1.Which of the following statements is correct regarding arbitrage pricing theory (APT)?

A. APT uses a pre-established series of variables to calculate expected returns.

B. APT provides more flexibility than traditional CAPM-based models.

C. APT relies on a strict series of assumptions.

D. APT is constrained to a five-factor model.

2. Which of the following statements regarding the inputs involved with a multifactor model is correct?

A. The factors included in a multifactor model are very rigid.

B. Factor betas describe how much the relationship is amplified between the stock under analysis and the respective factor.

C. Analysts must include only economic variables as the factors in a multifactor model.

D. Factor betas must be positive values.

3. What value is derived from adding more factors through a multifactor approach?

A. All company-specific risk can be mitigated.

B. The same variables can be added for every stock, which makes the process easy to implement.

C. Calculations can be derived over multiple time periods because the factor betas remain static.

D. A richer systematic relationship can be captured.

4. Which of the following statements about correlation and diversification is correct with respect to multifactor models?

A. Well-diversified portfolios hold constituent assets with high correlations.

B. The use of well-diversified portfolios removes the need for multifactor models.

C. The use of multiple assets with lower correlations makes the use of multifactor models more beneficial for analysts to consider.

D. Well-diversified portfolios typically include assets from the same asset class.

5. Which of the following statements relative to the use of multifactor models and hedging is incorrect?

A. Multifactor models enable investors to hedge specific factor exposures.

B. There are still no arbitrage opportunities, even when factoring in the granular exposures captured by multifactor models.

C. Multifactor models potentially enable investors to eliminate all calculated factor exposures.

D. The hedging process will most likely contain an element of model risk.

6. Which factors are explicitly considered in the Fama-French three-factor model?

A. A size factor

B. A momentum factor

C. A currency exposure factor

D. An operational robustness factor

7. Which of the following methods is not a way in which banks can mitigate interest rate risk?

A. Use swaps.

B. Use floors and caps.

C. Extend loan assets to longer terms.

D. Match the duration of the bank's assets and liabilities.

8. How is liquidity risk dangerous for a bank?

A. Liquidity risk positively correlates with interest rate risk.

B. Liquidity risk results from using costly long-term funding sources.

C. When long-term assets are funded with short-term liabilities, trouble is waiting if the funding sources evaporate.

D. When long-term liabilities are funded with short-term assets, trouble is waiting if the funding sources evaporate.

9.Which of the following statements is correct regarding the implementation of a hedging strategy?

A. Dynamic hedges require active supervision.

B. Dynamic hedges require the use of one-month futures contracts.

C. Static hedges are the best option for a rapidly changing market environment.

D. Static hedges require that the hedging instrument exactly match the position to be hedged.

10. Which of the following statements is not a lesson that risk managers should learn from the Long-Term Capital Management case study?

A. Short-term VaR parameters are always the best risk management tool.

B. There should be no exceptions to initial margin requirements imposed by fenders.

C. Position liquidity should be carefully monitored, especially when using extreme leverage.

D. Correlations are a great way to consider asset allocation, but they need to be monitored for convergence during periods of stress.