Qbank
Question 1 of 86.
Ballard's is a multiline retail company that currently
trades on a P/E of 4.6, compared to a 6.3 sector average. Its share price has
declined by 64% over the past 12 months, and the company is lagging behind its
sector peers in terms of innovation and partnerships. If analysts are
predicting negative earnings and a fall in revenue over the next two years,
Ballard's is most likely:
Option A: A growth trap.
Option B: A loss aversion trap.
Option C: A value trap.
... ... ... [PAUSE 5 SECONDS] ... ... ...
Correct Answer: Option C, A value trap.
Explanation: A value trap is a stock that is trading at
relatively low multiples due to its deteriorating fundamentals. A growth trap
applies to growth stocks rather than value stocks.
... ... ... [PAUSE 3 SECONDS] ... ... ...
Question 2 of 86.
Which of the following tactics is least likely to be used by
an activist investor?
Tactic 1: Seeking representation on a company's board of
directors.
Tactic 2: Initiating legal action against a company's
management for breach of fiduciary duties.
Tactic 3: Launching a full takeover bid for a company to
implement significant corporate change.
Option A: Tactic 2.
Option B: Tactic 3.
Option C: Tactic 1.
... ... ... [PAUSE 5 SECONDS] ... ... ...
Correct Answer: Option B, Tactic 3.
Explanation: Activist investors do not typically make full
takeover bids for a company. Instead, they take a significant-but
minority-position of less than 10% and try to garner support from other
shareholders in a proxy contest to push through their desired changes.
... ... ... [PAUSE 3 SECONDS] ... ... ...
Question 3 of 86.
A fund manager identifies his style as "a small
stock/growth strategy that creates value by being very active." A
returns-based style analysis equation is used to evaluate the manager. The
equation is as follows:
Returns on portfolio equals alpha plus b1 times Small Cap
Growth plus b2 times Large Cap Growth plus b3 times Small Cap Value plus b4
times Large Cap Value plus residual error.
Where alpha is a constant interpreted as value added, b_i is
the exposure to style i, and epsilon is residual return.
The results of the equation reveal that b1 = 0.20, b2 =
0.30, b3 = 0.10, and b4 = 0.40.
Furthermore, portfolio return is positive, alpha is close to
zero, and epsilon is considered very large. The manager's claim is most accurate
about:
Option A: Being a very active manager.
Option B: Creating value through active management.
Option C: Investing in small-cap stocks.
... ... ... [PAUSE 5 SECONDS] ... ... ...
Correct Answer: Option A, Being a very active manager.
Explanation: The very large residual term epsilon is
indicative of a manager not closely following the indexes used in the style
analysis. An alpha close to zero indicates the manager is not adding value
beyond the returns explained by the indexes. The coefficients b1 and b3 only
sum to 0.30, indicating most of the returns are not generated from small
stocks.
... ... ... [PAUSE 3 SECONDS] ... ... ...
Question 4 of 86.
Returns-based equity style analysis is least appropriate for
classifying:
Option A: A small-cap, growth fund.
Option B: An equity market neutral fund.
Option C: A large-cap, value fund.
... ... ... [PAUSE 5 SECONDS] ... ... ...
Correct Answer: Option B, An equity market neutral fund.
Explanation: Some equity hedge fund styles, like equity market
neutral, do not fit traditional style categories and cannot be easily
identified using returns-based or holdings-based style analysis. The fund
manager's description and fund prospectus become the key source of information
on style for such funds.
... ... ... [PAUSE 3 SECONDS] ... ... ...
Question 5 of 86.
Fidata has just announced that it is acquiring Topinfo in an
all-stock transaction, subject to regulatory and shareholder approval. Upon
hearing the news, a fund manager decides to buy Topinfo shares and
simultaneously short sell Fidata shares. The manager's strategy is most likely
to be described as:
Option A: Risk arbitrage.
Option B: Pairs trading.
Option C: Statistical arbitrage.
... ... ... [PAUSE 5 SECONDS] ... ... ...
Correct Answer: Option A, Risk arbitrage.
Explanation: Risk arbitrage, also known as merger arbitrage,
is an investment strategy that speculates on the successful completion of a
merger or acquisition. Risk arbitrage related to M&A activity is an
event-driven strategy. A risk arbitrage trade involves buying shares in the
target company and short selling shares in the acquirer, with the expectation
of making a profit when the acquisition is completed. Pairs trading is a
statistical arbitrage strategy that relies on high historical correlation of
prices of the stock pair. Statistical arbitrage strategies use statistical and
technical analysis to exploit pricing anomalies and achieve superior returns.
... ... ... [PAUSE 3 SECONDS] ... ... ...
Question 6 of 86.
Selected financial data for three stocks is shown:
Company ELO: Share Price 22, Forward EPS 2.2, 3-year EPS
Growth Forecast 1 percent, Dividend Yield 3 percent, Sector Average P/E 11.
