Fin 320 week 10 quiz – strayer

FIN 320 Week 10 Quiz – Strayer
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Quiz 8 Chapter 19 and 20
Chapter 19: ___________________________________________________________________________
1. In 2011, U.S. securities represented ______ of the world market for equities.
A. less than 25%
B. more than two-thirds
C. between 30% and 40%
D. a consistent 50%
2. _____ has the highest market capitalization of listed corporations among developed markets.
A. The United States
B. Japan
C. The United Kingdom
D. Switzerland
3. Total capitalization of corporate equity in the United States in 2011 was about _______ trillion.
A. $13.9
B. $23.4
C. $30.2
D. $45.5

4. If you limit your investment opportunity set to only the largest six countries in the world in terms of equity
capitalization as a percentage of total global equity capital, you will include about _______ of the world's
equity.
A. 34%
B. 44%
C. 54%
D. 64%
5. Limiting your investments to the top six countries in the world in terms of market capitalization may make
sense for _________ investor but probably does not make sense for ________ investor.
A. an active; a passive
B. a passive; an active
C. a security selection expert; a market timer
D. a fundamental; a technical
6. WEBS are ____________________.
A. investments in country-specific portfolios
B. traded exactly like mutual funds
C. identical to ADRs
D. designed to give investors foreign currency exposure to multiple countries
7. Which one of the following allows you to purchase the stock of a specific foreign company?
A. WEBS
B. MSCI
C. ADR
D. EAFE

8. Generally speaking, countries with ______ capitalization of equities ________.
A. larger; have higher GDP
B. smaller; are wealthier
C. larger; have smaller GDP
D. larger; are higher-growth countries
9. The 32 "developed" countries with the largest equity capitalization made up about _____ of the world GDP
in 2011.
A. 22%
B. 44%
C. 68%
D. 85%
10. According to a regression of GDP on market capitalization in 2010, virtually all developed countries had
_______ per capita GDP than (as) predicted by the regression.
A. higher
B. lower
C. the same
D. sometimes lower and sometimes higher
11. If the direct quote for the exchange rate for the U.S. dollar versus the Canadian dollar is .98, what is the
indirect quote?
A. 1.98
B. 1.02
C. .02
D. 1.05

12. EAFE stands for _______.
A. Equity And Foreign Exchange
B. European, Australian, Far East
C. European, Asian, Foreign Exchange
D. European, American, Far East
13. Which one of the following country risks includes the possibility of expropriation of assets, changes in tax
policy, and restrictions on foreign exchange transactions?
A. Default risk
B. Foreign exchange risk
C. Market risk
D. Political risk
14. The __________ index is a widely used index of non-U.S. stocks.
A. CBOE
B. Dow Jones
C. EAFE
D. Lehman Index
15. Suppose that U.S. equity markets represent about 35% of total global equity markets and that the typical
U.S. investor has about 95% of her portfolio invested only in U.S. equities. This is an example of
_________.
A. home-country bias
B. excessive diversification
C. active management
D. passive management

16. The four largest economies in the world in 2010 were ____________.
A. United States, India, China, and Japan
B. United States, China, Canada, and Japan
C. United States, China, Japan, and Germany
D. China, United Kingdom, Canada, and United States
17. The proper formula for interest rate parity is ___________.
A. [1 + rf(foreign)]/[1 + rf(US)] = F1/E0
B. [1 + rf(US)]/[1 + rf(foreign)] = E0/F1
C. [1 + rf(US)]/[1 + rf(foreign)] = F0/E0
D. [1 + rf(foreign)]/[1 + rf(foreign)] = F0/E1
18. Research indicates that exchange risk of the major currencies has been _________ so far in this century.
A. relatively high
B. relatively low
C. declining slightly
D. declining rapidly
19. It appears from empirical work that exchange rate risk ____________.
A. has been declining for individual investments in recent years
B. is mostly diversifiable
C. is mostly systematic risk
D. is unimportant for an investment in a single foreign country

