Question #25
Reading: Reading 34 Hedge Fund Strategies
PDF File: Reading 34 Hedge Fund Strategies.pdf
Page: 10
Status: Correct
Correct Answer: A
Question
A conditional factor risk model is used in analyzing hedge fund returns. The purpose of the dummy variable in that model is to distinguish between:
Answer Choices:
A. periods of normal market activity and financial crises
B. funds in countries with high inflation and low inflation
C. managed funds and passive funds
Explanation
The dummy variable is employed in the model since factors may have different influence
during normal periods and financial crises. Such a model is termed a conditional linear
factor model, where the dummy variable allows for the conditional analysis.