9. Portfolio Management

Question: The arbitrage gap for an ETF is most likely to be narrow when:

• A) the ETF and the securities underlying the ETF trade in the same market
• B) the securities underlying the ETF are illiquid Correct
• C) the ETF represents securities that are difficult to invest in directly

Page 1 | Status: ✅ Correct

Question: Which of the following is least likely a purpose of the in-kind creation/redemption of an ETF?

• A) Narrowing the arbitrage gap
• B) Tax efficiency Correct
• C) Lower cost

Page 1 | Status: ✅ Correct

Question: Zhang Wei, portfolio manager at Zenith Capital, makes the following two statements: Statement 1: For ETFs, hard closures entail creation halts and changes in investment strategy. Statement 2: When a bank ETN issuer is no longer interested in additional borrowings, the resulting creation halts may cause those ETNs to trade at a discount. Regarding the statements made by Wei, it would be most accurate to state that:

• A) only statement 2 is correct Correct
• B) neither statement is correct
• C) only statement 1 is correct

Page 1 | Status: ✅ Correct

Question: A large bank's decision to issue exchange traded notes (ETNs) that track the S&P500 index is most likely to be motivated by the belief that:

• A) the yield on bank’s unsecured debt would be higher than the swap fixed rate Correct
• B) the return on the S&P 500 index would be lower than the bank’s borrowing rate
• C) the return on the S&P 500 index would be higher than the bank’s lending rate

Page 2 | Status: ✅ Correct

Question: When an ETF trades on the primary market, this is most likely to refer to a trade that happens:

• A) on an exchange Correct
• B) over-the-counter
• C) between APs and issuers

Page 2 | Status: ✅ Correct

Question: ETFs trade in:

• A) both primary and secondary markets Correct
• B) secondary markets only
• C) primary markets only

Page 2 | Status: ✅ Correct

Question: Bob Nelson, analyst for Sigma securities, is evaluating EUXL, a leveraged ETF on European stocks. While the ETF is listed on multiple exchanges, it primarily trades on OTC markets. Nelson would most accurately assume that:

• A) OTC quotes tend to be more “live” compared to exchange quotes Correct
• B)
• C)

Page 2 | Status: ✅ Correct

Question: ETF ownership costs are least likely to be increased by:

• A) security lending
• B) portfolio turnover Correct
• C) bid–ask spreads

Page 3 | Status: ✅ Correct

Question: Settlement risk is most likely to be a concern for:

• A) Exchange traded notes Correct
• B) ETF investors where the ETF sponsors lend securities to short sellers for a fee
• C) ETFs using OTC derivative contracts

Page 3 | Status: ✅ Correct

Question: Suppose that a particular mutual fund is benchmarked against a large-cap equity index. The fund manager unexpectedly receives a large inflow of cash and wants to quickly equitize this cash. The ETF strategy most appropriate in order for the fund manager to achieve this goal would be:

• A) excess liquidity management Correct
• B) portfolio completion
• C) portfolio liquidity management

Page 3 | Status: ✅ Correct

Question: Consider the following two statements about exchange-traded funds: Statement 1: Large ETF orders may incur price-impact costs depending on the liquidity of the secondary market. Statement 2: ETFs that track stable indices will have a lower portfolio turnover cost. It would be most accurate to state that:

• A) only statement 2 is correct Correct
• B) both statements are correct
• C) only statement 1 is correct

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Question: Exchange-traded notes (ETNs) are similar to exchange traded funds (ETFs), in that they both:

• A) are subject to total default by the issuer
• B) hold underlying securities Correct
• C) use the creation/redemption process

Page 4 | Status: ⏸️ Unattempted

Question: The maximum spread on an ETF is most likely to be negatively related to the:

• A) risk premium demanded by the authorized participants (APs) for carrying the trade until the close of trading
• B) probability of authorized participants (APs) completing an offsetting the trade in secondary market Correct
• C) spread quoted on the underlying securities

Page 4 | Status: ⏸️ Unattempted

Question: An ETF's tracking difference is most accurately measured as the:

• A) standard deviation of the difference in daily returns between the ETF and its benchmark Your Answer
• B) difference between the ETF’s return (based on its NAV) and the return on the index tracked Correct
• C) annualized standard deviation of the differences between the daily returns of the ETF and its benchmark

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Question: ETFs are most likely to underperform the benchmark by their:

• A) tracking error Correct Your Answer
• B) expense ratio
• C) arbitrage gap

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Question: Which of the following is most likely to represent a passive strategy for constructing an ETF?

