2/2/23, 1:10 PM Kaplanlearn - Quiz

Question #1 of 185 Question ID: 1474050

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%?
C. E(Ra) = TC*IC*((BR)^1/2)*SDa
A) 1.8%
B) 2.4%
C) 2.0%

Question #2 of 185 Question ID: 1474023

Price multiples are least likely to increase when:

A) Inflation expectations decline.

B) Equity risk premium increases. B

C) Earnings growth increases.

Question #3 of 185 Question ID: 1473940

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:

Factor Risk
Risk Free Rate
Premium

A) 2.00% 3.00% A. Expected return = risk free rate + factor sensitivity x risk
premium
B) 2.50% 3.00%

C) 3.00% 2.00%

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Question #4 of 185 Question ID: 1474066

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.Further information is
as below:

Benchmark

Sector E (R) σ Weight

Industrial 12.00% 13.0% 80%

Utility 5.2% 2.5% 20%

The annualized active risk of Griffith's strategy is closest to:

A) 27.44%
A.
B) 10.90%
C) 13.72%

Question #5 of 185 Question ID: 1473983

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.
B) Maximum tracking error of 3%. A. Stop loss limits specify liquidation of a
portfolio or a reduction in its size if a loss of a
C) Maximum daily VaR of $1.5 million. specific magnitude occurs. Maximum daily VaR
and tracking errors are examples of risk
budgets.

Question #6 of 185 Question ID: 1473984

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

A) fair value of plan assets less fair value of liabilities.

B) assets minus VaR.
C) capital needed to overcome severe losses in the business.

C. Economic capital is the capital needed for a firm to survive if severe losses are
experienced based on the risk the business is exposed to.
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Ryan Manning is a new hire at Luongo Asset Managers. As part of his training, he has been
asked to compile a report on risk measurement and mechanisms to control risk.

Manning wants to give a simple illustration of VaR and has compiled the data for a two-asset
portfolio as shown in Exhibit 1.

Exhibit 1:

Daily standard Average daily Standard deviation of

Weighting Asset
deviation return daily return

Wszolek
70% 0.0186 0.06%
plc
1.54

30% Sylla plc 0.0124 0.04%

Current market value of portfolio £7,500,000

Manning's colleague, Alex Smith, makes three comments about Manning's computation of
VaR:

Comment "VaR is such a useful measure as it shows us the maximum potential loss on
1: our portfolio position. Your data shows the maximum daily loss that could be
incurred 5% of the days."

Comment "When using a parametric approach great care needs to be taken with the
2: look-back period. The raw data should only really be used if the historic
parameter estimates are similar to what we are expecting over the period for
which we are estimating VaR."

Manning's report contains a discussion on the historical simulation method of estimating

VaR. Manning states:

"The historical simulation approach to VaR is based on the actual periodic changes in risk
factors over a look-back period. The daily change in value of the portfolio is calculated for
each day over the look-back period. We then order the changes from most positive to most
negative and look for the largest 5% of losses. The VaR is then the average of the 5% biggest
losses. One advantage it has is that it doesn't use normal distributions and as a result can be
used for portfolios containing options."

Manning's report contains three limitations of VaR:

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If VaR is calculated under the assumption of normal distributions of asset

Limitation
returns, it will often underestimate the severity of losses. One cause of this is
1:
platykurtic return distributions.

Limitation During periods of financial distress asset correlations will often increase. This
2: means that computing VaR based on historical correlations observed over a
look-back period might well overestimate the benefits of diversification and as
a result underestimate the magnitude of potential losses.

Limitation VaR computation does not account for the liquidity of assets in its calculation.
3: When asset prices fall dramatically, liquidity often dissipates significantly as
was seen with asset-backed securities during the credit crunch of 2008–2009.
This has means that VaR will underestimate the true losses of liquidating
positions that are under extreme price pressure.

Question #7 - 10 of 185 Question ID: 1478227

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

A) £126,000.
B) £156,000. C. First, calculate the portfolios' average daily return and standard deviation:
average return = (0.7 × 0.06%) + (0.3 × 0.04%) = 0.054%
C) £186,000. = 1.54%
5% VaR = (–1)[0.054 – 1.65 × 1.54] = 2.48%
£ VaR = £7,500,000 × 0.0248 = £186,000

Question #8 - 10 of 185 Question ID: 1473972

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

A) Only comment 1 is correct.

B) Only comment 2 is correct.
C) Both comments are incorrect.
B. Comment 1 is incorrect. VaR is interpreted as the minimum loss that will be experiencedX% of the time;
losses estimated will be bigger.
Comment 2 is correct. Using historic parameters will only be of use if the future period is expected to be
similar to the look-back period. For example, if the look- back period hadan unusually low volatility then
VaR based on this measure would underestimate losses.

Question #9 - 10 of 185 Question ID: 1473973

Manning's paragraph detailing the historic simulation method is:

A) correct.
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B) incorrect about VaR calculation.

C) incorrect regarding the application to portfolios containing options.

B. The VaR estimate under the historical simulation approach is the smallest of the largest 5% losses, not
average. Great care should be taken that the historical period used to capture the data is not atypical in some
respect (i.e., had a very low or high volatility).

Question #10 - 10 of 185 Question ID: 1473974

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

A) 1 limitation.
B) 2 limitations.
C) 3 limitations.
A. Limitation 1 is incorrect. Platykurtic distributions have fewer extreme outliers than a normal distribution
(thinner tails). A normal distribution would therefore overestimate the potential losses. A leptokurtic
distribution would have fatter tails and therefore the normal distribution would underestimate potential
losses.

Question #11 of 185 Question ID: 1474000

In conducting a sensitivity analysis, an analyst is most likely to take fat tails and negative
skewness into account by repeating a Monte Carlo simulation using a multivariate:

A) normal distribution.
B) Bernoulli distribution.
C) skewed Student’s t-distribution.
C. To conduct a sensitivity analysis, we fit return data to a distribution that accounts for skewness
and excess kurtosis, such as a multivariate skewed Student's t-distribution and then repeat the
Monte Carlo simulation. .

Question #12 of 185 Question ID: 1473993

Which of the following is the least likely to result from using information that would have
been unavailable at the time of the investment decision?

A) Look-ahead bias.
B) Data snooping.
C) Survivorship bias.
B. Data snooping refers to a situation where a model is chosen based on backtesting performance.
Look-ahead bias refers to using information that would have been unavailable at the time of the
investment decision. Survivorship bias is a form of look ahead bias in which results are based on data
that only includes entities that have persisted until today.

Question #13 of 185 Question ID: 1474019

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

A) Increase during economic downturns.

B) Be unrelated to business cycle. A

C) Decrease during economic downturns.

Question #14 of 185 Question ID: 1473999

In the historical simulation approach, bootstrapping is most likely to be used when:

A) zero-coupon rates are available but par yields are unknown.

B) a merger transaction impacts earnings.
C) the number of trials is larger than the dataset.
C. Historical simulation sometimes makes use of bootstrapping, whereby random samples
are drawn with replacement. Bootstrapping is useful when the number of simulations
needed is large relative to the size of the historical dataset. .

Question #15 of 185 Question ID: 1473968

Delphia fund is a €100 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 €511,000.
Assuming 21 trading days per month, The 5% monthly VaR is closest to:

A) €3,801,000
B) €829,446
C. Monthly return = 0.00116 x 21 = 0.02436.
C) €435,000 Monthly standard deviation = 0.0038 x (21)^0.5 = 0.0174
5% Monthly VaR = [Expected monthly return (1.65 x Monthly standard
deviation)] × Portfolio value = [0.02436 – (1.65 x 0.0174)] x 100million = €435,000

Question #16 of 185 Question ID: 1473953

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Janice Barefoot, CFA, has been managing a portfolio for a client who has asked Barefoot to
use the Dow Jones Industrial Average (DJIA) as a benchmark. In her first year Barefoot
managed the portfolio by choosing 29 of the 30 DJIA stocks. She selected a non-DJIA stock in
the same industry as the omitted stock to replace that stock. Compared to the DJIA, Barefoot
has placed a higher weight on the financial stocks and a lower weight on the other stocks
still in the portfolio. Over that year, the non-DJIA stock in the portfolio had a negative return
while the omitted DJIA stock had a positive return. The portfolio managed by Barefoot
outperformed the DJIA. Based on this we can say that the return from factor tilts and asset
selection were:

A) negative and positive respectively.

B) both positive.
C) positive and negative respectively.
C. Since the replacement of the asset obviously had a negative effect, the tilting towards
financial stocks must have been positive to not only compensate for the loss but produce
a portfolio return greater than the DJIA.

Question #17 of 185 Question ID: 1474035

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:

Benchmark
Optimal Benchmark Optimal
Return
Asset Class (i)
Weight (wPi) Weight (wBi) Return E(RPi)
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) – 1.40% C. Asset allocation return = (wpi - wbi)* e(Rbi)

Stock selection = wpi * (e(Rpi) - e(Rbi))
B) -0.44% Expected active return = Asset allocation + stock selection
or
C) – 0.80%
Portfolio return = RP = sum of(wPi) x E(RPi) = 9.10%
Benchmark return = RB = sum of(wBi) x E(RBi) = 9.90%
Active return = RP - RB = 9.10% – 9.90% = -0.80%

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Question #18 of 185 Question ID: 1473998

A risk-averse investor is most likely to desire which of the following attributes of a

multivariate return distribution?

