Module 1 Quiz - Introduction to Alternative
Investments
For each question, Circle only one answer from each group of answers.
Question 1 1 pts
Which theory predicts that the term structure of interest rates can have many shapes, including
upward sloping and humped?
Group of answer choices
Unbiased expectations theory
Liquidity preference theory
Market segmentation theory
Question 2 1 pts
You have an investor who wants to impose a 5% hurdle rate, although she doesn't specify the
compounding frequency. In order to minimize the impact of the hurdle on your fee, what
compounding frequency would you implement?
Group of answer choices
A 5% continuously compounded hurdle rate
A 5% monthly compounded hurdle rate
A 5% quarterly compounded hurdle rate
A 5% annually compounded hurdle rate
Question 3 1 pts
Consider a 3‐month FRA (to be settled in several years) with an FRA rate of 4% and a notional
value of $1,000,000. What would happen at the time of settlement if the actual market interest
ate (LIBOR) rises to 5%?
Group of answer choices
The FRA would require the FRA seller to pay the buyer $25,000.
The FRA would require the FRA buyer to pay the seller $25,000.
The FRA would require the FRA seller to pay the buyer $100,000.
The FRA would require the FRA buyer to pay the seller $100,000.
Question 4 1 pts
A hedge fund returns 12% for the year before management and incentive fees have been
subtracted. What is the net return on the fund if the management fee is 1% (applied to the
eginning NAV) and the incentive fee is 20%?
Group of answer choices
2.38%
8.60%
8.80%
9.50%
Question 5 1 pts
The average of five‐year returns for a group of convertible a
itrage funds is 7.89% (annual)
with a standard deviation of 4%. You are doing due diligence on another convertible bond hedge
fund that produced a return of 11.50%. What is the upper end of the 95% confidence level for
convertible bond returns?
Group of answer choices
0.0%
7.89%
11.50%
15.73%.
Question 6 1 pts
How can a protective put be created?
Group of answer choices
A protective put combines being long an asset with a short position in a put option on the same
asset.
A protective put combines being short an asset with a short position in a put option on the same
asset.
A protective put combines being short an asset with a long position in a put option on the same
asset.
A protective put combines being long an asset with a long position in a put option on the same
asset.
Question 7 1 pts
GARCH models are frequently used to do which of the following?
Group of answer choices
Measure autoco
elation
Predict short‐term price movements
Predict long‐term price movements
Predict future volatility
Question 8 1 pts
You calculate four moments of a distribution for a series of returns presented as percentages.
Which of the following is in the same units (percentages) as the underlying data?
Group of answer choices
The first raw moment
The second central moment
The third central moment
The fourth central moment
Question 9 1 pts
Which of the following alternatives is not a co
ect term that could be used to refer to a front
month contract?
Group of answer choices
Front contract
Nea
y contract
Spot contract
Defe
ed contract
Question 10 1 pts
ABX Hedge Fund has an average return of 10% (annual) and standard deviation of return of 8%.
The risk‐free rate is 1.5%. It has a beta of 1.25 relative to its benchmark. You apply a target
eturn of 5% and the target semivariance is XXXXXXXXXXWhat is the Sortino ratio for ABX?
Group of answer choices
0.068
1.0625
1.25
31.25
Question 11 1 pts
Jensen's alpha can be described as which of the following?
Group of answer choices
The constant in a regression equation
A risk‐adjusted measure of past performance
A ratio of risk‐adjusted return
A measure of systematic or nondiversifiable risk
Question 12 1 pts
The area inside a 1‐standard‐deviation confidence band ( + /– 1σ) approximately equals which of
the following?
Group of answer choices
50%
68%
95%
99%
Question 13 1 pts
You enter into a $25 million (notional) interest rate swap at market levels, so you exchange no
money at the outset except for a 1% good faith deposit at your counterparty. Later, you value the
swap and the off‐market amount is $500,000 in your favor. What rate of return did you earn so
far?
