calendar spread; $31 – $18 = $13 d) Bear calendar spread; $13 – $10 = $3

Question 65 Which statements about the crush spread are most accurate?

I. There are no natural buyers of the crush spread. II. Soybean farmers may sell futures on soybeans to hedge their short-

term output price risk. III. Livestock feed producers may buy meal futures to hedge input price

risk. IV. Vegetable oil producers may sell soybean oil futures to hedge their

output price risk.

V. a) I and II only

b) II and III only c) III and IV only d) I, II, and III only

Question 66 Which factor(s) decrease(s) the likelihood of the value of a leveraged note being at least as large as the value of the leveraged underlying commodity?

I. Increases in volatility

II. Increases in the holding period III. Increases in the rate of borrowing

IV. a) II only

b) I and II only c) II and III only d) I, II, and III

Question 67 If the beginning commodity total return index is $100 and the excess return index is $105, and at the end of the index calculation period the excess return index is $110, what is the end-of-period total return index value if the risk-free return (collateral yield) for the period is 0.1%? There were no changes in the number of contracts held and no contracts were rolled over.

a) $104.66 b) $104.76 c) $104.87 d) $105.05

Question 68 Consider a managed futures trader with $40 million in capital. This commodity trading adviser (CTA) has determined that 30% of the capital should be allocated to trading in the crude oil market. The trader's conviction is strong, so the sizing function is 0.8, indicating a long position. Each futures contract is for 1,000 barrels with a current price of $40 per barrel for a notional contract size of $40,000. The annualized target volatility is 28% and the realized (annualized) target volatility based on the most recent 30 days is 38%. How many contracts should be purchased?

a) 24 contracts b) 152 contracts c) 177 contracts d) 240 contracts

Question 69 Consider a managed futures trader with $40 million in capital. This commodity trading adviser (CTA) has determined that 30% of the capital should be allocated to trading in the crude oil market. The trader's conviction is strong, so the sizing function is 0.8, indicating a long position. Each futures contract is for 1,000 barrels with a current price of $40 per barrel for a notional contract size of $40,000. The annualized target volatility is 28% and the realized (annualized) target volatility based on the most recent 30 days is 38%. How many futures would be required if realized volatility drops to 25%?

a) 24 contracts b) 27 contracts

c) 240 contracts d) 269 contracts

Question 70 Given a price series P1 = 12, P2 = 14, P3 = 16, P4 = 17, P5 = 16, what is the signal-to-noise ratio (SNR)?

a) 0.25 b) 0.36 c) 0.45 d) 0.67

Question 71 What is a measure of winning trades to losing trades (relative to a target return) within a given time period?

a) Omega ratio b) Semivariance c) Kappa ratio d) Capital at risk probability

Question 72 If a CTA's funding level is $25 million and the notional level is $50 million, what is the trading level?

a) $0.5 million b) $2 million c) $25 million d) $75 million

Question 73 Under what scenario(s) is a convertible bond trader most likely to be engaged in volatility trading?

I. When the bond is priced above parity II. When the bond is priced close to parity

III. When the bond is priced below parity

IV. a) I only

b) II only c) II and III only d) I, II, and III

Question 74 When is a convertible bond strategy not likely to behave like a synthetic put?

I. When the bond is priced above parity II. When the bond is priced close to parity

III. When the bond is priced below parity

IV. a) I only

b) I and II only c) II and III only d) I, II, and III

Question 75 Pairs trading strategies look for securities that are closely related but not necessarily correlated (e.g., those that are co-integrated). If μt is stationary, then when are the nonstationary prices pt and st co-integrated?

a) If pt + st = aμt b) If pt + a × st= μt c) If ln (pt) – a × ln (st) = μt d) If ln( pt) × ln (st) = aμt

Question 76 Which of the following statements is true for most directional trading strategies at CTAs?

a) Directional trading offers high return but entails high risk. b) The trade ideas are backed by technical research. c) The trade ideas are concentrated in volatility strategies. d) A common directional strategy is called pairs trading.

Question 77 Which fund style is most likely to be “black box” (model driven with little or no trader discretion permitted)?

a) Global macro b) Credit c) CTAs making directional trades. d) Convertible bond arbitrage.