Company OAR: Share Price 45, Forward EPS 3.0, 3-year EPS
Growth Forecast 15 percent, Dividend Yield 0 percent, Sector Average P/E 14.
Company TLC: Share Price 36, Forward EPS 1.8, 3-year EPS
Growth Forecast 3 percent, Dividend Yield 7 percent, Sector Average P/E 20.
Based on this information, an investor seeking growth at a reasonable
price is most likely to select:
Option A: TLC.
Option B: OAR.
Option C: ELO.
... ... ... [PAUSE 5 SECONDS] ... ... ...
Correct Answer: Option B, OAR.
Explanation: Investors seeking growth at a reasonable price
will select the stock with the lowest P/E-to-growth (PEG) ratio.
PEG for ELO stock = (22 / 2.2) / 1 = 10.0.
PEG for OAR stock = (45 / 3.0) / 15 = 1.0.
PEG for TLC stock = (36 / 1.8) / 3 = 6.7.
The investor should select OAR stock because its PEG ratio
is the lowest of the three stocks.
... ... ... [PAUSE 3 SECONDS] ... ... ...
Question 7 of 86.
A portfolio analyst makes the following statements about a
growth-based investment approach.
Statement 1: Growth investors tend to be more tolerant of
high price multiples than value investors.
Statement 2: The price of a growth stock will increase if
the company achieves above-average growth in earnings in line with consensus
expectations.
Which of the analyst's statements is correct?
Option A: Both Statement 1 and Statement 2.
Option B: Statement 2 only.
Option C: Statement 1 only.
... ... ... [PAUSE 5 SECONDS] ... ... ...
Correct Answer: Option C, Statement 1 only.
Explanation: Compared to value investors, growth investors
are more tolerant of high price multiples because of the expectation that the
share price will increase when the company experiences above-average growth.
The price of a growth stock may not increase even if the company achieves
above-average growth in line with consensus expectations because the stock may
have been overpriced at the time of purchase. This is an example of a growth
trap.
... ... ... [PAUSE 3 SECONDS] ... ... ...
Question 8 of 86.
An equity strategist makes the following statements about
the implementation of active, top-down strategies.
Statement 1: Volatility-based strategies are typically
implemented using derivatives such as VIX futures and variance swaps.
Statement 2: The availability of sector and industry
exchange-traded funds has provided greater flexibility in the implementation of
sector and industry rotation strategies.
Which of the strategist's statements is correct?
Option A: Statement 2 only.
Option B: Both Statement 1 and Statement 2.
Option C: Statement 1 only.
... ... ... [PAUSE 5 SECONDS] ... ... ...
Correct Answer: Option B, Both Statement 1 and Statement 2.
Explanation: Volatility-based strategies are typically
implemented using volatility derivatives, where the payoff depends explicitly
on a prespecified measure of volatility. The availability of sector and
industry exchange-traded funds has enabled sector and industry rotation
strategies to be implemented more flexibly, especially for investors who do not
wish to implement these strategies using individual stocks.
... ... ... [PAUSE 3 SECONDS] ... ... ...
Question 9 of 86.
Which of the following statements regarding statistical
arbitrage strategies is correct?
Statement 1: Statistical arbitrage strategies are typically
implemented using systematic rules.
Statement 2: Statistical arbitrage strategies use
statistical and technical analysis, together with quantitative data, to exploit
pricing anomalies.
Option A: Statement 2 only.
Option B: Statement 1 only.
Option C: Both Statement 1 and Statement 2.
... ... ... [PAUSE 5 SECONDS] ... ... ...
Correct Answer: Option C, Both Statement 1 and Statement 2.
Explanation: Statistical arbitrage strategies use
statistical and technical analysis to exploit pricing anomalies. These
strategies rely on extensive use of data and are typically implemented in a
systematic, rules-based way.
... ... ... [PAUSE 3 SECONDS] ... ... ...
Question 10 of 86.
An active bottom-up manager invests in companies that trade
at reasonable P/E multiples while offering above-average growth in earnings
compared to their sector peers. The manager's investment approach is best
described as:
Option A: Deep-value investing.
Option B: Relative value.
Option C: Growth at a reasonable price.
... ... ... [PAUSE 5 SECONDS] ... ... ...
Correct Answer: Option C, Growth at a reasonable price.
Explanation: The manager's preference for companies that
offer above-average growth in earnings at reasonable valuation multiples
indicates a growth-based approach. Both high-quality value and deep-value
investing are value-based approaches that do not emphasize earnings growth.
... ... ... [PAUSE 3 SECONDS] ... ... ...
Question 11 of 86.
Which of the following methods of implementing a
factor-based equity portfolio is most likely to be used in a market that places
significant constraints on short selling?
Option A: Hedged portfolio approach.