A) Excess kurtosis.
B) Negative skewness.
C) Positive skewness.
C. Positive skewness indicates an above-average probability of returns above the mean, a desirable
attribute. Negative skewness indicates an above-average probability of returns below the mean, which
would not be a desirable attribute for a risk-averse investor. Excess kurtosis or fat tails indicates higher
(than normal) probability of extreme events— again, an undesirable attribute for a risk-averse investor.

Question #19 of 185 Question ID: 1474003

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

A) New information confirms the market's expectations of future earnings.

New information reveals that the market’s expectations about earnings were
B)
accurate.
New information reveals that the market’s expectations about earnings were
C)
inaccurate.
C

Question #20 of 185 Question ID: 1473938

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) 24.0%.
B) 33.0%.
C
C) 30.0%.

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Question #21 of 185 Question ID: 1474017

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) High rated corporate bonds will outperform low-rated corporate bonds.

B) Risky bonds will outperform risk-free bonds.
B
C) Government bonds will outperform low-rated corporate bonds.

Question #22 of 185 Question ID: 1474094

A trader that places numerous false orders on one side of the market in order to incite other
market participants into trading with a real order on the other side of the market is most
likely to be accused of:

A) layering.
B) wash trading.
C) gunning the market.
A. Layering (also known as spoofing) is a quote stuffing strategy intended to use sham orders
to trick other market participants into trading with real orders on the other side of the
market. Gunning the market is a strategy used by market manipulators to cause other
traders to enter into disadvantageous trades. In wash trading, a trader will rapidly buy and
sell the same security in an attempt to artificially inflate the demand for the security.

Question #23 of 185 Question ID: 1473994

Bill Cassidy, CFA, is the portfolio manager for Applied Logistics pension fund. Cassidy is
meeting with Alex Swary, the senior quantitative analyst, to discuss the results of backtesting
of a model developed by Swary. The model uses several factors in selecting stocks, including
EPS growth over the past year, the industry competitiveness index, and price-to-book ratio.
The model makes picks on the first trading day of each calendar year with annual
rebalancing.

While evaluating the results of backtesting, Cassidy should be most likely concerned with:

A) survivorship bias.
B) data snooping bias.
C) look-ahead bias.
C. Factors such as the price-to-book ratio rely on accounting data (from the balance sheet),
which is usually available with a lag—therefore, it may not be available at the time of stock
selection. This fact is often overlooked while using historical data and is called the look-ahead bias.
Survivorship bias results from inclusion of only survivors in the investment universe, while data snooping
involves selection of a winning model (from many) based on statistical strength of the test results. The
question does not provide any evidence to support either the survivorship bias or the data snooping bias.
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Question #24 of 185 Question ID: 1474083

Which of the following implementation shortfall components is NOT influenced by market-

wide movements?

A) Explicit costs. Brokerage fees etc

B) Missed trade opportunity cost.
C) Realized profit and loss.
A. The realized profit and loss and missed trade opportunity cost are all affected by market
movements that the manager should not be held accountable for. For example, if the
security increases due to market-wide movements, the trader should not be held
responsible for this non-security specific change in price. Market-wide movements can be
adjusted for by the market model.

Question #25 of 185 Question ID: 1473945

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

Company-specific returns
Actual Expected
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) 11.0%.
B) 13.0%. A

C) 13.2%.

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Question #26 of 185 Question ID: 1473922

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.

B) neither statement is correct.
C) only statement 1 is correct.
B. Both statements are incorrect. Soft closures entail creation halts and changes in
investment strategy. When creations are halted by bank ETN issuers, those ETNs may
trade at a significant premium to their NAV as the arbitrage mechanism breaks down.

Question #27 of 185 Question ID: 1473914

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

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

Question #28 of 185 Question ID: 1474015

Credit spreads are most likely to:

A) Rise with policy rates.

B) Rise during expansions.
C.
C) Rise during recessions.

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Question #29 of 185 Question ID: 1474074

An active manager makes quarterly bets on the stocks in the Russell 2000 index and uses
the index as the benchmark. The manager claims a modest IC of 0.02 using a stock screening
model. Sam Fox, CFA makes the following two statements:

I. The bets on the 2000 stocks in the index is not independent as the screens by
definition introduce dependency in the decision process.
II. The quarterly bets are likely to be independent.

How many of Fox's statements are correct:

A) Both statements are correct.

B) Neither statement is correct.
C) Only one statement is correct.
C. Fox is correct that screens (e.g., minimum dividend yield) would pass stocks with similar
attributes and hence would introduce dependency in the decision making process. Fox is
incorrect that the decisions over time are independent. Those stocks that pass the screen
in one quarter are probably more likely to pass the same screen in the next quarter and
hence the decisions are not truly independent.

Question #30 of 185 Question ID: 1474007

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

A) expectations of higher income in the future.

investors attaching high utility to future consumption relative to current
B)
consumption.
expectations of goods and services being less available in the future relative to
C)
today.
A. An increase in real GDP growth means that more goods and services will be available in
the future relative to today. Investors will be less willing to substitute across time, leading
to more borrowing and less saving. This leads to an increase in the real default-free
interest rate.

Question #31 of 185 Question ID: 1473923

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) portfolio liquidity management. A. Portfolio liquidity management entails equitizing

excess cash. Portfolio completion strategies use ETFs
B) portfolio completion. to fill temporary gaps in portfolio allocation. Excess
liquidity management is not a strategy defined in the
C) excess liquidity management. CFA curriculum.

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Question #32 of 185 Question ID: 1473918

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% A. Round-trip commission = 2 × 0.04% = 0.08%

Round-trip trading cost = round-trip commission + spread = 0.08% + 0.10% = 0.18%
B) 0.30% Holding cost for 3 years = round-trip trading cost + management fees = 0.18% + (3 ×
0.09%) = 0.45%
C) 0.45% Average annual cost (for 3-year holding period) = 0.45% / 3 = 0.15%

Question #33 of 185 Question ID: 1473932

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.

an investment that has an expected positive net cash flow but requires no initial
B)
investment.
C) a portfolio with factor exposures that sum to one.
B. All factor portfolios will have positive risk premiums equal to the factor price for that
factor. An arbitrage opportunity does not necessarily require a return equal to the riskfree rate, and the factor
exposures for an arbitrage portfolio are all equal to zero.

Question #34 of 185 Question ID: 1473907

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

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

Question #35 of 185 Question ID: 1474087

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2/2/23, 1:10 PM Kaplanlearn - Quiz

An electronic trading strategy that is common when dealers are willing to trade at better
prices than they quote, most accurately describes:

A) leapfrogging. A. Flickering quotes are exposed

limit orders that electronic traders submit and then cancel shortly
B) hidden orders. thereafter. Larger
traders submit hidden orders when they do not want to reveal their
C) flickering quotes. standing orders to the
markets.

Question #36 of 185 Question ID: 1473967

Sophia fund is a €200 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) €82,000
C
B) €37,400,000
C) €368,000

Question #37 of 185 Question ID: 1474033

Susan Thomas is evaluating the holdings of Primus fund. Based on the information below,
the estimated active return is closest to:

Portfolio Benchmark ReturnE

Weight (wPi) Weight (wBi) (Ri)

Security (i)

X 30% 40% 11.20%

y 15% 25% 4.25%

z 55% 35% 14.00%

Total 100% 100%

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

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Question #38 of 185 Question ID: 1473952

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 factor portfolio.

B) 30% short position in the inflation tracking portfolio.
C) 30% long position in the inflation factor portfolio.
A. To hedge inflation, the fund should take a 30% short position in the inflation factor
portfolio. This short position will fully offset the fund's positive exposure to inflation.
Tracking portfolios are typically used for active asset selection and have multiple factor
exposures which would prevent them from adequately hedging the inflation exposure of
the fund.

Question #39 of 185 Question ID: 1474096

Suppose that a market manipulator sells a particular security quickly to push prices down in
order to trigger stop-loss sell orders that other market participants have in place, in order
for the manipulator to profit by repurchasing that security at lower prices. This abusive
trading practices is most likely to be classified as:

A) gunning.
B) squeezing.
C) cornering.
A. Gunning the market is a strategy where a manipulator tries to push prices down, in order
to trigger stop-loss sell orders that will allow the manipulator to purchase the security at
lower prices. In a squeeze or corner, the manipulator obtains control over resources
necessary to settle trading contracts, then unexpectedly withdraws those resources from
the market.

Question #40 of 185 Question ID: 1473950

A tracking portfolio is a portfolio with:

a specific set of factor sensitivities designed to replicate the factor exposures of a

A)
benchmark index.
factor sensitivities of zero to all factors, positive expected net cash flow, and an
B)
initial investment of zero.
a factor sensitivity of one to a particular factor in a multi-factor model and zero to all
C)
other factors.
A

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Question #41 of 185 Question ID: 1473921

Settlement risk is most likely to be a concern for:

A) ETFs using OTC derivative contracts.