Question 78 What is one reason why a long/short equity strategy might rely on leverage in both the long and short positions?

a) Investors typically don't pay in all of their capital immediately, so the hedge fund manager overcommits.

b) The larger positions leverage the payoff of stock selection skills. c) The stocks being shorted are hard to borrow. d) Long/short strategies rely heavily on options, which require a margin account.

Question 79 A hedge fund buys $200 million face value of debt in a company contemplating bankruptcy. The analyst figures that the exposure at default (EAD) for this issue is $100 million and the loss given default (LGD) for this issue is $50 million. Which of the following options is most correct?

a) If the company defaults, the hedge fund expects to lose $100 million on its investment.

b) If the company defaults, the hedge fund expects to lose $50 million on its investment.

c) The expected recovery rate is 25%. d) The recovery rate is 50%.

Question 80 What is the key insight of the Merton model?

a) The prices of assets are normally distributed.

b) Bankruptcy sometimes is not invoked for a considerable time after a firm becomes insolvent.

c) The incentives of the owners of the equity closely resemble the incentives of a seller of a put.

d) The incentives of the owners of the equity closely resemble the incentives of a put owner.

Question 81 Why might a hedge fund invest in secured debt in a bankrupt company?

a) Secured debt is nonrecourse debt.

b) The value of the assets provides a fairly straightforward way to recover some or all of the loan amount.

c) The collateral is worth more than the loan amount.

d) The hedge fund is seeking to get a controlling position in the company by owning the debt.

Question 82 Hedge fund portfolio managers might choose to be short volatility in order to:

a) Hedge equity market risk exposure. b) Hedge volatility exposure. c) Earn a positive return by accepting a factor risk. d) Profit from underpriced call and put options.

Question 83 Which of the following options is correct about volatility/correlation trading strategies?

a) If a trader owns index options and is short options on individual stocks that make

up the index, the trader should expect to make money if correlations are lower than the market-implied forecast.

b) A trader is short straddles on several commodities. If implied volatilities rise, the trader can expect a mark-to-market profit.

c) A trader owns a book of long options with little or no net market exposure. If

realized volatility exceeds implied volatility, the trader should make money on the trade.

d) The trader owns a variance swap that pays £10 million × (Realized Variance – 0.04).

Realized volatility was lower than the volatility associated with the strike. The swap will pay a cash flow.

Question 84 Which of the following trades would be an example of an inter-asset swap?

a) Long calls on an asset and short puts on the same asset. b) Short calls and puts on the same asset. c) Long a straddle on one asset and short a straddle on another asset. d) Long a call on a British common stock and long a put on GBP/US$.

Question 85 Which of the following statements about alternative mutual funds is most accurate?

a) Alternative mutual funds constitute one of the largest growing segments of mutual

fund categories by assets under management (AUM) but not by the number of subcategories.

b) The categorization methods of many data service providers are largely suspect and have been questioned by several researchers.

c) Risks of alternative mutual funds are much lower than risks of hedge funds: liquidity and leverage risk are virtually eliminated in the mutual fund format.

Question 86 Why do managers that could earn high incentive fees choose to offer an AMF with much lower fees?

a) The mutual fund structure comes with several restrictions concerning leverage,

illiquid investments, and concentration levels, but these restrictions actually work to the manager's advantage for certain hedge fund strategies.

b) Managers can grow AUM much more quickly by offering a mutual fund and thereby increase total compensation even with low fees.

c) The investor base is less diversified in a mutual fund setting because retail investors have maximum income requirements.

d) The regulatory gap between mutual funds and hedge funds has widened since the passage of the Dodd-Frank Act.

Question 87 An investor enters into a swap agreement with a dealer that will pay the return on a particular hedge fund benchmark and the investor pays LIBOR plus a spread. This structure introduces what risk compared to direct investment in a hedge fund?

a) The swap introduces diversification, so the swap would generally subtract risk rather than increase it.

b) The swap produces leverage. c) There is a possibility that the return on the hedge fund index will be below LIBOR. d) Counterparty risk.

Question 88 Which of the statements is not true for funds of hedge funds as compared to a direct investment in one or more hedge funds?

a) Funds of hedge funds generally require longer minimum investment periods (lockups) than direct hedge fund investments.

b) Hedge funds offer greater transparency than funds of hedge funds.

c) Funds of hedge funds generally impose lower minimum investment amounts than direct investments in hedge funds.

d) Returns in hedge funds and funds of hedge funds are generally audited annually.