20. Passive investors with well-diversified international portfolios _________.
A. can safely ignore all political risk in emerging markets
B. can expect very large diversification gains from their international investing
C. do not need to be concerned with hedging exposure to foreign currencies
D. can expect returns to be better than the EAFE on a consistent basis
21. Which stock market has the largest weight in the EAFE index?
A. Japan
B. Germany
C. United Kingdom
D. Australia
22. The correlation coefficient between the U.S. stock market index and stock market indexes of major
countries is __________.
A. between -1 and -.5
B. between -.50 and 0
C. between 0 and .5
D. between .5 and 1
23. In 2010, the ___ countries with the largest capitalization of equities made up approximately 60% of the
world equity portfolio.
A. 2
B. 4
C. 5
D. 12

24. Investor portfolios are notoriously overweighted in home-country stocks. This is commonly called
________.
A. local fat
B. nativism
C. home-country bias
D. misleading representation
25. Corruption is _________ risk variable.
A. a firm-specific
B. a political
C. a financial
D. an economic
26. A U.S. hedge fund owns Swiss franc bonds. The fund manager believes that if Swiss interest rates rise
relative to U.S. interest rates, the value of the franc will rise. To limit the risk to the fund's dollar return, the
fund manager should __________.
A. sell the Swiss franc bonds now
B. sell the Swiss franc forward
C. probably do nothing because the franc move will offset the lower bond price
D. enter into an interest rate swap to pay variable and receive fixed
27. The annual inflation rate is ______ risk variable.
A. a firm-specific
B. a political
C. a financial
D. an economic

28. A U.S. insurance firm must pay €75,000 in 6 months. The spot exchange rate is $1.32 per euro, and in 6
months the exchange rate is expected to be $1.35. The 6-month forward rate is currently $1.36 per euro. If
the insurer's goal is to limit its risk, should the insurer hedge this transaction? If so how?
A. The insurer need not hedge because the expected exchange rate move will be favorable.
B. The insurer should hedge by buying the euro forward even though this will cost more than the expected
cost of not hedging.
C. The insurer should hedge by selling the euro forward because this will cost less than the expected cost of
not hedging.
D. The insurer should hedge by buying the euro forward even though this will cost less than the expected
cost of not hedging.
29. A fund has assets denominated in euros and liabilities in yen due in 6 months. The 6-month forward rate for
the euro is $1.36 per euro, and the 6-month forward rate for the yen is 121 yen per dollar. The 6-month
forward rate for the euro versus the yen should be ________ per euro.
A. ×88.97
B. ×145.34
C. ×154.67
D. ×164.56
30. You invest in various broadly diversified international mutual funds as well as your U.S. portfolio. The one
risk you probably don't have to worry about affecting your returns is __________.
A. business-cycle risk
B. beta risk
C. inflation risk
D. currency risk

31. According to the International Country Risk Guide in 2011, which of the following countries was the
riskiest according to the current composite risk rating?
A. Japan
B. United States
C. China
D. India
32. Suppose the 6-month risk-free rate of return in the United States is 5%. The current exchange rate is 1
pound = US$2.05. The 6-month forward rate is 1 pound = US$2. The minimum yield on a 6-month risk-
free security in Britain that would induce a U.S. investor to invest in the British security is ________.
A. 5.06%
B. 6.74%
C. 8.48%
D. 10.13%
33. The quoted interest rate on a 3-month Canadian security is 8%. The current exchange rate is C$1 = US$.68.
The 3-month forward rate is C$1 = US$.70. The APR (denominated in US$) that a U.S. investor can earn
by investing in the Canadian security is __________.
A. 5%
B. 7.25%
C. 20%
D. 22.43%
34. Suppose the 1-year risk-free rate of return in the United States is 5% and the 1-year risk-free rate of return
in Britain is 8%. The current exchange rate is $1 = ₤.50. A 1-year future exchange rate of __________
would make a U.S. investor indifferent between investing in the U.S. security and investing in the British
security.
A. ₤.5150
B. ₤.5142
C. ₤.5123
D. ₤.4859