B) ETF investors where the ETF sponsors lend securities to short sellers for a fee.
C) Exchange traded notes.
A

Question #42 of 185 Question ID: 1473991

Which of the following metrics are most likely to be reported in a backtest of an investment
strategy?

A) Altman Z-score, Sloan ratio, and Beneish M-score.

C
B) Enterprise value, volume, and market capitalization.
C) Maximum drawdown, Sharpe ratio, and Sortino ratio.

Question #43 of 185 Question ID: 1473962

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 exposure to the recession risk factor.

B) less-than-average exposure to the recession risk factor.
C) greater-than-average market risk exposure.
A. Multifactor models allow us to capture other dimensions of risk besides overall market risk. Investors with
unique circumstances different than the average investor may want to hold portfolios tilted away from the market
portfolio in order to hedge or speculate on factors like recession risk, interest rate risk or inflation risk. An investor
with lower-than average exposure to recession risk can earn a premium by creating greater-than-average
exposure to the recession risk factor. In effect, he earns a risk premium determined by the average investor by
taking on a risk he doesn't care about as much as the average investor does.
Question #44 of 185 Question ID: 1474086

An electronic trader that tries to profit by exploiting the option value of standing orders is
most accurately categorized as an electronic:

A) quote matcher.

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B) arbitrageur.
C) front runner.
A. Electronic quote matchers attempt to exploit the option values of standing orders (i.e.
limit orders waiting to be filled.) Standing orders allow quote matchers to limit the losses
on positions they take. If prices move in the quote matcher's favor, they profit. If prices
move against the quote matcher, they can exit by trading using the standing orders.

Question #45 of 185 Question ID: 1473916

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) both statements are correct.

B) only statement 2 is correct. A

C) only statement 1 is correct.

Question #46 of 185 Question ID: 1474011

The risk-premium for uncertainty in inflation is most likely to be:

A) positively related to the term spread.

B) unrelated to the term spread.
C) negatively related to the term spread.
A. Term spread (i.e., difference in yield between long dated government bonds and shortdated
government bonds) is normally positive. Given that longer-term government bonds
have a higher risk premium for uncertainty in inflation; term spread would be higher
resulting in a positive relationship.

Question #47 of 185 Question ID: 1473949

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. B

B) factor portfolio.

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C) tracking portfolio.

Question #48 of 185 Question ID: 1474082

Which of the following is most accurate regarding the volume-weighted average price
(VWAP) intraday benchmark? VWAP is applicable:

A) when wishing to exclude potential trade outliers.

B) in market environments that are potentially volatile throughout the day.
C) when rebalancing a portfolio over the day with buy and sell orders.
C.. Portfolio managers who are rebalancing their portfolios over the day and have both buy
and sell orders would likely select the VWAP as a price benchmark. In these situations, the
preference is to participate with market volume.
Excluding potential trade outliers and used in market environments that are potentially
volatile throughout the day would suggest that time-weighted average price (TWAP) would
be applicable as opposed to VWAP.
Question #49 of 185 Question ID: 1474039

Which of the following statements is least accurate?

A) Unlike Sharpe ratio, information ratio is affected due to addition of cash or leverage.
The information ratio of a constrained active portfolio is unaffected by
B)
aggressiveness of the active weights.
Sharpe ratio of a portfolio consisting of a combination of benchmark and actively
C) managed portfolio with positive active return will be higher than the Sharpe ratio of
the benchmark.
B. Information ratio of an unconstrained active portfolio is unaffected by aggressiveness of
the active weights. Sharpe ratio is unaffected by addition of cash or leverage but
information ratio would be. A portfolio consisting of a combination of benchmark and an
actively managed portfolio is calculated as:

Question #50 of 185 Question ID: 1473961

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.
B) −1.0 to the confidence risk factor and 1.0 to the time-horizon factor.
C) 1.0 to the confidence risk factor and 0.0 to the time-horizon factor.
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C. She wants to create a confidence risk factor portfolio, which has a sensitivity of 1.0 to the
confidence risk factor and 0.0 to the time horizon factor. Because the risk premium on the
confidence risk factor is positive, an unexpected increase in this factor will increase the
returns on her portfolio. The exposure to the time-horizon risk factor has been hedged
away, because the sensitivity to that factor is zero
Question #51 of 185 Question ID: 1474013

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.
B) Decrease. C

C) Be uncertain.

Question #52 of 185 Question ID: 1473985

Which of the following statements about backtesting an investment strategy is least

accurate? Backtesting:

A) lends rigor to the investment process.

B
B) ensures that a strategy will perform well in the future.
C) approximates the real-life investment process.

Question #53 of 185 Question ID: 1473927

Which of the following is an equilibrium-pricing model?

A) The arbitrage pricing theory (APT). A. The APT is an equilibrium-pricing model; multi-factor
models are "ad-hoc," meaning the
B) Fundamental factor model. factors in these models are not derived directly from an
equilibrium theory. Rather they
C) Macroeconomic factor model. are identified empirically by looking for macroeconomic
variables that best fit the data.

Question #54 of 185 Question ID: 1473966

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

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

Question #55 of 185 Question ID: 1473977

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

A) using partial analysis.

C
B) using scenario analysis.
C) using sensitivity analysis.

Question #56 of 185 Question ID: 1474021

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?

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

Question #57 of 185 Question ID: 1473924

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

A) Smart beta.
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B) Alternative weighting.
C) Representative sampling/optimization.
C. Replicating index performance by using an optimized sample rather than investing in all
the securities in the index is considered a passive ETF strategy. Active management
strategies used in the construction of ETFs include factor (smart beta), discretionary active,
alternatively weighted, dynamic asset allocation and multi-asset strategies.

Question #58 of 185 Question ID: 1473955

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

C. Replicating index performance by using an optimized

A) No Yes sample rather than investing in all
the securities in the index is considered a passive ETF
strategy. Active management
B) Yes No strategies used in the construction of ETFs include factor
(smart beta), discretionary active,
alternatively weighted, dynamic asset allocation and
C) No No multi-asset strategies.

Question #59 of 185 Question ID: 1474055

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 ratio will fall by approximately 50%

B. Information ratio (IR) = IC × (BR)
B) The information ratio will fall by approximately 30% ^1/2

C) The information coefficient will fall by approximately 50%

Question #60 of 185 Question ID: 1473980

Which of the following is a limitation of scenario analysis?

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A) Scenario analysis does not account for “fat tail” problem of the return distribution.
B) The relationship between portfolio value and the risk factors used may not be static.
C) Scenario analysis does not provide the probability of a specific scenario occurring.
C. While scenario analysis can be used to measure the impact of a scenario, it can't provide
the probability of the scenario actually occurring. Since scenario analysis does not assume
a normal (or any other) distribution of asset returns, the question of fat tails does not
arise. Assumption of static relationship between individual risk factors and portfolio value
is a limitation of sensitivity analysis.

Question #61 of 185 Question ID: 1473911

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.

B) outperform the underlying benchmark.
C) trade at a discount.
A

Question #62 of 185 Question ID: 1474052

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

A) TC<1
A. When we impose constraints on portfolios, the actual active weights (wi) will differ from
B) TC>1 optimal active weights (wi*) and TC<1.

C) TC=1

Question #63 of 185 Question ID: 1474008

real risk free rate
The real rate of return is most likely higher:

Lower the utility investors attach to future consumption relative to current

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

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Question #64 of 185 Question ID: 1474046

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

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

Question #65 of 185 Question ID: 1474038

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) 6%
B) 8% A. Active risk = (IR/SRb)*SDb
C) 7%

Question #66 of 185 Question ID: 1508685

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

A) Equity.
B) Real estate. C

C) Risk-free bonds.

Question #67 of 185 Question ID: 1473979

Which of the following approaches to conducting scenario analysis on a portfolio of stock

options is most accurate?
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A) Evaluate the impact on the portfolio owning to changes in volatility.

B) Value the portfolio based on the parameters identified in the scenario.
C) Evaluate the impact on the portfolio owing to changes in delta.
B

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%

Active risk 4.1% 3.6% 15.5%

Radichkova is also analyzing an actively managed portfolio consisting of financials and

pharmaceuticals. The following table shows the weights and returns of the benchmark and
portfolio:

Sector WB WP RB RP

Financials 50% 70% 9.2% 17.8%

Pharmaceuticals 50% 30% 8.1% 6.3%

Radichkova makes the following comments about the two-sector portfolio:

Comment 1: The value added is 5.7%.

Comment 2: The asset allocation decision only accounts for 0.22% of the value added.

Radichkova is writing a summary of the fundamental law of active management. In that

section of the report, she states that the transfer coefficient can be viewed as the correlation
between:

1. ex-ante active returns and actual active weights

2. risk-weighted optimal active weights and risk-weighted actual active weights
3. ex-ante active returns and realized active returns

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Question #68 - 71 of 185 Question ID: 1474059

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

A) 0.85.
B) 0.90. C. SRp^2 = SRb^2 + IR^2

C) 0.95.

