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Chinese_validation_1
一个全球股权经理负责从一个全球性的股票市场中选择股票,其业绩将通过将他的收益率与MSCI国际债券市场的收益率作比较来作出评估,而他可以自由地按他认为合适的比例持有来自世界各 国的股票。在某一月内其投资结果如下:<image_1>
计算此期间内该经理所有决策的总价值。
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经理人收益率=12.50% 基准(标准)=13.80% 增加的价值=-1.30%
经理人收益率=0.30×20+0.10×15+0.40×10+0.20×5=12.50% 基准(标准)=0.15×12+0.30×15+0.45×14+0.10×12=13.80% 增加的价值=-1.30%
easy
open question
portfolio management
chinese
67
1
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Chinese_validation_2
一个全球股权经理负责从一个全球性的股票市场中选择股票,其业绩将通过将他的收益率与MSCI国际债券市场的收益率作比较来作出评估,而他可以自由地按他认为合适的比例持有来自世界各 国的股票。在某一月内其投资结果如下:<image_1>
计算他的国家配置决策增加或减少的价值。
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-0.7
medium
open question
portfolio management
chinese
67
2
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Chinese_validation_3
一个全球股权经理负责从一个全球性的股票市场中选择股票,其业绩将通过将他的收益率与MSCI国际债券市场的收益率作比较来作出评估,而他可以自由地按他认为合适的比例持有来自世界各 国的股票。在某一月内其投资结果如下:<image_1>
计算他在国家内的股票选择方面增加的价值
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table
-0.6
medium
open question
portfolio management
chinese
67
3
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Chinese_validation_4
一大型养老基金的行政官员想评价四个投资经理的业绩。每个经理都是只投资于美国的普通股市场。假定最近5年来,标准普尔500指数包括红利的平均年度收益率为14%,而政府国库券的平均名义收益率为8%。下表显示了对每种资产组合的风险与收益进行测度的情况:<image_1>
对于资产组合P的特雷纳业绩测度为
['0.082','0.099','0.155','0.450']
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A
特雷纳比率 = (17-8 ) /1.1 = 8.2
easy
multiple-choice
portfolio management
chinese
68
1
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Chinese_validation_5
一大型养老基金的行政官员想评价四个投资经理的业绩。每个经理都是只投资于美国的普通股市场。假定最近5年来,标准普尔500指数包括红利的平均年度收益率为14%,而政府国库券的平均名义收益率为8%。下表显示了对每种资产组合的风险与收益进行测度的情况:<image_1>
对于资产组合P的夏普业绩测度为
['0.076','0.126','0.336','0.888']
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D
夏普比率 = (24 - 8 ) / 18 = 0.888
easy
multiple-choice
portfolio management
chinese
68
2
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Chinese_validation_6
假定用100000美元投资,与<image_1>的无风险短期国库券相比,投资于股票的预期风险溢价是多 少?
['13000美元','15000美元','18000美元', '20000美元']
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A
medium
multiple-choice
portfolio management
chinese
16
1
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Chinese_validation_7
经济状况的概率分布与某一特定股票在每种状况下的收益的概率分布如下表所示<image_1>
经济状况为中等且股票业绩很差的概率为
['0.06','0.15','0.50','0.80']
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B
中等经济状况的概率为0.50,或50%。在中等经济状况下,股票有30%的时间表现出较差的业 绩。因此,股票业绩表现很差且经济状况中等的概率为 0.30×0.50 = 0.15 = 15%。答案( b )正确。
easy
multiple-choice
equity
chinese
10
1
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Chinese_validation_8
使用下列信息回答: <image_1> 标准普尔现金 = 930 标准普尔期货 = 950
为了防止标准普尔指数变动50点,需要多少标准普尔500指数期货合约才能对由三种股票各5000股(X、Y、Z)的资产组合进行套期保值?
['5', '3', '4', '2', '上述各项均不准确']
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D
指数的变动 = + 5 0 点,或 5 . 3 8% ; 投资组合的初值=450 000美元; 投资组合的贝塔值 = 1 . 0 3 3 ; 投资组合的价值变动 = 5 . 5 6 %,或 25 001.67 美元 /12 500 美元 = 2份合约
hard
multiple-choice
portfolio management
chinese
107
1
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Chinese_validation_9
使用下列信息回答: <image_1> 标准普尔现金 = 930 标准普尔期货 = 950
现金标准普尔500指数下跌至900点将表明由三种股票各5000股组成的投资组合的价值将减少多少?
['42870美元', '22500美元', '23243美元', '41500美元', '上述各项均不准确']
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C
( 9 0 0 - 9 3 0 ) / 9 3 0 =-0.033 3 × 1 . 0 3 3 =- 0.0344 3 ×450 000 美元 =15495美元。
medium
multiple-choice
portfolio management
chinese
107
2
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Chinese_validation_10
使用下列信息回答: <image_1> 标准普尔现金 = 930 标准普尔期货 = 950
标准普尔500指数期货下跌至925点,将导致每份标准普尔500期货合约多头有?
['12250美元的损失', '12250美元的利润', '6250美元的损失', '6250美元的利润', '既无损失也无利润']
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C
( -9 5 0 + 9 2 5 ) ×2 5 0 美元 = -6250美元。
medium
multiple-choice
portfolio management
chinese
107
3
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Chinese_validation_11
假定投资者认为沃尔马特公司的股票在今后6个月会大幅度贬值。股票现价S为100美元。6个0月看涨期权执行价格X为100美元,期权价格C为10美元。用10000美元投资,投资者有以下三种选择。a.投资全部10000美元购买股票100股。b.投资全部10000美元购买期权1000份(10份合约)。c.购买100份期权(1份合约)价值1000美元,其余9000美元投资于货币市场基金,6个月付息4%(每年8%)
6个月后股票为下列四种价格时,每种投资选择的收益率各是多少?总结如下表<image_1>所示
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table
全部股票: 80美元为-20% 100美元为0% 110美元为10% 120美元为20% 全部期权: 80美元为-100% 100美元为-100% 110美元为0% 120美元为100% 国库券+期权 80美元为-6.4% 100美元为-6.4% 110美元为3.6% 120美元为13.6%
medium
open question
derivatives
chinese
56
1
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Chinese_validation_12
考虑下表中的三种股票。Pt表示t时刻的价格,Qt表示t时刻的在外流通股,股票C在最后一期时1股拆为2股。<image_1>
计算第一期 (t =0 到t = 1 ) 三种股票价格加权指数的收益率
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0.0417
t= 0时的指数为(90+50+100)/3=80 t= 1时的指数为250/3=83.333,收益率为4.167%
easy
open question
alternative investments
chinese
2
1
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Chinese_validation_13
考虑下表中的三种股票。Pt表示t时刻的价格,Qt表示t时刻的在外流通股,股票C在最后一期时1股拆为2股。<image_1>
对第二年的价格加权指数,针对发生拆股的股票应如何设置除数?
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table
我们需要设定除数d,使得83.33=(95+45+55) /d,即d= 2.34
在不存在拆股的情况下,股票C售价110,指数为250/3=83.33。在拆股后,股票C售价55。因此,我们需要设定除数d,使得83.33=(95+45+55) /d,即d= 2.34
hard
open question
equity
chinese
2
2
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Chinese_validation_14
考虑下表中的三种股票。Pt表示t时刻的价格,Qt表示t时刻的在外流通股,股票C在最后一期时1股拆为2股。<image_1>
计算第二期的收益率 (t = 1到 t= 2 )
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table
收益为0
指数保持不变,也应该不变,因为每支股票各自的收益率都等于0
medium
open question
equity
chinese
2
3
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Chinese_validation_15
考察下列图形<image_1> ,该图表示内幕人员买卖公司股票的日期前后的累积非正常收益。
投资者怎样解释这一图形?我们怎样得到此类在事件发生日前后的累计的异常收益?
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chart
在购买股票前的负的异常收益(在C A R上下移)表明,内幕人员推迟了他们的购买直至坏消息公布给公众。这是内幕信息是有价值的一个证明。在购买后的正的异常收益则表明内幕人员在预期到好消息时买入。对内幕人员抛售的分析是与上面的分析对称的
hard
open question
equity
chinese
34
1
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Chinese_validation_16
T公司股票一年之后的价格有如下的概率分布<image_1>
如果你以55美元买入股票,并且一年可以得到4美元的红利,那么T公司股票的预期持有期收益率是多少?
['7.27%','18.18%','10.91%','16.36%','9.09%']
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B
E(P)=0.25×50+0.4×60+0.35×70=61美元 E(HPR)=(61-55+4)/55=18.18%
hard
multiple-choice
equity
chinese
80
1
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Chinese_validation_17
<image_1> U= E( r )-( A / 2 ) 2 , A = 4.0
根据上面的效用函数,你将选择下列哪项投资?
['1','2','3','4']
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C
U(c)=0.21-4/2(0.16)2=15.88(可选择的最高效用)
easy
multiple-choice
equity
chinese
81
1
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Chinese_validation_18
<image_1> U= E( r )-( A / 2 ) 2 , A = 4.0
如果你是风险中性的,你将选择哪项投资?
['1','2','3','4']
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table
D
如果你是风险中性的,你唯一关心的是收益,不是风险
easy
multiple-choice
equity
chinese
81
2
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Chinese_validation_19
<image_1> U= E( r )-( A / 2 ) 2 , A = 4.0
效用方程中的变量 A 代表什么?
['投资者的收益要求','投资者的风险厌恶程度','资产组合的确定等价率','资产组合要求的最小效用','以上各项均不准确']
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B
A是一个度量投资者风险忍受程度的变量。A的值越大,投资者风险厌恶的程度越高
medium
multiple-choice
equity
chinese
81
3
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English_validation_1
none
The following price quotations on WFM were taken from the Wall Street Journal. <image_1> The premium on one WFM February 90 call contract is
['$4.1250', '$418.00', '$412.50', '$158.00']
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table
C
41/8 = $4.125 * 100 = $412.50. Price quotations are per share; however, option contracts are standardized for 100 shares of the underlying stock; thus, the quoted premiums must be multiplied by 100.
easy
multiple-choice
derivatives
english
128
1
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English_validation_2
Consider the following abbreviated financial statements for Weston Enterprises: <image_1> <image_2>
What is owners’ equity for 2014?
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$2,567
Total assets 2014 = $964 + 4,384 = $5,348 Total liabilities 2014 = $401 + 2,380 = $2,781 Owners’ equity 2014 = $5,348 – 2,781 = $2,567
easy
open question
corporate finance
english
379
1
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English_validation_3
Consider the following abbreviated financial statements for Weston Enterprises: <image_1> <image_2>
What is owners’ equity for 2015?
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$3,122
Total assets 2015 = $1,176 + 5,104 = $6,280 Total liabilities 2015 = $445 + 2,713 = $3,158 Owners’ equity 2015 = $6,280 – 3,158 = $3,122
easy
open question
corporate finance
english
379
2
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English_validation_4
Consider the following abbreviated financial statements for Weston Enterprises: <image_1> <image_2>
What is the change in net working capital for 2015?
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$168
NWC 2014 = CA14 – CL14 = $964 – 401 = $563 NWC 2015 = CA15 – CL15 = $1,176 – 445 = $731 Change in NWC = NWC15 – NWC14 = $731 – 563 = $168
easy
open question
corporate finance
english
379
3
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English_validation_5
Consider the following abbreviated financial statements for Weston Enterprises: <image_1> <image_2>
In 2015, Weston Enterprises purchased $2,350 in new fixed assets. How much in fixed assets did Weston Enterprises sell?
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$440
We can calculate net capital spending as: Net capital spending = Net fixed assets 2015 – Net fixed assets 2014 + Depreciation Net capital spending = $5,104 – 4,384 + 1,190 Net capital spending = $1,910 So, the company had a net capital spending cash flow of $1,910. We also know that net capital spending is: Net capital spending = Fixed assets bought – Fixed assets sold $1,910 = $2,350 – Fixed assets sold Fixed assets sold = $2,350 – 1,910 Fixed assets sold = $440
easy
open question
corporate finance
english
379
4
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English_validation_6
Consider the following abbreviated financial statements for Weston Enterprises: <image_1> <image_2>
In 2015, Weston Enterprises purchased $2,350 in new fixed assets. What is the cash flow from assets for the year? (The tax rate is 40 percent.)
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$3,814
To calculate the cash flow from assets, we must first calculate the operating cash flow. The operating cash flow is calculated as follows (you can also prepare a traditional income statement): EBIT = Sales – Costs – Depreciation EBIT = $14,740 – 5,932 – 1,190 EBIT = $7,618 EBT = EBIT – Interest EBT = $7,618 – 328 EBT = $7,290 Taxes = EBT × .40 Taxes = $7,290 × .40 Taxes = $2,916 OCF = EBIT + Depreciation – Taxes OCF = $7,618 + 1,190 – 2,916 OCF = $5,892 Cash flow from assets = OCF – Change in NWC – Net capital spending Cash flow from assets = $5,892 – 168 – 1,910 Cash flow from assets = $3,814
easy
open question
corporate finance
english
379
5
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English_validation_7
Consider the following abbreviated financial statements for Weston Enterprises: <image_1> <image_2>
During 2015, Weston Enterprises raised $455 in new long-term debt. How much long-term debt must Weston Enterprises have paid off during the year?
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$122
Net new borrowing = LTD15 – LTD14 Net new borrowing = $2,713 – 2,380 Net new borrowing = $333 Net new borrowing = $333 = Debt issued – Debt retired Debt retired = $455 – 333 Debt retired = $122
easy
open question
corporate finance
english
379
6
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English_validation_8
Consider the following abbreviated financial statements for Weston Enterprises: <image_1> <image_2>
During 2015, Weston Enterprises raised $455 in new long-term debt. What is the cash flow to creditors?
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–$5
Cash flow to creditors = Interest – Net new LTD Cash flow to creditors = $328 – 333 Cash flow to creditors = –$5
easy
open question
corporate finance
english
379
7
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English_validation_9
none
If you invested in an equally-weighted portfolio of stocks B and C, your portfolio return would be _____________ if economic growth was weak. There are three stocks: A, B, and C. You can either invest in these stocks or short sell them. There are three possible states of nature for economic growth in the upcoming year (each equally likely to occur); economic growth may be strong, moderate, or weak. The returns for the upcoming year on stocks A, B, and C for each of these states of nature are given below: <image_1>
['-2.5%', '0.5%', '3.0%', '11.0%']
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table
D
0.5(0%) + 0.5(22%) = 11%.
easy
multiple-choice
portfolio management
english
46
1
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English_validation_10
Gregory Dodson, is an investment consultant who advises individual and institutional clients on their equity portfolios. During a typical work week, he is called upon to evaluate a variety of situations and provide expert advice. This week, he is meeting with three clients. Dodson's first client meeting is with the Magnolia Foundation, a small not-for-profit organization. Magnolia currently uses three long-only portfolio managers for its equity investments. Details of those investments, including expected performance relative to Magnolia's equity benchmark, the S&P 500 Index, are shown in Exhibit 1. <image_1> Magnolia's goal for its total equity investment is expected alpha greater than 0.40% and expected tracking error less than 1.00%. Dodson's second client meeting is with Sarah Tan, a wealthy individual who is actively involved in managing her investments. Tan wants to add a $100 million allocation to US midcap stocks, represented by the US S&P 400 Midcap Index, to her long-term asset allocation. No investment has been made to meet this new allocation. Tan has not found any manager capable of generating positive alpha in US midcap stocks. She has, however, identified a long-only portfolio manager of Canadian equities whom she believes will produce positive alpha. This manager uses the S&P/TSX (Toronto Stock Exchange) Index as a benchmark. Tan wants to create a portable alpha strategy that will earn the alpha of the Canadian equity portfolio and meet the new benchmark allocation to US midcap stocks. She asks Dodson for advice to establish this strategy. Tan provides some information about the security selection methods used by the Canadian equity portfolio manager. The Canadian manager uses a proprietary discounted cash flow model to analyze all stocks in the S&P/TSX Index and purchases those with market prices that are the most below the intrinsic value estimated by his model, regardless of their price-to-earnings ratios (P/Es). Dodson's third client meeting is with the chief investment officer (CIO) of Susquehanna Industries' pension fund. The fund needs to establish a $50 million portfolio that replicates the Russell 2000 Index, an index of small-cap US equities. The CIO's goal is to minimize trading costs. He asks Dodson to suggest an investment approach that will meet this goal. The CIO also outlines his portfolio managers' sell discipline with respect to the pension fund's actively managed value and growth equity portfolios. Currently, the managers monitor the P/E of each stock held. A value stock is sold when its P/E rises to its 10-year historical average. A growth stock is sold when its P/E falls to its 10-year historical average.
The Magnolia Foundation's approach to portfolio construction is best described as:
['using a completeness fund.', 'a portable alpha strategy.', 'a core–satellite structure.']
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table
C
Answer = C. A large portion of the portfolio is invested with a manager that is expected to match the portfolio's benchmark (zero alpha, zero tracking error), forming the core of the portfolio.
easy
multiple-choice
equity
english
164
1
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English_validation_11
Gregory Dodson, is an investment consultant who advises individual and institutional clients on their equity portfolios. During a typical work week, he is called upon to evaluate a variety of situations and provide expert advice. This week, he is meeting with three clients. Dodson's first client meeting is with the Magnolia Foundation, a small not-for-profit organization. Magnolia currently uses three long-only portfolio managers for its equity investments. Details of those investments, including expected performance relative to Magnolia's equity benchmark, the S&P 500 Index, are shown in Exhibit 1. <image_1> Magnolia's goal for its total equity investment is expected alpha greater than 0.40% and expected tracking error less than 1.00%. Dodson's second client meeting is with Sarah Tan, a wealthy individual who is actively involved in managing her investments. Tan wants to add a $100 million allocation to US midcap stocks, represented by the US S&P 400 Midcap Index, to her long-term asset allocation. No investment has been made to meet this new allocation. Tan has not found any manager capable of generating positive alpha in US midcap stocks. She has, however, identified a long-only portfolio manager of Canadian equities whom she believes will produce positive alpha. This manager uses the S&P/TSX (Toronto Stock Exchange) Index as a benchmark. Tan wants to create a portable alpha strategy that will earn the alpha of the Canadian equity portfolio and meet the new benchmark allocation to US midcap stocks. She asks Dodson for advice to establish this strategy. Tan provides some information about the security selection methods used by the Canadian equity portfolio manager. The Canadian manager uses a proprietary discounted cash flow model to analyze all stocks in the S&P/TSX Index and purchases those with market prices that are the most below the intrinsic value estimated by his model, regardless of their price-to-earnings ratios (P/Es). Dodson's third client meeting is with the chief investment officer (CIO) of Susquehanna Industries' pension fund. The fund needs to establish a $50 million portfolio that replicates the Russell 2000 Index, an index of small-cap US equities. The CIO's goal is to minimize trading costs. He asks Dodson to suggest an investment approach that will meet this goal. The CIO also outlines his portfolio managers' sell discipline with respect to the pension fund's actively managed value and growth equity portfolios. Currently, the managers monitor the P/E of each stock held. A value stock is sold when its P/E rises to its 10-year historical average. A growth stock is sold when its P/E falls to its 10-year historical average.
Do the Magnolia Foundation's current equity investments most likely meet its total equity investment return and risk goals?
['Yes', 'No, the expected alpha is too low', 'No, the expected tracking error is too high']
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table
A
Answer = A. <ans_image_1> which is less than 1.00%.
hard
multiple-choice
equity
english
164
2
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English_validation_12