35. The risk-free interest rate in the United States is 4%, while the risk-free interest rate in the United Kingdom
is 9%. If the British pound is worth $2 in the spot market, a 1-year futures rate on the British pound should
be worth __________.
A. $1.83
B. $1.91
C. $2.08
D. $2.18
36. The risk-free interest rate in the United States is 8%, while the risk-free interest rate in the United Kingdom
is 15%. If the 1-year futures price on the British pound is $2.40, the spot market value of the British pound
today should be __________.
A. $1.93
B. $2.22
C. $2.56
D. $2.76
37. The present exchange rate is C$1 = US$.77. The 1-year futures rate is C$1 = US$.73. The yield on a 1-year
U.S. bill is 4%. A yield of __________ on a 1-year Canadian bill will make investors indifferent between
investing in the U.S. bill and the Canadian bill.
A. 9.7%
B. 2.9%
C. 2.8%
D. 2%
38. The yield on a 1-year bill in the United Kingdom is 6%, and the present exchange rate is 1 pound = US$2.
If you expect the exchange rate to be 1 pound = US$1.95 a year from now, the return a U.S. investor can
expect to earn by investing in U.K. bills is approximately __________.
A. -3%
B. 3%
C. 3.35%
D. 8.72%

39. Assume there is a fixed exchange rate between the Canadian and U.S. dollars. The expected return and
standard deviation of return on the U.S. stock market are 13% and 15%, respectively. The expected return
and standard deviation of return on the Canadian stock market are 12% and 16%, respectively. The
covariance of returns between the U.S. and Canadian stock markets is 1.2%. If you invested 50% of your
money in the Canadian stock market and 50% in the U.S. stock market, the expected return on your
portfolio would be __________.
A. 12%
B. 12.5%
C. 14%
D. 15.5%
40. Assume there is a fixed exchange rate between the Canadian and U.S. dollars. The expected return and
standard deviation of return on the U.S. stock market are 10% and 15%, respectively. The expected return
and standard deviation of return on the Canadian stock market are 12% and 16%, respectively. The
covariance of returns between the U.S. and Canadian stock markets is .012. If you invested 50% of your
money in the Canadian stock market and 50% in the U.S. stock market, the standard deviation of return on
your portfolio would be __________.
A. 10.96%
B. 12.25%
C. 13.42%
D. 15.5%
41. Inclusion of international equities in a U.S. investor's portfolio has historically produced
___________________.
A. a substantially reduced portfolio variance
B. a slightly reduced portfolio variance
C. a substantially poorer portfolio variance
D. a slightly poorer portfolio variance

42. WEBS are _____________.
A. mutual funds marketed internationally on the Internet
B. synthetic domestic stock indexes
C. equity indexes that replicate the price and yield performance of foreign stock portfolios
D. single stock investments in a foreign security
43. You are a U.S. investor who purchased British securities for 3,500 pounds 1 year ago when the British
pound cost $1.35. No dividends were paid on the British securities in the past year. Your total return based
on U.S. dollars was __________ if the value of the securities is now 4,200 pounds and the pound is worth
$1.15.
A. -3.8%
B. 2.2%
C. 5.6%
D. 15%
44. Real U.S. interest rates move above Japanese interest rates. If you believe that Japanese interest rates won't
move and that interest rate parity will hold, then ____________.
A. the yen-per-dollar exchange rate should rise
B. the dollar-per-yen exchange rate should rise
C. the exchange rate should stay the same if parity holds
D. The answer cannot be determined from the information given.
45. Suppose a U.S. investor wants to invest in a British firm currently selling for ₤50 per share. The investor
has $7,000 to invest, and the current exchange rate is $1.40/₤.
How many shares can the investor purchase?
A. 140
B. 100
C. 71.43
D. None of these options

After 1 year, the exchange rate is unchanged and the share price is ₤55. What is the dollar-denominated
return?
A. 14%
B. 10%
C. 9.3%
D. 7.1%
After 1 year, the exchange rate is unchanged and the share price is ₤55. What is the pound-denominated
return?
A. 14%
B. 10%
C. 9.3%
D. 7.1%
After 1 year, the exchange rate is $1.60/₤ and the share price is ₤55. What is the dollar-denominated
return?
A. 25.7%
B. 16%
C. 14.3%
D. 9.3%