Question #69 - 71 of 185 Question ID: 1474060

If the FTSE 100 and Crystal fund are combined in an optimal portfolio, what proportion
should be invested in Crystal?

A) 136%. C. We first compute the optimal level of risk using Active risk = (IR/SRb)*SDb
Then, divide the answer by 15.5%.
B) 146%.
C) 156%.

Question #70 - 71 of 185 Question ID: 1474061

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

A) One.
B) Both.
B
C) None.

Question #71 - 71 of 185 Question ID: 1474062

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

A) 1 and 2.
B) 2 and 3. A

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C) 1 and 3.

Question #72 of 185 Question ID: 1474004

Investors are least likely to increase their savings rate when:

A) Expected rates of returns increase.

B
B) Uncertainty about their future income decreases.
C) Uncertainty about their future income increases.

Question #73 of 185 Question ID: 1473975

Conditional VaR is most accurately measured as:

A) Average VaR in the tails of the value distribution.

B) Average VaR given that losses to the extent of VaR has occurred.
C) Average VaR in the tails of the return distribution. B

Question #74 of 185 Question ID: 1473951

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 asset portfolio weights equal to that of the index.
C) a portfolio with factor sensitivities equal to that of the index.
C.Enhanced indexing by matching primary risk factors could be implemented by creating a
tracking portfolio with the same factor sensitivities as the index but with a different set of
bonds. Then any differences in performance between the portfolio and the benchmark
index will be the result of bond selection ability and not from different exposures to
macroeconomic factors like GDP, inflation, and interest rates.

Question #75 of 185 Question ID: 1474079

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Suppose a trader is quoted a market bid price of $30.00 and an ask of $30.07. The execution
price of a buy order is $30.04. What is the effective spread?

A) $0.06.
B. Effective spread = 2 x (cost estimate)
B) $0.01. Buy order cost estimate = Execution price - mid quote price
Sell order cost estimate = mid quote price - execution price
C) $0.02.

Question #76 of 185 Question ID: 1474051

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) 1.35 B. iR = TC * IC * (BR)^1/2

B) 0.23
C) 0.45

Question #77 of 185 Question ID: 1474068

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) 5.48%
B) 13.72% A

C) 10.64%

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Question #78 of 185 Question ID: 1473978

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

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

Question #79 of 185 Question ID: 1474093

A trader that arranges for the same security to be traded among several commonly
controlled accounts to create the impression of market activity at a particular price is most
likely to be accused of: B. Gunning the market is a strategy used by market manipulation to
cause other traders to
A) quote stuffing. enter into disadvantageous trades. In wash trading, a trader will rapidly
buy and sell the
B) wash trading. same security in an attempt to artificially inflate the demand for the
security. Quote
C) gunning the market. stuffing refers to a trader distracting and disadvantaging other
algorithms by placing a
great quantity of fictitious orders and then cancelling them almost
immediatel

Question #80 of 185 Question ID: 1474005

The marginal utility of current consumption is most likely higher:

A) Higher the wealth.

B
B) During economic contractions.
C) During economic expansions.

Question #81 of 185 Question ID: 1473954

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Janice Barefoot, CFA, has been managing a portfolio for a client who has asked Barefoot to
use the Dow Jones Industrial Average (DJIA) as a benchmark. In her second year, Barefoot
used 29 of the 30 DJIA stocks. She selected a non-DJIA stock in the same industry as the
omitted DJIA stock to replace that stock. Compared to the DJIA, Barefoot placed a lower
weight on the communication stocks and a higher weight on the other stocks still in the
portfolio. Over that year, the non-DJIA stock in the portfolio had a positive and higher return
than the omitted DJIA stock. The communication stocks had a negative return while all of the
other stocks had a positive return. The portfolio managed by Barefoot outperformed the
DJIA. Based on this we can say that the return from factor tilts and asset selection were:

A) both positive. A. Since the communications stocks had a negative return

while all the other stocks had a
B) positive and negative respectively. positive return, Barefoot's underweighting of those stocks
produced a positive tilt return.
C) negative and positive respectively. Since the asset chosen to replace the DJIA stock outperformed
the omitted stock, the asset
selection return was positive.

Question #82 of 185 Question ID: 1473989

Which of the following most accurately describes the steps in backtesting an investment
strategy?

Conceptualization of the modeling task, data collection, data preparation and

A)
wrangling, data exploration, and model training.
B) Strategy design, historical investment simulation, and analysis of output.
Obtain estimates of the regression parameters, determine the assumed values of
C) the independent variables, and compute the predicted value of the dependent
variable.
B. The three steps in backtesting an investment strategy are: (1) strategy design,
(2) historical
investment simulation, and (3) analysis of output.

Question #83 of 185 Question ID: 1473941

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. B

C) fundamental factor model.

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Question #84 of 185 Question ID: 1474032

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
B) lack of liquidity.
C) the break-even inflation rate.

Question #85 of 185 Question ID: 1474076

Which of the following trading costs is NOT an explicit cost?

A) Stamp duties. C. The explicit costs in a trade are readily discernable and include
commissions, taxes, stamp
B) Commissions. duties, and fees. Implicit costs sometimes cannot be measured as
easily but do exist. They
C) Market impact costs. include the bid-ask spread, market or price impact costs, opportunity
costs, and delay
costs (a.k.a. slippage costs)

Question #86 of 185 Question ID: 1508684

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

A) $1.00.
The expected value of the investors’ inter-temporal rate of substitution between
B)
current period and one period from now.
C) Uncertain.
B. The price of a The price of a zero-coupon, inflation indexed, risk-free bond that pays $1 in
one period is the expected value of the investors' inter-temporal rate of substitution
between current period and one period from now. This value is less than $1 as the utility
of current consumption is greater than consumption in one period in the future

Question #87 of 185 Question ID: 1474095

A trader that has advance information about a large buy-side order is most likely to attempt
to profit from the large trade's market impact through the market manipulation known as:

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A) quote stuffing.
B) front running. B

C) gunning the market.

Question #88 of 185 Question ID: 1473965

Assuming that the returns distribution of a portfolio is normal, using the parametric method
of estimation of VaR needs which of the following inputs:

A) mean, standard deviation and size of the lookback period.

B) mean and standard deviation.
C) mean, standard deviation, and kurtosis.
B

Question #89 of 185 Question ID: 1474002

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

Risk free interest rates, risk premiums, timing and/or magnitude of expected cash
A)
flows change.
Real risk-free rates, risk premiums, timing/magnitude of expected cash flows
B)
change.
Real risk-free rates, inflation premium, timing/magnitude of expected cash flows
C)
change.
A. Market values of assets are affected when the expected cash flows or discount rate
changes. The discount rate can change either due to changes in risk-free rate or due to
changes in risk premiums.

Question #90 of 185 Question ID: 1473904

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

A) a special group of institutional investors (APs) only. A

B) anyone, including individual investors using a brokerage account.

C) accredited investors (i.e. qualified investors) only.

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Question #91 of 185 Question ID: 1508686

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:

Benchmark
Optimal Benchmark Optimal
Return
Asset Class (i)
Weight (wPi) Weight (wBi) Return E(RPi)
E(RBi)

Industrials 30% 40% 11% 12%

Financials 50% 30% 6% 5%

Utilities 20% 30% 14% 12%

The expected active return due to asset allocation for Optimal is closest to:

A) -0.44%.
B) – 0.86%. C

C) – 1.40%.

Question #92 of 185 Question ID: 1473934

Arbitrage pricing models assume which risk is priced?

A) Systematic.
A. Unsystematic risk can be diversified away. Thus,
B) Both systematic and unsystematic. arbitrage pricing reflects only systematic
risk. It is assumed that the portfolio manager will take
steps to diversify and reduce risk.
C) Unsystematic.

Question #93 of 185 Question ID: 1473997

In the presence of return distribution asymmetry and excess kurtosis, the most appropriate
approach would be to make use of a Monte Carlo simulation using a:

A) skewed Student’s t-distribution. A

B) normal distribution.
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C) F-distribution.

Question #94 of 185 Question ID: 1474047

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

A) Breadth
C. Information coefficient is the ex-ante correlation between
B) Transfer Coefficient forecasted active returns and
actual active returns. It captures the skill of the manager
C) Information Coefficient

Question #95 of 185 Question ID: 1473996

Which of the following is least likely an example of historical stress testing?

CAN BE +VE OR -VE
Backtesting the performance of the strategy, assuming that the CBOE VIX Index is
A)
greater than 55.
Backtesting the performance of the strategy during the high market return period of
B)
2017–2018.
Backtesting the performance of the strategy during the great recession, a period
C)
following the global financial crisis of 2008.
A. Historical scenario analysis (or historical stress testing) involves backtesting a strategy
during actual historical periods. Assumed VIX level is not a historical period. The
recessionary period following the global financial crisis of 2008 and the high market return
period of 2017–2018 are both historical periods.

Question #96 of 185 Question ID: 1474001

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

A) A decrease in expectations about corporate earnings.

B) An increase in Treasury yields.
C
C) A decline in expected inflation.

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Question #97 of 185 Question ID: 1474067

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?