• A) Smart beta Your Answer
• B) Representative sampling/optimization Correct
• C) Alternative weighting

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Question: An ETF is least likely to trade at a premium/discount to its NAV when:

• A) the ETF is infrequently traded Correct Your Answer
• B) the underlying securities are exchange-traded
• C)

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Question: Compared to long-term buy-and-hold ETF investors, investors that trade frequently are most likely to be concerned with:

• A) management fees
• B) trading costs Correct Your Answer
• C) tracking error

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Question: PSTO ETF is quoted at a bid-ask spread of 0.10%. ETF commissions are 0.04% of trade value. Management fees are 0.09% per year. The average annual total cost of holding the PSTO ETF for 3 years is closest to:

• A) 0.15% Correct
• B) 0.45% Your Answer
• C) 0.30%

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Question: It would be most accurate to state that ETF shares can be created or redeemed by:

• A) anyone, including individual investors using a brokerage account
• B) a special group of institutional investors (APs) only Correct Your Answer
• C) accredited investors (i.e. qualified investors) only

Page 6 | Status: ❌ Incorrect

Question: All else constant, significant tracking error in an ETF is most likely to cause the ETF to:

• A) be a poor instrument for hedging an exposure to the underlying index Correct
• B) trade at a discount
• C) outperform the underlying benchmark

Page 7 | Status: ✅ Correct

Question: Spreads tend to be narrower for:

• A) fixed-income ETFs (as compared to large-cap equity ETFs) Correct
• B) specialized ETFs such as those that track commodity indexes
• C) popular ETFs

Page 7 | Status: ✅ Correct

Question: A multi-factor model that uses unexpected changes (surprises) in macroeconomic variables (e.g., inflation and gross domestic product) as the factors to explain asset returns is called a:

• A) statistical factor model
• B) macroeconomic factor model Correct
• C) fundamental factor model

Page 1 | Status: ⏸️ Unattempted

Question: Which of the following is NOT an assumption necessary to derive the arbitrage pricing theory (APT)?

• A) A large number of assets are available to investors
• B) Asset returns are described by a k-factor model Correct
• C) The priced factors risks can be hedged without taking short positions in any portfolios

Page 1 | Status: ⏸️ Unattempted

Question: Janice Barefoot, CFA, has been managing a portfolio for a client who has asked Barefoot to use the Dow Jones Industrial Average (DJI

• A) positive and negative respectively Correct
• B) negative and positive respectively
• C)

Page 1 | Status: ⏸️ Unattempted

Question: Summer Vista decides to develop a fundamental factor model. She establishes a proxy for the market portfolio, and then considers the importance of various factors in determining stock returns. She decides to use the following factors in her model: Changes in payout ratios. Credit rating changes. Companies' position in the business cycle. Management tenure and qualifications. Which of the following factors is least appropriate for Vista's factor model?

• A) Management tenure and qualifications
• B) Companies’ position in the business cycle Correct
• C) Changes in payout ratios

Page 2 | Status: ✅ Correct

Question: A common strategy in bond portfolio management is enhanced indexing by matching primary risk factors. This strategy could be implemented by forming:

• A) a portfolio with factor sensitivities that sum to one
• B) a portfolio with factor sensitivities equal to that of the index Correct
• C) a portfolio with asset portfolio weights equal to that of the index

Page 2 | Status: ✅ Correct

Question: Assume you are considering forming a common stock portfolio consisting of 25% Stonebrook Corporation (Stone) and 75% Rockway Corporation (Rock). As expressed in the two-factor returns models presented below, both of these stocks' returns are affected by two common factors: surprises in interest rates and surprises in the unemployment rate. RStone = 0.11 + 1.0FInt + 1.2FUn + εStone RRock = 0.13 + 0.8FInt + 3.5FUn + εRock Assume that at the beginning of the year, interest rates were expected to be 5.1% and unemployment was expected to be 6.8%. Further, assume that at the end of the year, interest rates were actually 5.3%, the actual unemployment rate was 7.2%, and there were no company-specific surprises in returns. This information is summarized in Table 1 below: Table 1: Expected versus Actual Interest Rates and Unemployment Rates Actual Expected Company-specific returns surprises Interest Rate 0.053 0.051 0.0 Unemployment Rate 0.072 0.068 0.0 What is the expected return for Stonebrook in the absence of surprises?

• A) 13.2% Correct
• B) 11.0%
• C) 13.0%

Page 3 | Status: ✅ Correct

Question: One of the assumptions of the arbitrage pricing theory (APT) is that there are no arbitrage opportunities available. An arbitrage opportunity is:

• A) a factor portfolio with a positive expected risk premium Correct
• B) an investment that has an expected positive net cash flow but requires no initial investment
• C) a portfolio with factor exposures that sum to one

Page 4 | Status: ✅ Correct

Question: The Real Value Fund is designed to have zero exposure to inflation. However its current inflation factor sensitivity is 0.30. To correct for this, the portfolio manager should take a:

• A) 30% short position in the inflation tracking portfolio Correct
• B) 30% long position in the inflation factor portfolio
• C) 30% short position in the inflation factor portfolio

Page 4 | Status: ✅ Correct

Question: Which of the following is NOT an underlying assumption of the arbitrage pricing theory (APT)?

