TRUE OR FALSE? Only the answer, without explanation. Need in 30 minutes.

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

Question 6

Equity Style Analysis: Equity style analysis was introduced by William Sharpe and finds its

visualization in the Morningstar Boxes. Regressing fund returns on style benchmarks would

enable the analyst to measure the funds implicit allocation to that style.

True

False

Question 7

Binomial and Black Scholes Option Pricing Model: The multi period approach to option pricing

is labeled the binomial model and with the use of continuously compounded mathematics, the

Black Scholes pricing formula can be derived. The Black Scholes model assumes a constant

volatility over the life of the option.

True

False

Question 8

Venture Capital Business Model: The successful venture capital portfolio model hinges on the

ability to find a home run, thereby generating a return that offsets the losses and the breakeven

positions. Roughly half of the portfolio positions are assumed to eventually fail.

True

False

Question 9

Long or Short Futures: The trader taking the long position commits to buying the commodity on

the delivery date while the trader taking the short position commits to selling.

True

False

Question 10

Futures Hedge Ratio: In general, the hedge ratio is the number of futures contracts one would

need to offset the risk of a particular unprotected position. Futures contracts could be used to

hedge interest rates, stock market indices, currency or commodity risk.

True

False

Question 11

Earning Quality (EQ): One of the best indicators of EQ is a high percentage of the earnings,

accrual accounting defined, covered (or reflected) by working capital.

True

False

Question 12

Option Basics: A put option is the right to sell an asset at an agreed upon exercise price. A call

option is the right to buy an asset at a given strike price. The difference between the asset price

and the exercise price is used to determine whether the option is in the money, at the money, or

out of the money.

True

False

Question 13

Protective Put and Covered Call: A protective put is a form of insurance whereby a stock is

overlaid with a put option that is purchased. A covered call is the purchase of a share of stock

with a simultaneous sale of a call option on that stock. A protective put is an

example of the use of options in risk management.

True

False

Question 14

Price Metrics: The P/E ratio is a useful measure of the markets assessment of the firms growth

opportunities. Many analysts form their estimates of a stocks value by multiplying their forecast

of next years earnings per share by a predicted P/E multiple. The P/B ratio is a useful measure

of the markets assessment of the firms return on equity (ROE) opportunities. The P/S ratio is a

useful measure of the markets assessment of the firms net margins and the expectations thereof.

True

False

Question 15

FCFF: The Free Cash Flow to the Firm (FCFF) is oftentimes employed by private equity firms to

measure available pretax cash flows from operations minus necessary working capital and

essential capital spending needs. It is discounted via WACC. For equity valuation, the FCFF is

discounted by the WACC to arrive at a present value (PV), from which debt is subtracted to

arrive at an equity value.

True

False

Question 16

Swaps: Swaps in essence, call for the exchange of a series of cash flows. For example, an interest

rate swap may call for the exchange of a series of fixed cash flows for a series of floating rate

cash flows.

True

False

Question 17

Implied Volatility: The implied volatility of an option is the standard deviation of stock returns

consistent with an options market price or stated differently, the volatility level for the stock that

is embedded in its price. The measure of volatility of the S&P500 is known commonly as the

open interest. High levels of open interest correspond to perceived risky markets while low levels of open interest

correspond to less risk markets.

True

False

Question 18

Real Assets: Real assets (as an alternative asset class) include timberland, farmland, REITs, direct

real estate investment, and infrastructure. Its particularly important characteristic is its inflation

sensitivity or more specifically, its ability to act as an inflation hedge.

True

False

Question 19

Home Country Bias (HCB). HCB refers to the common tendency for investors to overweight

foreign equities in their portfolio of risky assets.

True

False

Question 20

Attribution: Common attribution procedures partition performance improvements to asset

allocation, sector selection, and security selection. Performance is assessed by calculating

departure of portfolio composition from a benchmark portfolio.

True

False