As Fortina’s strategy has a much larger breadth, she must have a larger information
A)
coefficient than Grenkin.
As Grenkin makes fewer bets per year, he requires a higher information coefficient
B)
on each bet than Fortina to achieve the same information ratio.
As both managers have the same information ratio, they must also have the same
C)
information coefficient.
B. As a stock selector, Fortina makes many more bets per period and has a much larger
breadth. She therefore requires a lower information coefficient than Grenkin to achieve
the same information ratio. Grenkin requires a higher coefficient.
Since IR = IC * (BR)^1/2

Question #98 of 185 Question ID: 1473906

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

A) the securities underlying the ETF are illiquid.

B) the ETF represents securities that are difficult to invest in directly.
C) the ETF and the securities underlying the ETF trade in the same market.

Question #99 of 185 Question ID: 1474037

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%.

The maximum possible Sharpe ratio of a portfolio consisting of Zeta fund and the
benchmark portfolio is closest to:

A) 0.5
B) 0.4 B
C) 0.55

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Question #100 of 185 Question ID: 1474064

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
B. In conclusion 1, the market timer has a breadth of 52
Regarding Gamlin's conclusions: and the stock selector 50. In order to
achieve the same information ratio, the stock selector
A) Only conclusion 1 is correct. would need to make up for the
lower breadth with a higher information coefficient.
B) Neither conclusion is correct. In conclusion 2, the specialist has a breadth of 400 and
the selector 100. If they have the
C) Only conclusion 2 is correct. same skill level, the specialist with the larger breadth will
have a higher information ratio

Question #101 of 185 Question ID: 1508682

Marginal Var is least likely to be:

A) conceptually similar to incremental VaR. C

B) change in VaR due to very small change in asset positon.

C) change in VaR due to change in probability.

Question #102 of 185 Question ID: 1473905

Which of the following is least likely a purpose of the in-kind creation/redemption of an ETF?
B. The in-kind creation/redemption process serves
three purposes: lower cost, tax efficiency
A) Lower cost. and keeping market prices in line with NAV. Arbitrage
gap is the band around NAV at
B) Narrowing the arbitrage gap. which the ETF should trade at and is not affected by
the in-kind creation/redemption
process
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C) Tax efficiency.

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

Portfolio Benchmark Expected Expected

Asset
weight weight portfolio return benchmark return

U.S. equities 15% 20% 11% 9%

U.S. corporate
35% 35% 8% 7%
bonds

International
8% 40% 14% 10%
equities

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

Portfolio Benchmark
Portfolio Benchmark Sharpe Tracking
Fund standard standard
return return ratio error
deviation deviation

Saltire 8.46% 5.80% 6.13% 4.50% 1.05 1.58%

Dragon 13.01% 11.56% 7.64% 5.15% 1.44 2.12%

Rose 11.39% 11.37% 11.01% 11.14% 0.85 0.21%

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Question #103 - 106 of 185 Question ID: 1474042

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

A) –9.00%.
B) –0.09%.
B
C) +3.49%.

Question #104 - 106 of 185 Question ID: 1474043

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

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

Question #105 - 106 of 185 Question ID: 1474044

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

A) Saltire.
B) Dragon. A. The information ratio measures the active return (RP– RB) per unit of active risk
(tracking error). The information ratio for each fund is calculated as follows:
C) Rose.

Question #106 - 106 of 185 Question ID: 1474045

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

A) Saltire.
B) Dragon.
C
C) Rose.

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Question #107 of 185 Question ID: 1474054

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 decrease A

B) The information ratio will remain constant
C) The information ratio will increase

Question #108 of 185 Question ID: 1508680

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 losing $2.5 million every month.
C) There is a 5% chance of loss in portfolio value of at least $2.5 million in a month.
C

Question #109 of 185 Question ID: 1474053

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%
C
B) 8%
C) 14%

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Question #110 of 185 Question ID: 1474010

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 5% or more.

B) The bond’s return is 4.89% or more. C. Real risk-free rate = (1/E
(inter-temporal rate of
C) The bond’s return is 5.26% or more. substitution)-1 = (1/0.95))-1 =
0.0526 or
5.26%

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%

Active return 10.8% 9.2%

Mithai makes the following comments regarding the two active managers:

Comment The investment mandate of Phasar appears to be less constrained relative to

1: Galab.

Comment Galab appears to have better skill at predicting returns.

2:

Mithai recently decided to give all the analysts at the firm a refresher on the fundamental
law of active portfolio management. Details of a hypothetical unconstrained fund is shown
in Exhibit 2.

Exhibit 2: Hypothetical Fund

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Information coefficient 0.14

Monthly active bets 5

Active risk 4.32%

Question #111 - 114 of 185 Question ID: 1474070

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

A) 3.
B) 10.
b
C) 36.

Question #112 - 114 of 185 Question ID: 1474071

How many of Mithai's comments are correct in relation to the comparison between Galab
and Phasar?

A) One. C. Both comments are incorrect. Phasar has higher information coefficient, which
indicates better skill at predicting results. Phasar has also a lower transfer coefficient,
B) Both. which indicates that it is a more restrained fund.

C) None.

Question #113 - 114 of 185 Question ID: 1474072

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

A) 3.12%.
B) 4.68%.
B. E(Ra) = 1 × 0.14 × (6^1/2) × 4.32% = 4.68%
C) 8.20%.

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Question #114 - 114 of 185 Question ID: 1493686

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

A) rise.
B
B) fall.
C) remain unchanged.

Question #115 of 185 Question ID: 1473942

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%.
B) 18.0%. B

C) 19.96%.

Question #116 of 185 Question ID: 1473948

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

A) factor portfolio.
B
B) tracking portfolio.
C) arbitrage portfolio.

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Question #117 of 185 Question ID: 1474057

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% B. Darent will select the manager with the highest information ratio – or Alfred.
IR (Alfred) = 3/12 = 0.25
B) 13.75% IR(Brad) = 2.2/11 = 0.20
IR(Charles) = 2.0/10.50 = 0.19
C) 2.75% Expected active return = E(RA) = IR x A =0.25 x 11 = 2.75%.
Expected return = E(RB) + E(RA) = 11% + 2.75% = 13.75%

Question #118 of 185 Question ID: 1473933

Marcie Deiner is an investment manager with G&G Investment Corporation. She works with
a variety of clients who differ in terms of experience, risk aversion and wealth. Deiner
recently attended a seminar on multifactor analysis. Among other things, the seminar taught
how the assumptions concerning the Arbitrage Pricing Theory (APT) model are different
from those of the Capital Asset Pricing Model (CAPM). One of the examples used in the
seminar is below.

E(Ri) = Rf + f1 Bi,1 + f2 Bi,2 + f3 Bi,3. where: f1 =3.0%, f2 = −40.0%, and f3 =50.0%.

Beta estimates for Growth and Value funds for a three factor model

Factor 1 Factor 2 Factor 3

Betas for Growth 0.5 0.7 1.2

Betas for Value 0.2 1.8 0.6

For the model used as an example in the seminar, if the T-bill rate is 3.5%, what are the
expected returns for the Growth and Value Funds?

E(RGrowth) E(RValue)

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A) 33.5% −41.4%

B) 37.0% −37.9% B

C) 3.1% −3.16%

Question #119 of 185 Question ID: 1473937

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%.
B) 36.0%. B
C) 50.0%.

Question #120 of 185 Question ID: 1474006

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

Low real rate, high inter-temporal rate of substitution and a low rate of current
A)
borrowing by investors.
High real rate, low inter-temporal rate of substitution and a high rate of current
B)
borrowing by investors. B

High real rate, low inter-temporal rate of substitution and a low rate of current
C)
consumption.

Question #121 of 185 Question ID: 1474012

Which of the following is most likely to be the shape of the yield curve during recessions?
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A) Flat
B. During recessions, policy rates tend to be low. Over a longer
B) Upward sloping period, investor's expect
inflation to be higher as the economy comes out of recession and
C) Downward sloping hence longer-term rates
tend to be higher resulting in an upward sloping yield curve.

Question #122 of 185 Question ID: 1473988

Which of the following most accurately describes a step in backtesting an investment

strategy?

A) In the “strategy design” step, we form investment portfolios for each period.
In the “historical investment simulation” step, we rebalance the portfolio
B)
periodically.
In the “historical investment simulation” step, we calculate portfolio performance
C)
statistics.
B. In the "strategy design" step, we specify investment hypothesis and goal(s), determine
investment rules and process, and decide key parameters.
In the "historical investment simulation" step, we form investment portfolios for each
period according to the rules specified, and rebalance the portfolio periodically
In the "analysis of backtesting output" step, we calculate portfolio performance statistics
and compute other key metrics (such as turnover, etc.)

Question #123 of 185 Question ID: 1473992

Which of the following identifies problems that are most likely to arise in a backtest of an
investment strategy?

A) Survivorship bias, look-ahead bias, and data snooping. A

B) Heteroskedasticity, serial correlation, and multicollinearity.

C) Including lagged dependent variables as independent variables.

Sunil Chabbria has just been hired by Noveau Investments as part of the firm's trading desk
team. Chabbria had previously traded bonds for a large public pension plan. As part of
Noveau's training program for new hires, Chabbria is reviewing the trading manual and
protocols for trade evaluation at Noveau.

