Question 1

Investment Policy Statement (IPS). Several of the components of the IPS include the statement

of investment goals, objectives, and constraints; performance measures and benchmarks;

considerations in developing strategic asset allocation; and investment strategies and investment

styles.

True

False

Question 2

Basis Risk and Convergence: While the futures price and the spot price must converge at

maturity, the basis defines the difference between the futures price and the spot price. Basis risk

is assumed over the life of the contract, except at maturity where convergence occurs.

True

False

Question 3

Operating & Financial Leverage: Operating leverage and financial leverage increase sensitivity

to the business cycle. By definition, operating leverage links to fixed costs as a percentage of

total costs while financial leverage links to the percentage of debt to total capital.

True

False

Question 4

Tracking Error (TE). TE is estimated from the time series of differences between the returns of

the risky portfolio and the risk free returns. Over the past 30+ years, TEs have tended to

decline, suggesting that risky portfolios have become more index-like.

True

False

Question 5

Internal Rate of Return: Dollar weighted rates of return is another term for Internal Rate of

Return (IRR). Because of the nuances of the (oftentimes) highly irregular cash flows both into

and out of the limited liability partnership (LLP), IRR is used in the performance measurement of

alternative assets.

True

False