Gregory Dodson, is an investment consultant who advises individual and institutional clients on their equity portfolios. During a typical work week, he is called upon to evaluate a variety of situations and provide expert advice. This week, he is meeting with three clients. Dodson's first client meeting is with the Magnolia Foundation, a small not-for-profit organization. Magnolia currently uses three long-only portfolio managers for its equity investments. Details of those investments, including expected performance relative to Magnolia's equity benchmark, the S&P 500 Index, are shown in Exhibit 1. <image_1> Magnolia's goal for its total equity investment is expected alpha greater than 0.40% and expected tracking error less than 1.00%. Dodson's second client meeting is with Sarah Tan, a wealthy individual who is actively involved in managing her investments. Tan wants to add a $100 million allocation to US midcap stocks, represented by the US S&P 400 Midcap Index, to her long-term asset allocation. No investment has been made to meet this new allocation. Tan has not found any manager capable of generating positive alpha in US midcap stocks. She has, however, identified a long-only portfolio manager of Canadian equities whom she believes will produce positive alpha. This manager uses the S&P/TSX (Toronto Stock Exchange) Index as a benchmark. Tan wants to create a portable alpha strategy that will earn the alpha of the Canadian equity portfolio and meet the new benchmark allocation to US midcap stocks. She asks Dodson for advice to establish this strategy. Tan provides some information about the security selection methods used by the Canadian equity portfolio manager. The Canadian manager uses a proprietary discounted cash flow model to analyze all stocks in the S&P/TSX Index and purchases those with market prices that are the most below the intrinsic value estimated by his model, regardless of their price-to-earnings ratios (P/Es). Dodson's third client meeting is with the chief investment officer (CIO) of Susquehanna Industries' pension fund. The fund needs to establish a $50 million portfolio that replicates the Russell 2000 Index, an index of small-cap US equities. The CIO's goal is to minimize trading costs. He asks Dodson to suggest an investment approach that will meet this goal. The CIO also outlines his portfolio managers' sell discipline with respect to the pension fund's actively managed value and growth equity portfolios. Currently, the managers monitor the P/E of each stock held. A value stock is sold when its P/E rises to its 10-year historical average. A growth stock is sold when its P/E falls to its 10-year historical average.
Which of the following combinations of futures positions would most likely be included in Dodson's advice to Tan regarding her intended portable alpha strategy
['Short position in S&P/TSX futures and long position in S&P 400 futures', 'Long position in S&P/TSX futures and short position in S&P 400 futures', 'Long position in S&P/TSX futures and long position in S&P 400 futures']
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table
A
Answer = A. The portfolio needs to shed exposure to the return of the S&P/TSX and gain exposure to the return of the S&P 400.
medium
multiple-choice
equity
english
164
3
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English_validation_13
Gregory Dodson, is an investment consultant who advises individual and institutional clients on their equity portfolios. During a typical work week, he is called upon to evaluate a variety of situations and provide expert advice. This week, he is meeting with three clients. Dodson's first client meeting is with the Magnolia Foundation, a small not-for-profit organization. Magnolia currently uses three long-only portfolio managers for its equity investments. Details of those investments, including expected performance relative to Magnolia's equity benchmark, the S&P 500 Index, are shown in Exhibit 1. <image_1> Magnolia's goal for its total equity investment is expected alpha greater than 0.40% and expected tracking error less than 1.00%. Dodson's second client meeting is with Sarah Tan, a wealthy individual who is actively involved in managing her investments. Tan wants to add a $100 million allocation to US midcap stocks, represented by the US S&P 400 Midcap Index, to her long-term asset allocation. No investment has been made to meet this new allocation. Tan has not found any manager capable of generating positive alpha in US midcap stocks. She has, however, identified a long-only portfolio manager of Canadian equities whom she believes will produce positive alpha. This manager uses the S&P/TSX (Toronto Stock Exchange) Index as a benchmark. Tan wants to create a portable alpha strategy that will earn the alpha of the Canadian equity portfolio and meet the new benchmark allocation to US midcap stocks. She asks Dodson for advice to establish this strategy. Tan provides some information about the security selection methods used by the Canadian equity portfolio manager. The Canadian manager uses a proprietary discounted cash flow model to analyze all stocks in the S&P/TSX Index and purchases those with market prices that are the most below the intrinsic value estimated by his model, regardless of their price-to-earnings ratios (P/Es). Dodson's third client meeting is with the chief investment officer (CIO) of Susquehanna Industries' pension fund. The fund needs to establish a $50 million portfolio that replicates the Russell 2000 Index, an index of small-cap US equities. The CIO's goal is to minimize trading costs. He asks Dodson to suggest an investment approach that will meet this goal. The CIO also outlines his portfolio managers' sell discipline with respect to the pension fund's actively managed value and growth equity portfolios. Currently, the managers monitor the P/E of each stock held. A value stock is sold when its P/E rises to its 10-year historical average. A growth stock is sold when its P/E falls to its 10-year historical average.
The style of the Canadian equities portfolio manager is most likely
['growth.', 'market oriented.', 'value.']
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table
B
Answer = B. The portfolio manager is willing to buy both value and growth stocks (regardless of P/E). He focuses solely on whether the stock is trading below its intrinsic value. This approach is also known as a blend or core style with reference to equity investing, which is an intermediate grouping for investment disciplines that cannot be clearly categorized as value or growth.
hard
multiple-choice
equity
english
164
4
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English_validation_14
Gregory Dodson, is an investment consultant who advises individual and institutional clients on their equity portfolios. During a typical work week, he is called upon to evaluate a variety of situations and provide expert advice. This week, he is meeting with three clients. Dodson's first client meeting is with the Magnolia Foundation, a small not-for-profit organization. Magnolia currently uses three long-only portfolio managers for its equity investments. Details of those investments, including expected performance relative to Magnolia's equity benchmark, the S&P 500 Index, are shown in Exhibit 1. <image_1> Magnolia's goal for its total equity investment is expected alpha greater than 0.40% and expected tracking error less than 1.00%. Dodson's second client meeting is with Sarah Tan, a wealthy individual who is actively involved in managing her investments. Tan wants to add a $100 million allocation to US midcap stocks, represented by the US S&P 400 Midcap Index, to her long-term asset allocation. No investment has been made to meet this new allocation. Tan has not found any manager capable of generating positive alpha in US midcap stocks. She has, however, identified a long-only portfolio manager of Canadian equities whom she believes will produce positive alpha. This manager uses the S&P/TSX (Toronto Stock Exchange) Index as a benchmark. Tan wants to create a portable alpha strategy that will earn the alpha of the Canadian equity portfolio and meet the new benchmark allocation to US midcap stocks. She asks Dodson for advice to establish this strategy. Tan provides some information about the security selection methods used by the Canadian equity portfolio manager. The Canadian manager uses a proprietary discounted cash flow model to analyze all stocks in the S&P/TSX Index and purchases those with market prices that are the most below the intrinsic value estimated by his model, regardless of their price-to-earnings ratios (P/Es). Dodson's third client meeting is with the chief investment officer (CIO) of Susquehanna Industries' pension fund. The fund needs to establish a $50 million portfolio that replicates the Russell 2000 Index, an index of small-cap US equities. The CIO's goal is to minimize trading costs. He asks Dodson to suggest an investment approach that will meet this goal. The CIO also outlines his portfolio managers' sell discipline with respect to the pension fund's actively managed value and growth equity portfolios. Currently, the managers monitor the P/E of each stock held. A value stock is sold when its P/E rises to its 10-year historical average. A growth stock is sold when its P/E falls to its 10-year historical average.
Given the manager's goal, what approach should Dodson most likely recommend for the $50 million portfolio of the Susquehanna Industries' pension fund?
['Full replication', 'Optimization', 'Stratified sampling']
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table
C
Answer = C. The portfolio contains small-cap stocks, which indicates an approach other than full replication, and the desire to minimize transaction costs indicates stratified sampling rather than optimization.
hard
multiple-choice
equity
english
164
5
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English_validation_15
none
Consider the following $1,000-par-value zero-coupon bonds: <image_1> The yield to maturity on bond A is
['10%', '11%', '12%', '14%', 'None of the options are correct']
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table
A
<ans_image_1>
easy
multiple-choice
fixed income
english
54
1
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English_validation_16
Three years ago, the Albright Investment Management Company (Albright) added four new funds—the Barboa Fund, the Caribou Fund, the DoGood Fund, and the Elmer Fund—to its existing fund offering. Albright’s new funds are described in Exhibit 1. <image_1> Hans Smith, an Albright portfolio manager, makes the following notes after examining these funds: Note 1 The fee on the Caribou Fund is a 15% share of any capital appreciation above a 7% threshold and the use of a high-water mark. Note 2 The DoGood Fund invests in Fleeker Corporation stock, which is rated high in the ESG space, and Fleeker’s pension fund has a significant investment in the DoGood Fund. This dynamic has the potential for a conflict of interest on the part of Fleeker Corporation but not for the DoGood Fund. Note 3 The DoGood Fund’s portfolio manager has written policies stating that the fund does not engage in shareholder activism. Therefore, the DoGood Fund may be a free-rider on the activism by these shareholders. Note 4 Of the four funds, the Elmer Fund is most likely to appeal to investors who want to minimize fees and believe that the market is efficient. Note 5 Adding investment-grade bonds to the Elmer Fund will decrease the portfolio’s short-term risk. Smith discusses means of enhancing income for the three funds with the junior analyst, Kolton Frey, including engaging in securities lending or writing covered calls. Frey tells Smith the following: Statement 1 Securities lending would increase income through reinvestment of the cash collateral but would require the fund to miss out on dividend income from the lent securities. Statement 2 Writing covered calls would generate income, but doing so would limit the upside share price appreciation for the underlying shares.
The Barboa Fund can be best described as a fund segmented by:
['size/style', 'geography', 'economic activity']
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table
C
C is correct. The Barboa Fund invests solely in the equity of companies in the oil production and transportation industries in many countries. The fund’s description is consistent with the production-oriented approach, which groups companies that manufacture similar products or use similar inputs in their manufacturing processes. A is incorrect because the fund description does not mention the firms’ size or style (i.e., value, growth, or blend). Size is typically measured by market capitalization and often categorized as large cap, mid-cap, or small cap. Style is typically classified as value, growth, or a blend of value and growth. In addition, style is often determined through a “scoring” system that incorporates multiple metrics or ratios, such as price-to- book ratios, price-to- earnings ratios, earnings growth, dividend yield, and book value growth. These metrics are then typically “scored” individually for each company, assigned certain weights, and then aggregated. B is incorrect because the fund is invested across many countries, which indicates that the fund is not segmented by geography. Segmentation by geography is typically based upon the stage of countries’ macroeconomic development and wealth. Common geographic categories are developed markets, emerging markets, and frontier markets.
hard
multiple-choice
equity
english
208
1
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English_validation_17
Three years ago, the Albright Investment Management Company (Albright) added four new funds—the Barboa Fund, the Caribou Fund, the DoGood Fund, and the Elmer Fund—to its existing fund offering. Albright’s new funds are described in Exhibit 1. <image_1> Hans Smith, an Albright portfolio manager, makes the following notes after examining these funds: Note 1 The fee on the Caribou Fund is a 15% share of any capital appreciation above a 7% threshold and the use of a high-water mark. Note 2 The DoGood Fund invests in Fleeker Corporation stock, which is rated high in the ESG space, and Fleeker’s pension fund has a significant investment in the DoGood Fund. This dynamic has the potential for a conflict of interest on the part of Fleeker Corporation but not for the DoGood Fund. Note 3 The DoGood Fund’s portfolio manager has written policies stating that the fund does not engage in shareholder activism. Therefore, the DoGood Fund may be a free-rider on the activism by these shareholders. Note 4 Of the four funds, the Elmer Fund is most likely to appeal to investors who want to minimize fees and believe that the market is efficient. Note 5 Adding investment-grade bonds to the Elmer Fund will decrease the portfolio’s short-term risk. Smith discusses means of enhancing income for the three funds with the junior analyst, Kolton Frey, including engaging in securities lending or writing covered calls. Frey tells Smith the following: Statement 1 Securities lending would increase income through reinvestment of the cash collateral but would require the fund to miss out on dividend income from the lent securities. Statement 2 Writing covered calls would generate income, but doing so would limit the upside share price appreciation for the underlying shares.
The Caribou Fund is most likely classified as a:
['large-cap value fund', 'small-cap value fund', 'small-cap growth fund']
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table
C
C is correct because the fund focuses on new companies that are generally classified as small firms, and the fund has a style classified as aggressive. A widely used approach to segment the equity universe incorporates two factors: size and style. Size is typically measured by market capitalization and often categorized as large cap, mid-cap, or small cap. Style is typically classified as value, growth, or a blend of value and growth.
easy
multiple-choice
equity
english
208
2
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English_validation_18
Three years ago, the Albright Investment Management Company (Albright) added four new funds—the Barboa Fund, the Caribou Fund, the DoGood Fund, and the Elmer Fund—to its existing fund offering. Albright’s new funds are described in Exhibit 1. <image_1> Hans Smith, an Albright portfolio manager, makes the following notes after examining these funds: Note 1 The fee on the Caribou Fund is a 15% share of any capital appreciation above a 7% threshold and the use of a high-water mark. Note 2 The DoGood Fund invests in Fleeker Corporation stock, which is rated high in the ESG space, and Fleeker’s pension fund has a significant investment in the DoGood Fund. This dynamic has the potential for a conflict of interest on the part of Fleeker Corporation but not for the DoGood Fund. Note 3 The DoGood Fund’s portfolio manager has written policies stating that the fund does not engage in shareholder activism. Therefore, the DoGood Fund may be a free-rider on the activism by these shareholders. Note 4 Of the four funds, the Elmer Fund is most likely to appeal to investors who want to minimize fees and believe that the market is efficient. Note 5 Adding investment-grade bonds to the Elmer Fund will decrease the portfolio’s short-term risk. Smith discusses means of enhancing income for the three funds with the junior analyst, Kolton Frey, including engaging in securities lending or writing covered calls. Frey tells Smith the following: Statement 1 Securities lending would increase income through reinvestment of the cash collateral but would require the fund to miss out on dividend income from the lent securities. Statement 2 Writing covered calls would generate income, but doing so would limit the upside share price appreciation for the underlying shares.
The DoGood Fund’s approach to the aerospace and defense industry is best described as:
['positive screening', 'negative screening', 'thematic investing']
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table
B
B is correct. The DoGood fund excludes companies based on specified activities (e.g., aerospace and defense), which is a process of negative screening. Negative or exclusionary screening refers to the practice of excluding certain sectors or companies that deviate from accepted standards in areas such as human rights or environmental concerns A is incorrect because positive screening attempts to identify companies or sectors that score most favorably regarding ESG-related risks and/or opportunities. The restrictions on investing indicates that a negative screen is established. C is incorrect because thematic investing focuses on investing in companies within a specific sector or following a specific theme, such as energy efficiency or climate change. The DoGood Fund’s investment universe includes all companies and sectors that have favorable ESG (no specific sectors or screens) but with specific exclusions.
hard
multiple-choice
equity
english
208
3
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English_validation_19
Three years ago, the Albright Investment Management Company (Albright) added four new funds—the Barboa Fund, the Caribou Fund, the DoGood Fund, and the Elmer Fund—to its existing fund offering. Albright’s new funds are described in Exhibit 1. <image_1> Hans Smith, an Albright portfolio manager, makes the following notes after examining these funds: Note 1 The fee on the Caribou Fund is a 15% share of any capital appreciation above a 7% threshold and the use of a high-water mark. Note 2 The DoGood Fund invests in Fleeker Corporation stock, which is rated high in the ESG space, and Fleeker’s pension fund has a significant investment in the DoGood Fund. This dynamic has the potential for a conflict of interest on the part of Fleeker Corporation but not for the DoGood Fund. Note 3 The DoGood Fund’s portfolio manager has written policies stating that the fund does not engage in shareholder activism. Therefore, the DoGood Fund may be a free-rider on the activism by these shareholders. Note 4 Of the four funds, the Elmer Fund is most likely to appeal to investors who want to minimize fees and believe that the market is efficient. Note 5 Adding investment-grade bonds to the Elmer Fund will decrease the portfolio’s short-term risk. Smith discusses means of enhancing income for the three funds with the junior analyst, Kolton Frey, including engaging in securities lending or writing covered calls. Frey tells Smith the following: Statement 1 Securities lending would increase income through reinvestment of the cash collateral but would require the fund to miss out on dividend income from the lent securities. Statement 2 Writing covered calls would generate income, but doing so would limit the upside share price appreciation for the underlying shares.
