1. What is the characteristics of a bond fund with the following Morningstar FIS style box where X marks the style of the bond.

LTD MOD EXT

HIGH X

MID

LOW

1. The fund predominantly invests in High Yield bonds
2. The fund has low credit risk and long duration bonds.
3. The fund predominantly invests in Large Capitalized Growth firms
4. The fund invests in low credit risk and low duration bonds
5. The fund has high credit risk and long duration bonds

2. An analyst predicts that the yield curve will twist at the 5 year maturity, The 1-year zero-coupon government bond yield to maturity will increase by 1% while the 11-year zero-coupon government bond yield to maturity will decrease by 1%.

Fixed Income securities available in the market have a maximum maturity of 11 years and a minimum maturity of 1 year.

If the analyst's prediction does come true, which of the following investment strategies will result in the highest returns?

1. A barbell strategy which allocates 10% to 1-year zero-coupon government bonds and 90% to 11-year zero-coupon government bonds.
2. A barbell strategy which allocates 50% to 1-year zero-coupon government bonds and 50% to 11-year zero-coupon government bonds.
3. A bullet strategy which allocates 100% to 1-year zero-coupon government bonds
4. A ladder (equally weighted) allocation across all maturities (from 1 to 11 years) of zero-coupon government bonds.
5. A bullet strategy which allocates 100% to 11-year zero-coupon government bonds

3. Which of the following statements is incorrect about Active investing

1. Active investment strategy may be based on fundamental or technical analysis.
2. Active investment strategy may focus on identifying asset classes that will perform better in future than other asset classes.
3. Momentum and Contrarian investing are examples of active investing but Value or Growth investing are examples of passive investing
4. Active investment try to outperform their benchmark
5. Active investment strategy may focus on identifying undervalued securities.

4. Most Equity and FIS indexes are capitalisation weighted. Which of the following is not correct regarding capitalisation weighted indexes?

1. Capitalisation weighted equity indexes include allocation to risk free assets as well
2. Style based indexes use selection screens to select investments that display characteristics to a specific investment style, such as Value or Growth.
3. Capitalisation weighted equity indexes are not as diversified as the market.
4. Capitalisation weighted indexes are buy and hold indexes, which means once the assets in the index are allocated in the same proportion as in the index, the allocation performance will mirror the performance of the index.
5. Capitalisation weighted equity indexes do not include unlisted equities while the market is a portfolio of all investments in a market.

5. Which of the following statements is incorrect about Passive investing?

1. Security allocation methodology in a passive investment include capitalization-based weighting, equal weighting, volume weighting, price weighting etc.
2. Passive investing requires a selection of securities from market and an allocation methodology to decide how much to invest in the securities to be included in the fund (or portfolio).
3. Passive investing incurs no security analyst cost to identify undervalued or overvalued investments.
4. Passive fund (or portfolio) managers can pay index providers (such as MSCI or S&P) to obtain information (through a license) on the securities in the index, and the allocations for each security, on a daily basis.
5. Passive investing incurs no transaction cost when the fund (or portfolio) is initially formed.

6. Which of the following statements is incorrect about High Yield FIS?

1. High Yield bond should be avoided by investors since they come with high risk of default and no diversification benefits in a portfolio of government and investment grade bonds.
2. High Yield bonds have a larger coupon rate than an investment grade bond with the same maturity
3. A Junk (High Yield) bond can be re-rated as an investment grade bond before the bond matures.
4. High Yield bonds will have a lower duration than a Government bond with the same maturity.
5. High Yield bonds should perform better in economic upturns than in economic downturns.

7. The textbook uses pension funds to show that active funds underperform their benchmarks. Which of the following statements regarding the research is incorrect?

1. Pension funds performed better than mutual funds on an after-cost basis
2. The research uses pension funds only invests in index funds and after management costs, the pension funds underperform the benchmark.
3. The pension funds use a composite benchmark of bonds and equities indexes.
4. The research shows that pension funds have the ability to invest in riskier investments, not only in the equities and bonds in the benchmark.
5. The research shows that pension funds have the ability to hire analysts skilled in identifying mispriced securities.

8. Which of the following statements is incorrect about the market?

1. The weighted average returns for all the investments in the market provides the returns of the market.
2. If an investor could invest in all investments in the market by allocating their capital on a capitalization basis, then they would receive the returns of the market.
3. Investing in the market on a capitalization weighted basis is passive investing.
4. Investors can invest in the complete market by investing in indexes for all asset classes.
5. The market consists of listed and unlisted investments.

9. Which of the following statements is incorrect about Value and Growth investing?

1. Value investments include firms with depressed prices relative to their (firms') forward earnings, dividends, and sales.
2. Value may outperform or underperform growth investing depending on the quality of the fund manager, size of the fund and market conditions.
3. Growth and Value investing have a higher management fee (management cost) compared with capitalization weighted index for the same market segment (such as large capitalized equities).
4. Value and Growth investing result in performance better than benchmark returns.
5. Growth investments include firms with healthy short term and long term forward earnings potential.

10. Berk's (2005) model provides a framework explains how investors choose funds to invest with and how funds perform over time. Which of the following statements is incorrect?

1. The model shows that investors use past fund performance to judge future fund performance.
2. The model shows that the returns of the best fund will eventually underperform the benchmark, and the returns of the worst fund will eventually outperform the benchmark.
3. The model shows that there is an optimal fund size beyond which fund performance decreases.
4. The model shows that the best fund manager has the highest capital invested with them
5. The model shows that skills are valued in the funds management industry.