TRUE OR FALSE? Only the answer, no explanation is needed. Please answer in 30 minutes.

Question 21

Futures Markets: Backwardation futures markets are those in which spot prices are higher than

futures prices while Contango futures markets are those in which spot prices are lower than

futures prices

True

False

Question 22

Life Cycle Approach to Investing (LCAI). The LCAI views the individual as passing through a

series of stages, becoming more risk seeking in later years, the rationale being that one ages, an

individual uses up his/her human capital and have less time remaining to recoup possible

portfolio losses through increased labor supply.

True

False

Question 23

Strategic Asset Allocation (SAA) and Tactical Asset Allocation (TAA). TAA represents a

dynamic investment strategy that actively adjusts the portfolios asset allocation, shifting it

towards undervalued assets and away from overvalued assets for time periods generally spanning

one to several years. Conversely, SAA is long term.

True

False

Question 24

Futures Profitability and Zero Sum Game: The profit to a long futures contract is the spot price at

maturity minus the original futures price. The profit to a short futures contract is the original

futures price minus the spot price at maturity. When summed, the profits to the long and the short

suggest that futures contracts are a zero-sum arrangement.

True

False

Question 25

Valuation Model Consistency: Valuation model consistency refers to the proper linking of the

numerator and denominators components. For example, the discounting factors for FCFE and

FCFF are the CAPM required return and the WACC, respectively.

True

False

Question 26

FCFE. The Free Cash Flow to Equity equals FCFF minus after tax interest expenditures plus

increase in net debt. FCFE is discounted by the CAPM.

True

False

Question 27

Alternative Asset Attributes: Diversification, illiquidity, and inefficiency define a number of the

distinguishing characteristics of the alternative assets space. Alternative assets are termed alpha

investments (representing manager skill to generate a positive risk adjusted return).

True

False

Question 28

Forwards & Futures: A futures contract is similar to a forward contract, differing more

importantly in the aspects of standardization and daily marking to market, which is the process by

which gains and losses on futures contract positions are settled daily. Futures contracts can be

used for hedging or speculating.

True

False

Question 29

Two Classes of LLP Partners. The two classes of LLP partners are Equity Partners and Debt

Partners. Debt partners, while limited in their authority, are nonetheless responsible for

providing the majority of the capital investment.

True

False

Question 30

M^2 Measure of Performance. To compute the M^2 measure-of-performance, a managed

portfolio is adjusted such that the adjusted portfolio matches the volatility of the benchmark

portfolio. Because the adjusted portfolio and the benchmark have the same standard deviation, an

analyst can compare their performance simply by comparing returns.

True

False

Question 31

Option Hedge Ratio: Hedge ratios (or deltas) are one for deep out-of-the-money call options and

zero for deep in-the-money calls.

True

False

Question 33

Portfolio Constraints (PC) in Investment Policy Statements. PC can include liquidity, investment

horizon, regulations, tax considerations, and unique needs.

True

False

Question 34

Option Valuation: Option values may be viewed as the sum of intrinsic value plus time value.

The value of a call option increases if the stock price increases, the exercise price (or strike price)

decreases, the volatility increases, the time to expiration increases, the risk free interest rate

increases, and the dividend payment decreases.

True

False

Question 35

Sector Rotation (SR): One means analysts think about the relationship between industry analysis

and the business cycle is the notion of SR. The idea is to shift the portfolio more heavily into

industry or sector groups that are expected to outperform based on ones assessment of the state

of the business cycle. For instance, if one were anticipating an economic expansion, one would

focus attention on the consumer discretionary, materials, industrials, and energy sectors.

True

False

Question 36

Defined Contribution (DC) vs. Defined Benefit (DB). The two types of pension plans are DC and

DB, the later where the contributions made on behalf of the employees by the firm specifies the

retirement benefits to which the employee is entitled. The benefit formula typically takes into

account years of service for the employer and level of wages. In DC plans, the investment risk is

transferred to the employee.

True

False

Question 37

J Curves. J curves are generally associated with venture capital investments and indicate the

anticipated negative return (or cash flows) early on in its life cycle.

True

False

Question 38

Value Proposition: The consulting model value proposition suggests that a stock price will be

higher the larger the expected dividend per share (or free cash flow), the higher the market

capitalization rate (or risk), and the higher the expected growth rate of dividends (or free cash

flow).

True

False

Question 39

Credit Default Swaps (CDS). CDS are in effect, an insurance product that pays off in the event of

a trigger event (some sort of technical or real default). The protection seller receives a premium

from the protection buyer.

True

False

Question 40

European Australasia, Far East (EAFE) Index. EAFE is one of the most used indexes of non-US

stocks.

True

False