The Elmer fund’s management strategy is:
['active', 'passive', 'blended']
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B
B is correct. The fund is managed assuming that the market is efficient, and investments are selected to mimic an index. Compared with active strategies, passive strategies generally have lower turnover and generate a higher percentage of long-term gains. An index fund that replicates its benchmark can have minimal rebalancing.
easy
multiple-choice
equity
english
208
4
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English_validation_20
REDD Partners specializes in forecasting and consulting in particular sectors of the equity market. Minglu Li is an analyst for REDD and specializes in the consumer credit industry. Last year (2012), Li and her team gathered data to determine the expected return for the industry, shown in Exhibit 1. <image_1> After considering a number of approaches, Li and her team decided to use the bond-yield-plus-risk-premium method. The method had worked well in 2012, but a new assignment presented to Li’s team the previous week posed a new challenge. A new consumer credit mechanism was being tested on a small scale using a smartphone application to pay for items instead of the traditional credit card. The application had proved successful in the use of microloans in developing countries and was now being applied to a much broader consumer base. The new challenge for Li’s team is to develop a model for the expected return for these new consumer credit companies, which are called “smart credit” companiesbecause they combine the consumer credit industry and what had traditionally been considered the telecommunications industry. Although smart credit company returns data are sparse, a five-year monthly equally weighted index called the “Smart Credit Index” (SCI) was created from the existing companies’ returns data. The number of companies in the index at a given time varies because of firms failing and also merging over time. The SCI risk premium, equal to the SCI return minus the risk-free rate, denoted as SCIRP, is used as the dependent variable in a two-factor regression in which the independent variables are index returns minus the risk-free rate for the consumer credit industry (CCIRP) and the telecommunications industry (TELIRP). The regression results are in Exhibit 2. <image_2> Although volatility information is available from the SCI data and correspondingly for the SCIRP, Li’s team wants to determine the statistical relationship between the SCIRP and both the CCIRP and the TELIRP because forecasting the CCIRP and TELIRP is much less difficult than forecasting the SCIRP. After some discussion, the team believes that the volatility measure for the SCIRP data based on the volatility of CCIRP and TELIRP through the regression should be adjusted to incorporate a correlation coefficient of 0.25 between the CCIRP and TELIRP. Although the two index risk premiums were uncorrelated in the past and within the regression, Li’s team believes the two technologies will become more correlated in the future. Li’s team also examined survey data within the consumer credit and telecommunications industries over the same time period for which the actual data were collected. They found that projections in the surveys of the CCI and TELI tended to be more volatile than the actual data. However, Li’s team has decided not to make any adjustments because a definitive procedure could not be determined. Given the effect of short-term interest rates on consumer credit, Li’s team then decided to determine what the short-term interest rate is expected to be in the future. The central bank’s last official statement identified 2.5% as the appropriate rate, assuming no other factors. Li’s team then estimates potential factors that may make the central bank behave differently from the 2.5% rate in the statement, shown in Exhibit 3. <image_3> Based on Taylor’s rule, with an assumption of equal weights applied to forecast versus trend measures, the short-term rate is expected to increase from the current 1.23%, and the yield curve is expected to flatten. For further insight, Li decides to consult an in-house expert on central banking, Randy Tolliver. Tolliver states that a flat yield curve is consistent with tight monetary policies and tight fiscal policies.
Based on Exhibit 1 and the method used by Li's team, the expected return for the consumer credit industry in 2012 was closest to
['12.8%.', '12.2%.', '12.4%.']
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B
Answer = B. The bond-yield-plus-risk-premium method sets the expected return to the yield to maturity on a long-term government bond plus the equity risk premium (12.2% = 3.8% + 8.4%).
hard
multiple-choice
portfolio management
english
189
1
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English_validation_21
REDD Partners specializes in forecasting and consulting in particular sectors of the equity market. Minglu Li is an analyst for REDD and specializes in the consumer credit industry. Last year (2012), Li and her team gathered data to determine the expected return for the industry, shown in Exhibit 1. <image_1> After considering a number of approaches, Li and her team decided to use the bond-yield-plus-risk-premium method. The method had worked well in 2012, but a new assignment presented to Li’s team the previous week posed a new challenge. A new consumer credit mechanism was being tested on a small scale using a smartphone application to pay for items instead of the traditional credit card. The application had proved successful in the use of microloans in developing countries and was now being applied to a much broader consumer base. The new challenge for Li’s team is to develop a model for the expected return for these new consumer credit companies, which are called “smart credit” companiesbecause they combine the consumer credit industry and what had traditionally been considered the telecommunications industry. Although smart credit company returns data are sparse, a five-year monthly equally weighted index called the “Smart Credit Index” (SCI) was created from the existing companies’ returns data. The number of companies in the index at a given time varies because of firms failing and also merging over time. The SCI risk premium, equal to the SCI return minus the risk-free rate, denoted as SCIRP, is used as the dependent variable in a two-factor regression in which the independent variables are index returns minus the risk-free rate for the consumer credit industry (CCIRP) and the telecommunications industry (TELIRP). The regression results are in Exhibit 2. <image_2> Although volatility information is available from the SCI data and correspondingly for the SCIRP, Li’s team wants to determine the statistical relationship between the SCIRP and both the CCIRP and the TELIRP because forecasting the CCIRP and TELIRP is much less difficult than forecasting the SCIRP. After some discussion, the team believes that the volatility measure for the SCIRP data based on the volatility of CCIRP and TELIRP through the regression should be adjusted to incorporate a correlation coefficient of 0.25 between the CCIRP and TELIRP. Although the two index risk premiums were uncorrelated in the past and within the regression, Li’s team believes the two technologies will become more correlated in the future. Li’s team also examined survey data within the consumer credit and telecommunications industries over the same time period for which the actual data were collected. They found that projections in the surveys of the CCI and TELI tended to be more volatile than the actual data. However, Li’s team has decided not to make any adjustments because a definitive procedure could not be determined. Given the effect of short-term interest rates on consumer credit, Li’s team then decided to determine what the short-term interest rate is expected to be in the future. The central bank’s last official statement identified 2.5% as the appropriate rate, assuming no other factors. Li’s team then estimates potential factors that may make the central bank behave differently from the 2.5% rate in the statement, shown in Exhibit 3. <image_3> Based on Taylor’s rule, with an assumption of equal weights applied to forecast versus trend measures, the short-term rate is expected to increase from the current 1.23%, and the yield curve is expected to flatten. For further insight, Li decides to consult an in-house expert on central banking, Randy Tolliver. Tolliver states that a flat yield curve is consistent with tight monetary policies and tight fiscal policies.
The SCI data most likely exhibits which type of bias?
['Survivorship', 'Data-mining', 'Time-period']
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table
A
Answer = A. The SCI data is an index that is not composed of the same number of firms each period because of firm failures and combinations through time, which is indicative of a survivorship bias.
easy
multiple-choice
portfolio management
english
189
2
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English_validation_22
REDD Partners specializes in forecasting and consulting in particular sectors of the equity market. Minglu Li is an analyst for REDD and specializes in the consumer credit industry. Last year (2012), Li and her team gathered data to determine the expected return for the industry, shown in Exhibit 1. <image_1> After considering a number of approaches, Li and her team decided to use the bond-yield-plus-risk-premium method. The method had worked well in 2012, but a new assignment presented to Li’s team the previous week posed a new challenge. A new consumer credit mechanism was being tested on a small scale using a smartphone application to pay for items instead of the traditional credit card. The application had proved successful in the use of microloans in developing countries and was now being applied to a much broader consumer base. The new challenge for Li’s team is to develop a model for the expected return for these new consumer credit companies, which are called “smart credit” companiesbecause they combine the consumer credit industry and what had traditionally been considered the telecommunications industry. Although smart credit company returns data are sparse, a five-year monthly equally weighted index called the “Smart Credit Index” (SCI) was created from the existing companies’ returns data. The number of companies in the index at a given time varies because of firms failing and also merging over time. The SCI risk premium, equal to the SCI return minus the risk-free rate, denoted as SCIRP, is used as the dependent variable in a two-factor regression in which the independent variables are index returns minus the risk-free rate for the consumer credit industry (CCIRP) and the telecommunications industry (TELIRP). The regression results are in Exhibit 2. <image_2> Although volatility information is available from the SCI data and correspondingly for the SCIRP, Li’s team wants to determine the statistical relationship between the SCIRP and both the CCIRP and the TELIRP because forecasting the CCIRP and TELIRP is much less difficult than forecasting the SCIRP. After some discussion, the team believes that the volatility measure for the SCIRP data based on the volatility of CCIRP and TELIRP through the regression should be adjusted to incorporate a correlation coefficient of 0.25 between the CCIRP and TELIRP. Although the two index risk premiums were uncorrelated in the past and within the regression, Li’s team believes the two technologies will become more correlated in the future. Li’s team also examined survey data within the consumer credit and telecommunications industries over the same time period for which the actual data were collected. They found that projections in the surveys of the CCI and TELI tended to be more volatile than the actual data. However, Li’s team has decided not to make any adjustments because a definitive procedure could not be determined. Given the effect of short-term interest rates on consumer credit, Li’s team then decided to determine what the short-term interest rate is expected to be in the future. The central bank’s last official statement identified 2.5% as the appropriate rate, assuming no other factors. Li’s team then estimates potential factors that may make the central bank behave differently from the 2.5% rate in the statement, shown in Exhibit 3. <image_3> Based on Taylor’s rule, with an assumption of equal weights applied to forecast versus trend measures, the short-term rate is expected to increase from the current 1.23%, and the yield curve is expected to flatten. For further insight, Li decides to consult an in-house expert on central banking, Randy Tolliver. Tolliver states that a flat yield curve is consistent with tight monetary policies and tight fiscal policies.
Based on the correlation that Li's team believes to exist between the CCIRP and TELIRP, the new volatility for the SCIRP is closest to:
['56.4%.', '31.8%.', '49.1%.']
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A
Answer = A. <ans_image_1>
hard
multiple-choice
portfolio management
english
189
3
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English_validation_23
REDD Partners specializes in forecasting and consulting in particular sectors of the equity market. Minglu Li is an analyst for REDD and specializes in the consumer credit industry. Last year (2012), Li and her team gathered data to determine the expected return for the industry, shown in Exhibit 1. <image_1> After considering a number of approaches, Li and her team decided to use the bond-yield-plus-risk-premium method. The method had worked well in 2012, but a new assignment presented to Li’s team the previous week posed a new challenge. A new consumer credit mechanism was being tested on a small scale using a smartphone application to pay for items instead of the traditional credit card. The application had proved successful in the use of microloans in developing countries and was now being applied to a much broader consumer base. The new challenge for Li’s team is to develop a model for the expected return for these new consumer credit companies, which are called “smart credit” companiesbecause they combine the consumer credit industry and what had traditionally been considered the telecommunications industry. Although smart credit company returns data are sparse, a five-year monthly equally weighted index called the “Smart Credit Index” (SCI) was created from the existing companies’ returns data. The number of companies in the index at a given time varies because of firms failing and also merging over time. The SCI risk premium, equal to the SCI return minus the risk-free rate, denoted as SCIRP, is used as the dependent variable in a two-factor regression in which the independent variables are index returns minus the risk-free rate for the consumer credit industry (CCIRP) and the telecommunications industry (TELIRP). The regression results are in Exhibit 2. <image_2> Although volatility information is available from the SCI data and correspondingly for the SCIRP, Li’s team wants to determine the statistical relationship between the SCIRP and both the CCIRP and the TELIRP because forecasting the CCIRP and TELIRP is much less difficult than forecasting the SCIRP. After some discussion, the team believes that the volatility measure for the SCIRP data based on the volatility of CCIRP and TELIRP through the regression should be adjusted to incorporate a correlation coefficient of 0.25 between the CCIRP and TELIRP. Although the two index risk premiums were uncorrelated in the past and within the regression, Li’s team believes the two technologies will become more correlated in the future. Li’s team also examined survey data within the consumer credit and telecommunications industries over the same time period for which the actual data were collected. They found that projections in the surveys of the CCI and TELI tended to be more volatile than the actual data. However, Li’s team has decided not to make any adjustments because a definitive procedure could not be determined. Given the effect of short-term interest rates on consumer credit, Li’s team then decided to determine what the short-term interest rate is expected to be in the future. The central bank’s last official statement identified 2.5% as the appropriate rate, assuming no other factors. Li’s team then estimates potential factors that may make the central bank behave differently from the 2.5% rate in the statement, shown in Exhibit 3. <image_3> Based on Taylor’s rule, with an assumption of equal weights applied to forecast versus trend measures, the short-term rate is expected to increase from the current 1.23%, and the yield curve is expected to flatten. For further insight, Li decides to consult an in-house expert on central banking, Randy Tolliver. Tolliver states that a flat yield curve is consistent with tight monetary policies and tight fiscal policies.
A comparison between the survey data containing projections of the CCI and TELI and the actual CCI and TELI most likely exhibits
['a status quo trap.', 'ex post risk being a biased measure of ex ante risk.', 'a recallability trap.']
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B
Answer = B. As stated, the projections in the survey data tended to be more volatile than the actual outcomes over the same time period. This result indicates that the ex-post risk (i.e., the volatility of the actual data) tends to have a downward bias relative to the ex ante risk displayed by the survey data. This tendency is evidence of ex post risk being a biased measure of ex ante risk.
hard
multiple-choice
portfolio management
english
189
4
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English_validation_24
