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The first 20 questions are TRUE/FALSE. Mark A if the statement is true and B if the statement is false.
1. Positive M2 Measure means the managed portfolio outperforms the market
2. One of the limitations for historical VaR measure is that it depends on the assumptions of the parameter values
3. Centralized risk governance allows risks to be managed by departments that are most familiar with this specific risk
4. One of the common features of alternative investments is difficult to set up performance benchmarks
5. One of the reasons that hedge fund benchmark is unreliable is that most databases are self-reported.
6. REITS are preferred to direct ownership of real estate when investors pursue more control of their investments
7. Distressed debt arbitrage works because debt has higher seniority than equity
8. Collateral return is negative if the futures price on commodity is less than the spot price
9. Immunized investment portfolio value does not change with interest rate.
10. The covered interest rate parity implies the forward exchange rate is the ratio of domestic interest returns and foreign interest returns
11. Asset liability management approach is preferred when investors are risk averse
12. Tactical asset allocation (TAA) is active management strategy at security level
13. Resampled efficient frontier optimization works better than the original mean-variance optimization approach because it is more stable over time
14. Situational profiling considers the current status of human sentiments to understand the risk tolerance of the investors
15. Upward sloping term structure (contango) usually leads to profit to investors buying commodity ETFs.
16. Angel investors are usually the first accredited investors at seed stage to provide fundings to startups.
17. Investment objectives are boundaries that investors place on their choice of investment assets.
18. Convexity risk is considered when duration of a bond changes with interest rate.
19. One difference between the Keogh plans and the 401K plan is that Keogh plan is taxable before funds are withdrawn.
20. Convenience yield refers to the inherent rights of commodity holders to take actions on the commodities.
The next 25 questions are MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question. Mark your answer on the Scantron sheet.
21. Which of the following usually has the highest liquidity constraint?
a. Endowment funds
b. banks
c. property and casualty insurance companies
d. mutual funds
e. life insurance companies
22. The desirable components of an Investment Policy Statement for individual investors can be divided into
a. scope and purpose, governance, risk management, and risk and return objectives
b. scope and purpose, governance, investment strategy, return and risk objectives.
c. responsibility, governance, risk management and risk and return objectives
d. scope and purpose, constraints, risk management, return and risk objectives.
e. scope and purpose, governance, risk management, and feedback.
23. Which of the following should not be considered as unique investor circumstances?
a. A Muslim investor refuses to put any investment allocations on gambling industry
b. Experienced mechanist working for BP avoids investment concentration in the oil industry
c. No allocation in the tobacco industry for a cancer association endowment fund
d. Shorting Japanese government bond after the assassination of Shinzo Abe.
e. Buying tax-exempt bond to avoid high income tax for a mid-career professional
24. Performance evaluation of hedge funds is complicated by
A. leverage calculations.
B. survivorship bias.
C. unreliable market valuations of infrequently-traded assets.
D. Stale prices may distort correlation measures.
E. All of the options are correct.
25. Assume a university ABC endowment fund has a spending rate of 5% per year. This amount is committed to the budgetary support of the college for the coming year. At the end of the prior year the market value of the ABS endowment’s assets is $80 million. In addition, the ABC endowment has committed to contribute $2 million in the coming year to the construction of a new student dormitory and the planners expect to receive contribution or gifts of $800,000 over the coming year. What is the anticipated liquidity requirement of the ABC endowment for the coming year?
a. $4,000,000.
b. $4,200,000
c. $1,200,000
d. $2,200,000
e. $2,800,000
26. Which of the statements below is incorrect regarding the difference between Strategic Asset Allocation (SAA) and Tactical Asset Allocation (TAA)?
a. An SAA without TAA will not be able to achieve return objectives if the portfolio manager does not ensure a pre-defined minimum level of diversification.
b. TAA can produce higher returns over the SAA returns IF the portfolio manager has the ability to forecast future market performance with relative certainty.
c. SAA is an allocation for the long term while TAA is an allocation for the forecastable future (short term).
d. TAA allows for taking controlled additional risk over the SAA by ensuring all assets remain within the minimum and maximum ranges.
e. SAA is only relevant at the asset class level, while TAA would allocate sub-assets within each asset class.
27. Which of the following is not true?
a. Correlations between asset classes increase in bear markets
b. Correlations between asset classes enhance portfolio diversification
c. Correlations between asset classes have been increasing over the long term
d. Correlations between asset classes makes asset allocations harder
e. Correlations between risky assets and safe assets are generally inverse
28. Which of the following is considered as an Asset-Liability management (ALM) approach?
a. Mean-variance optimization
b. Corner Portfolios
c. Resampled efficient frontier
d. Balanced portfolio approach
e. Immunization strategy
29. Which of the following investment recommendation is the most appropriate?
a. Recommend REITs to a property insurance company
b. Recommend a dividend-paying stock to a bank
c. Recommend distressed security to a young investor
d. Recommend a tax-exempt bond to an endowment fund
e. Recommend a high-yield corporate bond to a mid-career professional
30. Supposed the following table is provided for the portfolio return. Calculate the portfolio’s tracking risk for the three-period time frame?
Period |
Portfolio return |
Benchmark return |
1 |
15% |
12% |
2 |
7% |
6% |
3 |
3% |
6% |
a. 4.88%
b. 3.06%
c. 3.53%
d. 2.37%
e. 1.25%