• A) A market portfolio exists that contains all risky assets and is mean-variance efficient Correct
• B) There are a sufficient number of assets for investors to create diversified portfolios in which firm-specific risk is eliminated
• C) Asset returns are described by a K factor model

Page 5 | Status: ✅ Correct

Question: A portfolio with a factor sensitivity of one to a particular factor in a multi-factor model and zero to all other factors is called a(n):

• A) arbitrage portfolio Correct Your Answer
• B) tracking portfolio
• C) factor portfolio

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Question: In the context of multi-factor models, investors with lower-than-average exposure to recession risk (e.g. those without labor income) can earn a risk premium for holding dimensions of risk unrelated to market movements by creating equity portfolios with:

• A) greater-than-average market risk exposure Your Answer
• B) less-than-average exposure to the recession risk factor Correct
• C) greater-than-average exposure to the recession risk factor

Page 6 | Status: ❌ Incorrect

Question: A tracking portfolio is a portfolio with:

• A) factor sensitivities of zero to all factors, positive expected net cash flow, and an initial investment of zero Correct
• B) a factor sensitivity of one to a particular factor in a multi-factor model and zero to all other factors
• C) a specific set of factor sensitivities designed to replicate the factor exposures of a benchmark index

Page 7 | Status: ✅ Correct

Question: Which of the following is an equilibrium-pricing model?

• A) Macroeconomic factor model Correct
• B) The arbitrage pricing theory (APT)
• C) Fundamental factor model

Page 8 | Status: ✅ Correct

Question: Assume you are attempting to estimate the equilibrium expected return for a portfolio using a two-factor arbitrage pricing theory (APT) model. Assume that you have estimated the risk premium for factor 1 to be 0.02, and the risk premium for factor 2 to be 0.03. The sensitivity of the portfolio to factor 1 is –1.2 and the portfolios sensitivity to factor 2 is 0.80. Given a risk free rate equal to 0.03, what is the expected return for the asset?

• A) 5.0% Correct
• B) 2.4%
• C) 3.0%

Page 8 | Status: ✅ Correct

Question: Given a three-factor arbitrage pricing theory (APT) model, what is the expected return on the Premium Dividend Yield Fund? The factor risk premiums to factors 1, 2 and 3 are 8%, 12% and 5%, respectively. The fund has sensitivities to the factors 1, 2, and 3 of 2.0, 1.0 and 1.0, respectively. The risk-free rate is 3.0%.

• A) 33.0% Correct
• B) 36.0%
• C) 50.0%

Page 8 | Status: ✅ Correct

Question: A portfolio manager uses a two-factor model to manage her portfolio. The two factors are confidence risk and time-horizon risk. If she wants to bet on an unexpected increase in the confidence risk factor (which has a positive risk premium), but hedge away her exposure to time-horizon risk (which has a negative risk premium), she should create a portfolio with a sensitivity of:

• A) −1.0 to the confidence risk factor and 1.0 to the time-horizon factor Correct
• B) 1.0 to the confidence risk factor and 0.0 to the time-horizon factor
• C) 1.0 to the confidence risk factor and -1.0 to the time-horizon factor Your Answer

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Question: Diversification can reduce:

• A) systematic risk Correct
• B) unsystematic risk
• C) macroeconomic risks Your Answer

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Question: Portfolios A and B have an expected return of 4.4% and 5.3% respectively. Assume that a one-factor APT model is appropriate and the factor sensitivities of portfolios A and B are 0.8 and 1.1 respectively. The risk-free rate and factor risk premium are closest to: Risk Free Rate Factor Risk Premium

• A) 2.50% 3.00%
• B) 2.00% 3.00% Correct
• C) 3.00% 2.00% Your Answer

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Question: Which of the following is not an assumption of the arbitrage pricing theory (APT)?

• A) Returns on assets can be described by a multi-factor process
• B) Security returns are normally distributed Correct
• C) The market contains enough stocks so that unsystematic risk can be diversified away

Page 10 | Status: ✅ Correct

Question: Assume you are considering forming a common stock portfolio consisting of 25% Stonebrook Corporation (Stone) and 75% Rockway Corporation (Rock). As expressed in the two-factor returns models presented below, both of these stocks' returns are affected by two common factors: surprises in interest rates and surprises in the unemployment rate. RStone = 0.11 + 1.0FInt + 1.2FUn + εStone RRock = 0.13 + 0.8FInt + 3.5FUn + εRock Assume that at the beginning of the year, interest rates were expected to be 5.1% and unemployment was expected to be 6.8%. Further, assume that at the end of the year, interest rates were actually 5.3%, the actual unemployment rate was 7.2%, and there were no company-specific surprises in returns. This information is summarized in Table 1 below: Table 1: Expected versus Actual Interest Rates and Unemployment Rates Actual Expected Company-specific returns surprises Interest Rate 0.053 0.051 0.0 Unemployment Rate 0.072 0.068 0.0 What is the portfolio's sensitivity to interest rate surprises?

• A) 0.25 Correct
• B) 0.85
• C) 0.95

Page 10 | Status: ✅ Correct

Question: A portfolio with a specific set of factor sensitivities designed to replicate the factor exposures of a benchmark index is called a:

• A) tracking portfolio Correct
• B) factor portfolio
• C) arbitrage portfolio

Page 11 | Status: ✅ Correct

Question: Which of the following does NOT describe the arbitrage pricing theory (APT)?