REDD Partners specializes in forecasting and consulting in particular sectors of the equity market. Minglu Li is an analyst for REDD and specializes in the consumer credit industry. Last year (2012), Li and her team gathered data to determine the expected return for the industry, shown in Exhibit 1. <image_1> After considering a number of approaches, Li and her team decided to use the bond-yield-plus-risk-premium method. The method had worked well in 2012, but a new assignment presented to Li’s team the previous week posed a new challenge. A new consumer credit mechanism was being tested on a small scale using a smartphone application to pay for items instead of the traditional credit card. The application had proved successful in the use of microloans in developing countries and was now being applied to a much broader consumer base. The new challenge for Li’s team is to develop a model for the expected return for these new consumer credit companies, which are called “smart credit” companiesbecause they combine the consumer credit industry and what had traditionally been considered the telecommunications industry. Although smart credit company returns data are sparse, a five-year monthly equally weighted index called the “Smart Credit Index” (SCI) was created from the existing companies’ returns data. The number of companies in the index at a given time varies because of firms failing and also merging over time. The SCI risk premium, equal to the SCI return minus the risk-free rate, denoted as SCIRP, is used as the dependent variable in a two-factor regression in which the independent variables are index returns minus the risk-free rate for the consumer credit industry (CCIRP) and the telecommunications industry (TELIRP). The regression results are in Exhibit 2. <image_2> Although volatility information is available from the SCI data and correspondingly for the SCIRP, Li’s team wants to determine the statistical relationship between the SCIRP and both the CCIRP and the TELIRP because forecasting the CCIRP and TELIRP is much less difficult than forecasting the SCIRP. After some discussion, the team believes that the volatility measure for the SCIRP data based on the volatility of CCIRP and TELIRP through the regression should be adjusted to incorporate a correlation coefficient of 0.25 between the CCIRP and TELIRP. Although the two index risk premiums were uncorrelated in the past and within the regression, Li’s team believes the two technologies will become more correlated in the future. Li’s team also examined survey data within the consumer credit and telecommunications industries over the same time period for which the actual data were collected. They found that projections in the surveys of the CCI and TELI tended to be more volatile than the actual data. However, Li’s team has decided not to make any adjustments because a definitive procedure could not be determined. Given the effect of short-term interest rates on consumer credit, Li’s team then decided to determine what the short-term interest rate is expected to be in the future. The central bank’s last official statement identified 2.5% as the appropriate rate, assuming no other factors. Li’s team then estimates potential factors that may make the central bank behave differently from the 2.5% rate in the statement, shown in Exhibit 3. <image_3> Based on Taylor’s rule, with an assumption of equal weights applied to forecast versus trend measures, the short-term rate is expected to increase from the current 1.23%, and the yield curve is expected to flatten. For further insight, Li decides to consult an in-house expert on central banking, Randy Tolliver. Tolliver states that a flat yield curve is consistent with tight monetary policies and tight fiscal policies.
Based on how the Taylor rule is applied by Li's team, the central bank's estimated optimal short-term rate is closest to:
['2.8%.', '1.5%.', '2.0%.']
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table
C
Answer = C. The Taylor rule sets the optimal short-term rate as Neutral rate + 0.5 × (GDP growth forecast – GDP growth trend) + 0.5 × (Inflation forecast – Inflation target). Applying numbers from Exhibit 3, 2.0% = 2.5% + 0.5 × (2.0% ‒ 1.0%) + 0.5 × (1.5% ‒ 3.5%).
hard
multiple-choice
portfolio management
english
189
5
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English_validation_25
REDD Partners specializes in forecasting and consulting in particular sectors of the equity market. Minglu Li is an analyst for REDD and specializes in the consumer credit industry. Last year (2012), Li and her team gathered data to determine the expected return for the industry, shown in Exhibit 1. <image_1> After considering a number of approaches, Li and her team decided to use the bond-yield-plus-risk-premium method. The method had worked well in 2012, but a new assignment presented to Li’s team the previous week posed a new challenge. A new consumer credit mechanism was being tested on a small scale using a smartphone application to pay for items instead of the traditional credit card. The application had proved successful in the use of microloans in developing countries and was now being applied to a much broader consumer base. The new challenge for Li’s team is to develop a model for the expected return for these new consumer credit companies, which are called “smart credit” companiesbecause they combine the consumer credit industry and what had traditionally been considered the telecommunications industry. Although smart credit company returns data are sparse, a five-year monthly equally weighted index called the “Smart Credit Index” (SCI) was created from the existing companies’ returns data. The number of companies in the index at a given time varies because of firms failing and also merging over time. The SCI risk premium, equal to the SCI return minus the risk-free rate, denoted as SCIRP, is used as the dependent variable in a two-factor regression in which the independent variables are index returns minus the risk-free rate for the consumer credit industry (CCIRP) and the telecommunications industry (TELIRP). The regression results are in Exhibit 2. <image_2> Although volatility information is available from the SCI data and correspondingly for the SCIRP, Li’s team wants to determine the statistical relationship between the SCIRP and both the CCIRP and the TELIRP because forecasting the CCIRP and TELIRP is much less difficult than forecasting the SCIRP. After some discussion, the team believes that the volatility measure for the SCIRP data based on the volatility of CCIRP and TELIRP through the regression should be adjusted to incorporate a correlation coefficient of 0.25 between the CCIRP and TELIRP. Although the two index risk premiums were uncorrelated in the past and within the regression, Li’s team believes the two technologies will become more correlated in the future. Li’s team also examined survey data within the consumer credit and telecommunications industries over the same time period for which the actual data were collected. They found that projections in the surveys of the CCI and TELI tended to be more volatile than the actual data. However, Li’s team has decided not to make any adjustments because a definitive procedure could not be determined. Given the effect of short-term interest rates on consumer credit, Li’s team then decided to determine what the short-term interest rate is expected to be in the future. The central bank’s last official statement identified 2.5% as the appropriate rate, assuming no other factors. Li’s team then estimates potential factors that may make the central bank behave differently from the 2.5% rate in the statement, shown in Exhibit 3. <image_3> Based on Taylor’s rule, with an assumption of equal weights applied to forecast versus trend measures, the short-term rate is expected to increase from the current 1.23%, and the yield curve is expected to flatten. For further insight, Li decides to consult an in-house expert on central banking, Randy Tolliver. Tolliver states that a flat yield curve is consistent with tight monetary policies and tight fiscal policies.
Tolliver's statement regarding the yield curve is most likely:
['incorrect with regard to fiscal policy.', 'incorrect with regard to monetary policy.', 'correct.']
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table
A
Answer = A. A flat yield curve is consistent with tight monetary policy and loose fiscal policy, which means that Tolliver’s statement is incorrect with regard to fiscal policy.
hard
multiple-choice
portfolio management
english
189
6
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English_validation_26
The treasurer of Amaro Canned Fruits, Inc., has projected the cash flows of Projects A, B, and C as follows: <image_1> Suppose the relevant discount rate is 12 percent per year.
Compute the profitability index for Project A.
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1.24
The profitability index is the PV of the future cash flows divided by the initial investment. The profitability index for Project A is: PIA = [$165,000 / 1.12 + $165,000 / 1.12^{2}] / $225,000 = 1.24
easy
open question
alternative investments
english
403
1
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English_validation_27
The treasurer of Amaro Canned Fruits, Inc., has projected the cash flows of Projects A, B, and C as follows: <image_1> Suppose the relevant discount rate is 12 percent per year.
Compute the profitability index for Project B.
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1.13
The profitability index is the PV of the future cash flows divided by the initial investment. The profitability index for Project B is: PIB = [$300,000 / 1.12 + $300,000 / 1.12^{2}] / $450,000 = 1.13
easy
open question
alternative investments
english
403
2
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English_validation_28
The treasurer of Amaro Canned Fruits, Inc., has projected the cash flows of Projects A, B, and C as follows: <image_1> Suppose the relevant discount rate is 12 percent per year.
Compute the profitability index for Project C.
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1.19
The profitability index is the PV of the future cash flows divided by the initial investment. The profitability index for Project C is: PIC = [$180,000 / 1.12 + $135,000 / 1.12^{2}] / $225,000 = 1.19
easy
open question
alternative investments
english
403
3
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English_validation_29
The treasurer of Amaro Canned Fruits, Inc., has projected the cash flows of Projects A, B, and C as follows: <image_1> Suppose the relevant discount rate is 12 percent per year.
Compute the NPV for Project A.
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$53,858.42
The NPV of Project A is: NPVA = –$225,000 + $165,000 / 1.12 + $165,000 / 1.12^{2} NPVA = $53,858.42
easy
open question
alternative investments
english
403
4
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English_validation_30
The treasurer of Amaro Canned Fruits, Inc., has projected the cash flows of Projects A, B, and C as follows: <image_1> Suppose the relevant discount rate is 12 percent per year.
Compute the NPV for Project B.
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table
$57,015.31
The NPV of Project B is: NPVB = –$450,000 + $300,000 / 1.12 + $300,000 / 1.12^{2} NPVB = $57,015.31
easy
open question
alternative investments
english
403
5
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English_validation_31
The treasurer of Amaro Canned Fruits, Inc., has projected the cash flows of Projects A, B, and C as follows: <image_1> Suppose the relevant discount rate is 12 percent per year.
Compute the NPV for Project C.
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$43,335.46
The NPV of Project C is: NPVC = –$225,000 + $180,000 / 1.12 + $135,000 / 1.12^{2} NPVC = $43,335.46
easy
open question
alternative investments
english
403
6
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English_validation_32
The treasurer of Amaro Canned Fruits, Inc., has projected the cash flows of Projects A, B, and C as follows: <image_1> Suppose the relevant discount rate is 12 percent per year.
Suppose these three projects are independent. Which project(s) should Amaro accept based on the profitability index rule?
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Projects A, B, and C
Accept Projects A, B, and C. Since the projects are independent, accept all three projects because the respective profitability index of each is greater than one.
easy
open question
alternative investments
english
403
7
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English_validation_33
The treasurer of Amaro Canned Fruits, Inc., has projected the cash flows of Projects A, B, and C as follows: <image_1> Suppose the relevant discount rate is 12 percent per year.
Suppose these three projects are mutually exclusive. Which project(s) should Amaro accept based on the profitability index rule?
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Project B
Accept Project B. Since the Projects are mutually exclusive, choose the Project with the highest PI, while taking into account the scale of the Project. Because Projects A and C have the same initial investment, the problem of scale does not arise when comparing the profitability indexes. Based on the profitability index rule, Project C can be eliminated because its PI is less than the PI of Project A. Because of the problem of scale, we cannot compare the PIs of Projects A and B. However, we can calculate the PI of the incremental cash flows of the two projects, which are: <ans_image_1> When calculating incremental cash flows, remember to subtract the cash flows of the project with the smaller initial cash outflow from those of the project with the larger initial cash outflow. This procedure insures that the incremental initial cash outflow will be negative. The incremental PI calculation is: PI(B – A) = [$135,000 / 1.12 + $135,000 / 1.12^{2}] / $225,000 PI(B – A) = 1.014 The company should accept Project B since the PI of the incremental cash flows is greater than one.
medium
open question
alternative investments
english
403
8
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English_validation_34
The treasurer of Amaro Canned Fruits, Inc., has projected the cash flows of Projects A, B, and C as follows: <image_1> Suppose the relevant discount rate is 12 percent per year.
Suppose Amaro’s budget for these projects is $450,000. The projects are not divisible. Which project(s) should Amaro accept?
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Projects A and C
Remember that the NPV is additive across projects. Since we can spend $450,000, we could take Project B or Project A and Project C. Since the combined NPV of Projects A and C is higher than Project B, we should take both Projects A and C.
easy
open question
alternative investments
english
403
9
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English_validation_35
The United States–based CME Foundation serves a wide variety of human interest causes in rural areas of the country. The fund’s investment policy statement sets forth allocation ranges for major asset classes, including U.S. large, mid-, and small-cap stocks, international equities, and domestic and international bonds. When revising its outlook for the capital markets, CME typically applies data from GloboStats Research on the global investable market (GIM) and major asset classes to produce long-term estimates for risk premiums, expected return, and risk measurements. Although they have worked with GloboStats for many years, CME is evaluating the services of RiteVal, a competing research firm, via a trial offer. Unlike the equilibrium modeling approach applied to GloboStats’s data, RiteVal prefers to use a multifactor modeling approach. Both research firms also provide short- and long-term economic analysis. CME has asked Pauline Cortez, chief investment officer, to analyze the benefit of adding U.S. real estate equities as a permanent asset class. To determine the appropriate risk premium and expected return for this new asset class, Cortez needs to determine the appropriate risk factor to apply to the international capital asset pricing model (ICAPM). Selected data from GloboStats is shown in Exhibit 1. <image_1> Cortez’s colleague Jason Grey notes that U.S. real estate is a partially segmented market. For this reason, Grey recommends using the Singer–Terhaar approach to the ICAPM and assumes a correlation of 0.39 between U.S. real estate and the GIM. Cortez reviews RiteVal data (Exhibit 2) and preferred two-factor model with global equity and global bonds as the two common drivers of return for all other asset classes. <image_2> Grey makes the following observations about the two different approaches the research firms use to create their respective covariance matrices: • GloboStats uses a historical sample to estimate covariances, whereas • RiteVal uses a target covariance matrix by relating asset class returns to a particular set of return drivers. Grey recommends choosing the GloboStats approach. Cortez states: I disagree. We will use the results of both firms by calculating a weighted average for each covariance estimate. Grey finds that RiteVal’s economic commentary reveals a non-consensus view on inflation. Specifically, they believe that a near-term period of deflation will surprise many investors but that the current central bank policy will eventually result in a return to an equilibrium expected level of inflation. Grey states: If RiteVal is correct, in the near-term our income producing assets, such as Treasury bonds and real estate, should do well because of the unexpected improvement in purchasing power. When inflation returns to the expected level, our equities are likely to perform well. Cortez points out that RiteVal uses an econometrics approach to economic analysis, whereas GloboStats prefers a leading indicator–based approach. Cortez and Grey discuss these approaches at length. Cortez comments: The big disadvantage to the leading indicator approach is that it has not historically worked because relationships between inputs are not static. One major advantage to the econometric approach is quantitative estimates of the effects on the economy of changes in exogenous variables.”
Using the data provided in Exhibit 1 and assuming perfect markets, the calculated beta for U.S. real estate is closest to:
['1.08.', '0.38.', '0.58']
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C
Answer = C. <ans_image_1>
hard
multiple-choice
alternative investments
english
181
1
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English_validation_36
The United States–based CME Foundation serves a wide variety of human interest causes in rural areas of the country. The fund’s investment policy statement sets forth allocation ranges for major asset classes, including U.S. large, mid-, and small-cap stocks, international equities, and domestic and international bonds. When revising its outlook for the capital markets, CME typically applies data from GloboStats Research on the global investable market (GIM) and major asset classes to produce long-term estimates for risk premiums, expected return, and risk measurements. Although they have worked with GloboStats for many years, CME is evaluating the services of RiteVal, a competing research firm, via a trial offer. Unlike the equilibrium modeling approach applied to GloboStats’s data, RiteVal prefers to use a multifactor modeling approach. Both research firms also provide short- and long-term economic analysis. CME has asked Pauline Cortez, chief investment officer, to analyze the benefit of adding U.S. real estate equities as a permanent asset class. To determine the appropriate risk premium and expected return for this new asset class, Cortez needs to determine the appropriate risk factor to apply to the international capital asset pricing model (ICAPM). Selected data from GloboStats is shown in Exhibit 1. <image_1> Cortez’s colleague Jason Grey notes that U.S. real estate is a partially segmented market. For this reason, Grey recommends using the Singer–Terhaar approach to the ICAPM and assumes a correlation of 0.39 between U.S. real estate and the GIM. Cortez reviews RiteVal data (Exhibit 2) and preferred two-factor model with global equity and global bonds as the two common drivers of return for all other asset classes. <image_2> Grey makes the following observations about the two different approaches the research firms use to create their respective covariance matrices: • GloboStats uses a historical sample to estimate covariances, whereas • RiteVal uses a target covariance matrix by relating asset class returns to a particular set of return drivers. Grey recommends choosing the GloboStats approach. Cortez states: I disagree. We will use the results of both firms by calculating a weighted average for each covariance estimate. Grey finds that RiteVal’s economic commentary reveals a non-consensus view on inflation. Specifically, they believe that a near-term period of deflation will surprise many investors but that the current central bank policy will eventually result in a return to an equilibrium expected level of inflation. Grey states: If RiteVal is correct, in the near-term our income producing assets, such as Treasury bonds and real estate, should do well because of the unexpected improvement in purchasing power. When inflation returns to the expected level, our equities are likely to perform well. Cortez points out that RiteVal uses an econometrics approach to economic analysis, whereas GloboStats prefers a leading indicator–based approach. Cortez and Grey discuss these approaches at length. Cortez comments: The big disadvantage to the leading indicator approach is that it has not historically worked because relationships between inputs are not static. One major advantage to the econometric approach is quantitative estimates of the effects on the economy of changes in exogenous variables.”