After 1 year, the exchange rate is $1.50/₤ and the share price is ₤45. How much of your dollar-denominated
return is due to the currency change?
A. 10%
B. 6.43%
C. 4.34%
D. 2.12%
50. You find that the exchange rate quote for the yen is 121 yen per dollar. This is an example of ________
quote. You also find that the euro is worth $1.33. This second quote is an example of _______ quote.
A. a direct; an indirect
B. an indirect; a direct
C. a foreign; a U.S.
D. a U.S.; a foreign
51. Among emerging countries the largest equity market in 2011 was located in _____________.
A. China
B. India
C. Brazil
D. Russia
52. In the PRS country composite risk ratings, a score of ______ represents the least risky and a score of _____
represents the most risky.
A. 0; 100
B. 0; 50
C. 50; 0
D. 100; 0

53. Which emerging country had the highest percentage growth in market capitalization during the 2000-2011
period?
A. Brazil
B. China
C. Columbia
D. Turkey
54. The dollar-per-euro spot rate is 1.2 when an importer of French wines places an order. Six months later,
when she takes delivery, the spot rate is 1.3 dollars per euro. If her original invoice was for 30,000 euro,
what is her gain or loss due to exchange rate risk?
A. $3,000 gain
B. $3,000 loss
C. $6,000 loss
D. No gain or loss
55. An importer of televisions from Japan has a contract to purchase a shipment of televisions for 2 million
yen. The spot rate increases from 105 yen per dollar to 108 yen per dollar. What is the importer's gain or
loss?
A. $529 gain
B. $529 loss
C. $619 gain
D. $619 loss
56. A country has a PRS political risk rating of 75, a financial score of 40, and an economic score of 35. The
country's composite rating is _________.
A. 75
B. 50
C. 40
D. 35

57. The risk-free rate in the United States is 2.5%, and the risk-free rate in Europe is 3.2%. If the spot rate of
dollars per euro is 1.32, what is the likely forward rate in terms of dollars per euro?
A. 1.30
B. 1.31
C. 1.32
D. 1.33
58. The risk-free rate in the United States is 4%, and the risk-free rate in Japan is 1.2%. If the spot rate of yen
to dollars is 105, what is the likely yen-per-dollar forward rate?
A. 101
B. 102
C. 105
D. 108
59. The yen-per-dollar spot rate is 104. The yen-per-dollar forward rate is 107. If the U.S. risk-free rate is
2.4%, what is the likely yen risk-free rate?
A. 1.24%
B. 2.35%
C. 3.98%
D. 5.35%
60. In the PRS financial risk ratings, the United States rates poorly because of the U.S. ________.
I. Large budget deficit
II. Large trade deficit
III. Large amount of total debt
A. I only
B. I and II only
C. I and III only
D. I, II, and III

61. The major participants who directly purchase securities in the capital markets of other countries are
predominantly ____________.
A. large institutional investors
B. individual investors
C. government agencies
D. central banks
62. Of the following, which is the most commonly used international index?
A. DJIA
B. EAFE
C. Russell 2000
D. S&P 500
63. WEBS differ from mutual funds in that:
I. WEBS can be shorted.
II. WEBS trade continuously on the AMEX.
III. WEBS are passively managed.
A. II only
B. II and III only
C. I and III only
D. I, II, and III
64. The variation in the betas of emerging markets suggests that ____________.
A. emerging markets are more uniform than developed markets
B. beta does not hold in international markets
C. international diversification may reduce portfolio risk
D. riskier emerging markets have uniformly lower betas