• A) It requires a weaker set of assumptions than the CAPM to derive
• B) There are assumed to be at least five factors that explain asset returns Correct
• C) It is an equilibrium-pricing model like the CAPM

Page 11 | Status: ✅ Correct

Question: Rob Tanner, portfolio manager at Alpha Inc. meets his old college friend Del Torres for lunch. Torres excitedly tells Tanner about his latest work with tracking and factor portfolios. Torres says he has developed a tracking portfolio to aid in speculating on oil prices and is working on a factor portfolio with a specific set of factor sensitivities to the Russell 2000. Did Torres correctly describe tracking and factor portfolios? Tracking Factor

• A) No Yes Correct
• B) Yes No
• C) No No

Page 11 | Status: ✅ Correct

Question: Pierre's answer to Belair's first request regarding the equally weighted portfolio, is closest to:

• A) 1.75% Correct
• B) 2.13% Your Answer
• C) 2.63%

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Question: The actual return of Merci is closest to:

• A) 9% Correct
• B) 10% Your Answer
• C) 11%.

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Question: Using Exhibit 2, the portfolio that has the most exposure to asset selection risk is:

• A) EM Correct
• B) EC Your Answer
• C) EV

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Question: Which two portfolios from Exhibit 3 best achieve Belair's goals in relation to business activity and inflation risk?

• A) B and A. Correct
• B) B and E Your Answer
• C) C and E

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Question: Identify the most accurate statement regarding multifactor models from among the following.

• A) Macroeconomic factor models include explanatory variables such as real GDP growth and the price-to-earnings ratio and fundamental factor models include explanatory variables such as firm size and unexpected inflation
• B) Macroeconomic factor models include explanatory variables such as firm size and the price-to-earnings ratio and fundamental factor models include explanatory variables such as real GDP growth and unexpected inflation
• C) Macroeconomic factor models include explanatory variables such as the business cycle, interest rates, and inflation, and fundamental factor models include explanatory variables such as firm size and the price-to-earnings ratio Correct

Page 15 | Status: ✅ Correct

Question: The Arbitrage Pricing Theory (APT) has all of the following characteristics EXCEPT it:

• A) is an equilibrium pricing model
• B) assumes that asset returns are described by a factor model Correct
• C) assumes that arbitrage opportunities are available to investors

Page 16 | Status: ✅ Correct

Question: Arbitrage pricing models assume which risk is priced?

• A) Systematic Correct
• B) Unsystematic
• C) Both systematic and unsystematic

Page 16 | Status: ✅ Correct

Question: The macroeconomic factor models for the returns on Omni, Inc., (OM) and Garbo Manufacturing (GAR) are: ROM = 20.0% +1.0(FGDP) + 1.4(FQS) + εOM RGAR = 15.0% +0.5(FGDP) + 0.8 (FQS) + εGAR What is the expected return on a portfolio invested 60% in Omni and 40% in Garbo?

• A) 20.96% Correct
• B) 19.96%
• C) 18.0%

Page 16 | Status: ✅ Correct

Question: Given a three-factor arbitrage pricing theory APT model, what is the expected return on the Freedom Fund? The factor risk premiums to factors 1, 2, and 3 are 10%, 7% and 6%, respectively. The Freedom Fund has sensitivities to the factors 1, 2, and 3 of 1.0, 2.0 and 0.0, respectively. The risk-free rate is 6.0%.

• A) 33.0% Correct
• B) 30.0%
• C) 24.0%

Page 17 | Status: ✅ Correct

Question: Which of the following is most accurately a limitation of the historical simulation method?

• A) The size of the lookback period may be too small Correct
• B) The behavior of returns over the lookback period may not accurately capture the future behavior
• C) Estimates of mean and standard deviation may be inaccurate

Page 1 | Status: ✅ Correct

Question: Delphia fund is a EUR100 million portfolio of euro zone equities. The expected daily return and standard deviation are 0.116% and 0.38% respectively. The 5% daily VaR is EUR511,000. Assuming 21 trading days per month, The 5% monthly VaR is closest to:

• A) €435,000 Correct
• B) €3,801,000
• C) €829,446

Page 1 | Status: ✅ Correct

Question: A portfolio has a 5% monthly VaR of $2.5 million dollar. Which of the following is most accurate?

• A) There is a 95% chance of losing $2.5 million in 5% of the months
• B) There is a 5% chance of loss in portfolio value of at least $2.5 million in a month Correct
• C) There is a 5% chance of losing $2.5 million every month

Page 1 | Status: ✅ Correct

Question: Which of the following is closest to 5% daily VaR for the data included in Exhibit 1?

• A) £126,000 Correct
• B) £156,000 Your Answer
• C) £186,000

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Question: Which of the following is most accurate about Smith's comments?

• A) Only comment 1 is correct Correct
• B) Only comment 2 is correct
• C)

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Question: Manning's paragraph detailing the historic simulation method is:

• A) correct Correct
• B) incorrect about VaR calculation Your Answer
• C) incorrect regarding the application to portfolios containing options

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Question: How many of Manning's limitations of VaR are incorrect?

• A) 1 limitation Correct
• B) 2 limitations Your Answer
• C) 3 limitations

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Question: Which one of the following is NOT a limitation of VaR?

• A) Incorporates only right tail risk
• B) VaR based risk limits may be inappropriate in trending markets Correct Your Answer
• C) VaR computed during periods of unusually low volatility may underestimate actual VaR

Page 4 | Status: ❌ Incorrect

Question: With regards to convexity and gamma, which of the following statements are most accurate?

