QUESTION 1

Consider the statements below:

I) Quantitative investors rely of sophisticated, data-driven algorithms to do discounted cash-flow valuation of a very large number of stocks simultaneously.

II) On average, professional investment managers are able to beat the market, but their clients do not beat the market because the managers keep all the surplus to themselves due to the high management fees they charge.

		I and II are TRUE.
		I is TRUE, II is FALSE.
		I is FALSE, II is TRUE.
		I and II are FALSE.

10 points

QUESTION 2

Consider the statements below:

I) Over the last few decades investors have increasingly chosen to invest in Index funds rather than picking funds that attempt to "beat the market".

II) The primary clientele of Quantitative Investing asset management firms consists of intititutional investors rather than retail clients.

		I and II are TRUE.
		I is TRUE, II is FALSE.
		I is FALSE, II is TRUE.
		I and II are FALSE.

10 points

QUESTION 3

Consider the statements below:

I) Because stock markets are extremely competitive, quantitative signals that forecast relative stock returns stop being able to forecast stock returns shortly (ie., a couple of years or less) after investment managers begin using them.

II) On average across stocks and over time, stocks that appear expensive based on valuation ratios (e.g., high PE ratio) are in fact expensive, that is, they tend to underperform stocks that do not appear expensive.

		I and II are TRUE.
		I is TRUE, II is FALSE.
		I is FALSE, II is TRUE.
		I and II are FALSE.

10 points

QUESTION 4

Consider the statements below:

I) Because they rely on vast quantities of data, Quantitative Investors display relatively more conviction than Discretionary Investors in their typical trades.

II) Examples of asset management firms that only do Quantitative Investing include AQR, Acadian, and Arrowstreet.

		I and II are TRUE.
		I is TRUE, II is FALSE.
		I is FALSE, II is TRUE.
		I and II are FALSE.

10 points

QUESTION 5

Sell-side analysts working for brokerages issue public buy-sell-hold recommendations about the stocks they follow. Most of the time these recommendations are in a scale of 1 to 5: strong sell, sell, hold, buy, strong buy. Using the scale, it is possible to calculate a stock's average recommendation by averaging across all analysts rating the stock.

Andrew and Ximena work for an investment management company. In a committee meeting, Andrew is recommending the purchase of stock ABC, while Ximena is recommending the purchase of stock XYZ. Both stocks are part of the Russell 3000 Index and only one stock will be purchased. To support his pitch, Andrew shows that sellside analysts have higher average recommendations for stock ABC than for stock XYZ. The investment committee is unsure about how to evaluate Andrew's point about sell-side analysts recommentations. What is the best way for the committee to proceed regarding Andrew's point?

		Find out whether the sell-side analysts rating stocks ABC and XYZ currently work for reputable brokerages.
		Use backtests to check whether, on average across stocks and over time, stocks with more favorable average buy-sell-hold recommendations have relatively higher future returns than stocks with less favorable buy-sell-hold recommendations.
		Find out how the sell-side analysts currently rating stocks ABC and XYZ rated the same stocks over the last 3 to 5 years.
		Use backtests to check whether, on average across stocks and over time, stocks that have favorable average buy-sell-hold recommendations have had large returns prior to those recommendations.
		Find out whether stocks that currently have favorable buy-sell-hold recommendations outperformed the market in the past.

10 points

QUESTION 6

Consider the statements below:

I) Consider a dynamically rebalanced portfolio that contains 300 stocks at any point in time and no short positions. All stocks are part of the Russell 3000 Index. Despite the large number of stocks, such portfolio may have a return significantly different from that of the Russell 3000 Index itself over a 10-year period (say, 15% per year versus 8% per year).

II) It is impossible to use publicly available financial statements to forecast relative stock returns.

		I and II are TRUE.
		I is TRUE, II is FALSE.
		I is FALSE, II is TRUE.
		I and II are FALSE.

