Question 1

______ uses quantitative techniques, and often automated trading systems, to seek out many temporary misalignments among securities.

Accepted Answer

A)  Covered interest arbitrage 
B)  Locational arbitrage 
C)  Triangular arbitrage 
D)  Statistical arbitrage 
E)  All arbitrage 
A)  Covered interest arbitrage 
B)  Locational arbitrage 
C)  Triangular arbitrage 
D)  Statistical arbitrage 
E)  All arbitrage D

Question 2

______ are subject to the Securities Act of 1933 and the Investment Company Act of 1940 to protect unsophisticated investors.

Accepted Answer

A)  Hedge funds 
B)  Mutual funds 
C)  ADRs 
D)  Hedge funds and ADRs 
E)  Mutual funds and ADRs 
A)  Hedge funds 
B)  Mutual funds 
C)  ADRs 
D)  Hedge funds and ADRs 
E)  Mutual funds and ADRs B

Question 3

Hedge funds differ from mutual funds in terms of

Accepted Answer

A)  transparency. 
B)  investors. 
C)  investment strategy. 
D)  liquidity. 
E)  All of the options are correct. 
A)  transparency. 
B)  investors. 
C)  investment strategy. 
D)  liquidity. 
E)  All of the options are correct. E

Question 4

Performance evaluation of hedge funds is complicated by

Accepted Answer

A)  liquidity premiums. 
B)  survivorship bias. 
C)  unreliable market valuations of infrequently-traded assets. 
D)  merger arbitrage. 
E)  All of the options are correct. 
A)  liquidity premiums. 
B)  survivorship bias. 
C)  unreliable market valuations of infrequently-traded assets. 
D)  merger arbitrage. 
E)  All of the options are correct.

Question 5

Hedge funds are typically set up as ______ and provide ______ information about portfolio composition and strategy to their investors.

Accepted Answer

A)  limited liability partnerships; minimal 
B)  limited liability partnerships; extensive 
C)  investment trusts; minimal 
D)  investment trusts; extensive 
A)  limited liability partnerships; minimal 
B)  limited liability partnerships; extensive 
C)  investment trusts; minimal 
D)  investment trusts; extensive

Question 6

Hedge funds are ______ transparent than mutual funds because of ______ strict SEC regulation on hedge funds.

Accepted Answer

A)  more; more 
B)  more; less 
C)  less; less 
D)  less; more 
A)  more; more 
B)  more; less 
C)  less; less 
D)  less; more

Question 7

The typical hedge fund fee structure is

Accepted Answer

A)  a management fee of 1% to 2%. 
B)  an annual incentive fee equal to 20% of investment profits beyond a stipulated benchmark performance. 
C)  a 12-b1 fee of 1%. 
D)  a management fee of 1% to 2% and an annual incentive fee equal to 20% of investment profits beyond a stipulated benchmark performance. 
E)  a management fee of 1% to 2% and a 12-b1 fee of 1%. 
A)  a management fee of 1% to 2%. 
B)  an annual incentive fee equal to 20% of investment profits beyond a stipulated benchmark performance. 
C)  a 12-b1 fee of 1%. 
D)  a management fee of 1% to 2% and an annual incentive fee equal to 20% of investment profits beyond a stipulated benchmark performance. 
E)  a management fee of 1% to 2% and a 12-b1 fee of 1%.

Question 8

Sadka (2010) shows that exposure to unexpected declines in ________ is an important determinant of average hedge fund returns, and that the spreads in average returns across funds with the highest and lowest ________ may be as much as 6% annually.

Accepted Answer

A)  market risk; systematic risk 
B)  market liquidity; liquidity risk 
C)  unsystematic risk; unique risk 
D)  default risk; default risk 
A)  market risk; systematic risk 
B)  market liquidity; liquidity risk 
C)  unsystematic risk; unique risk 
D)  default risk; default risk

Question 9

Hedge funds often employ ______ that require investors to provide ________ notice of their desire to redeem funds.