Option B: Factor-mimicking portfolio.
Option C: Factor-tilting portfolio.
... ... ... [PAUSE 5 SECONDS] ... ... ...
Correct Answer: Option C, Factor-tilting portfolio.
Explanation: A factor-tilting portfolio is a long-only
portfolio that tracks a benchmark index while providing exposure to a given
factor. The hedged portfolio approach results in a long/short portfolio, as
does the factor-mimicking portfolio. Investors are likely to avoid long/short
portfolios if there are significant constraints on short selling.
... ... ... [PAUSE 3 SECONDS] ... ... ...
Question 12 of 86.
An equity portfolio manager makes the following statements
about value-based approaches to active investing.
Statement 1: Stocks trading at low price-to-book multiples
due to financial distress are likely to appeal to high-quality value investors.
Statement 2: Compared to noncontrarian value investors,
contrarian investors rely more on market sentiment and sharp price fluctuations
to make investment decisions.
Which of the manager's statements is correct?
Option A: Neither Statement 1 nor Statement 2.
Option B: Statement 2 only.
Option C: Statement 1 only.
... ... ... [PAUSE 5 SECONDS] ... ... ...
Correct Answer: Option B, Statement 2 only.
Explanation: High-quality value investors look for stocks
with attractive valuations, with an emphasis on financial strength and
demonstrated profitability. A company in financial distress is unlikely to
exhibit financial strength/profitability. Contrarian investors rely more on
market sentiment and sharp price fluctuations when making investment decisions,
compared to noncontrarian value investors that rely on fundamental value
indicators such as price multiples.
... ... ... [PAUSE 3 SECONDS] ... ... ...
Question 13 of 86.
A factor-based quantitative active equity investment manager
is investigating the relationship between treasury yields and factor returns.
They regress both contemporaneous and subsequent month factor returns against
the 10-year treasury bond yield. The factors used are systematic risk (beta),
size (market capitalization), and value (book-to-market).
Based on the regression coefficients: Beta in current month
is -0.1, subsequent month is +0.7. Size in current month is +0.1, subsequent
month is -0.2. Value in current month is +0.2, subsequent month is -0.5.
Which of the following strategies is most likely to be
profitable?
Option A: Short high beta securities and long value
securities in months subsequent to treasury yields being high.
Option B: Long high beta securities and short value
securities in months subsequent to treasury yields being high.
Option C: Long high beta securities and short value
securities in months where treasury yields are high.
... ... ... [PAUSE 5 SECONDS] ... ... ...
Correct Answer: Option B, Long high beta securities and
short value securities in months subsequent to treasury yields being high.
Explanation: The regression coefficients indicate there is a
positive relationship between bond yields and returns to high beta securities
in the subsequent month. Hence high beta securities should be bought the month
after high treasury yields have been observed. There is a negative relationship
between bond yields and returns to value securities in the subsequent month, hence
value securities should be sold in the month after high treasury yields have
been observed.
... ... ... [PAUSE 3 SECONDS] ... ... ...
Question 14 of 86.
A portfolio manager who favors a top-down approach to active
investing is least likely to use:
Option A: Contrarian investing.
Option B: Country and geographic allocation.
Option C: A volatility-based strategy.
... ... ... [PAUSE 5 SECONDS] ... ... ...
Correct Answer: Option A, Contrarian investing.
Explanation: Contrarian investing is classified as a
bottom-up approach. Volatility-based strategies and country and geographic
allocation are top-down approaches.
... ... ... [PAUSE 3 SECONDS] ... ... ...
Question 15 of 86.
Which of the following best describes the difference between
the fundamental and quantitative approaches to active management?
Option A: The fundamental approach assumes market efficiency
and is largely passive, while the quantitative approach exploits price
differentials.
Option B: The fundamental approach uses financial statement
data, while the quantitative approach uses market data.
Option C: The fundamental approach uses discretion, while
the quantitative approach is objective.
... ... ... [PAUSE 5 SECONDS] ... ... ...
Correct Answer: Option C, The fundamental approach uses
discretion, while the quantitative approach is objective.
Explanation: Both approaches may use financial statement and
quantitative data. However, the fundamental approach emphasizes discretion and
judgment in estimating intrinsic values of securities, whereas the quantitative
approach relies on systematic rules to select investments. Both approaches are
active strategies.
Question 16 of 86.
Which of the following statements regarding
market-microstructure arbitrage strategies is least accurate?
Option A: High-frequency trading techniques are a
fundamental part of the strategy.
Option B: The typical time horizon of a trade is a few
minutes.
Option C: The strategy analyses limit order books of
exchanges to identify very short-term mispricing opportunities.
... ... ... [PAUSE 5 SECONDS] ... ... ...
Correct Answer: Option B, The typical time horizon of a
trade is a few minutes.