Using the data provided in Exhibit 1 and Grey's recommended approach and assumed correlation, the expected return for U.S. real estate is closest to:
['6.3%.', '6.9%.', '4.3%.']
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A
Answer = A . Grey recommends the Singer–Terhaar approach and a correlation of 0.39 between real estate and the market. Use these steps to solve for the expected return: <ans_image_1>
hard
multiple-choice
alternative investments
english
181
2
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English_validation_37
The United States–based CME Foundation serves a wide variety of human interest causes in rural areas of the country. The fund’s investment policy statement sets forth allocation ranges for major asset classes, including U.S. large, mid-, and small-cap stocks, international equities, and domestic and international bonds. When revising its outlook for the capital markets, CME typically applies data from GloboStats Research on the global investable market (GIM) and major asset classes to produce long-term estimates for risk premiums, expected return, and risk measurements. Although they have worked with GloboStats for many years, CME is evaluating the services of RiteVal, a competing research firm, via a trial offer. Unlike the equilibrium modeling approach applied to GloboStats’s data, RiteVal prefers to use a multifactor modeling approach. Both research firms also provide short- and long-term economic analysis. CME has asked Pauline Cortez, chief investment officer, to analyze the benefit of adding U.S. real estate equities as a permanent asset class. To determine the appropriate risk premium and expected return for this new asset class, Cortez needs to determine the appropriate risk factor to apply to the international capital asset pricing model (ICAPM). Selected data from GloboStats is shown in Exhibit 1. <image_1> Cortez’s colleague Jason Grey notes that U.S. real estate is a partially segmented market. For this reason, Grey recommends using the Singer–Terhaar approach to the ICAPM and assumes a correlation of 0.39 between U.S. real estate and the GIM. Cortez reviews RiteVal data (Exhibit 2) and preferred two-factor model with global equity and global bonds as the two common drivers of return for all other asset classes. <image_2> Grey makes the following observations about the two different approaches the research firms use to create their respective covariance matrices: • GloboStats uses a historical sample to estimate covariances, whereas • RiteVal uses a target covariance matrix by relating asset class returns to a particular set of return drivers. Grey recommends choosing the GloboStats approach. Cortez states: I disagree. We will use the results of both firms by calculating a weighted average for each covariance estimate. Grey finds that RiteVal’s economic commentary reveals a non-consensus view on inflation. Specifically, they believe that a near-term period of deflation will surprise many investors but that the current central bank policy will eventually result in a return to an equilibrium expected level of inflation. Grey states: If RiteVal is correct, in the near-term our income producing assets, such as Treasury bonds and real estate, should do well because of the unexpected improvement in purchasing power. When inflation returns to the expected level, our equities are likely to perform well. Cortez points out that RiteVal uses an econometrics approach to economic analysis, whereas GloboStats prefers a leading indicator–based approach. Cortez and Grey discuss these approaches at length. Cortez comments: The big disadvantage to the leading indicator approach is that it has not historically worked because relationships between inputs are not static. One major advantage to the econometric approach is quantitative estimates of the effects on the economy of changes in exogenous variables.”
Using the multifactor model preferred by RiteVal and Exhibit 2, the standard deviation of U.S. real estate is closest to:
['24.5%.', '21.0%.', '23.1%.']
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C
Answer = C. <ans_image_1>
hard
multiple-choice
alternative investments
english
181
3
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English_validation_38
The United States–based CME Foundation serves a wide variety of human interest causes in rural areas of the country. The fund’s investment policy statement sets forth allocation ranges for major asset classes, including U.S. large, mid-, and small-cap stocks, international equities, and domestic and international bonds. When revising its outlook for the capital markets, CME typically applies data from GloboStats Research on the global investable market (GIM) and major asset classes to produce long-term estimates for risk premiums, expected return, and risk measurements. Although they have worked with GloboStats for many years, CME is evaluating the services of RiteVal, a competing research firm, via a trial offer. Unlike the equilibrium modeling approach applied to GloboStats’s data, RiteVal prefers to use a multifactor modeling approach. Both research firms also provide short- and long-term economic analysis. CME has asked Pauline Cortez, chief investment officer, to analyze the benefit of adding U.S. real estate equities as a permanent asset class. To determine the appropriate risk premium and expected return for this new asset class, Cortez needs to determine the appropriate risk factor to apply to the international capital asset pricing model (ICAPM). Selected data from GloboStats is shown in Exhibit 1. <image_1> Cortez’s colleague Jason Grey notes that U.S. real estate is a partially segmented market. For this reason, Grey recommends using the Singer–Terhaar approach to the ICAPM and assumes a correlation of 0.39 between U.S. real estate and the GIM. Cortez reviews RiteVal data (Exhibit 2) and preferred two-factor model with global equity and global bonds as the two common drivers of return for all other asset classes. <image_2> Grey makes the following observations about the two different approaches the research firms use to create their respective covariance matrices: • GloboStats uses a historical sample to estimate covariances, whereas • RiteVal uses a target covariance matrix by relating asset class returns to a particular set of return drivers. Grey recommends choosing the GloboStats approach. Cortez states: I disagree. We will use the results of both firms by calculating a weighted average for each covariance estimate. Grey finds that RiteVal’s economic commentary reveals a non-consensus view on inflation. Specifically, they believe that a near-term period of deflation will surprise many investors but that the current central bank policy will eventually result in a return to an equilibrium expected level of inflation. Grey states: If RiteVal is correct, in the near-term our income producing assets, such as Treasury bonds and real estate, should do well because of the unexpected improvement in purchasing power. When inflation returns to the expected level, our equities are likely to perform well. Cortez points out that RiteVal uses an econometrics approach to economic analysis, whereas GloboStats prefers a leading indicator–based approach. Cortez and Grey discuss these approaches at length. Cortez comments: The big disadvantage to the leading indicator approach is that it has not historically worked because relationships between inputs are not static. One major advantage to the econometric approach is quantitative estimates of the effects on the economy of changes in exogenous variables.”
Grey’s statement regarding the impact of RiteVal’s inflation scenario is most likely:
['incorrect because of his comment about real estate.', 'incorrect because of his comment about equities.', 'correct.']
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A
Answer = A. In deflation, real estate experiences downward pricing pressure (negative) and bonds benefit from improving purchasing power (positive). Therefore, Grey’s comment about real estate is incorrect. In equilibrium, inflation at or below expectations is a positive for equities. The comment about equities is correct.
hard
multiple-choice
alternative investments
english
181
4
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English_validation_39
The United States–based CME Foundation serves a wide variety of human interest causes in rural areas of the country. The fund’s investment policy statement sets forth allocation ranges for major asset classes, including U.S. large, mid-, and small-cap stocks, international equities, and domestic and international bonds. When revising its outlook for the capital markets, CME typically applies data from GloboStats Research on the global investable market (GIM) and major asset classes to produce long-term estimates for risk premiums, expected return, and risk measurements. Although they have worked with GloboStats for many years, CME is evaluating the services of RiteVal, a competing research firm, via a trial offer. Unlike the equilibrium modeling approach applied to GloboStats’s data, RiteVal prefers to use a multifactor modeling approach. Both research firms also provide short- and long-term economic analysis. CME has asked Pauline Cortez, chief investment officer, to analyze the benefit of adding U.S. real estate equities as a permanent asset class. To determine the appropriate risk premium and expected return for this new asset class, Cortez needs to determine the appropriate risk factor to apply to the international capital asset pricing model (ICAPM). Selected data from GloboStats is shown in Exhibit 1. <image_1> Cortez’s colleague Jason Grey notes that U.S. real estate is a partially segmented market. For this reason, Grey recommends using the Singer–Terhaar approach to the ICAPM and assumes a correlation of 0.39 between U.S. real estate and the GIM. Cortez reviews RiteVal data (Exhibit 2) and preferred two-factor model with global equity and global bonds as the two common drivers of return for all other asset classes. <image_2> Grey makes the following observations about the two different approaches the research firms use to create their respective covariance matrices: • GloboStats uses a historical sample to estimate covariances, whereas • RiteVal uses a target covariance matrix by relating asset class returns to a particular set of return drivers. Grey recommends choosing the GloboStats approach. Cortez states: I disagree. We will use the results of both firms by calculating a weighted average for each covariance estimate. Grey finds that RiteVal’s economic commentary reveals a non-consensus view on inflation. Specifically, they believe that a near-term period of deflation will surprise many investors but that the current central bank policy will eventually result in a return to an equilibrium expected level of inflation. Grey states: If RiteVal is correct, in the near-term our income producing assets, such as Treasury bonds and real estate, should do well because of the unexpected improvement in purchasing power. When inflation returns to the expected level, our equities are likely to perform well. Cortez points out that RiteVal uses an econometrics approach to economic analysis, whereas GloboStats prefers a leading indicator–based approach. Cortez and Grey discuss these approaches at length. Cortez comments: The big disadvantage to the leading indicator approach is that it has not historically worked because relationships between inputs are not static. One major advantage to the econometric approach is quantitative estimates of the effects on the economy of changes in exogenous variables.”
Cortez’s comment with regard to the two different approaches to economic analysis is most likely:
['incorrect because of the statement regarding leading indicators.', 'correct.', 'incorrect because of the statement regarding econometrics.']
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B
Answer = B . Cortez’s statement is entirely correct. A disadvantage of the leading indicators–based approach is that historically, it has not consistently worked because relationships between inputs are not static. An advantage to the econometric approach is that it provides quantitative estimates of the effects on the economy of changes in exogenous variables.
hard
multiple-choice
alternative investments
english
181
5
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English_validation_40
Cleveland Compressor and Pnew York Pneumatic are competing manufacturing firms. Their financial statements are printed here.<image_1><image_2><image_3><image_4>
How is the current asset of firm Cleveland Compressor financed?
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By retained earnings.
The current assets of Cleveland Compressor are financed largely by retained earnings. From 2015 to 2016, total current assets grew by $7,212. Only $2,126 of this increase was financed by the growth of current liabilities. .
hard
open question
financial statement analysis
english
329
1
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English_validation_41
Cleveland Compressor and Pnew York Pneumatic are competing manufacturing firms. Their financial statements are printed here.<image_1><image_2><image_3><image_4>
How is the current asset of firm Pnew York Pneumatic financed?
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By current liabilities.
Pnew York Pneumatic’s current assets are largely financed by current liabilities. Bank loans are the most important of these current liabilities. They decreased by $3,077 as current assets decreased by $8,333.
hard
open question
financial statement analysis
english
329
2
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English_validation_42
Cleveland Compressor and Pnew York Pneumatic are competing manufacturing firms. Their financial statements are printed here.<image_1><image_2><image_3><image_4>
Which firm has the larger investment in current assets? Why?
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table
Cleveland Compressor.
Cleveland Compressor holds the larger investment in current assets. It has current assets of $92,616 while Pnew York Pneumatic has $70,101 in current assets. The main reason for the difference is the larger sales of Cleveland Compressor.
hard
open question
financial statement analysis
english
329
3
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English_validation_43
Cleveland Compressor and Pnew York Pneumatic are competing manufacturing firms. Their financial statements are printed here.<image_1><image_2><image_3><image_4>
Which firm is more likely to incur carrying costs?
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Pnew York Pneumatic.
That ratio for Pnew York Pneumatic is .77.Pnew York Pneumatic is incurring more carrying costs for the same reason, a higher ratio of current assets to sales.
hard
open question
financial statement analysis
english
329
4
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English_validation_44
Cleveland Compressor and Pnew York Pneumatic are competing manufacturing firms. Their financial statements are printed here.<image_1><image_2><image_3><image_4>
which is more likely to incur shortage costs?
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Cleveland Compressor.
Cleveland Compressor is more likely to incur shortage costs because the ratio of current assets to sales is .57. That ratio for Pnew York Pneumatic is .77.
hard
open question
financial statement analysis
english
329
5
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English_validation_45
Assume that both X and Y are well-diversified portfolios and the risk-free rate is 8%.<image_1>
In this situation you would conclude that portfolios X and Y:
['Are in equilibrium.', 'Offer an arbitrage opportunity.', 'Are both underpriced.', 'Are both fairly priced.']
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b.
Since Portfolio X has β = 1.0, then X is the market portfolio and E(RM) =16%. Using E(RM) = 16% and rf = 8%, the expected return for portfolio Y is not consistent.
medium
multiple-choice
portfolio management
english
297
1
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English_validation_46
Hardwick Enterprises is evaluating alternative uses for a three-story manufacturing and warehousing building that it has purchased for $1,250,000. The company can continue to rent the building to the present occupants for $60,000 per year. The present occupants have indicated an interest in staying in the building for at least another 15 years. Alternatively, the company could modify the existing structure to use for its own manufacturing and warehousing needs. The company’s production engineer feels the building could be adapted to handle one of two new product lines. The cost and revenue data for the two product alternatives are as follows: <image_1> The building will be used for only 15 years for either Product A or Product B. After 15 years the building will be too small for efficient production of either product line. At that time, the company plans to rent the building to firms similar to the current occupants. To rent the building again, the company will need to restore the building to its present layout. The estimated cash cost of restoring the building if Product A has been undertaken is $75,000. If Product B has been manufactured, the cash cost will be $85,000. These cash costs can be deducted for tax purposes in the year the expenditures occur. The company will depreciate the original building shell (purchased for $1,250,000) over a 30-year life to zero, regardless of which alternative it chooses. The building modifications and equipment purchases for either product are estimated to have a 15-year life. They will be depreciated by the straight-line method. The firm’s tax rate is 34 percent, and its required rate of return on such investments is 12 percent. For simplicity, assume all cash flows occur at the end of the year. The initial outlays for modifications and equipment will occur today (Year 0), and the restoration outlays will occur at the end of Year 15. The company has other profitable ongoing operations that are sufficient to cover any losses.
Which use of the building would you recommend to management?
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Project A
