Java Python Advanced Portfolio Management Final Exam
The first 20 questions are TRUE/FALSE. Mark A if the statement is true and B if the statement is false.
1. Positive M2 Measure means the managed portfolio outperforms the market
2. One of the limitations for historical VaR measure is that it depends on the assumptions of the parameter values
3. Centralized risk governance allows risks to be managed by departments that are most familiar with this specific risk
4. One of the common features of alternative investments is difficult to set up performance benchmarks
5. One of the reasons that hedge fund benchmark is unreliable is that most databases are self-reported.
6. REITS are preferred to direct ownership of real estate when investors pursue more control of their investments
7. Distressed debt arbitrage works because debt has higher seniority than equity
8. Collateral return is negative if the futures price on commodity is less than the spot price
9. Immunized investment portfolio value does not change with interest rate.
10. The covered interest rate parity implies the forward exchange rate is the ratio of domestic interest returns and foreign interest returns
11. Asset liability management approach is preferred when investors are risk averse
12. Tactical asset allocation (TAA) is active management strategy at security level
13. Resampled efficient frontier optimization works better than the original mean-variance optimization approach because it is more stable over time
14. Situational profiling considers the current status of human sentiments to understand the risk tolerance of the investors
15. Upward sloping term structure (contango) usually leads to profit to investors buying commodity ETFs.
16. Angel investors are usually the first accredited investors at seed stage to provide fundings to startups.
17. Investment objectives are boundaries that investors place on their choice of investment assets.
18. Convexity risk is considered when duration of a bond changes with interest rate.
19. One difference between the Keogh plans and the 401K plan is that Keogh plan is taxable before funds are withdrawn.
20. Convenience yield refers to the inherent rights of commodity holders to take actions on the commodities.
The next 25 questions are MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question. Mark your answer on the Scantron sheet.
21. Which of the following usually has the highest liquidity constraint?
a. Endowment funds
b. banks
c. property and casualty insurance companies
d. mutual funds
e. life insurance companies
22. The desirable components of an Investment Policy Statement for individual investors can be divided into
a. scope and purpose, governance, risk management, and risk and return objectives
b. scope and purpose, governance, investment strategy, return and risk objectives.
c. responsibility, governance, risk management and risk and return objectives
d. scope and purpose, constraints, risk management, return and risk objectives.
e. scope and purpose, governance, risk management, and feedback.
23. Which of the following should not be considered as unique investor circumstances?
a. A Muslim investor refuses to put any investment allocations on gambling industry
b. Experienced mechanist working for BP avoids investment concentration in the oil industry
c. No allocation in the tobacco industry for a cancer association endowment fund
d. Shorting Japanese government bond after the assassination of Shinzo Abe.
e. Buying tax-exempt bond to avoid high income tax for a mid-career professional
24. Performance evaluation of hedge funds is complicated by
A. leverage calculations.
B. survivorship bias.
C. unreliable market valuations of infrequently-traded assets.
D. Stale prices may distort correlation measures.
E. All of the options are correct.
25. Assume a university ABC endowment fund has a spending rate of 5% per year. This amount is committed to the budgetary support of the college for the coming year. At the end of the prior year the market value of the ABS endowment’s assets is $80 million. In addition, the ABC endowment has committed to contribute $2 million in the coming year to the construction of a new student dormitory and the planners expect to receive contribution or gifts of $800,000 over the coming year. What is the anticipated liquidity requirement of the ABC endowment for the coming year?
a. $4,000,000.
b. $4,200,000
c. $1,200,000
d. $2,200,000
e. $2,800,000
26. Which of the statements below is incorrect regarding the difference between Strategic Asset Allocation (SAA) and Tactical Asset Allocation (TAA)?
a. An SAA without TAA will not be able to achieve return objectives if the portfolio manager does not ensure a pre-defined minimum level of diversification.
b. TAA can produce higher returns over the SAA returns IF the portfolio manager has the ability to forecast future market performance with relative certainty.
c. SAA is an allocation for the long term while TAA is an allocation for the forecastable future (short term).
d. TAA allows for taking controlled additional risk over the SAA by ensuring all assets remain within the minimum and maximum ranges.
e. SAA is only relevant at the asset class level, while TAA would allocate sub-assets within each asset class.
27. Which of the following is not true?
a. Correlations between asset classes increase in bear markets
b. Correlations between asset classes enhance portfolio diversification
c. Correlations between asset classes have been increasing over the long term
d. Correlations between asset classes makes asset allocations harder
e. Correlations between risky assets and safe assets are generally inverse
28. Which of the following is considered as an Asset-Liability management (ALM) approach?
a. Mean-variance optimization
b. Corner Portfolios
c. Resampled efficient frontier
d. Balanced portfolio approach
e. Immunization strategy
29. Which of the following investment recommendation is the most appropriate?
a. Recommend REITs to a property insurance company
b. Recommend a dividend-paying stock to a bank
c. Recommend distressed security to a young investor
d. Recommend a tax-exempt bond to an endowment fund
e. Recommend a high-yield corporate bond to a mid-career professional
30. Supposed the following table is provided for the portfolio return. Calculate the portfolio’s tracking risk for the three-period time frame?
| Period | Portfolio return | Benchmark return |
| 1 | 15% | 12% |
| 2 | 7% | 6% |
| 3 | 3% | 6% |
a. 4.88%
b. 3.06%
c. 3.53%
d. 2.37%
e. 1.25%
31. Assume the Dollar/Swiss Franc exchange rate is 1 at current and the annual domestic interest rate in Switzerland is 5%. The annual domestic interest rate in the U.S. is 3%. What is the forward exchange rate of Dollar/Swiss Franc one year from now?
a. 1.1
b. 1
c. 0.98
d. 1.2
e. 0.9
32. An investor has a 5% annual coupon bond matures in three years with par value of $1000 as the liability. If the investor’s investment horizon is 2 years, which of the following immunization strategy would work to hedge against the interest rate risk? Assume the yield curve is 5% flat.
a. Purchase a 2-year zero-coupon bond with face value of $1103.
b. Purchase a 3-year zero-coupon bond with face value of $1000.
c. Purchase a 3-year zero-coupon bond with face value of $1331.
d. Purchase a 2-year zero-coupon bond with face value of $1200.
e. Purchase a 1-year zero-coupon bond with face value of $1103.