• A) Both are second order effects value arising from changes in underlying risk factors to the change in value of the asset Correct
• B) Convexity is a second order effect while gamma is a first order effect arising from changes in underlying risk factors to the change in value of the asset
• C) Convexity is a first order effect while gamma is a second order effect arising from changes in underlying risk factors to the change in value of the asset

Page 5 | Status: ✅ Correct

Question: Which of the following is a limitation of scenario analysis?

• A) Scenario analysis does not provide the probability of a specific scenario occurring Correct
• B) Scenario analysis does not account for “fat tail” problem of the return distribution
• C) The relationship between portfolio value and the risk factors used may not be static

Page 5 | Status: ✅ Correct

Question: Which of the following approaches to conducting scenario analysis on a portfolio of stock options is most accurate?

• A) Value the portfolio based on the parameters identified in the scenario Correct
• B) Evaluate the impact on the portfolio owning to changes in volatility
• C)

Page 5 | Status: ✅ Correct

Question: A fixed income portfolio manager utilizes duration as a risk measure for the portfolio. The portfolio manager is most likely:

• A) using scenario analysis
• B) using sensitivity analysis Correct
• C) using partial analysis

Page 6 | Status: ✅ Correct

Question: Marginal Var is least likely to be:

• A) change in VaR due to change in probability
• B) change in VaR due to very small change in asset positon Correct
• C) conceptually similar to incremental VaR

Page 6 | Status: ✅ Correct

Question: Conditional VaR is most accurately measured as:

• A) Average VaR in the tails of the return distribution Correct
• B) Average VaR given that losses to the extent of VaR has occurred
• C) Average VaR in the tails of the value distribution

Page 6 | Status: ✅ Correct

Question: Which of the following is most likely an example of a stop loss limit?

• A) Liquidate the portfolio if the portfolio value falls below $100 million Correct
• B) Maximum tracking error of 3%
• C) Maximum daily VaR of $1.5 million

Page 7 | Status: ✅ Correct

Question: A firm's economic capital is most accurately described as:

• A) capital needed to overcome severe losses in the business Correct
• B) assets minus VaR
• C) fair value of plan assets less fair value of liabilities

Page 7 | Status: ✅ Correct

Question: Sophia fund is a EUR200 million portfolio of euro zone equities. The expected daily return and standard deviation are 0.179% and 0.22% respectively. The 5% daily VaR is closest to:

• A) €37,400,000 Correct
• B) €82,000
• C) €368,000

Page 7 | Status: ✅ Correct

Question: ABC Inc. stock's price is inversely related to the business cycle; it is higher during economic downturns. Which of the following appropriately characterizes the consumption hedging property of an investment in ABC stock and the equity risk premium demanded by investors for an investment in it?

• A) Due to its desirable consumption hedging ability, an investment in ABC stock would command a higher equity risk premium Correct
• B) Due to its poor consumption hedging ability, an investment in ABC stock would command a higher equity risk premium
• C) Due to its desirable consumption hedging ability, an investment in ABC stock would command a lower equity risk premium

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Question: The break-even inflation rate is expected to be 2% over the next year. What is the credit spread for a 2% annual pay corporate bond maturing in one year with a market price of $96.91 ($100 par) if the real risk-free rate of return over the next year is 1%?

• A) 2.25% Correct
• B) 0.19% Your Answer
• C) 2.00%

Page 1 | Status: ❌ Incorrect

Question: Differences in credit spreads across sectors are least likely due to:

• A) Differences in services and products that an industry produces Correct
• B) Differences in leverage typical of the sector
• C) Differences in ratings

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Question: Jeff Dentmat is expecting overall credit spreads to narrow over the next few years. Which of the following conclusions can Dentmat most appropriately make?

• A) Risky bonds will outperform risk-free bonds
• B) Government bonds will outperform low-rated corporate bonds Correct
• C) High rated corporate bonds will outperform low-rated corporate bonds

Page 2 | Status: ✅ Correct

Question: Which of the following assets provides a most effective hedge against bad consumption outcomes?

• A) Equity
• B) Risk-free bonds Correct
• C) Real estate

Page 2 | Status: ✅ Correct

Question: Spreads for issuers in the consumer cyclical sector are most likely to:

• A) Be unrelated to business cycle
• B) Decrease during economic downturns Correct
• C) Increase during economic downturns

Page 2 | Status: ✅ Correct

Question: A high default-free interest rate is most likely to be associated with:

• A) investors attaching high utility to future consumption relative to current consumption Correct
• B) expectations of higher income in the future
• C)

Page 2 | Status: ✅ Correct

Question: If the market expects inflation to decrease over the next few years but the uncertainty about inflation was increasing, the break-even inflation rate is most likely to:

• A) Increase Correct
• B) Decrease Your Answer
• C) Be uncertain

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Question: The real rate of return is most likely higher:

• A) Lower the utility investors attach to future consumption relative to current consumption
• B) Higher the expectations of lower income in the future Correct
• C) Higher the utility investors attach to future consumption relative to current consumption

Page 3 | Status: ⏸️ Unattempted

Question: As compared to an investment in equities, the difference in discount rate for valuation of commercial real estate is most likely due to:

• A) inflation uncertainty
• B) lack of liquidity Correct
• C) the break-even inflation rate

Page 3 | Status: ⏸️ Unattempted

Question: Statement 1 made by Professor Adams is most likely to be:

• A) correct
• B) incorrect in respect of the marginal utility of consumption Correct
• C) incorrect in respect of the inter-temporal rate of substitution

Page 5 | Status: ✅ Correct

Question: If Statement 2 made by Professor Adams is correct, the one year real risk-free rate of return will most likely be closest to:

• A) 4.95% Correct
• B) 5.00%
• C) 5.26%

Page 5 | Status: ✅ Correct

Question: Assuming the Taylor rule holds, Professor Brady's statement on the correlation of interest rates with macroeconomic fundamentals is most likely:

• A) correct
• B) incorrect in respect of the correlation of interest rates with inflation Correct
• C) incorrect in respect of the correlation of interest rates with GDP growth

Page 5 | Status: ✅ Correct

Question: The equity risk premium in Nearland is closest to:

• A) 4.50% Correct
• B) 7.60% Your Answer
• C) 10.40%

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Question: Of the asset classes mentioned by Professor Douglas, the most likely to be suitable as a consumption hedge is:

• A) real estate Your Answer
• B) growth stocks Correct
• C) value stocks

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Question: Market values of assets are most likely to be affected when either:

• A) Real risk-free rates, inflation premium, timing/magnitude of expected cash flows change Your Answer
• B) Risk free interest rates, risk premiums, timing and/or magnitude of expected cash flows change Correct
• C)

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Question: Price multiples are least likely to increase when:

• A) Equity risk premium increases
• B) Earnings growth increases Correct
• C) Inflation expectations decline

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Question: Corporate earnings from which of the following sectors would be most sensitive to business cycle?

• A) non-cyclical
• B) Consumer non-discretionary Correct
• C) Consumer durable

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Question: Which of the following is least likely to explain a decline in the S&P 500 index:

• A) An increase in Treasury yields
• B) A decrease in expectations about corporate earnings Correct
• C) A decline in expected inflation

Page 7 | Status: ⏸️ Unattempted

Question: Janet Grange's current one-period inter-temporal rate of substitution is 0.95. Janet is most likely to invest in a default-free inflation indexed one-period bond if:

• A) The bond’s return is 4.89% or more
• B) The bond’s return is 5% or more Correct
• C) The bond’s return is 5.26% or more

Page 8 | Status: ✅ Correct

Question: Break-even inflation rate is most appropriately described as the:

• A) The difference in yields between long-dated and short-dated government bonds
• B) The difference between market’s expectation of the inflation rate and the risk premium for inflation uncertainty Correct
• C) The difference in yields of non-inflation indexed and inflation indexed risk-free bonds

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Question: The price of a zero-coupon, inflation indexed, risk-free bond that pays $1 in one period is:

• A) Uncertain Correct
• B) The expected value of the investors’ inter-temporal rate of substitution between current period and one period from now
• C) $1.00

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Question: Value stocks are most likely to be characterized by:

• A) Low price multiples Correct
• B) Immature markets Your Answer
• C) High earnings growth

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Question: Rapidly developing economies like India and China have high GDP growth rates and therefore are most likely to have a:

• A) Low real rate, high inter-temporal rate of substitution and a low rate of current borrowing by investors Correct
• B) High real rate, low inter-temporal rate of substitution and a high rate of current borrowing by investors Your Answer
• C) High real rate, low inter-temporal rate of substitution and a low rate of current consumption

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Question: Investors are least likely to increase their savings rate when:

• A) Uncertainty about their future income decreases Correct
• B) Expected rates of returns increase Your Answer
• C) Uncertainty about their future income increases

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Question: Which of the following is most likely to be the shape of the yield curve during recessions?

• A) Upward sloping Correct
• B) Flat Your Answer
• C) Downward sloping

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Question: The marginal utility of current consumption is most likely higher:

• A) During economic expansions
• B) Higher the wealth Correct
• C) During economic contractions

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Question: Market values of assets are most likely to be affected when:

• A) New information reveals that the market’s expectations about earnings were accurate
• B) New information confirms the market's expectations of future earnings Correct
• C) New information reveals that the market’s expectations about earnings were inaccurate

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Question: Which of the following statements is least accurate?

• A) The Sharpe ratio of a portfolio is unaffected by addition of cash or leverage in the portfolio
• B) Investors can take active risk that is suitable for them by investing in a combination of actively managed portfolio and benchmark portfolio Your Answer
• C) A closet index fund has a low Sharpe ratio Correct

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Question: Alisa Darent is evaluating several active portfolio managers with the same style and benchmark portfolio. Manager Active return Active risk Alfred 3.00% 12.00% Brad 2.20% 11.00% Charles 2.00% 10.50% Benchmark return is expected to be 11%. What will be the maximum expected return for Darent's portfolio assuming that she wants to limit her active risk to 11%?

• A) 2.20% Correct
• B) 2.75% Your Answer
• C) 13.75%

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Question: Which of the following terms is the number of independent bets per year made by an active manager?