To answer this question, we need to compute the NPV of all three alternatives, specifically, continue to rent the building, Project A, or Project B. We would choose the project with the highest NPV. If all three of the projects have a positive NPV, the project that is more favorable is the one with the highest NPV There are several important cash flows we should not consider in the incremental cash flow analysis. The remaining fraction of the value of the building and depreciation are not incremental and should not be included in the analysis of the two alternatives. The $1,250,000 purchase price of the building is the same for all three options and should be ignored. In effect, what we are doing is finding the NPV of the future cash flows of each option, so the only cash flow today would be the building modifications needed for Project A and Project B. If we did include these costs, the effect would be to lower the NPV of all three options by the same amount, thereby leading to the same conclusion. The cash flows from renting the building after Year 15 are also irrelevant. No matter what the company chooses today, it will rent the building after Year 15, so these cash flows are not incremental to any project. We will begin by calculating the NPV of the decision of continuing to rent the building first. Continue to rent: <ans_image_1> Since there is no incremental depreciation, the operating cash flow is the net income. So, the NPV of the decision to continue to rent is: NPV = $39,600(PVIFA_{12%15}) NPV = $269,710.23 Product A: Next, we will calculate the NPV of the decision to modify the building to produce Product A. The income statement for this modification is the same for the first 14 years, and in Year 15, the company will have an additional expense to convert the building back to its original form. This will be an expense in Year 15, so the income statement for that year will be slightly different. The cash flow at time zero will be the cost of the equipment, and the cost of the initial building modifications, both of which are depreciable on a straight-line basis. So, the pro forma cash flows for Product A are: Initial cash outlay: <ans_image_2> The OCF each year is net income plus depreciation. So, the NPV for modifying the building to manufacture Product A is: NPV = –$335,000 + $106,593(PVIFA_{12%14}) + $57,093 / 1.1215 NPV = $381,949.28 Product B: Now we will calculate the NPV of the decision to modify the building to produce Product B. The income statement for this modification is the same for the first 14 years, and in Year 15, the company will have an additional expense to convert the building back to its original form. This will be an expense in Year 15, so the income statement for that year will be slightly different. The cash flow at time zero will be the cost of the equipment, and the cost of the initial building modifications, both of which are depreciable on a straight-line basis. So, the pro forma cash flows for Product B are: Initial cash outlay: <ans_image_3> The OCF each year is net income plus depreciation. So, the NPV for modifying the building to manufacture Product B is: NPV = –$405,000 + $114,780(PVIFA_{12%14}) + $58,680 / 1.1215 NPV = $366,501.77 Since Product A has the highest NPV, the company should opt for that product. We could have also done the analysis as the incremental cash flows between Product A and continuing to rent the building, and the incremental cash flows between Product B and continuing to rent the building. The results of this type of analysis would be: NPV of differential cash flows between Product A and continuing to rent: NPV = NPV_{product A} – NPV_{Rent} NPV = $381,949.28 – 269,710.23 NPV = $112,239.05 NPV of differential cash flows between Product B and continuing to rent: NPV = NPVProduct B – NPVRent NPV = $366,501.77 – 269,710.23 NPV = $96,791.53 Since the differential NPV of Product A is positive and is the largest incremental NPV, the company should choose Project A, which is the same as our original result.
hard
open question
corporate finance
english
411
1
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English_validation_47
<image_1>
Your portfolio is invested 30 percent each in A and C, and 40 percent in B. What is the expected return of the portfolio?
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.1117, or 11.17%
This portfolio does not have an equal weight in each asset. We first need to find the return of the portfolio in each state of the economy. To do this, we will multiply the return of each asset by its portfolio weight and then sum the products to get the portfolio return in each state of the economy. Doing so, we get: Boom: Rp = .30(.24) + .40(.45) + .30(.33) Rp = .3510, or 35.10% Good: Rp = .30(.09) + .40(.10) + .30(.15) Rp = .1120, or 11.20% Poor: Rp = .30(.03) + .40(–.10) + .30(–.05) Rp = –.0460, or –4.60% Bust: Rp = .30(–.05) + .40(–.25) + .30(–.09) Rp = –.1420, or –14.20% And the expected return of the portfolio is: E(Rp) = .25(.3510) + .40(.1120) + .30(–.0460) + .05(–.1420) E(Rp) = .1117, or 11.17%
medium
open question
equity
english
424
1
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English_validation_48
<image_1>
What is the variance of this portfolio?
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0.025
To find the variance, we find the squared deviations from the expected return. We then multiply each possible squared deviation by its probability, and then add all of these up. The result is the variance. So, the variance of the portfolio is: <ans_image_1>
medium
open question
portfolio management
english
424
2
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English_validation_49
<image_1>
What is the standard deviation of this portfolio?
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.1581, or 15.81%
To calculate the standard deviation, we first need to calculate the variance. To find the variance, we find the squared deviations from the expected return. We then multiply each possible squared deviation by its probability, and then add all of these up. The result is the variance. So, the standard deviation of the portfolio is: <ans_image_1>
medium
open question
portfolio management
english
424
3
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English_validation_50
Olli Nava is a junior economist for Globofunds Asset Management, a large investment management company. She has been asked to produce capital market expectations for asset classes in several different markets relevant to the Diversified Absolute Return Strategies Fund (DARS), the company’s largest fund. Nava is aware that long-term GDP trend forecasting is considered the starting point to form capital market expectations at Globofunds, but she is unsure why this is the case. She asks a colleague, Jedd Wiggins to explain why long-term trend GDP growth is considered so important when forecasting asset class returns. Wiggins makes the following two statements. • Statement 1: There is both theoretical and empirical support for the case that the average level of real government bond yields is causally linked to the trend rate of growth in the economy. • Statement 2: Over the long run, the total return of an equity market is causally linked to the growth rate of GDP. To make a forecast of trend GDP growth in the domestic economy, Nava collates the following Globofunds data displayed in Figure 1. <image_1> Nava has the view that increased levels of globalization will lead to the current account playing a larger role in growth rate of economies. She considers the macroeconomic linkages between the three main economies which the fund is exposed to. Macroeconomic data relating to these economies is displayed in Figure 2. <image_2> Nava also considers the movement in foreign exchange to be a key determinant of the medium-term performance of DARS. She considers the macroeconomic policy of the three main developing markets which the fund is exposed to and collates the data as shown in Figure 3. <image_3> Nava attempts to forecast the likely foreign exchange rate movements that will affect the fund. She notes that the largest foreign currency exposure is in Country X. The current spot rate of the domestic currency of the fund (DOM) versus the foreign currency of Country X (FOR) is DOM/FOR = 1.3020. Data related to the expected returns in the domestic and foreign markets is displayed below in Figure 4. <image_4> Nava also considers purchasing power parity as a tool for long-term foreign exchange rate forecasting. She notes that expected inflation in the domestic country is higher than the expected inflation in Country X.
How many of the statements made by Wiggins are accurate
['Zero', 'One', 'Two']
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B
Solution: B Statement 1 is correct. There is theoretical and empirical evidence that average long-term government bond yields are directly linked to the trend rate of growth in an economy. Statement 2 is incorrect. Over the long run, the capital gains component of equity returns is directly linked to GDP. However, this does not apply to the income component of returns (i.e., the dividend yield). Hence, it is not true to say that the total return (capital gains plus income) is linked to GDP growth.
hard
multiple-choice
economics
english
231
1
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English_validation_51
Olli Nava is a junior economist for Globofunds Asset Management, a large investment management company. She has been asked to produce capital market expectations for asset classes in several different markets relevant to the Diversified Absolute Return Strategies Fund (DARS), the company’s largest fund. Nava is aware that long-term GDP trend forecasting is considered the starting point to form capital market expectations at Globofunds, but she is unsure why this is the case. She asks a colleague, Jedd Wiggins to explain why long-term trend GDP growth is considered so important when forecasting asset class returns. Wiggins makes the following two statements. • Statement 1: There is both theoretical and empirical support for the case that the average level of real government bond yields is causally linked to the trend rate of growth in the economy. • Statement 2: Over the long run, the total return of an equity market is causally linked to the growth rate of GDP. To make a forecast of trend GDP growth in the domestic economy, Nava collates the following Globofunds data displayed in Figure 1. <image_1> Nava has the view that increased levels of globalization will lead to the current account playing a larger role in growth rate of economies. She considers the macroeconomic linkages between the three main economies which the fund is exposed to. Macroeconomic data relating to these economies is displayed in Figure 2. <image_2> Nava also considers the movement in foreign exchange to be a key determinant of the medium-term performance of DARS. She considers the macroeconomic policy of the three main developing markets which the fund is exposed to and collates the data as shown in Figure 3. <image_3> Nava attempts to forecast the likely foreign exchange rate movements that will affect the fund. She notes that the largest foreign currency exposure is in Country X. The current spot rate of the domestic currency of the fund (DOM) versus the foreign currency of Country X (FOR) is DOM/FOR = 1.3020. Data related to the expected returns in the domestic and foreign markets is displayed below in Figure 4. <image_4> Nava also considers purchasing power parity as a tool for long-term foreign exchange rate forecasting. She notes that expected inflation in the domestic country is higher than the expected inflation in Country X.
Based on the data in Figure 1, the projected long-term domestic market equity return is closest to
['4.5%', '5.0%', '7.5%']
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table
C
Solution: C. Real GDP growth = labor input growth + labor productivity growth = 0.8% + 1.2% = 2.0% Nominal GDP growth = real GDP growth + inflation = 2.0% + 2.5% =4.5% Long-term capital gains in equity markets = %Δ nominal GDP + %Δ profits/GDP + %Δ PE = 4.5% + 0% + 0% = 4.5% Long-term total domestic market equity return = capital gains + dividend yield = 4.5% + 3.0% = 7.5%
hard
multiple-choice
economics
english
231
2
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English_validation_52
Olli Nava is a junior economist for Globofunds Asset Management, a large investment management company. She has been asked to produce capital market expectations for asset classes in several different markets relevant to the Diversified Absolute Return Strategies Fund (DARS), the company’s largest fund. Nava is aware that long-term GDP trend forecasting is considered the starting point to form capital market expectations at Globofunds, but she is unsure why this is the case. She asks a colleague, Jedd Wiggins to explain why long-term trend GDP growth is considered so important when forecasting asset class returns. Wiggins makes the following two statements. • Statement 1: There is both theoretical and empirical support for the case that the average level of real government bond yields is causally linked to the trend rate of growth in the economy. • Statement 2: Over the long run, the total return of an equity market is causally linked to the growth rate of GDP. To make a forecast of trend GDP growth in the domestic economy, Nava collates the following Globofunds data displayed in Figure 1. <image_1> Nava has the view that increased levels of globalization will lead to the current account playing a larger role in growth rate of economies. She considers the macroeconomic linkages between the three main economies which the fund is exposed to. Macroeconomic data relating to these economies is displayed in Figure 2. <image_2> Nava also considers the movement in foreign exchange to be a key determinant of the medium-term performance of DARS. She considers the macroeconomic policy of the three main developing markets which the fund is exposed to and collates the data as shown in Figure 3. <image_3> Nava attempts to forecast the likely foreign exchange rate movements that will affect the fund. She notes that the largest foreign currency exposure is in Country X. The current spot rate of the domestic currency of the fund (DOM) versus the foreign currency of Country X (FOR) is DOM/FOR = 1.3020. Data related to the expected returns in the domestic and foreign markets is displayed below in Figure 4. <image_4> Nava also considers purchasing power parity as a tool for long-term foreign exchange rate forecasting. She notes that expected inflation in the domestic country is higher than the expected inflation in Country X.
Based on the information in Figure 3, the market that is least likely to be able to pursue an independent monetary policy is developing
['Market A', 'Market B', 'Market C']
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table
B
Solution: B. A country cannot simultaneously have unrestricted capital flows, a fixed exchange rate, and an independent monetary policy because changes in monetary policy (e.g., interest rates) will likely cause capital flows, which will impact on the currency exchange rate. Hence, developing Market B is least likely to be able to follow an independent monetary policy.
easy
multiple-choice
economics
english
231
3
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English_validation_53
Olli Nava is a junior economist for Globofunds Asset Management, a large investment management company. She has been asked to produce capital market expectations for asset classes in several different markets relevant to the Diversified Absolute Return Strategies Fund (DARS), the company’s largest fund. Nava is aware that long-term GDP trend forecasting is considered the starting point to form capital market expectations at Globofunds, but she is unsure why this is the case. She asks a colleague, Jedd Wiggins to explain why long-term trend GDP growth is considered so important when forecasting asset class returns. Wiggins makes the following two statements. • Statement 1: There is both theoretical and empirical support for the case that the average level of real government bond yields is causally linked to the trend rate of growth in the economy. • Statement 2: Over the long run, the total return of an equity market is causally linked to the growth rate of GDP. To make a forecast of trend GDP growth in the domestic economy, Nava collates the following Globofunds data displayed in Figure 1. <image_1> Nava has the view that increased levels of globalization will lead to the current account playing a larger role in growth rate of economies. She considers the macroeconomic linkages between the three main economies which the fund is exposed to. Macroeconomic data relating to these economies is displayed in Figure 2. <image_2> Nava also considers the movement in foreign exchange to be a key determinant of the medium-term performance of DARS. She considers the macroeconomic policy of the three main developing markets which the fund is exposed to and collates the data as shown in Figure 3. <image_3> Nava attempts to forecast the likely foreign exchange rate movements that will affect the fund. She notes that the largest foreign currency exposure is in Country X. The current spot rate of the domestic currency of the fund (DOM) versus the foreign currency of Country X (FOR) is DOM/FOR = 1.3020. Data related to the expected returns in the domestic and foreign markets is displayed below in Figure 4. <image_4> Nava also considers purchasing power parity as a tool for long-term foreign exchange rate forecasting. She notes that expected inflation in the domestic country is higher than the expected inflation in Country X.
Based in the data in Figure 4, the forecast one year DOM/FOR foreign exchange rate, based on capital flows using the Dornbusch overshooting, is closest to
['1.2825', '1.2889', '1.3215']
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table
A
Solution: A. The Dornbusch overshooting mechanism states that immediate capital flows will strengthen the currencies of countries with high expected returns to the point where the high return currency will be expected to depreciate going forward by the return differential. This is captured by the relation: E(%ΔSVAR/FIX) = E(RVAR) – E(RFIX), where: E(RVAR) = expected return in the variable currency market E(RFIX) = expected return in the fixed currency market The quote of DOM/FOR has the domestic currency as variable and the foreign currency of Country X as fixed. The expected return of the domestic market is given by the sum of the domestic returns and premiums. This is equal to 0.75% + 0.00% + 1.10% + 3.00% + 0.00% = 4.85%. The expected return of the market in Country X is given by the sum of the Country X returns and premiums. This is equal to 1.25% + 0.50% + 0.60% + 4.00% + 0.00% = 6.35%. Hence under the Dornbusch overshooting model: E(%ΔSDOM/FOR) = 4.85% – 6.35% = –1.50% Hence, the forecast foreign exchange rate in one year = (1 – 0.015) × spot DOM/FOR = (1 – 0.015) × 1.3020 = 1.2825. Note that the higher expected return currency of Country X is expected to weaken going forward.
hard
multiple-choice
economics
english
231
4
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English_validation_54
Olli Nava is a junior economist for Globofunds Asset Management, a large investment management company. She has been asked to produce capital market expectations for asset classes in several different markets relevant to the Diversified Absolute Return Strategies Fund (DARS), the company’s largest fund. Nava is aware that long-term GDP trend forecasting is considered the starting point to form capital market expectations at Globofunds, but she is unsure why this is the case. She asks a colleague, Jedd Wiggins to explain why long-term trend GDP growth is considered so important when forecasting asset class returns. Wiggins makes the following two statements. • Statement 1: There is both theoretical and empirical support for the case that the average level of real government bond yields is causally linked to the trend rate of growth in the economy. • Statement 2: Over the long run, the total return of an equity market is causally linked to the growth rate of GDP. To make a forecast of trend GDP growth in the domestic economy, Nava collates the following Globofunds data displayed in Figure 1. <image_1> Nava has the view that increased levels of globalization will lead to the current account playing a larger role in growth rate of economies. She considers the macroeconomic linkages between the three main economies which the fund is exposed to. Macroeconomic data relating to these economies is displayed in Figure 2. <image_2> Nava also considers the movement in foreign exchange to be a key determinant of the medium-term performance of DARS. She considers the macroeconomic policy of the three main developing markets which the fund is exposed to and collates the data as shown in Figure 3. <image_3> Nava attempts to forecast the likely foreign exchange rate movements that will affect the fund. She notes that the largest foreign currency exposure is in Country X. The current spot rate of the domestic currency of the fund (DOM) versus the foreign currency of Country X (FOR) is DOM/FOR = 1.3020. Data related to the expected returns in the domestic and foreign markets is displayed below in Figure 4. <image_4> Nava also considers purchasing power parity as a tool for long-term foreign exchange rate forecasting. She notes that expected inflation in the domestic country is higher than the expected inflation in Country X.