Question 89 The allocation of a fund of hedge funds is driven by mean-variance optimization (MVO). The manager might constrain the higher moments (skewness and kurtosis) so that:

a) The manager limits negative skewness. b) The manager limits positive skewness. c) The manager increases correlation among the returns on the funds in the portfolio. d) The manager reduces correlation among the returns on the funds in the portfolio.

Question 90 What is the primary purpose of due diligence of hedge funds?

a) To monitor ongoing performance to track existing investment commitments. b) To pick a fund that will likely perform well. c) To improve risk-adjusted return by avoiding unnecessary risks. d) To minimize the risks that a hedge fund investor takes.

Question 91 An investor's due diligence discovers that a hedge fund self-administers. Why is this a concern?

a) Administration requires special knowledge not possessed by most hedge fund managers.

b) There is no independent verification of mark-to-market prices. c) The administrator assures compliance with the investment guidelines.

d) The books and records must be completed by the auditors rather than an independent administrator.

Question 92 Why does due diligence include a review of the corporate governance of a hedge fund?

a) Investors want to know what recourse they have if the investment goes badly.

b) Governance is the structure that ensures that the manager acts according to the fund's partnership agreement.

c) Proper corporate governance is associated with better stock-picking ability.

d) Investment advisers are trying to avoid liability for picking a bad hedge fund for

their clients, so they review corporate governance mostly because other advisers review corporate governance.

Question 93 What are the implications of the Volcker rule?

a) Small and midsize advisers must now register with the state, and large advisers must register with the Securities and Exchange Commission (SEC).

b) Hedge fund investors are required to be accredited investors or qualified purchasers.

c) All hedge fund investors are required to be both accredited investors and qualified purchasers.

d) The Volcker rule restricts the ways that commercial banks can invest in hedge

funds, private equity funds, and proprietary trading strategies, and regulates trading in derivatives.

Question 94 Which of the following types of term structures can be generated by Vasicek's model?

a) Vasicek's model can generate a downward-sloping or an upward-sloping term structure.

b) Vasicek's model can generate a downward-sloping or a humped term structure. c) Vasicek's model can generate an upward-sloping or a humped term structure.

d) Vasicek's model can generate a downward-sloping, an upward-sloping, or a humped term structure.

Question 95 Firm ABC buys an interest rate floor from Bank XYZ. The floor is for four years, has a strike rate of 5%, is settled quarterly, and has a notional value of $80 million.

What is the payment, if any, from Bank XYZ to Firm ABC in the first quarter if the reference rate for that quarter is 4%?

a) $0 b) $200,000 c) $400,000 d) $800,000

Question 96 If the single monthly mortality (SMM) rate in an auto loan security is 1.32%, what is the conditional prepayment rate (CPR)?

a) 13.98% b) 14.74% c) 15.84% d) 17.04%

Question 97 Which of the following alternatives is least likely to represent a correct internal credit enhancement to credit card receivables (CCRs)?

a) Senior/subordinated certificates b) Spread accounts c) Collateral invested amounts (also known as CIAs) d) Excess finance charges

Question 98 Suppose that a cat bond covering earthquakes has just been issued. The bond matures in four years. If the probability of occurrence of an earthquake is 2.2% for next year, and the estimated annual monetary loss as a result of this event is $130 million, what is the expected annual loss if the principal amount of the bond is $150 million?

a) 1.91% b) 2.20% c) 2.54% d) 3.28%

Question 99 Consider a five-year bond with an initial principal amount of $3 million. This is a nonamortizing loan with a 12% payment in kind (PIK) annual compounding interest rate. Which of the following alternatives is most likely to be correct regarding the cash payments that investors will receive? Assume that there is no default.

a) There will be fixed cash interest payments prior to maturity. b) There will be no cash interest payments prior to maturity.

c) There will be increasing cash interest payments as the bond approaches maturity. d) There will be decreasing cash interest payments as the bond approaches maturity.

Question 100 Consider a five-year bond with an initial principal amount of $3 million. This is a nonamortizing loan with a 12% payment in kind (PIK) annual compounding interest rate. What is the total amount of cash that is due when the bond matures in five years?

a) $2,287,025 b) $3,000,000 c) $4,800,000 d) $5,287,025