• A) Information Coefficient Correct Your Answer
• B) Transfer Coefficient
• C) Breadth

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Question: An active manager currently covers 40 stocks and makes a forecast for each of them every quarter. Next year he intends to cover the same stocks but only once every 6 months. Assuming the manager's skill, measured in terms of the correlation of each forecast with actual returns doesn't change, which of the following statements is most accurate?

• A) The information coefficient will fall by approximately 50% Your Answer
• B) The information ratio will fall by approximately 30% Correct
• C) The information ratio will fall by approximately 50%

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Question: Which of the following terms is the ex-ante risk weighted correlation between forecasted active returns and actual active returns?

• A) Transfer Coefficient Your Answer
• B) Information Coefficient Correct
• C) Breadth

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Question: Which of the following statements is least accurate?

• A) Sharpe ratio of a portfolio consisting of a combination of benchmark and actively managed portfolio with positive active return will be higher than the Sharpe ratio of the benchmark Your Answer
• B) The information ratio of a constrained active portfolio is unaffected by aggressiveness of the active weights Correct
• C) Unlike Sharpe ratio, information ratio is affected due to addition of cash or leverage

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Question: Which of the following terms is the cross-sectional correlation between forecasted active returns and actual active weights adjusted for risk?

• A) Breadth
• B) Transfer Coefficient Correct
• C) Information Coefficient

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Question: Zeta fund has active return and active risk of 1.6% and 8% respectively. Benchmark portfolio has a Sharpe ratio of 0.35 and standard deviation of benchmark returns is 10.5%. What is the level of active risk that an investor would need to take to maximize the Sharpe ratio of a portfolio consisting of Zeta fund and the benchmark portfolio?

• A) 8% Correct
• B) 7% Your Answer
• C) 6% Radina Radichkova, CFA, is considering investing in one of three actively managed funds whose benchmark is the FTSE 100. The Sharpe ratio and standard deviation of the benchmark are 0.50 and 15%, respectively. Alpha Bankso Crystal Active return 3.2% 2.8% 12.5%

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Question: In relation to funds Alpha, Bankso, and Crystal, the highest achievable Sharpe ratio is closest to:

• A) 0.85 Correct
• B) 0.90
• C) 0.95

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Question: How many of Radichkova's comments are correct in relation to the two-sector portfolio?

• A) One Correct
• B) Both
• C) None

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Question: Which are the correct definitions of the transfer coefficient included in Radichkova's report?

• A) 1 and 2 Correct
• B) 2 and 3
• C) 1 and 3

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Question: Susan Thomas is evaluating the holdings of Primus fund. Based on the information below, the estimated active return is closest to: Security (i) Portfolio Weight (wPi) Benchmark Weight (wBi) ReturnE (Ri) X 30% 40% 11.20% y 15% 25% 4.25% z 55% 35% 14.00% Total 100% 100%

• A) 1.77% Correct
• B) 1.26%
• C) 0.44%

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Question: Which of the following is correct for an unconstrained active portfolio?

• A) TC=1 Correct
• B) TC>1
• C) TC<1

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Question: Charles Griffith makes quarterly bets between stocks of industrial and utility sectors. The historical correlation between the returns of the two sectors is -0.20 and Griffith's bets have been correct 55% of the time. Further information is as below: Benchmark Sector E (R) σ Weight Industrial 12.00% 13.0% 80% Utility 5.2% 2.5% 20% The expected annualized active return of Griffith's sector rotation strategy is closest to:

• A) 10.64% Correct
• B) 13.72% Your Answer
• C) 5.48%

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Question: An active manager has an information coefficient of 0.07, transfer coefficient of 0.90, and makes 49 independent bets per year. Benchmark portfolio has a Sharpe ratio of 0.40 and standard deviation of benchmark returns is 12%. The optimal amount of active risk is closest to:

• A) 6% Correct
• B) 8%
• C) 14%

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Question: Charles Griffith makes quarterly bets between stocks of industrial and utility sectors. Griffith's strategy has an annualized active risk of 18%. Based on the information below, If Griffith wants to limit his active risk to 6%, what is the allocation to Utility sector when Griffith is bullish about Industrial stocks? Benchmark Sector Weight Industrial 80% Utility 20%

• A) 5% Correct
• B) -13%
• C) 14%

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Question: Jon Gamlin is comparing a market timing strategy with a stock selection strategy. He draws the following two conclusions for unconstrained active managers: Conclusion 1 To achieve the same information ratio, a market timer making weekly forecasts on the movement of the market needs to have a higher skill level than a stock selector following 25 stocks and updating the forecast semi-annually Conclusion 2 A specialist following only 4 stocks who revises his forecast 100 times per year will achieve the same information ratio as a stock selector with the same skill level who follows 50 stocks and updates his assessments semi-annually Regarding Gamlin's conclusions:

• A) Only conclusion 2 is correct Correct
• B) Neither conclusion is correct
• C) Only conclusion 1 is correct

Page 10 | Status: ✅ Correct

Question: An active manager expects his information coefficient to drop from 0.08 to 0.02 in the coming period due to extremely volatile and unpredictable markets. As a response he intends to increase his breadth by a factor of 4. Which of the following statements is most accurately describes the impact on the information ratio?