Based on purchasing power parity, Nava should forecast that, relative to the current spot rate, the DOM/FOR exchange rate is forecast to
['fall', 'rise', 'remain unchanged']
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table
B
Solution: B. Purchasing power parity states that high inflation currencies are expected to weaken. If the domestic country inflation is expected to be higher than inflation in Country X, then the domestic currency is expected to weaken. This means the DOM/FOR quote will rise as there will be more DOM units per FOR units.
hard
multiple-choice
economics
english
231
5
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English_validation_55
For the following characteristics<image_1>, answer the question.
What is the price of a call option?
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screenshot
$6.30
Using the Black–Scholes option pricing model to find the price of the call option, we find:<ans_image_1> Putting these values into the Black–Scholes model, we find the call price is:<ans_image_2>
medium
open question
derivatives
english
319
1
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English_validation_56
For the following characteristics<image_1>, answer the question.
What is the price of a put option?
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screenshot
$8.11
Using put–call parity, the put price is:<ans_image_1>
medium
open question
derivatives
english
319
2
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English_validation_57
none
Suppose that all investors expect that interest rates for the 4 years will be as follows: <image_1> If you have just purchased a 4-year zero-coupon bond, what would be the expected rate of return on your investment in the first year if the implied forward rates stay the same? (Par value of the bond = $1,000)
['5%', '7%', '9%', '10%', 'None of the options are correct']
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table
A
The forward interest rate given for the first year of the investment is given as 5% (see table above).
easy
multiple-choice
fixed income
english
60
1
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English_validation_58
Cooper Reyder was asked by her employer, Astounding Wealth Advisors, to attend a symposium on managing assets for high-net-worth individuals. Sessions were available covering a wide range of topics, including managing individual investor portfolios, lifetime financial advice, setting asset allocation policies, and applying risk tolerance concepts to asset allocation. The Jones Family Case Study, shown in Exhibit 1, provided a helpful framework to present and discuss many of the concepts. The moderator, Vince Dunne, conducted the sessions using panel discussions and lectures, each followed by question and answer (Q&A) periods. <image_1> The initial session on lifetime financial advice evolved into a discussion of the concept of human capital. The speaker briefly described how the present value of an individual's lifetime of income can be considered as an asset class that should be viewed in relation to financial assets. During the lengthy Q&A period, Reyder made the following additional notes: • Term life insurance is superior to lifetime payout annuities when attempting to hedge against the risks of the loss of human capital. • Risk tolerance of the combined portfolio of financial assets and human capital increases proportionally with greater human capital regardless of wage earnings risk. • The magnitude of loss of human capital at younger ages is less important than the higher probability of death at older ages. During a discussion of ways Gladys could achieve her stated goal, the following statements were made: • A jointly owned fixed annuity lifetime payout would achieve her goal as well as providing purchasing power protection. • A jointly owned variable payout lifetime annuity product would also meet her goal but would provide less certainty in terms of cash flow. • Although annuity products would help, it is more important to change the asset allocation of the joint portfolio toward less risk. Mark's stated goal prompted a review of the use of trusts to implement investment and estate planning strategies. Reyder was unfamiliar with trusts. After listening to Dunne's lecture on the topic, Reyder summed up the possibilities to see if she had heard him correctly. "In establishing an irrevocable trust, Peter would be the grantor and Mark would be the beneficiary. A motivation for using this structure could be for Peter to make resources available to Mark without yielding control of those resources to him. A discretionary irrevocable trust could enable the trustee to determine how much to distribute to Mark from time to time based on Mark's general welfare, but the assets cannot be protected from claims made by Mark's creditors."
Which of Reyder's additional notes from the discussion on human capital is most accurate
['the magnitude of loss of human capital', 'the risk tolerance of the combined portfolio', 'term life insurance versus annuities']
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table
C
Solution: C. The statement regarding term life insurance is most accurate. Life insurance is a perfect hedge against the loss of human capital in the event of death, whereas annuities address longevity risk. Although overall risk tolerance increases with human capital, overall risk tolerance decreases with greater wage risk. The magnitude of loss of human capital at younger ages is much more important than the higher probability of death at older ages.
hard
multiple-choice
portfolio management
english
254
1
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English_validation_59
Cooper Reyder was asked by her employer, Astounding Wealth Advisors, to attend a symposium on managing assets for high-net-worth individuals. Sessions were available covering a wide range of topics, including managing individual investor portfolios, lifetime financial advice, setting asset allocation policies, and applying risk tolerance concepts to asset allocation. The Jones Family Case Study, shown in Exhibit 1, provided a helpful framework to present and discuss many of the concepts. The moderator, Vince Dunne, conducted the sessions using panel discussions and lectures, each followed by question and answer (Q&A) periods. <image_1> The initial session on lifetime financial advice evolved into a discussion of the concept of human capital. The speaker briefly described how the present value of an individual's lifetime of income can be considered as an asset class that should be viewed in relation to financial assets. During the lengthy Q&A period, Reyder made the following additional notes: • Term life insurance is superior to lifetime payout annuities when attempting to hedge against the risks of the loss of human capital. • Risk tolerance of the combined portfolio of financial assets and human capital increases proportionally with greater human capital regardless of wage earnings risk. • The magnitude of loss of human capital at younger ages is less important than the higher probability of death at older ages. During a discussion of ways Gladys could achieve her stated goal, the following statements were made: • A jointly owned fixed annuity lifetime payout would achieve her goal as well as providing purchasing power protection. • A jointly owned variable payout lifetime annuity product would also meet her goal but would provide less certainty in terms of cash flow. • Although annuity products would help, it is more important to change the asset allocation of the joint portfolio toward less risk. Mark's stated goal prompted a review of the use of trusts to implement investment and estate planning strategies. Reyder was unfamiliar with trusts. After listening to Dunne's lecture on the topic, Reyder summed up the possibilities to see if she had heard him correctly. "In establishing an irrevocable trust, Peter would be the grantor and Mark would be the beneficiary. A motivation for using this structure could be for Peter to make resources available to Mark without yielding control of those resources to him. A discretionary irrevocable trust could enable the trustee to determine how much to distribute to Mark from time to time based on Mark's general welfare, but the assets cannot be protected from claims made by Mark's creditors."
Which of the statements made about meeting Gladys' stated goal is most accurate? The statement regarding
['fixed annuity products', 'revised asset allocation', 'variable annuity products']
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table
C
Solution: C. A jointly owned variable payout lifetime annuity product would provide cash flows until the end of the surviving spouse's lifetime. Therefore, the Jones family will not outlive the assets. It is true there is less certainty regarding the cash flows because they are linked to the performance of the underlying investments.
hard
multiple-choice
portfolio management
english
254
2
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English_validation_60
Cooper Reyder was asked by her employer, Astounding Wealth Advisors, to attend a symposium on managing assets for high-net-worth individuals. Sessions were available covering a wide range of topics, including managing individual investor portfolios, lifetime financial advice, setting asset allocation policies, and applying risk tolerance concepts to asset allocation. The Jones Family Case Study, shown in Exhibit 1, provided a helpful framework to present and discuss many of the concepts. The moderator, Vince Dunne, conducted the sessions using panel discussions and lectures, each followed by question and answer (Q&A) periods. <image_1> The initial session on lifetime financial advice evolved into a discussion of the concept of human capital. The speaker briefly described how the present value of an individual's lifetime of income can be considered as an asset class that should be viewed in relation to financial assets. During the lengthy Q&A period, Reyder made the following additional notes: • Term life insurance is superior to lifetime payout annuities when attempting to hedge against the risks of the loss of human capital. • Risk tolerance of the combined portfolio of financial assets and human capital increases proportionally with greater human capital regardless of wage earnings risk. • The magnitude of loss of human capital at younger ages is less important than the higher probability of death at older ages. During a discussion of ways Gladys could achieve her stated goal, the following statements were made: • A jointly owned fixed annuity lifetime payout would achieve her goal as well as providing purchasing power protection. • A jointly owned variable payout lifetime annuity product would also meet her goal but would provide less certainty in terms of cash flow. • Although annuity products would help, it is more important to change the asset allocation of the joint portfolio toward less risk. Mark's stated goal prompted a review of the use of trusts to implement investment and estate planning strategies. Reyder was unfamiliar with trusts. After listening to Dunne's lecture on the topic, Reyder summed up the possibilities to see if she had heard him correctly. "In establishing an irrevocable trust, Peter would be the grantor and Mark would be the beneficiary. A motivation for using this structure could be for Peter to make resources available to Mark without yielding control of those resources to him. A discretionary irrevocable trust could enable the trustee to determine how much to distribute to Mark from time to time based on Mark's general welfare, but the assets cannot be protected from claims made by Mark's creditors."
In Reyder's summary on the use of trusts to meet Mark's stated goal, the statement that is least accurate is the one dealing with
['claims by creditors', 'yielding control of resources', 'trust distributions']
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table
A
Solution: A. The statement about the claims by creditors is inaccurate because the trust assets cannot be reached by the beneficiary's creditors. The other statements are accurate
hard
multiple-choice
portfolio management
english
254
3
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English_validation_61
Samuel Morse, is a senior analyst in the Balance Sheet Strategy Division of Bayside Insurance. Morse has been asked to contrast the merits of cash flow matching and duration matching. Bayside presently uses both strategies, but given the recent increase in volatility in US interest rates over the last month, Bayside’s management wants to better prepare for future opportunities. Morse also considers the use of derivatives to manage interest rate risk. This would be a new strategy for Bayside. Morse determines the number of bond futures needed to immunize the overall interest rate risk exposure of the company. The basis point value (BPV) for the asset portfolio is 48,000, while the liability portfolio has a BPV of 22,000. To facilitate her analysis, Morse compiles the additional information related to bond futures shown in Exhibit 1. <image_1> Morse intends to construct sample portfolio structures by shifting the allocations between three tenors of bullet government bonds: 2-year, 10-year and 30-year US Treasury securities. The allocations in the sample portfolios are shown in Exhibit 2. The expected return estimates for the 2- and 30-year bonds, which are shown in Exhibit 3. <image_2> <image_3> Morse interviews Horace Mann to assist him in evaluating fixed-income funds and securities for the bank’s fixed-income offerings. Morse shows his the following financial data of three funds presented in Exhibit 4 and asks him to review each fund. Mann assumes that there is no reinvestment income and the yield curve remains unchanged in the preliminary review of each fund. Morse interviews Horace Mann to assist him in evaluating fixed-income funds and securities for the bank’s fixed-income offerings. Morse shows his the following financial data of three funds presented in Exhibit 4 and asks him to review each fund. Mann assumes that there is no reinvestment income and the yield curve remains unchanged in the preliminary review of each fund. <image_4> Morse recommends Treasuries from the existing portfolio that he believes are overvalued and will generate capital gains. Mann asks Morse why he chose only overvalued bonds with capital gains and did not include any bonds with capital losses. Morse responds with two statements. Statement 1 Taxable investors should prioritize selling overvalued bonds and always sell them before selling bonds that are viewed as fairly valued or undervalued. Statement 2 Taxable investors should never intentionally realize capital lo sses.
Which immunization strategy is most likely to be more negatively impacted by non- parallel shifts in the yield curve
['Cash flow matching', 'Duration matching', 'The strategies will perform the same']
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table
B
Solution: B. A duration matching strategy is more likely than a cash flow matching strategy to be negatively impacted by non-parallel shifts in the yield curve. With cash flow matching, assets are selected to mirror the timing of payments in the liability portfolio. In a duration matching strategy, the potential for greater dispersion of the maturities may lead to unexpected risk exposures as interest rates change over time.
easy
multiple-choice
derivatives
english
247
1
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English_validation_62
Samuel Morse, is a senior analyst in the Balance Sheet Strategy Division of Bayside Insurance. Morse has been asked to contrast the merits of cash flow matching and duration matching. Bayside presently uses both strategies, but given the recent increase in volatility in US interest rates over the last month, Bayside’s management wants to better prepare for future opportunities. Morse also considers the use of derivatives to manage interest rate risk. This would be a new strategy for Bayside. Morse determines the number of bond futures needed to immunize the overall interest rate risk exposure of the company. The basis point value (BPV) for the asset portfolio is 48,000, while the liability portfolio has a BPV of 22,000. To facilitate her analysis, Morse compiles the additional information related to bond futures shown in Exhibit 1. <image_1> Morse intends to construct sample portfolio structures by shifting the allocations between three tenors of bullet government bonds: 2-year, 10-year and 30-year US Treasury securities. The allocations in the sample portfolios are shown in Exhibit 2. The expected return estimates for the 2- and 30-year bonds, which are shown in Exhibit 3. <image_2> <image_3> Morse interviews Horace Mann to assist him in evaluating fixed-income funds and securities for the bank’s fixed-income offerings. Morse shows his the following financial data of three funds presented in Exhibit 4 and asks him to review each fund. Mann assumes that there is no reinvestment income and the yield curve remains unchanged in the preliminary review of each fund. Morse interviews Horace Mann to assist him in evaluating fixed-income funds and securities for the bank’s fixed-income offerings. Morse shows his the following financial data of three funds presented in Exhibit 4 and asks him to review each fund. Mann assumes that there is no reinvestment income and the yield curve remains unchanged in the preliminary review of each fund. <image_4> Morse recommends Treasuries from the existing portfolio that he believes are overvalued and will generate capital gains. Mann asks Morse why he chose only overvalued bonds with capital gains and did not include any bonds with capital losses. Morse responds with two statements. Statement 1 Taxable investors should prioritize selling overvalued bonds and always sell them before selling bonds that are viewed as fairly valued or undervalued. Statement 2 Taxable investors should never intentionally realize capital lo sses.
The number of five-year T-note futures contracts required to be sold in order to rebalance the immunizing portfolio is closest to
['329 contracts', '464 contracts', '501 contracts']
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table
B
Solution: B. With derivative overlay strategies, in order to calculate the number of contracts needed, the futures BPV must be adjusted to reflect the conversion factor: Futures BPV = Note BPV / Conversion Factor 44.8/0.8=56 Number of contracts = (Asset BPV–Liability BPV) / Futures BPV (48,000-22,000)/56=464.286
hard
multiple-choice
derivatives
english
247
2
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Introduction