10 points

QUESTION 7

Consider the statements below:

I) Frequent portfolio rebalancing can lead to higher tax bills for non-tax advantaged investors through capital gains realizations.

II) The Shareholder Yield of a stock takes into account not only dividend payments but also stock buybacks, and as such is an improved version of the Dividend Yield.

		I and II are TRUE.
		I is TRUE, II is FALSE.
		I is FALSE, II is TRUE.
		I and II are FALSE.

10 points

QUESTION 8

Consider the statements below:

I) In practice, Enterprise Value is calculated as Market Cap of Equity + Book Value of (Total Debt + Preferred Equity + Minority Interest) - Cash. The"Cash" term refers to the cash investment managers set aside for future distributions.

II) On average across stocks and over time, stocks with higher CAPM betas (as measured using recent return data) tend to have higher future returns than stocks with low CAPM betas.

		I and II are TRUE.
		I is TRUE, II is FALSE.
		I is FALSE, II is TRUE.
		I and II are FALSE.

10 points

QUESTION 9

Consider a unequivocally quantifiable stock characteristic labeled MSR. An analyst performs a backtest to check whether stocks with high MSR tend to have higher future returns.

His analysis uses the 2021 MSRs of all Russell 3000 firms existing in 2021. He sorts the stocks on that list into three groups: HIGH MSR (top 30%), MEDIUM MSR (mid 40%), and LOW MSR (bottom 30%). Then, within each group, he creates a capitalization-weighted portfolio and measure the return of such portfolios over the 1999-2021 period. He finds that, on average across stocks and over time, high MSR stocks beat low MSR stocks by 8% per year.

Which statement below is true about this analysis?

		The sample size is too small. Meaningful backtests must include at least 30 years of data.
		The analysis is somewhat incorrect because the analysts should divide the stocks into three groups with the same number of stocks in each.
		The analysis is somewhat misleading because the the analysts should have equally-weighted stocks within each group rather than capitalization-weighting them.
		The analysis is completely incorrect because it does not use point-in-time data.
		The analysis is not useful because there are too few "buckets": he should have divided stocks into at least 10 groups.

10 points

QUESTION 10

Consider the statements below:

I) The FIN 619 material this week shows evidence that, on average across stocks and on average over time, stocks with smaller market capitalization tend to have higher future returns than stocks with larger market capitalization.

II) A quantititative manager has a ranking system based on only two signals: 75% weight in signal 1 and 25% in signal 2. Her Universe is the Russell 3000. The Table below contains the "Rank" of each stock (#1 is bottom and #3000 is top). Stock XYZ is higher ranked than stock ABC is such ranking system.

	Signal 1	Signal 2
Stock ABC	2399	2293
Stock XYZ	2987	1545

		I and II are TRUE.
		I is TRUE, II is FALSE.
		I is FALSE, II is TRUE.
		I and II are FALSE.

10 points

QUESTION 11

Consider the statements below:

I) Enterprise Value divided by Sales is a better valuation ratio than Price of Equity per Share divided by Sales per Share because it does not violate the Capital Structure Consistency principle.

II) According to Grinold and Khan, for Quantitative Investing purposes the reasonable range of expected active returns for stocks (for broad stock Universes and typical circumstances) is from -30% to +30% per year.

		I and II are TRUE.
		I is TRUE, II is FALSE.
		I is FALSE, II is TRUE.
		I and II are FALSE.

10 points

QUESTION 12

Consider the statements below:

1) The expected active return of a stock (also known as expected alpha) is how much, in percentage terms, the stock is expected to beat or trail the benchmark over the next year.

2) According to Grinold and Kahn, the range of expected active returns one can estimate using Quantitative Investing is relatively narrow (about -5% to 5% per year) in part because the correlation between active return forecasts and active return realizations is typically very low, like 0.05.

		I and II are TRUE.
		I is TRUE, II is FALSE.
		I is FALSE, II is TRUE.
		I and II are FALSE.