• A) The information ratio will remain constant
• B) The information ratio will decrease Correct
• C) The information ratio will increase

Page 10 | Status: ✅ Correct

Question: Zeta fund has active return and active risk of 1.6% and 8% respectively. Benchmark portfolio has a Sharpe ratio of 0.35 and standard deviation of benchmark returns is 10.5%. What is the weight of benchmark portfolio in a portfolio consisting of Zeta fund and the benchmark portfolio assuming that the portfolio is constructed to have optimal active risk?

• A) 0.1667 Correct
• B) 0.2
• C) 0.25 Ufton Wealth Management's Ranger fund has proved popular with clients. An extract from the prospectus of the Ranger fund is shown in Exhibit 1. Exhibit 1: Ranger Fund Asset Portfolio weight Benchmark weight Expected portfolio return Expected benchmark return U.S. equities 15% 20% 11% 9% U.S. corporate bonds 35% 35% 8% 7% International equities 8% 40% 14% 10% U.S. real estate 42% 5% 7% 7% Ufton awards its best performing fund manager with a large cash bonus each year. Details of the performance of three funds is shown in Exhibit 2. Risk-free rate is 2%. Exhibit 2: Selected Fund Performance

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Question: The expected level of active return expected to be achieved by the Ranger fund is closest to:

• A) –9.00% Correct
• B) –0.09%
• C) +3.49%

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Question: The largest positive contribution to the active return achieved by the Ranger fund is expected to come from:

• A) security selection Correct
• B) asset allocation
• C) Cannot tell from the information available

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Question: Of the three funds described in Exhibit 2, the fund with the highest information ratio is:

• A) Saltire Correct
• B) Dragon
• C)

Page 12 | Status: ✅ Correct

Question: Of the three funds described in Exhibit 2, the most likely to be a closet index fund is:

• A) Saltire Correct
• B) Dragon Your Answer
• C) Rose

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Question: Which of the following is correct for a constrained active portfolio?

• A) TC<1 Correct
• B) TC>1 Your Answer
• C) TC=1 Sundar Mithai, CFA, is a fund manager for Pearl Investments and makes a monthly report to the firm's partners. Mithai mentions two active managers in his report, Galab and Phasar. Exhibit 1 provides additional information on the two managers: Exhibit 1: Selected Information on Galab and Phasar Galab Phasar Information coefficient 0.22 0.37 Transfer coefficient 0.8 0.73 Active risk 5.6% 6.6%

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Question: According to the fundamental law of active management, how many forecasts is Galab making per month?

• A) 3 Correct
• B) 10
• C) 36

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Question: The expected active return generated by the hypothetical fund described in Exhibit 2 is:

• A) 3.12% Correct
• B) 4.68%
• C) 8.20%

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Question: If the hypothetical fund described in Exhibit 2 was subject to investment constraints, its expected active return would be expected to:

• A) rise Correct
• B) fall
• C) remain unchanged

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Question: An active manager has an information coefficient of 0.05 and makes 36 independent bets per year. What is the manager's information ratio given a transfer coefficient of 0.75?

• A) 0.23 Correct
• B) 0.45
• C) 1.35

Page 15 | Status: ✅ Correct

Question: Tom Grenkin is a market timer with an information ratio of 0.75. He makes a prediction of the movement in the market each quarter. Jane Fortina is a stock selector who follows 50 companies and revises her assessment each quarter. She also has an information ratio of 0.75. Assuming both managers have unconstrained portfolios, which of the following statements regarding the two managers is most accurate?

• A) As both managers have the same information ratio, they must also have the same information coefficient Your Answer
• B) As Fortina’s strategy has a much larger breadth, she must have a larger information coefficient than Grenkin Correct
• C) As Grenkin makes fewer bets per year, he requires a higher information coefficient on each bet than Fortina to achieve the same information ratio

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Question: When choosing an active manager, an investor with a high level of risk aversion:

• A) will choose the manager with the highest active return Correct Your Answer
• B) will choose a manager with the lowest active risk
• C) will choose the manager with the highest information ratio

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Question: An active manager has an information coefficient of 0.08, transfer coefficient of 0.50, and makes 100 independent bets per year. What is the expected active return for an active risk constraint of 5%?

• A) 2.4% Correct
• B) 2.0% Your Answer
• C) 1.8%

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Question: Helen Wilde is trying to estimate the active return of Optimal fund. A comparison of Optimal's holdings and that of the benchmark are shown below: Asset Class (i) Optimal Weight (wPi) Benchmark Weight (wBi) Optimal Return E(RPi) Benchmark Return E(RBi) Industrials 30% 40% 11% 12% Financials 50% 30% 6% 5% Utilities 20% 30% 14% 12% The expected active return for Optimal is closest to:

• A) -0.44% Correct
• B) – 1.40%
• C) – 0.80%

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Question: Pamela Grieve claims that her information coefficient is 0.20 on monthly bets on 10 stocks in the healthcare industry. Assuming unconstrained optimization, the reduction in her information ratio if her bets have a correlation coefficient of 0.45 as opposed to being truly independent is closest to:

• A) 22% Correct
• B) 45%
• C) 86%

Page 17 | Status: ✅ Correct