Explanation: Market microstructure arbitrage strategies involve
extensive analysis of the limit order books of trading venues to identify very
short-term trading opportunities. The time horizon of the opportunities is
usually a few milliseconds.
... ... ... [PAUSE 3 SECONDS] ... ... ...
Question 17 of 86.
The table below provides information on three stocks being
considered for investment by a bottom-up equity manager:
Stock S: Price $5, 12-Month Forward EPS $0.25, 3-Year EPS
Growth Forecast 20 percent, Dividend $0.00, Industry Sector Pharmaceuticals,
Sector Average P/E 20.
Stock T: Price $95, 12-Month Forward EPS $4.75, 3-Year EPS
Growth Forecast 3 percent, Dividend $0.08, Industry Sector Defense, Sector
Average P/E 25.
Stock U: Price $15, 12-Month Forward EPS $5.50, 3-Year EPS
Growth Forecast -5 percent, Dividend $0.03, Industry Sector Utilities, Sector
Average P/E 12.
Which stock is most likely to be the best opportunity for
investors that use a relative value approach?
Option A: Stock T.
Option B: Stock U.
Option C: Stock S.
... ... ... [PAUSE 5 SECONDS] ... ... ...
Correct Answer: Option A, Stock T.
Explanation: Relative value investors look for low price
multiples relative to the industry sector. Stock S has a PE of 5 / $0.25 = 20x
which is equal to the industry average hence stock S is not a relative value
investment. Stock T has a PE of 95 / $4.75 = 20x which is below the industry
average of 25x hence making it potentially a relative value investment. Stock U
has a PE of 15 / 5.5 = 2.7x which is considerably lower than the industry
average of 12. This would suggest that Stock U would be more appropriate for a
deep value or distressed investing strategy than a relative value strategy.
... ... ... [PAUSE 3 SECONDS] ... ... ...
Question 18 of 86.
A fund analyst makes the following statements about
holdings-based equity style analysis.
Statement 1: Compared to a returns-based approach, a
holdings-based approach can be more widely applied but is generally less
accurate.
Statement 2: Holdings-based style analysis is a bottom-up approach
that requires availability of all portfolio constituents, including the style
attributes of each stock in the portfolio.
Which of the analyst's statements is correct?
Option A: Statement 1 only.
Option B: Both Statement 1 and Statement 2.
Option C: Statement 2 only.
... ... ... [PAUSE 5 SECONDS] ... ... ...
Correct Answer: Option C, Statement 2 only.
Explanation: Holdings-based style analysis looks at the
attributes of each individual stock in a portfolio and aggregates these
attributes to determine the overall style of the portfolio. It therefore
requires knowledge of all portfolio constituents and the style attributes of
each stock. This means that a holdings-based approach facilitates deeper style
analysis and is generally more accurate than a returns-based approach. Many
investment managers do not make full disclosure of their funds' constituents,
limiting the application of a holdings-based approach.
... ... ... [PAUSE 3 SECONDS] ... ... ...
Question 19 of 86.
Which of the following active management strategies is most
likely to be employed by a top-down equity fund?
Option A: Thematic investing.
Option B: Special situations.
Option C: Restructuring and distressed investing.
... ... ... [PAUSE 5 SECONDS] ... ... ...
Correct Answer: Option A, Thematic investing.
Explanation: Thematic investing is a top-down approach,
whereas special situations and restructuring and distressed investing are
bottom-up approaches.
... ... ... [PAUSE 3 SECONDS] ... ... ...
Question 20 of 86.
Investors using the quantitative approach to active equity
investing are most likely to:
Option A: Construct models that use systematic rules to
select investments.
Option B: Continuously monitor and rebalance portfolio
constituents.
Option C: Analyze a relatively small number of stocks.
... ... ... [PAUSE 5 SECONDS] ... ... ...
Correct Answer: Option A, Construct models that use
systematic rules to select investments.
Explanation: The quantitative approach to active management
uses models that use systematic nondiscretionary rules to select portfolio
constituents. Quantitative investors focus on identifying relationships between
returns and factors across a large group of stocks. Quantitative investors
usually rebalance their portfolios at regular intervals (e.g., monthly or
quarterly) using predetermined rules.
... ... ... [PAUSE 3 SECONDS] ... ... ...
Question 21 of 86.
Competitive positioning and environmental, social and
governance (ESG) characteristics of a company are most likely to be used as
information sources for:
Option A: Fundamental active managers only.
Option B: Both quantitative and fundamental active equity
managers.
Option C: Neither quantitative nor fundamental active equity
managers.
... ... ... [PAUSE 5 SECONDS] ... ... ...
Correct Answer: Option A, Fundamental active managers only.
Explanation: Competitive positioning and environmental,
social and governance (ESG) characteristics of a company are data that are
unlikely to be expressed numerically, and as such are unlikely to be
information used in a quantitative active equity approach. Fundamental active
equity approaches focusing on bottom-up investing could consider such
information as part of their approach.