65. One year U.S. interest rates are 5%, and European interest rates are 7%. The spot euro direct exchange rate
quote is 1.32, and the 1-year forward rate direct quote is 1.35. If you can borrow either $1 million or €1
million to start with, what would be your dollar profits from interest arbitrage based on these data?
A. $94,322
B. $55,345
C. $44,318
D. $33,595
66. One year U.S. interest rates are 7%, and European interest rates are 5%. The spot euro direct exchange rate
quote is 1.30 and the 1-year forward rate direct quote is 1.25. If you can borrow either $1 million or €1
million to start with, what would be your dollar profits from interest arbitrage based on these data?
A. $60,384
B. $42,973
C. $68,422
D. $78,500
67.
All exchange rates are expressed as units of foreign currency that can be purchased with one U.S. dollar.
Answer the following about decomposing the manager's performance.
What is the difference in return of the manager's portfolio due to currency selection?
A. -5%
B. -3%
C. 2%
D. 1%

68.
What is the difference in return of the manager's portfolio due to country selection?
A. -.60%
B. -.75%
C. .12%
D. .22%
69.
What is the difference in return of the manager's portfolio due to stock selection?
A. 1.15%
B. 3.25%
C. 5.45%
D. 6.13%

Chapter 20:
_____________________________________________________________________
______
1. Which of the following are characteristics of a hedge fund?
I. Pooling of assets
II. Strict regulatory oversight by the SEC
III. Investing in equities, debt instruments, and derivative instruments
IV. Professional management of assets
A. I and II only
B. II and III only
C. III and IV only
D. I, III, and IV only
2. A __________ is a private investment pool open only to wealthy or institutional
investors that is exempt from SEC regulation and can therefore pursue more
speculative policies than mutual funds.
A. commingled pool
B. unit trust
C. hedge fund
D. money market fund
3. Hedge funds are typically set up as _______________.
A. limited liability partnerships
B. corporations
C. REITs
D. mutual funds

4. A(n) _______________ hedge fund attempts to profit from situations such as
mergers, acquisitions, restructuring, bankruptcy, or reorganization.
A. multistrategy
B. managed futures
C. dedicated short bias
D. event-driven
5. ______ are private partnerships of a small number of wealthy investors, are often
subject to lock-up periods, and are allowed to pursue a wide range of investment
activities.
A. Hedge funds
B. Closed-end funds
C. REITs
D. Mutual funds
6. Which of the following typically employ(s) significant amounts of leverage?
I. Hedge funds
II. Equity mutual funds
III. Money market funds
IV. Income mutual funds
A. I only
B. I and II only
C. III and IV only
D. I, II, and III only

7. As of 2012, hedge funds had approximately _____ under management.
A. $.5 trillion
B. $1.6 trillion
C. $2 trillion
D. $3.2 trillion
8. A restriction under which investors cannot withdraw their funds for as long as
several months or years is called __________.
A. transparency
B. a lock-up period
C. a back-end load
D. convertible arbitrage
9. Hedge fund managers are compensated by ___________________.
A. deducting management fees from fund assets and receiving incentive bonuses
for beating index benchmarks
B. deducting a percentage of any gains in asset value
C. selling shares in the trust at a premium to the cost of acquiring the underlying
assets
D. charging portfolio turnover fees
10.Management fees for hedge funds typically range between _____ and _____.
A. .5%; 1.5%
B. 1%; 2%
C. 2%; 5%
D. 5%; 8%

11.Hedge funds can invest in various investment options that are not generally
available to mutual funds. These include:
I. Futures and options
II. Merger arbitrage
III. Currency contracts
IV. Companies undergoing Chapter 11 restructuring and reorganization
A. I only
B. I and II only
C. I, II, and III only
D. I, II, III, and IV
12.A typical traditional initial investment in a hedge fund generally is in the range
between _____ and _____.
A. $1,000; $5,000
B. $5,000; $25,000
C. $25,000; $250,000
D. $250,000; $1,000,000
13.The difference between market-neutral and long-short hedges is that market-
neutral hedge funds _________.
A. establish long and short positions on both sides of the market to eliminate risk
and to benefit from security asset mispricing whereas long-short hedges
establish positions only on one side of the market
B. allocate money to several other funds while long-short funds do not
C. invest in relatively stable proportions of stocks and bonds while the proportions
may vary dramatically for long-short funds
D. invest only in equities and bonds while long-short funds use only derivatives