Group of answer choices
The gain is infinite because the investment is zero.
The loss is infinite because the investment is zero.
Either 2% or 200%.
There is insufficient information to calculate return.
Question 14 1 pts
Under which condition will the term structure of forward contracts on a financial security be
downward sloping?
Group of answer choices
When the convenience yield is greater than the risk‐free rate.
When the risk‐free rate is greater than the storage cost.
When the interest rate is less than the dividend yield.
When supply of the underlying security exceeds its demand.
Question 15 1 pts
The internal rate of return (IRR) is often used to calculate past hedge fund returns because of
which of the following?
Group of answer choices
The internal rate of return is simpler to apply than the net present value is.
Investing in a hedge fund is a capital investment.
IRR is the simplest tool to track performance over multiple years.
The IRR is analogous to the yield on a bond.
Question 16 1 pts
Consider a 2 to 1 hedge where today a $1,000,000 long bond portfolio with a duration of 7 is
hedged with a $500,000 portfolio. If the hedge is perfect today, which adjustment must be made
in one year to make the hedge perfect?
Group of answer choices
No adjustment is needed.
Change the duration of the long portfolio to 6.5.
Change the duration of the short portfolio to 5.5.
Question 17 1 pts
A hedge fund has returns with skewness of –2.5. This return is which of the following?
Group of answer choices
Leptokurtotic
Mesokurtotic
Skewed right
Skewed left
Question 18 1 pts
Consider a bond that is trading at $100 and is certain to pay a coupon of $5 at the end of six
months. The cost to finance the purchase of this bond is $3, due in six months. What is the no‐
a
itrage price of a futures contract on this bond?
Group of answer choices
$98
$102
$103
$105
Question 19 1 pts
Charlie Green evaluated a project for you and he believes that the return would be 15%
compounded annually. Julie White evaluated a second project for you and she believes that the
eturn would be 14.25% compounded continuously. Which project has the higher expected return
accounting for the different compounding?
Group of answer choices
It is impossible to know without knowing the length of the stream of cash flows with each
project.
Julie White's project has a higher return.
Jason Green's project has a higher return.
The two rates are equivalent.
Question 20 1 pts
A hedge fund has a mean return of 6% with a standard deviation of 4%. The lower end of the
95% confidence band equals which of the following?
Group of answer choices
–2%
–1.84%
0%
13.84%
Question 21 1 pts
A hedge fund had annual returns of 10%, 5%, and –5% in each of the past three years. What is
the arithmetic average return?
Group of answer choices
3.50%
3.63%
3.33%
10.88%
Question 22 1 pts
Which of the following terms best describes a situation where an unskilled manager may decide
not to take substantive risk and just collect the management fee?
Group of answer choices
Holdup Problem
Moral hazard
Adverse selection
Question 23 1 pts
A hedge fund has been producing returns averaging 10% annually with a 4% standard deviation.
What can be said about a return in the future?
Group of answer choices
If the return next year is consistent with past returns, the hedge fund is not likely to produce a
loss at the 95% confidence level.
The hedge fund will not create a loss.
If the return next month is consistent with past returns, the hedge fund is not likely to produce a
loss at the 95% confidence level.
The hedge fund has been manipulating prices to dampen reported volatility.
Question 24 1 pts
A hedge fund NAV goes from 112 to XXXXXXXXXXyear over year). What is the continuously
compounded annualized return?
Group of answer choices
5.29%
–5.43%
5.43%
5.58%
Question 25 1 pts
If you have $125.00 today and put it in a bank account earning 10% interest with no fees, make
no withdrawals, and have $184.68 in your account four years from today, what was the
compounding frequency for the interest?
Group of answer choices
Quarterly
Semiannually
Annually
Question 26 1 pts
Shortfall risk measures which of the following?
Group of answer choices
The frequency or number of times a manager has produced a loss
The probability that a manager will produce a loss in the next period
The probability that a portfolio will return less than an investor's targeted return
The amount that a portfolio falls below the investor's targeted