One of the learning assessments in the training manual asks to calculate the effective
spread on shares of Amplicity purchased at $25.89. At the time of the transaction, the
quoted bid-ask prices were $25.75 – $25.91.

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Chabbria is concerned about the merits of using effective spread in evaluating trades, and is
considering other alternatives. He makes a note to himself to consider the pros and cons of
each of the metrics.

Chabbria reviews the section on electronic markets from the training manual and jots down
the following:

1. Due to ever-increasing computing power and communication speeds, quoted bid- ask
spreads have increased in electronic markets.
2. Unlike floor-based traders, electronic exchange systems do not inadvertently reveal
clients' hidden orders.

Finally, Chabbria sees mention of flickering quotes in a description of a trading strategy that
the firm uses, however he is unsure of what this term means. Chabbria sends an email to
Suzanne Thomas, head trader for the firm, asking what is meant by flickering quotes.

Question #124 - 127 of 185 Question ID: 1474089

The effective spread on Amplicity shares is closest to:

A) $0.02.
B) $0.06. C

C) $0.12.

Question #125 - 127 of 185 Question ID: 1474090

Which of the following statements about effective spread is most accurate? Effective spread:

is a good indicator of trade performance when a large order is split into smaller
A)
orders.
B) captures the opportunity cost of a trade.
does not account for slippage or delay costs when part of the order does not get
C)
filled at desired prices.
C. When a large order is split into smaller orders, the effective spread is a poor indicator of
trade performance because it does not take into account the price impact cost. Effective
spread does not account for slippage or delay costs when part of the order does not get
filled at desired prices. Effective spread does not capture the opportunity cost of a trade –
the cost of lost opportunities when an unfilled part of the order is canceled due to adverse
price movements.
Question #126 - 127 of 185 Question ID: 1474091

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Which of Chabbria's statements about electronic markets are accurate?

A) Statement 1 only.
B
B) Statement 2 only.
C) Both statements are accurate.

Question #127 - 127 of 185 Question ID: 1474092

Thomas would most appropriately respond to Chabbria's question by responding that

flickering quotes are orders that:

A) are submitted and then cancelled immediately. A

B) randomly switch between exposed and hidden mode.

C) are hidden, but can be revealed by an algorithm designed to find them.

Question #128 of 185 Question ID: 1473929

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

A) Asset returns are described by a K factor model.

B) A market portfolio exists that contains all risky assets and is mean-variance efficient.
There are a sufficient number of assets for investors to create diversified portfolios
C)
in which firm-specific risk is eliminated.
B

Question #129 of 185 Question ID: 1474077

Suppose a trader is quoted a market bid price of $40.40 and an ask of $40.49. The execution
price of a buy order is $40.47. What is the effective spread?

A) $0.090.
B) $0.050. B

C) $0.025.
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Question #130 of 185 Question ID: 1473917

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

A) trading costs. A

B) management fees.
C) tracking error.

Question #131 of 185 Question ID: 1473936

Michael Paul, a portfolio manager, is screening potential investments and suspects that an
arbitrage opportunity may be available. The three portfolios that meet his screening criteria
are detailed below:

Portfolio Expected Return Beta

X 12% 1.0

Y 16% 1.3

Z 8% 0.9

Which of the following portfolio combinations produces the highest return while maintaining
a beta of 1.00?

Portfolio X Portfolio Y Portfolio Z

A) 100% 0% 0%
A
B) 50% 12% 38%

C) 25% 50% 25%

Question #132 of 185 Question ID: 1473963

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Janice Barefoot, CFA, has managed a portfolio where she used the Dow Jones Industrial
Average (DJIA) as a benchmark. In the past two years the average monthly return on her
portfolio has been higher than that of the DJIA. To get a measure of active return per unit of
active risk Barefoot should compute the:

Sharpe ratio, which is the standard deviation of the differences between the
A)
portfolio and benchmark returns divided into the average of those differences.
information ratio, which is the standard deviation of the differences between the
B)
portfolio and benchmark returns divided by the average of those differences.
information ratio, which is the average excess portfolio return over the benchmark
C) divided by the standard deviation of the differences between the portfolio and
benchmark returns.
C

Question #133 of 185 Question ID: 1473926

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

A) Asset returns are described by a k-factor model.

B) A large number of assets are available to investors.
The priced factors risks can be hedged without taking short positions in any
C)
portfolios.

Question #134 of 185 Question ID: 1473939

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%.
B) 3.0%. B

C) 2.4%.

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Question #135 of 185 Question ID: 1473928

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

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

Question #136 of 185 Question ID: 1473912

ETFs are most likely to underperform the benchmark by their:

A) tracking error. C. ETFs generally underperform the benchmark by their expense

ratio. Tracking error is the
B) arbitrage gap. annualized standard deviation of daily tracking error (which captures
the difference in
C) expense ratio. returns between an ETF and its underlying benchmark). Tracking
error may result in the
ETF underperforming or outperforming the benchmark.

Question #137 of 185 Question ID: 1474048

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

A) TC<1
B
B) TC=1
C) TC>1

Question #138 of 185 Question ID: 1473982

Which of the following risk measures are most likely to be used by a hedge fund?
C. Maximum drawdown reflects the performance during the worst performing
A) Glidepath. period and is commonly used as a risk metric by hedge funds. Surplus at risk
is used by pension plans. Glidepath is a tool used by pension plan to manage
B) Surplus at risk. plan surplus/deficit and charts the planned move of the fund position from its
current state to the target state.
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C) Maximum drawdown.

Question #139 of 185 Question ID: 1508683

Which of the following risk measures are most likely to be used by a traditional asset
manager?

A) Active share. A. Traditional active managers are concerned about underperforming

against their
B) Surplus at risk. benchmark and hence use active share as a relative measure of risk.
Surplus at risk is used
C) Maximum drawdown. by pension plans and maximum drawdown is most commonly used by
hedge funds.

Question #140 of 185 Question ID: 1473990

A rolling-window backtesting is most accurately described when:

A) a data set is divided into two distinct samples.

B) the out-of-sample data becomes the in-sample data for the subsequent period.
C) repeated sampling from the same data set leads to the use of redundant sources.
B. Rolling window relies on an overlap between in-sample and out-of-sample data, allowing
repeated in-sample training data to adjust portfolio positions based on information
available at that time. Data is not divided into just two samples (one for training and the
other for testing).

Question #141 of 185 Question ID: 1473944

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.

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C) Changes in payout ratios.

B. Fundamental factors are factors measured by characteristics of the companies themselves, like
price-to-earnings (P/E) ratios or growth rates. Macroeconomic factors are economic influences on security
returns. A company's position in the business cycle is dependent on the cycle itself, and cannot be accurately
measured by looking at a company's fundamentals – business cycle is a macroeconomic factor. Payout ratios
and
management tenure are pieces of company-specific data suitable for use in a fundamental
Question #142 of 185
factor model.
Question ID: 1473946

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

Company-specific returns
Actual Expected
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) 0.95.
B) 0.85. B. (0.25)(1.0) + (0.75)(0.8) = 0.85.
C) 0.25.

Question #143 of 185 Question ID: 1508681

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

VaR computed during periods of unusually low volatility may underestimate actual
A)
VaR.
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B) VaR based risk limits may be inappropriate in trending markets.

C) Incorporates only right tail risk.
C. VaR computations only incorporate left tail risk (and ignores the returns in the right tail).
VaR computed using too low of estimates of volatility will be too low and underestimates
the downside risk based on true estimates of volatility. In downward trending markets,
consistent negative returns may not breach daily or weekly VaR but nonetheless can lead
to significant accumulation of losses.

Question #144 of 185 Question ID: 1473908

ETFs trade in:

A) primary markets only.

B) both primary and secondary markets.
C) secondary markets only.
B

Question #145 of 185 Question ID: 1473995

Which of the following most accurately describes a scenario analysis?

A) Backtesting a model during periods of high volatility and periods of low volatility.
Backtesting a model using U.S. market data as well as using the European market
B)
data.
C) Backtesting a model for large-cap securities as well as for medium-cap securities.
A

Question #146 of 185 Question ID: 1473925

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 return on the S&P 500 index would be higher than the bank’s lending rate.
B) the yield on bank’s unsecured debt would be higher than the swap fixed rate.
C) the return on the S&P 500 index would be lower than the bank’s borrowing rate.
B. If a large bank that wants to issue unsecured debt at a fixed interest rate finds that the
rate demanded by the market is significantly higher than the swap fixed rate for same
maturity, the bank may instead issue an ETN that pays the return on an equity index. The
bank then would simultaneously enter into an equity swap as the equity return receiver
and the (swap) fixed rate payer. The index return received is used to service the ETN and
the bank's effective borrowing cost becomes the swap fixed rate.
Question #147 of 185 Question ID: 1474036
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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) 0.2
B) 0.25
B. Active risk of Zeta fund = 8%
C) 0.1667 Weight of Zeta fund = 6% / 8% = 0.75
Weight of benchmark = 0.25

Question #148 of 185 Question ID: 1474014

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

The difference in yields of non-inflation indexed and inflation indexed risk-free

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

Question #149 of 185 Question ID: 1474080

If the volume-weighted average price (VWAP) during a day was $21 and 100 shares were
bought at $20.40, which of the following statements regarding the costs of trading is most
accurate?