14.Convertible arbitrage hedge funds _________.
A. attempt to profit from mispriced interest-sensitive securities
B. hold long positions in convertible bonds and offsetting short positions in stocks
C. establish long and short positions in global capital markets
D. use derivative products to hedge their short positions in convertible bonds
15.Assuming positive basis and negligible borrowing cost, which of the following
transactions could yield positive arbitrage profits if pursued by a hedge fund?
A. Buy gold in the spot market, and sell the futures contract.
B. Buy the futures contract, and sell the gold spot and invest the money earned.
C. Buy gold spot with borrowed money, and buy the futures contract.
D. Buy the futures contract, and buy the gold spot using borrowed money.
16.An example of a neutral pure play is _______.
A. pairs trading
B. statistical arbitrage
C. convergence arbitrage
D. directional strategy
17.You believe that the spread between the September S&P 500 future and the S&P
500 Index is too large and will soon correct. To take advantage of this mispricing,
a hedge fund should ______________.
A. buy all the stocks in the S&P 500 and write put options on the S&P 500 Index
B. sell all the stocks in the S&P 500 and buy call options on the S&P 500 Index
C. sell S&P 500 Index futures and buy all the stocks in the S&P 500
D. sell short all the stocks in the S&P 500 and buy S&P 500 Index futures

18.You believe that the spread between the September S&P 500 future and the S&P
500 Index is too large and will soon correct. This is an example of
______________.
A. pairs trading
B. convergence play
C. statistical arbitrage
D. a long-short equity hedge
19.A 1-year oil futures contract is selling for $74.50. Spot oil prices are $68, and the
1-year risk-free rate is 3.25%.
The 1-year oil futures price should be equal to __________.
A. $68
B. $70.21
C. $71.25
D. $74.88
The arbitrage profit implied by these prices is _____________.
A. $6.50
B. $5.44
C. $4.29
D. $3.25

Based on the above data, which of the following sets of transactions will yield
positive riskless arbitrage profits?
A. Buy oil in the spot market with borrowed money, and sell the futures contract.
B. Buy the futures contract, and sell the oil spot and invest the money earned.
C. Buy the oil spot with borrowed money, and buy the futures contract.
D. Buy the futures contract, and buy the oil spot using borrowed money.
22.Assume that you have invested $500,000 to purchase shares in a hedge fund
reporting $800 million in assets, $100 million in liabilities, and 70 million shares
outstanding. Your initial lockout period is 3 years.
How many shares did you purchase?
A. 13,333
B. 25,000
C. 50,000
D. 66,000
If the share price after 3 years increases to $15.28, what is the value of your
investment?
A. $553,600
B. $625,000
C. $733,800
D. $764,000

What is your annualized return over the 3-year holding period?
A. 14.45%
B. 15.18%
C. 16%
D. 17.73%
25.Which of the following are not managed investment companies?
A. Hedge funds
B. Unit investment trusts
C. Closed-end funds
D. Open-end funds
26.You manage a $15 million hedge fund portfolio with beta = 1.2 and alpha = 2%
per quarter. Assume the risk-free rate is 2% per quarter and the current value of
the S&P 500 Index is 1,200. You want to exploit the positive alpha, but you are
afraid that the stock market may fall and you want to hedge your portfolio by
selling 3-month S&P 500 future contracts. The S&P contract multiplier is $250.
How many S&P 500 contracts do you need to sell to hedge your portfolio?
A. 25
B. 35
C. 50
D. 60

When you hedge your stock portfolio with futures contracts, the value of your
portfolio beta is __________.
A. 0
B. 1
C. 1.2
D. The answer cannot be determined from the information given.
What is the expected quarterly return on the hedged portfolio?
A. 0%
B. 2%
C. 3%
D. 4%