... ... ... [PAUSE 3 SECONDS] ... ... ...
Question 22 of 86.
A quantitative portfolio manager is backtesting a
factor-based strategy for a new equity fund. If the manager uses the Pearson
information coefficient to assess factor performance in the backtest, he is
most likely to be analyzing the strength of the linear relationship between:
Option A: The current period's stock returns and the next
period's factor scores.
Option B: The current period's factor scores and the next
period's stock returns.
Option C: The current period's factor scores and stock
returns.
... ... ... [PAUSE 5 SECONDS] ... ... ...
Correct Answer: Option B, The current period's factor scores
and the next period's stock returns.
Explanation: Backtesting a quantitative strategy is used to
identify the correlation between the current period's factor scores and next
period's stock returns.
... ... ... [PAUSE 3 SECONDS] ... ... ...
Question 23 of 86.
A fund manager makes the following statements about the
fundamental approach to active equity investing.
Statement 1: Forecasting the future business prospects of a
company is an important aspect of fundamental analysis.
Statement 2: Risks to a fundamental strategy include
misestimation of a stock's intrinsic value and failure of the market to
recognize a stock's mispricing.
Which of the manager's statements is correct?
Option A: Statement 1 only.
Option B: Statement 2 only.
Option C: Both Statement 1 and Statement 2.
... ... ... [PAUSE 5 SECONDS] ... ... ...
Correct Answer: Option C, Both Statement 1 and Statement 2.
Explanation: Fundamental analysis is used to estimate the
intrinsic value of a company's stock and to generate forecasts of the company's
future business prospects, including earnings and cash flows. Risks to a
fundamental strategy lie at the individual company level (e.g., misestimation
of a stock's intrinsic value) or failure of the market to recognize a stock's
mispricing.
... ... ... [PAUSE 3 SECONDS] ... ... ...
Question 24 of 86.
Suppose a positive, nonlinear relationship exists between
stock returns and a risk factor. An analyst computes both a Pearson information
coefficient and a Spearman Rank information coefficient. Which of the following
relationships is most likely?
Option A: The Pearson information coefficient is less than
the Spearman Rank information coefficient.
Option B: The information coefficients will be equal.
Option C: The Pearson information coefficient is greater
than the Spearman Rank information coefficient.
... ... ... [PAUSE 5 SECONDS] ... ... ...
Correct Answer: Option A, The Pearson information
coefficient is less than the Spearman Rank information coefficient.
Explanation: Because the relationship is positive, the
information coefficients will be positive as well. The Spearman Rank
information coefficient is more robust to the nonlinear relationship because it
is only measuring the correlation between rankings and not the raw data.
Therefore, the Spearman Rank coefficient will most likely be higher.
... ... ... [PAUSE 3 SECONDS] ... ... ...
Question 25 of 86.
Justin Nadder is an analyst selecting stocks based upon the
strength of company earnings and effectiveness of management. The approach
Nadder is using is:
Option A: Income investing.
Option B: High quality value.
Option C: Relative value.
... ... ... [PAUSE 5 SECONDS] ... ... ...
Correct Answer: Option B, High quality value.
Explanation: High quality value emphasizes quality
management and financial strength. Relative value utilizes value ratios, such
as price-to-book and price-to-earnings, and income investing focuses on income
measures, such as dividend yields.
... ... ... [PAUSE 3 SECONDS] ... ... ...
Question 26 of 86.
When starting the quantitative active investment process, a
portfolio manager is most likely to select factors and models that differ from
those of other quantitative investors to:
Option A: Maximize short availability.
Option B: Minimize transaction costs.
Option C: Avoid crowding.
... ... ... [PAUSE 5 SECONDS] ... ... ...
Correct Answer: Option C, Avoid crowding.
Explanation: Quant crowding can occur if many investors
follow similar strategies. Once a strategy becomes crowded, there is a risk
that a period of poor performance could cause many investors to exit their
positions at the same time, thereby exacerbating losses.
... ... ... [PAUSE 3 SECONDS] ... ... ...
Question 27 of 86.
A portfolio strategist makes the following statements
related to a factor-based strategy for a quantitative fund.
Statement 1: When creating a multifactor model for a
factor-based strategy, investors should avoid using qualitative processes to
select factors for inclusion in the model.
Statement 2: When evaluating a factor-based strategy, an
out-of-sample backtest should be performed to confirm model robustness.
Which of the strategist's statements is correct?
Option A: Both Statement 1 and Statement 2.
Option B: Statement 1 only.
Option C: Statement 2 only.
... ... ... [PAUSE 5 SECONDS] ... ... ...
Correct Answer: Option C, Statement 2 only.