A) The explicit costs are -$60.

B) The implicit costs are $60.
C) The implicit costs are -$60.
C. Implicit costs are usually measured using some benchmark, such as the VWAP. VWAP is a
weighted average of security prices during a day, where the weight applied is the
proportion of the day's trading volume. If the VWAP during a day was $21 and 100 shares
were bought at $20.40, then the estimate of the implicit cost would be 100 ×
($20.40-$21.00) = -$60. The explicit costs in a trade are the commissions, taxes, stamp
Mostfees.
duties, and economic observers in the Republic of Nearland agree that the country will suffer a
recession in the near future. At an economics conference at Nearland's premier university,
four professors were having a lively discussion about how economic theory, the business
cycle, and investment performance interact.

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Professor Adams made two statements about the utility of consumption being an important
driver of interest rates:

Statement "If we believe that a recession is likely in the future, we would expect the
1: marginal utility of consumption in the future to be lower relative to the utility
of current consumption, and the inter-temporal rate of substitution to be
higher than they would otherwise be if there was optimism about future
economic conditions."

Statement "It is my estimate that consumption in one year's time has 5% less utility than
2: consumption in the present."

Professor Brady poured scorn on Professor Adams' second statement. He replied that
predicting such precise values for abstract economic concepts such as utility was impossible.
Trying to value bonds and interest rates, he argued, was much more likely to be accurate if
calculations were based on more measurable macroeconomic fundamentals, such as GDP
growth and inflation. Central bank policy rates, he stated, are positively correlated to current
inflation and current GDP growth.

Professor Chapman attempted to mediate between Adams and Brady. He said, "In a way,
you both have a point. At the top of the business cycle there is higher inflation and current
GDP growth. At the same time, market participants begin to worry about future recession,
which increases the marginal utility of delayed consumption. These conditions both explain
a steepening of the upward-sloping yield curve."

Professor Douglas tried to move the conversation towards the business cycle and risk
premiums. She presented the audience with economic data as presented in Exhibit 1, and
challenged observers to calculate the equity risk premium in Nearland.

Exhibit 1: Economic Data for Nearland

Break-even rate of inflation 2.80%

Credit spread 3.10%

Risk premium for equities relative to debt 4.50%

Professor Douglas went on to discuss asset classes, which could act as a consumption hedge
to guard against the upcoming recession. She invited the audience to attend her upcoming
discussion seminar where she would analyze the prospects for real estate, growth stocks,
and value stocks.

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Question #150 - 155 of 185 Question ID: 1474026

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

A) correct. B

B) incorrect in respect of the marginal utility of consumption.

C) incorrect in respect of the inter-temporal rate of substitution.

Question #151 - 155 of 185 Question ID: 1474027

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%. C. If the utility of delayed consumption is 5% less that consumption at present, setting
the utility of present consumption as 1 implies the utility of delayed consumption is 0.95.
B) 5.00%. Inter-rate of substitution = 0.95/1 = 0.95

C) 5.26%. Risk free rate = (1/Inter-rate of substitution)-1 = 5.26%

Question #152 - 155 of 185 Question ID: 1474028

Assuming the Taylor rule holds, Professor Brady's statement on the correlation of interest
rates with macroeconomic fundamentals is most likely:
A
A) correct.
B) incorrect in respect of the correlation of interest rates with inflation.
C) incorrect in respect of the correlation of interest rates with GDP growth.

Question #153 - 155 of 185 Question ID: 1474029

Professor Chapman's statement about utility, inflation, GDP growth, and the yield curve is
most likely:

A) correct.
B) incorrect as the circumstances described would have no effect on the yield curve.
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incorrect as the circumstances described would flatten an upward-sloping yield

C)
curve.
C. At the top of the business cycle current inflation and GDP growth are high, which increases
short-term rates. Fears about future recession, however, increase marginal utility of
delayed consumption, which decreases longer-term interest rates as investors become
more keen to save, increasing demand for bonds and decreasing yields. These
circumstances would cause a flattening of an upward-sloping yield curve, and could even
result in an inverted (downward-sloping) yield curve.
Question #154 - 155 of 185 Question ID: 1474030

The equity risk premium in Nearland is closest to:

A) 4.50%. B. The equity risk premium is the return demanded by equity investors in excess of the
nominal return on a risk-free bond. It comprises a credit risk premium (credit spread)
representing the risk of default on a risky bond, as well as an additional risk premium
B) 7.60%. relative to risky bonds for an investment in equities.
The break-even inflation rate comprises expected inflation as well as a risk premium for
C) 10.40%. uncertainty about inflation. It is included in both the overall expected return on equity and
the nominal risk-free rate, so does not affect the equity risk premium. 3.1 + 4.5 = 7.6%

Question #155 - 155 of 185 Question ID: 1474031

Of the asset classes mentioned by Professor Douglas, the most likely to be suitable as a
consumption hedge is:
C. An asset suitable as a consumption hedge is one which performs relatively
A) real estate. better in recessionary conditions than other asset classes. Equities in general are
cyclical, and would be expected to perform poorly in weak economic conditions.
B) growth stocks. Real estate can be considered to have both bond-like properties in that there is a
predictable stream of cash flows, and equity-like properties in the uncertainty of
the future value of the property. The equity-like element of real estate investments
C) value stocks. makes them unsuitable as a consumption hedge.
Growth stocks (high P/E, low dividend yields) tend to be in immature markets with
high growth prospects. Value stocks (low P/E, high dividend yields, stable
earnings) are commonly in established markets. A value strategy tends to perform
well in recessionary conditions, while a growth strategy is more suitable for
economic expansions.

Question #156 of 185 Question ID: 1473910

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

difference between the ETF’s return (based on its NAV) and the return on the index
A)
tracked.
annualized standard deviation of the differences between the daily returns of the
B)
ETF and its benchmark. TRACKING ERROR
standard deviation of the difference in daily returns between the ETF and its
C)
benchmark.
A. Tracking difference is the divergence between an ETF's return (based on its NAV) and the
return on the tracked index. This measure provides an indication of the ETF's ability to
follow its underlying benchmark. Tracking error is the annualized standard deviation of
the daily tracking difference.

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Question #157 of 185 Question ID: 1474024

Value stocks are most likely to be characterized by:

A) Immature markets.
B) High earnings growth. C
C) Low price multiples.

Question #158 of 185 Question ID: 1508679

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

Company-specific returns
Actual Expected
surprises

Interest Rate 0.053 0.051 0.0

Unemployment Rate 0.072 0.068 0.0

What is the predicted return for Stonebrook if the return unexplained by the model was
-1%?

A) 10.68%. A

B) 12.00%.
C) 1.40%.

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Question #159 of 185 Question ID: 1473987

Which of the following statements about backtesting an investment strategy is least

accurate? Backtesting:

A) is based on the implied assumption that the future will somewhat resemble history.
B) is incompatible with quantitative and systematic investment styles.
C) can take the randomness of the future into account.
B. acktesting is a natural fit for quantitative and systematic investment styles. Backtesting is
based on the implied assumption that the future will somewhat resemble history.
Methods such as Monte Carlo analysis can allow backtesting to take into account the
randomness of the future

Question #160 of 185 Question ID: 1474065

Which of the following statements regarding the information ratio of an unconstrained

portfolio is most likely correct?

A market timer who uses independent information to make predictions about

market movements on a monthly basis and has an information ratio of 0.20 must
A)
have an information coefficient lower than a stock selector with the same
information ratio who follows 10 stocks and revises his forecast quarterly
A market timer who uses independent information to make predictions about
market movements on a monthly basis and has an information ratio of 0.20 must
B)
have an information coefficient higher than a stock selector with the same
information ratio who follows 10 stocks and revises his forecast quarterly
A market timer who uses independent information to make predictions about
market movements on a monthly basis and has an information ratio of 0.20 must
C)
have an information coefficient equal to a stock selector with the same information
ratio who follows 10 stocks and revises his forecast quarterly

Question #161 of 185 Question ID: 1474049

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

A) Transfer Coefficient
C
B) Information Coefficient
C) Breadth
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Question #162 of 185 Question ID: 1474063

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% C. If active risk is limited to 6%, the deviation from the benchmark weights of 80%
and 20% is limited to 6%/18% or 33%. Hence when Griffith is bullish about
B) 14% industrials, the weight to that sector will be 80% + 33% or 113% and the weight to
utility sector will be 20% - 33% or -13%.
C) -13%

Question #163 of 185 Question ID: 1474075

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) 86%
A
B) 45%
C) 22%

Question #164 of 185 Question ID: 1473935

Diversification can reduce:

A) macroeconomic risks.

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B) unsystematic risk.
C) systematic risk. B. Systematic risk reflects factors that have a general effect on the
security markets as a
whole, and cannot be diversified away

Question #165 of 185 Question ID: 1473930

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

A) assumes that arbitrage opportunities are available to investors.