33. Which of the following is not a money market security?
a. Banker’s acceptance
b. Mortgage-backed securities
c. Fed funds
d. Repo agreement
e. Commercial papers
34. Managing factor mismatch is a bond investment strategy that_____________?
a. Invest in a sample of bonds to expose to the same risk factors underlying the index portfolio
b. Purchase the portfolio of assets the same as in the index portfolio
c. Individually select bond securities regardless of the index portfolio
d. Purchase corporate bonds from a sector where the index portfolio does not invest in
e. Starting from the index portfolio but tilt the portfolio in favor of some risk factors
35. Which of the following is not correct regarding the risk considerations of a bond portfolio?
a. Prepayment risk is bad because it makes the loan term effectively shorter
b. Currency risk is highly correlated with interest rate risk
c. Credit risk is the portfolio exposure to the default behavior. of the counterparty
d. Optionality risk refers to the value change of fixed-income securities when their embedded options have been exercised
e. Convexity risk happens when bond duration also changes with the interest rate
36. Suppose XYZ portfolio manager entered a futures contract of crude oil when the futures prices of Sep 2020 expiry was $80. The spot price at that time was $69. At the end of the month, XYZ decided to roll over the futures contract to October but at that time the spot price was trading at $69 and the futures price was trading at $82. What is the roll return in this case and is the market in Contango or Backwardation?
a. 2.5%, Backwardation
b. 3.2%, Backwardation
c. (3.2%), Contango
d. 3.2%, Contango
e. (2.5%), Contango
37. Suppose that you manage a $2 million hedge fund portfolio pays no dividend with a beta of 1.3 and alpha of 3% per month. Also assume the risk-free rate is 0.5% and the market return is 11%. Which of the following is closest to a market neutral investment strategy?
a. Holding another investment portfolio with beta of -1.3
b. Holding another investment portfolio with alpha of -3%
c. Holding another investment portfolio with return of 11%
d. Holding another investment portfolio consisting of only risk-free assets
e. None of the above
38. _______ usually refer to accredited investors providing startups capital at early stages?
a. Buyout fund
b. Angel investors
c. Strategic partners
d. Government fund
e. Vulture fund
39. A real estate investment trust (REITs) has all the benefits over direct investment in real estate except:
a. Direct real estate investment is less liquid than investments in REITs
b. REITs could invest in both direct real estate as well as real estate company ownerships
c. REITs allows investors to earn dividends from real estate investments avoiding the high maintenance costs of owning the real estate.
d. REITs provide better diversification for retail investors because they are less correlated with equities
e. REITs pass through most of its taxable income to their investors
40. Suppose we have a stock portfolio with two equal weighted stocks with expected weekly return of 10% and 12%. The standard deviation of both stocks are 5%. The correlation between the two stocks is 0.5. The portfolio value is $100 million. What is the 5% monthly dollar VaR of the portfolio? (Hint: The critical value for 5% percentile of a normal distribution is 1.65).
a. $10 million
b. $22 million
c. $33 million
d. $45 million
e. $8 million
41. Suppose we have a stock portfolio with two equal weighted stocks with expected weekly return of 10% and 12% respectively. The standard deviation of both stocks are 5%. The correlation between the two stocks is 0.5. The portfolio value is $100 million. What is the 5% monthly dollar incremental VaR of the second stock? (Hint: The critical value for 5% percentile of a normal distribution is 1.65).
a. $2 million
b. $7 million
c. $5 million
d. $1 million
e. $6 million
42. Which of the following is not a common market risk measure?
a. Beta
b. Sigma
c. VaR
d. Delta
e. Agency ratings
43. Which of the following is true regarding Sortino ratio?
a. A portfolio with low Sortino Ratio is preferred
b. A portfolio with high Sortino Ratio is preferred
c. Sortino ratio is the same as the SF criteria
d. Higher Sharpe ratio implies higher Sortino ratio
e. Higher RoMAD implies higher Sortino ratio
44. Assume the managed portfolio expected return is 20% and standard deviation is 15%. The market portfolio has an expected return of 40% with standard deviation of 30%. The t-bill rate is 5%. What is the M2 measure of this portfolio?
a. -5%
b. -2%
c. -9%
d. 2%
e. 5%
45. Which of the following has the best return per unit of market risk?
a. Fund A: Sharpe Ratio = 1.09, Treynor Ratio = 10.57, Beta = 1.02, Jensen’s Alpha = 0.08
b. Fund B: Sharpe Ratio = 1.18, Treynor Ratio = 12.57, Beta = 1.05, Jensen’s Alpha = 0.05
c. Fund C: Sharpe Ratio = 1.02, Treynor Ratio = 14.57, Beta = 2.02, Jensen’s Alpha = 0.06
d. Fund D: Sharpe Ratio = 1.07, Treynor Ratio = 16.57, Beta = 1.03, Jensen’s Alpha = 0.03
e. Fund E: Sharpe Ratio = 2.05, Treynor Ratio = 11.57, Beta = 0.95, Jensen’s Alpha = 0
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