Accepted Answer

A)  redemption notices; several weeks to several months 
B)  redemption notices; several hours to several days 
C)  redemption notices; several days to several weeks 
D)  lock-up; several years 
E)  lock-up; several hours 
A)  redemption notices; several weeks to several months 
B)  redemption notices; several hours to several days 
C)  redemption notices; several days to several weeks 
D)  lock-up; several years 
E)  lock-up; several hours

Question 10

A bet on particular mispricing across two or more securities with extraneous sources of risk, such as general market exposure hedged away, is a

Accepted Answer

A)  pure play. 
B)  relative play. 
C)  long shot. 
D)  sure thing. 
E)  relative play and sure thing. 
A)  pure play. 
B)  relative play. 
C)  long shot. 
D)  sure thing. 
E)  relative play and sure thing.

Question 11

Assume newly-issued 30-year on-the-run bonds sell at higher yields (lower prices) than 29½-year bonds with a nearly identical duration. A hedge fund that sells 29½-year bonds and buys 30-year bonds is taking a

Accepted Answer

A)  market neutral position. 
B)  conservative position. 
C)  bullish position. 
D)  bearish position. 
A)  market neutral position. 
B)  conservative position. 
C)  bullish position. 
D)  bearish position.

Question 12

Like mutual funds, hedge funds

Accepted Answer

A)  allow private investors to pool assets to be managed by a fund manager. 
B)  are commonly organized as private partnerships. 
C)  are subject to extensive SEC regulations. 
D)  are typically only open to wealthy or institutional investors. 
E)  are commonly organized as private partnerships and are typically only open to wealthy or institutional investors. 
A)  allow private investors to pool assets to be managed by a fund manager. 
B)  are commonly organized as private partnerships. 
C)  are subject to extensive SEC regulations. 
D)  are typically only open to wealthy or institutional investors. 
E)  are commonly organized as private partnerships and are typically only open to wealthy or institutional investors.

Question 13

Assume newly-issued 30-year on-the-run bonds sell at higher yields (lower prices) than 29½-year bonds with a nearly identical duration. A hedge fund that sells 29½-year bonds and buys 30-year bonds is taking a

Accepted Answer

A)  market neutral position. 
B)  conservative position. 
C)  bullish position. 
D)  bearish position. 
A)  market neutral position. 
B)  conservative position. 
C)  bullish position. 
D)  bearish position.

Question 14

______ bias arises when the returns of unsuccessful funds are left out of the sample.

Accepted Answer

A)  Survivorship 
B)  Backfill 
C)  Omission 
D)  Incubation 
E)  None of the options are correct. 
A)  Survivorship 
B)  Backfill 
C)  Omission 
D)  Incubation 
E)  None of the options are correct.

Question 15

Alpha-seeking hedge funds typically ______ relative mispricing of specific securities and ______ broad market exposure.

Accepted Answer

A)  bet on; bet on 
B)  hedge; hedge 
C)  hedge; bet on 
D)  bet on; hedge 
E)  None of the options are correct. 
A)  bet on; bet on 
B)  hedge; hedge 
C)  hedge; bet on 
D)  bet on; hedge 
E)  None of the options are correct.

Question 16

Assume that you manage a $3 million portfolio that pays no dividends and has a beta of 1.45 and an alpha of 1.5% per month. Also, assume that the risk-free rate is 0.025% (per month) and the S&P 500 is at 1,220. If you expect the market to fall within the next 30 days, you can hedge your portfolio by ______ S&P 500 futures contracts (the futures contract has a multiplier of $250).

Accepted Answer

A)  selling 1 
B)  selling 14 
C)  buying 1 
D)  buying 14 
E)  selling 6 
A)  selling 1 
B)  selling 14 
C)  buying 1 
D)  buying 14 
E)  selling 6

Question 17

______ bias arises because hedge funds only report returns to database publishers if they want to.

Accepted Answer

A)  Survivorship 
B)  Backfill 
C)  Omission 
D)  Incubation 
E)  None of the options are correct. 
A)  Survivorship 
B)  Backfill 
C)  Omission 
D)  Incubation 
E)  None of the options are correct.

Question 18

Shares in hedge funds are priced

Accepted Answer

A)  at NAV. 
B)  a significant premium to NAV. 
C)  a significant discount from NAV. 
D)  a significant premium to NAV or a significant discount from NAV. 
E)  None of the options are correct. 
A)  at NAV. 
B)  a significant premium to NAV. 
C)  a significant discount from NAV. 
D)  a significant premium to NAV or a significant discount from NAV. 
E)  None of the options are correct.