B) assumes that asset returns are described by a factor model.
C) is an equilibrium pricing model.
A

Question #166 of 185 Question ID: 1474085

Algorithms are least likely to adapt to market fragmentation by incorporating:

A) basket trading capabilities

B) liquidity aggregation capabilities
C) intelligent smart order routing capabilities
A. Basket trading is not a solution to market fragmentation, but rather is an algorithm used
for statistical arbitrage. Algorithms can adapt to market fragmentation if the algorithm
includes intelligent smart order routing capabilities and/or liquidity aggregation
capabilities

Question #167 of 185 Question ID: 1474084

The results of liquidity aggregation are most likely to be referred to as a:

A) “super book”. A. Liquidity aggregation refers to the process of monitoring a number of trading
venues and then compiling the data into a "super book" that summarizes price and
B) “dark pool”. liquidity across these markets. This allows trades to be routed appropriately.
A dark pool is a trading venue that is only open to certain clients, and that does not
C) “parent order”. publish its liquidity.
A parent order is a large order (e.g. buy 1 million shares of Facebook) that is divided
up by an execution algorithm into smaller child orders that are less likely to move the
market.

Marianne Belair, CFA, is a wealth manager for a well-known company in Paris, France. She
has developed macroeconomic factor models on portfolios Alpha and Bravo.

Equations for the two portfolios:

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RAlpha = 0.08 – 0.7 FINFL + 1.2 FGDP

RBravo = 0.13 + 0.6 FINFL + 2.3 FGDP

Belair has asked her colleague Pierre Louboutin to calculate the return attributable to a 1.5%
surprise in GDP for an equally weighted portfolio comprising Alpha and Bravo.

Meanwhile, Belair is looking at Merci, a beauty stock for which she has developed a
macroeconomic factor model. The arbitrage-pricing model shows a required return of 10%
and the company-specific surprise for the year was 2%. Exhibit 1 shows additional
information on the model:

Exhibit 1:

Variable Actual Value (%) Expected Value (%) Factor Sensitivity

Interest rates 3.5% 2.5% –0.3

Unemployment level 6.5% 5.5% –0.7

Emily Grant, a senior manager at the firm, asks Louboutin to analyze the performance of
three managers using the information in Exhibit 2.

Exhibit 2: Decomposing Active Risk

Active Active Active

Active Active risk
factor risk factor risk specific risk Active
Portfolio specific risk squared
squared (% of Total (% of Total risk (%)
squared (%) (%)
(%) Active Risk) Active Risk)

EM 0.5 0.5 1 50 50 1

EC 25.2 10.8 36 70 30 6

EV 21.6 14.4 36 60 40 6

Finally, Belair would like to capitalize on her expectation that real business activity will
increase over the next year. As a separate concern, she has some existing positive exposure
to inflation risk, which she would like to hedge. To achieve her goals she can use the

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portfolios in the Exhibit 3 which show the five relevant factors and respective factor
sensitivities:

Exhibit 3:

Risk Factor A B C D E

Confidence 0.10 1.00 0.00 0.70 0.00

Time horizon 0.00 0.00 0.00 0.50 0.00

Inflation 1.00 0.00 0.00 0.30 1.00

Business cycle 0.90 1.00 1.00 0.00 0.00

Market timing 1.00 0.00 0.00 0.90 0.00

Question #168 - 171 of 185 Question ID: 1473957

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

A) 1.75%. C. The combined sensitivity of the GDP factor is 0.5 × 1.2 + 0.5 × 2.3 = 1.75.
The change for 1.5% surprise is 1.5 × 1.75 = 2.625%
B) 2.13%.
C) 2.63%.

Question #169 - 171 of 185 Question ID: 1473958

The actual return of Merci is closest to:

A) 9%.
B) 10%.
C. actual return = 10 – 0.3 × (3.5 – 2.5) – 0.7 × (6.5 – 5.5) + 2 = 11%
C) 11%.

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Question #170 - 171 of 185 Question ID: 1473959

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

A) EM.
B) EC. C. Asset selection risk is also known as active specific risk. Portfolio EV has the highest
risk at 14.4.
C) EV.

Question #171 - 171 of 185 Question ID: 1473960

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

A) B and A.
B) B and E. C. his question is about factor portfolios (i.e., a portfolio that has a sensitivity of one to a
particular factor and zero to all other factors). The only two factor portfolios in Exhibit 3
C) C and E. are C and E having exposure to the business cycle and inflation respectively. A short
position in portfolio E would eliminate the inflation risk.

Question #172 of 185 Question ID: 1473986

Which of the following statements about backtesting an investment strategy is least

accurate? Backtesting is:

A) a new methodology that is slowly gaining acceptance in the investment community.

B) useful as a rejection or acceptance criterion for an investment strategy.
C) widely used by managers that use a fundamental investment style.

Question #173 of 185 Question ID: 1474056

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

A) will choose a manager with the lowest active risk.

B) will choose the manager with the highest information ratio.

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C) will choose the manager with the highest active return.

B. Value added is independent of the level of risk aversion. All investors will choose the
manager with the highest information ratio. Those with higher levels of risk aversion will
implement the strategy less aggressively (i.e., invest a larger proportion in the benchmark
portfolio).

Question #174 of 185 Question ID: 1473919

ETF ownership costs are least likely to be increased by:

A) security lending. A. The main components of ETF cost are the fund management fee, tracking
error, portfolio turnover, trading costs (including commissions, bid–ask
B) bid–ask spreads. spreads, and premiums/discounts), taxable gains/losses, and security lending.
These costs generally reduce returns, with the exception of security lending,
C) portfolio turnover. which can be considered a "negative" cost as it generates additional income
that offsets fund expenses. Security lending for an ETF typically means loaning
a portion of portfolio holdings to short sellers.

Question #175 of 185 Question ID: 1473909

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:

The increased settlement complexity from fragmented markets will lead to a

A)
decrease in quoted spreads.
The increased settlement complexity from fragmented markets will lead to an
B)
increase in the quoted spreads.
C) OTC quotes tend to be more “live” compared to exchange quotes.
B

Question #176 of 185 Question ID: 1473915

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

A) the underlying securities are exchange-traded.

there are timing differences between the capture of the ETF trade price and the
B)
price used to calculate it’s NAV.
C) the ETF is infrequently traded.
A. remiums or discounts on ETFs are most commonly caused by timing differences, ETFs on
OTC bonds where no true closing price is available and when ETFs are traded infrequently
(stale pricing).

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Question #177 of 185 Question ID: 1474078

Suppose a trader is quoted a market bid price of $16.00 and an ask of $16.10. The execution
price of a sell order is $16.03. What is the effective spread?

A) $0.03.
B) $0.02. C

C) $0.04.

Question #178 of 185 Question ID: 1474022

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

A) Consumer non-discretionary B. Earnings of companies in cyclical industries such as

consumer durable or consumer
B) Consumer durable discretionary would be more sensitive to business cycle as
opposed to companies in noncyclical industries such as
C) non-cyclical consumer non-discretionary.

Question #179 of 185 Question ID: 1474016

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%
A. The YTM on the corporate bond is (102/96.91) – 1 = 5.25%.
B) 0.19% Credit spread = Yield - BEI - R = 5.25% - 2% - 1% = 2.25%

C) 2.00%

Question #180 of 185 Question ID: 1474081

Which of the following trading costs results when an order is not filled?

A) Opportunity costs.

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B) Market impact costs.

A
C) Price impact costs.
Market impact cost - how much additionally a trader must pay over the initial price due to market slippage,
i.e. the cost incurred because the transaction itself changed the price of the asset.
Price impact cost - the price associated with carrying out a transaction for a particular index or securities
with certain order size

Question #181 of 185 Question ID: 1473913

Spreads tend to be narrower for:

A) specialized ETFs such as those that track commodity indexes.

B) popular ETFs.
C) fixed-income ETFs (as compared to large-cap equity ETFs).
b

Question #182 of 185 Question ID: 1474040

Which of the following statements is least accurate?

A) A closet index fund has a low Sharpe ratio.

Investors can take active risk that is suitable for them by investing in a combination
B)
of actively managed portfolio and benchmark portfolio.
The Sharpe ratio of a portfolio is unaffected by addition of cash or leverage in the
C)
portfolio.
A. A closet index fund will have Sharpe ratio close to the benchmark's Sharpe ratio. The Sharpe
ratio is for a portfolio is indeed unaffected by addition of cash or leverage to the portfolio. However,
information ratio does change as we add cash or leverage to the actively managed portfolio.
Investors can combine benchmark portfolio and active portfolio to obtain optimal level of active risk
for them.

Question #183 of 185 Question ID: 1474018

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

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

A. Differences in credit spreads across sectors is related to differences in products/services

the sector produces and leverage typically used in the sector.

Question #184 of 185 Question ID: 1473943

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

Macroeconomic factor models include explanatory variables such as the business

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

Question #185 of 185 Question ID: 1473931

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.
C) It is an equilibrium-pricing model like the CAPM.

B. APT is a k-factor model, in which the number of factors, k, is assumed to be a lot

smaller
than the number of assets; no specific number of factors is assumed.

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