Explanation: When deciding which factors to include in a
multifactor model, investors can use qualitative or systematic processes to
select and weight each factor. Out-of-sample testing, which uses a data set
that is different from the one that was initially used to backtest the
strategy, is usually performed to confirm model robustness.
... ... ... [PAUSE 3 SECONDS] ... ... ...
Question 28 of 86.
Geo Roberts is an analyst ranking stocks by
price-to-earnings ratios. Roberts has found that several low price-to-earnings
ratio stocks subsequently underperformed the market. He has most likely
discovered investments subject to:
Option A: The value trap.
Option B: The growth trap.
Option C: Behavioral biases.
... ... ... [PAUSE 5 SECONDS] ... ... ...
Correct Answer: Option A, The value trap.
Explanation: Value stocks, such as those with low
price-to-earnings ratios, may underperform the market due to deteriorating
fundamentals. The growth trap relates to high growth stocks not meeting growth
expectations and underperforming.
... ... ... [PAUSE 3 SECONDS] ... ... ...
Question 29 of 86.
An actively managed fund includes the following statement in
its fact sheet:
"The fund invests in equities of companies that
contribute to lowering carbon emissions by favoring clean energy in their
production process. The fund invests in developed and emerging markets, using a
combination of market and fundamental company analysis to select securities
that it believes offer growth prospects at a reasonable price."
The fund is best described as:
Option A: A geographic fund with a value orientation.
Option B: A thematic fund with a growth orientation.
Option C: A sector rotation fund with a growth orientation.
... ... ... [PAUSE 5 SECONDS] ... ... ...
Correct Answer: Option B, A thematic fund with a growth
orientation.
Explanation: The fund is a clean energy thematic fund that
invests in companies across the developed and emerging markets. It uses a
growth-based approach, favoring companies that offer growth at a reasonable
price.
... ... ... [PAUSE 3 SECONDS] ... ... ...
Question 30 of 86.
A quantitative equity fund includes the following statement
in its fact sheet:
"The fund seeks to efficiently deliver excess returns
by investing in a diverse portfolio of high-quality companies with positive
momentum. To assess fundamentals and derive an alpha forecast for all
investable constituents, the strategy uses a multifactor model using the
following metrics: P/E ratio, accruals anomaly, and 12-month increase in stock
price. The fund's risk management framework mitigates unintended risk through a
sector-neutral approach."
Based on this information, the fund is most likely using a
factor-based model that incorporates metrics of:
Option A: Growth, profitability, and price momentum.
Option B: Value, profitability, and analyst sentiment.
Option C: Value, earnings quality, and price momentum.
... ... ... [PAUSE 5 SECONDS] ... ... ...
Correct Answer: Option C, Value, earnings quality, and price
momentum.
Explanation: The P/E ratio is a value factor metric.
Accruals anomaly is an earning quality metric. The 12-month increase in stock
price is related to the price momentum factor.
Question 31 of 86.
Which of the following listed companies is an activist
investor most likely to invest in, based on the fundamental characteristics of
the companies?
Company 1: A large-cap utilities company with a
weaker-than-average corporate governance rating.
Company 2: A small software company with strong earnings
growth and positive share price momentum.
Company 3: A regional clothing retailer that has filed for
bankruptcy, with $8 billion in debt and $1 billion in assets.
Option A: Company 2.
Option B: Company 1.
Option C: Company 3.
... ... ... [PAUSE 5 SECONDS] ... ... ...
Correct Answer: Option B, Company 1.
Explanation: Activist investors target companies that, on
average, feature slower earnings and weaker revenue growth than the market,
negative share price momentum, and weaker-than-average corporate governance.
Company 1 has weaker-than-average corporate governance. Company 2 has strong
fundamental characteristics. Company 3 would be more appropriate for investors
that specialize in restructuring and distressed investing.
... ... ... [PAUSE 3 SECONDS] ... ... ...
Question 32 of 86.
Which of the following investment strategies is least likely
to be a top-down investment strategy?
Option A: Volatility based strategies.
Option B: Thematic investment strategies.
Option C: Special situations strategies.
... ... ... [PAUSE 5 SECONDS] ... ... ...
Correct Answer: Option C, Special situations strategies.
Explanation: The special situations investment style focuses
on mispricings occurring due to corporate events such as mergers, acquisitions,
spin-offs and divestitures. These corporate events relate to individual company
information and hence this is a bottom-up strategy. Both volatility based and
thematic investment strategies look at markets as a whole and hence are more
likely to be top down strategies.
... ... ... [PAUSE 3 SECONDS] ... ... ...
Question 33 of 86.
An analyst engages in an active strategy based upon the
ratio of the prices of stock W to stock Y. Both stocks are in the same
industry. Currently, the ratio is historically high at more than two standard
deviations from its moving average. The analyst will most likely:
Option A: Sell stock W according to a pairs trading
strategy.