How much is the portfolio expected to be worth 3 months from now?
A. $15,000,000
B. $15,450,000
C. $15,600,000
D. $16,000,000
Hedging this portfolio by selling S&P 500 futures contracts is an example of
___________.
A. statistical arbitrage
B. pure play
C. a short equity hedge
D. fixed-income arbitrage
31.Hedge funds that change strategies and types of securities invested and also vary
the proportions of assets invested in particular market sectors according to the
fund manager's outlook are called ____________________.
A. asset allocation funds
B. multistrategy funds
C. event-driven funds
D. market-neutral funds

32.When a short-selling hedge fund advertises in a prospectus that it is a 120/20 fund,
this means that the fund may sell short up to ______ for every $100 in net assets
and increase the long position to __________ of net assets.
A. $120; $20
B. $20; $120
C. $20; $20
D. $120; $120
33.The collapse of the Long Term Capital Management hedge fund in 1998 was a
case of an extremely unlikely statistical event called ________.
A. statistical arbitrage
B. an unhedged play
C. a tail event
D. a liquidity trap
34.Which of the following investment styles could be the best description of the Long
Term Capital Management market-neutral strategies?
A. Convergence arbitrage
B. Statistical arbitrage
C. Pairs trading
D. Convertible arbitrage
35.Consider a hedge fund with $250 million in assets at the start of the year. If the
gross return on assets is 18% and the total expense ratio is 2.5% of the year-end
value, what is the rate of return on the fund?
A. 15.05%
B. 15.5%
C. 17.25%
D. 18%

36.Consider a hedge fund with $200 million at the start of the year. The benchmark
S&P 500 Index was up 16.5% during the same period. The gross return on assets
is 21%, and the expense ratio is 2%. For each 1% above the benchmark return, the
fund managers receive a .1% incentive bonus.
What was the management cost for the year?
A. $4,877,000
B. $4,900,000
C. $5,929,000
D. $6,446,000
37.Consider a hedge fund with $200 million at the start of the year. The benchmark
S&P 500 Index was up 16.5% during the same period. The gross return on assets
is 21%, and the expense ratio is 2%. For each 1% above the benchmark return, the
fund managers receive a .1% incentive bonus.
What was the annual return on this fund?
A. 16.5%
B. 18.04%
C. 18.55%
D. 21%
38.Consider a hedge fund with $400 million in assets, $60 million in debt, and 16
million shares at the start of the year and with $500 million in assets, $40 million
in debt, and 20 million shares at the end of the year. During the year, investors
have received an income dividend of $.75 per share. Assuming that the total
expense ratio is 2.75%, what is the rate of return on the fund?
A. 6.45%
B. 8.52%
C. 8.95%
D. 9.46%

39.Market-neutral hedge funds may experience considerable volatility. The source of
volatile returns is the use of _________.
A. pure play
B. leverage
C. directional bests
D. net short positions
40.A hedge fund has $150 million in assets at the beginning of the year and 10
million shares outstanding throughout the year. Throughout the year assets grow at
12%. The fund charges a 3% management fee on the assets. The fee is imposed on
year-end asset values. What is the end-of-year NAV for the fund?
A. $15
B. $15.60
C. $16.30
D. $17.55
41.You pay $216,000 to the Capital Hedge Fund, which has a price of $18 per share
at the beginning of the year. The fund deducted a front-end commission of 4%.
The securities in the fund increased in value by 15% during the year. The fund's
expense ratio is 2% and is deducted from year-end asset values. What is your rate
of return on the fund if you sell your shares at the end of the year?
A. 5.35%
B. 7.23%
C. 8.19%
D. 10%

42.A hedge fund owns a $15 million bond portfolio with a modified duration of 11
years and needs to hedge risk, but T-bond futures are available only with a
modified duration of the deliverable instrument of 10 years. The futures are priced
at $105,000. The proper hedge ratio to use is ______.
A. 143
B. 157
C. 196
D. 218
43.Unlike market-neutral hedge funds, which have betas near ________, directional
long funds exhibit highly _______ betas.
A. zero; positive
B. positive; negative
C. positive; zero
D. negative; positive
44.Portfolio A has a beta of .2 and an expected return of 14%. Portfolio B has a beta
of .5 and an expected return of 16%. The risk-free rate of return is 10%. If you
manage a long-short equity fund and want to take advantage of an arbitrage
opportunity, you should take a short position in portfolio ______ and a long
position in portfolio __________.
A. A; A
B. A; B
C. B; A
D. B; B