Question 19

Hedge funds traditionally have ______ than 100 investors and ______ to the general public.

Accepted Answer

A)  more; advertise 
B)  more; do not advertise 
C)  less; advertise 
D)  less; do not advertise 
A)  more; advertise 
B)  more; do not advertise 
C)  less; advertise 
D)  less; do not advertise

Question 20

Unlike mutual funds, hedge funds

Accepted Answer

A)  allow private investors to pool assets to be managed by a fund manager. 
B)  are commonly organized as private partnerships. 
C)  are subject to extensive SEC regulations. 
D)  are typically only open to wealthy or institutional investors. 
E)  are commonly organized as private partnerships and are typically only open to wealthy or institutional investors. 
A)  allow private investors to pool assets to be managed by a fund manager. 
B)  are commonly organized as private partnerships. 
C)  are subject to extensive SEC regulations. 
D)  are typically only open to wealthy or institutional investors. 
E)  are commonly organized as private partnerships and are typically only open to wealthy or institutional investors.

Exam 26: Hedge Funds

______ uses quantitative techniques, and often automated trading systems, to seek out many temporary misalignments among securities.

______ are subject to the Securities Act of 1933 and the Investment Company Act of 1940 to protect unsophisticated investors.

Hedge funds differ from mutual funds in terms of

Performance evaluation of hedge funds is complicated by

Hedge funds are typically set up as ______ and provide ______ information about portfolio composition and strategy to their investors.

Hedge funds are ______ transparent than mutual funds because of ______ strict SEC regulation on hedge funds.

The typical hedge fund fee structure is

Sadka (2010) shows that exposure to unexpected declines in ________ is an important determinant of average hedge fund returns, and that the spreads in average returns across funds with the highest and lowest ________ may be as much as 6% annually.

Hedge funds often employ ______ that require investors to provide ________ notice of their desire to redeem funds.

A bet on particular mispricing across two or more securities with extraneous sources of risk, such as general market exposure hedged away, is a

Assume newly-issued 30-year on-the-run bonds sell at higher yields (lower prices) than 29½-year bonds with a nearly identical duration. A hedge fund that sells 29½-year bonds and buys 30-year bonds is taking a

Like mutual funds, hedge funds

Assume newly-issued 30-year on-the-run bonds sell at higher yields (lower prices) than 29½-year bonds with a nearly identical duration. A hedge fund that sells 29½-year bonds and buys 30-year bonds is taking a

______ bias arises when the returns of unsuccessful funds are left out of the sample.

Alpha-seeking hedge funds typically ______ relative mispricing of specific securities and ______ broad market exposure.

______ bias arises because hedge funds only report returns to database publishers if they want to.

Shares in hedge funds are priced

Hedge funds traditionally have ______ than 100 investors and ______ to the general public.

Unlike mutual funds, hedge funds

The Investment Environment

Asset Classes and Financial Instruments

How Securities Are Traded

Mutual Funds and Other Investment Companies

Risk, Return, and the Historical Record

Capital Allocation to Risky Assets

Optimal Risky Portfolios

Index Models

The Capital Asset Pricing Model

Arbitrage Pricing Theory and Multifactor Models of Risk and Return

The Efficient Market Hypothesis

Behavioral Finance and Technical Analysis

Empirical Evidence on Security Returns

Bond Prices and Yields

The Term Structure of Interest Rates

Managing Bond Portfolios

Macroeconomic and Industry Analysis

Equity Valuation Models

Financial Statement Analysis

Options Markets: Introduction

Option Valuation

Futures Markets

Futures, Swaps, and Risk Management

Portfolio Performance Evaluation

International Diversification

The Theory of Active Portfolio Management

Investment Policy and the Framework of the Cfa Institute

Filters

Hedge funds are typically set up as and provide information about portfolio composition and strategy to their investors.

Hedge funds are transparent than mutual funds because of strict SEC regulation on hedge funds.

Sadka (2010) shows that exposure to unexpected declines in is an important determinant of average hedge fund returns, and that the spreads in average returns across funds with the highest and lowest may be as much as 6% annually.

Hedge funds often employ that require investors to provide __ notice of their desire to redeem funds.

Alpha-seeking hedge funds typically relative mispricing of specific securities and broad market exposure.

Hedge funds traditionally have than 100 investors and to the general public.