Option B: Buy stock W according to an event-driven strategy.
Option C: Sell stock Y according to a pairs trading
strategy.
... ... ... [PAUSE 5 SECONDS] ... ... ...
Correct Answer: Option A, Sell stock W according to a pairs
trading strategy.
Explanation: The trading of two stocks in the same industry
most likely relates to a pairs trading strategy. Because the ratio is
historically high, the expectation is that the ratio will revert to the mean
with stock W decreasing relative to stock Y.
... ... ... [PAUSE 3 SECONDS] ... ... ...
Question 34 of 86.
An investment consultant lists three distinguishing features
of the fundamental approach to active equity investing as follows:
Feature 1: Discretionary decision-making process.
Feature 2: Portfolio construction controls for risk at the
portfolio level.
Feature 3: In-depth analysis of companies to estimate their
intrinsic values.
Which of the features listed by the consultant is least
accurate?
Option A: Feature 2.
Option B: Feature 3.
Option C: Feature 1.
... ... ... [PAUSE 5 SECONDS] ... ... ...
Correct Answer: Option A, Feature 2.
Explanation: The fundamental approach to active management
uses a discretionary decision-making process and in-depth analysis of companies
to estimate their intrinsic values. The in-depth analysis of fundamental
investors results in a list of high-conviction stocks, indicating that
fundamental investors view risk at the company level. In contrast, the
quantitative approach uses optimizers in portfolio construction to control for
risk at the portfolio level.
... ... ... [PAUSE 3 SECONDS] ... ... ...
Question 35 of 86.
When creating a fundamental active investment strategy, an
active equity manager should assign a price target that they believe to be the
fair value of the security. Which of the following statements regarding this
price target is most accurate?
Option A: The stock position should always be fully
liquidated as soon as the security reaches the price target.
Option B: The price target should not be adjusted after it
is set at the outset in order to avoid suffering from behavioral biases such as
loss aversion.
Option C: Adjusting the price target down in response to
negative news flow until it is lower than the current market price would
trigger a sale or reduction in the position size.
... ... ... [PAUSE 5 SECONDS] ... ... ...
Correct Answer: Option C, Adjusting the price target down in
response to negative news flow until it is lower than the current market price
would trigger a sale or reduction in the position size.
Explanation: The price target specified in a fundamental
investing strategy need not be fixed but can be updated to reflect changing
market conditions since the position was established. The manager should
recognize that the fair value of the security is an estimate and therefore
would not necessarily liquidate the full position as soon as the stock reaches
the price target, instead choosing to reduce the position.
... ... ... [PAUSE 3 SECONDS] ... ... ...
Question 36 of 86.
Which of the following statements regarding activist equity
investing is most accurate?
Option A: The assets under management of activist hedge
funds decreased sharply during the global financial crisis of 2008/2009 and
have since failed to recover to pre-crisis levels.
Option B: Activist investors tend to target companies that
have lower than average revenue growth with negative price momentum.
Option C: Activist investors tend to target companies that
have multi-class share structures.
... ... ... [PAUSE 5 SECONDS] ... ... ...
Correct Answer: Option B, Activist investors tend to target
companies that have lower than average revenue growth with negative price
momentum.
Explanation: Activist investors will target companies that
are not being run efficiently. These tend to be companies that have slower than
average revenue growth and negative price momentum. A multi-class share
structure may hinder activist investors since this usually means that the
founder's shares have multiple votes per share. The comment regarding the
assets under management of activist hedge funds is incorrect.
... ... ... [PAUSE 3 SECONDS] ... ... ...
Question 37 of 86.
Kiran Murthy manages a hedge fund that specializes in making
equity investments in a limited number of listed companies, then engaging with
management to bring about change for the purpose of generating superior returns
on the fund's invested capital. Murthy's investment strategy is best described
as:
Option A: Synergistic.
Option B: Top down.
Option C: Activist.
... ... ... [PAUSE 5 SECONDS] ... ... ...
Correct Answer: Option C, Activist.
Explanation: Activist investors specialize in taking stakes
in listed companies and pushing for companies to make changes that are expected
to enhance the value of the activist's stake. Top-down investors focus on the
overall macroeconomic environment and broad market variables when taking active
exposures.
... ... ... [PAUSE 3 SECONDS] ... ... ...
Question 38 of 86.
Selected financial data on three stocks is shown:
Company JLS: Share Price 17, Forward EPS 8.5, 3-year EPS
Growth Forecast -8 percent, Dividend Yield 1 percent, Sector Average P/E 12.
Company REM: Share Price 40, Forward EPS 2.5, 3-year EPS
Growth Forecast 3 percent, Dividend Yield 2 percent, Sector Average P/E 23.
Company TLC: Share Price 36, Forward EPS 1.8, 3-year EPS
Growth Forecast 3 percent, Dividend Yield 7 percent, Sector Average P/E 20.