45.According to a model that was estimated using monthly excess returns from
January 2005 through November 2011, average returns of equity hedge funds are
__________ the S&P 500 Index.
A. equal to
B. considerably higher than
C. slightly lower than
D. slightly higher than
46.Research by Aragon (2007) indicates that lock-up restrictions tend to hold
____________ portfolios.
A. less liquid
B. more liquid
C. event-driven
D. shorter-maturity
47.Higher returns of equity hedge funds as compared to the S&P 500 Index reflect
positive compensation for __________ risk.
A. market
B. liquidity
C. systematic
D. interest rate

48.Portfolio A has a beta of 1.3 and an expected return of 21%. Portfolio B has a beta
of .7 and an expected return of 17%. The risk-free rate of return is 9%. If a hedge
fund manager wants to take advantage of an arbitrage opportunity, she should take
a short position in portfolio __________ and a long position in portfolio
__________.
A. A; A
B. A; B
C. B; A
D. B; B
49.In a 2011 study, Agarwal, Daniel, and Naik documented that hedge funds tend to
report average returns in ____________ that are __________ than their average
returns in other months.
A. September; lower
B. January; higher
C. January; lower
D. December; higher
50.To attract new clients, hedge funds often include past returns of funds only if they
were successful. This is called __________.
A. long-short bias
B. survivorship bias
C. backfill bias
D. incentive bias

51.Some argue that abnormally high returns of hedge funds are tainted by
__________, which arises when unsuccessful funds cease operations, leaving only
successful ones.
A. reporting bias
B. survivorship bias
C. backfill bias
D. incentive bias
52.Malkiel and Saha (2005) estimate that the survivorship bias for hedge funds equals
4.4%, which is __________ the survivorship bias for mutual funds.
A. about the same as
B. much lower than
C. much higher than
D. only slightly lower than
53.Hedge fund managers receive incentive bonuses when they increase portfolio
assets beyond a stipulated benchmark but lose nothing when they fail to perform.
This is equivalent to __________.
A. writing a call option
B. receiving a free call option
C. writing a put option
D. receiving a free put option
54.A typical hedge fund incentive bonus is usually equal to ________ of investment
profits beyond a predetermined benchmark index.
A. 5%
B. 10%
C. 20%
D. 25%

55.The fastest-growing category of hedge funds is feeder funds. These funds invest in
________.
A. other hedge funds
B. convertible securities and preferred stock
C. equities and bonds
D. managed futures and options
56.A high water mark is a limiting factor of hedge fund manager compensation. This
means that managers can't charge incentive fees ________.
A. when a fund stays flat
B. when a fund falls and does not recover to its previous high value
C. when a fund falls by 10% or more
D. none of these options. (Managers can always charge incentive fees.)
57.If the risk-free interest rate is rf and equals the fund's benchmark, the portfolio's
net asset value is S0, and the hedge fund manager incentive fee is 20% of profit
beyond that, the incentive fee is equivalent to receiving ______ call(s) with
exercise price ________.
A. .2; S0
B. 1; S0(1 + rf)
C. 1.2; S0
D. .2; S0(1 + rf)

58.Assume the risk-free interest rate is 10% and is equal to the fund's benchmark, the
portfolio's net asset value is $100, and the fund's standard deviation is 20%. Also
assume a time horizon of 1 year.
What is the exercise price on the incentive fee?
A. $100
B. $105
C. $110
D. $115
What is the Black-Scholes value of the call option on the management incentive
fee?
A. $6.67
B. $8.18
C. $9.74
D. $10.22
Assuming a 2% management fee and a 20% incentive bonus, what is the expected
management compensation per share if the fund's net asset value exceeds the
stated benchmark?
A. $4.24
B. $4
C. $3.84
D. $2.20

Fin 320 week 10 quiz – strayer

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