FAMMA dataset consists of 1,758 meticulously collected multimodal questions. The questions encompass three heterogeneous image types - tables, charts and text & math screenshots - and span eight subfields in finance, comprehensively covering topics across major asset classes. Additionally, all the questions are categorized by three difficulty levels — easy, medium, and hard - and are available in three languages — English, Chinese, and French. Furthermore, the questions are divided into two types: multiple-choice and open questions.

The leaderboard is regularly updated and can be accessed at https://famma-bench.github.io/famma/.

Dataset Structure

features

  • question_id: a unique identifier for the question across the whole dataset.
  • context: relevant background information related to the question.
  • question: the specific query being asked.
  • options: the specific query being asked.
  • image_1- image_7: directories of images referenced in the context or question.
  • image_type: type of the image, e.g., chart, table, screenshot.
  • answers: a concise and accurate response. (non-public on the test set for the moment)
  • explanation:a detailed justification for the answer. (non-public on the test set for the moment)
  • topic_difficulty: a measure of the question's complexity based on the level of reasoning required.
  • question_type: categorized as either multiple-choice or open-ended.
  • subfield: the specific area of expertise to which the question belongs, categorized into eight subfields.
  • language:the language in which the question text is written.
  • main_question_id:a unique identifier for the question within its context; questions with the same context share the same ID.
  • sub_question_id:a unique identifier for the question within its corresponding main question.
  • ans_image_1 - ans_image_4: (non-public on the test set for the moment)

dataset splits

Chinese subset

  • splits:
    • name: validation
      • num_bytes: 530067.0
      • num_examples: 19
    • name: test
      • num_bytes: 10497574.0
      • num_examples: 234

English subset

  • splits:
    • name: validation
      • num_bytes: 19326545.0
      • num_examples: 88
    • name: test
      • num_bytes: 235713843.904
      • num_examples: 1297

French subset

  • splits:
    • name: validation
      • num_bytes: 1945622.0
      • num_examples: 13
    • name: test
      • num_bytes: 14026200.0
      • num_examples: 107

Citation

If you use FAMMA in your research, please cite our paper as follows:

@article{xue2024famma,
  title={FAMMA: A Benchmark for Financial Domain Multilingual Multimodal Question Answering},
  author={Siqiao Xue, Tingting Chen, Fan Zhou, Qingyang Dai, Zhixuan Chu, and Hongyuan Mei},
  journal={arXiv preprint arXiv:2410.04526},
  year={2024},
  url={https://arxiv.org/abs/2410.04526}
}
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