Based on the information in the table, an investor using a
relative value approach is least likely to select:
Option A: REM.
Option B: JLS.
Option C: TLC.
... ... ... [PAUSE 5 SECONDS] ... ... ...
Correct Answer: Option C, TLC.
Explanation: P/E for JLS stock = 17 / 8.5 = 2.0. P/E for REM
stock = 40 / 2.5 = 16.0. P/E for TLC stock = 36 / 1.8 = 20.0. JLS and REM have
P/E ratios that are significantly lower than the average P/E of their sector
peers, indicating that these stocks are good candidates for a relative value
approach. TLC's P/E ratio of 20 matches its sector average P/E, indicating that
it does not offer value relative to its sector peers based on this value
indicator.
... ... ... [PAUSE 3 SECONDS] ... ... ...
Question 39 of 86.
A hedge fund analyst makes the following statements
regarding activist investing.
Statement 1: Activist investors tend to have a shorter investment
time horizon compared to that of buy-and-hold investors.
Statement 2: Activist investors may advocate for changes
that are nonfinancial in nature (e.g., ESG-related matters).
Which of the analyst's statements is correct?
Option A: Statement 1 only.
Option B: Statement 2 only.
Option C: Both Statement 1 and Statement 2.
... ... ... [PAUSE 5 SECONDS] ... ... ...
Correct Answer: Option C, Both Statement 1 and Statement 2.
Explanation: While some activist investors may push for
changes that lead to superior returns on their invested capital, other activist
investors may target nonfinancial issues like a company's ESG record. While the
activist investing process can take several years, this is typically shorter
than the time horizon for a buy-and-hold investor (e.g., an index-replicating
passive investor).
... ... ... [PAUSE 3 SECONDS] ... ... ...
Question 40 of 86.
The following data is available for Stock X and Stock Y:
Stock X: Recent percentage price change positive 2.4
percent, percentage of earnings due to accruals 20 percent.
Stock Y: Recent percentage price change negative 1.3
percent, percentage of earnings due to accruals 42 percent.
Based upon the data, which of the following statements is
most likely true?
Option A: Stock X is preferred for a portfolio based on
quality of earnings.
Option B: Stock Y is preferred for a portfolio based on
momentum.
Option C: Stock Y is preferred for a portfolio based on
unstructured data.
... ... ... [PAUSE 5 SECONDS] ... ... ...
Correct Answer: Option A, Stock X is preferred for a
portfolio based on quality of earnings.
Explanation: Nonaccrual earnings are viewed as higher
quality, so X is preferred to Y for a quality of earnings portfolio. X has a
recent price increase and is also preferred for a portfolio based on momentum.
Unstructured data relates to other information, such as social media
information.
... ... ... [PAUSE 3 SECONDS] ... ... ...
Question 41 of 86.
A quantitative analyst makes the following statements about
a pairs trading strategy.
Statement 1: An appropriate stock pair for a pairs trading
strategy can be identified using either a quantitative or a fundamental
approach.
Statement 2: A pairs trading strategy anticipates mean
reversion in stock prices.
Which of the analyst's statements is correct?
Option A: Statement 2 only.
Option B: Statement 1 only.
Option C: Both Statement 1 and Statement 2.
... ... ... [PAUSE 5 SECONDS] ... ... ...
Correct Answer: Option C, Both Statement 1 and Statement 2.
Explanation: The identification of the stock pair can be
done using either a quantitative or a fundamental approach. A pairs trading
strategy bets that there will be mean reversion in the price relationship of
the stock pair (i.e., that the price divergence is temporary).
... ... ... [PAUSE 3 SECONDS] ... ... ...
Question 42 of 86.
Which of the following equity funds is most likely pursuing
a quantitative approach to active management?
Maple fund: The fund is designed to identify and exploit
short-term market inefficiencies using quality, value, and momentum factors to
deliver alpha through a disciplined, systematic process.
Poplar fund: The fund manager analyzes the historical
economic earnings of a company to gain an understanding of the business. The
manager also considers competitive advantages, products, management quality,
and other performance drivers when selecting securities for the fund.
Option A: Maple fund only.
Option B: Both Maple fund and Poplar fund.
Option C: Poplar fund only.
... ... ... [PAUSE 5 SECONDS] ... ... ...
Correct Answer: Option A, Maple fund only.
Explanation: Maple uses a quantitative approach based on
quality, value, and momentum factors to identify securities that will deliver
superior returns. The fund also uses a systematic active management process,
which is a feature of a quantitative strategy. Poplar uses a fundamental,
bottom-up approach to research and analyze companies. In a fundamental
strategy, the insights obtained from fundamental research into both
quantifiable and qualitative characteristics are used to generate forecasts and
select securities for the fund.
... ... ... [PAUSE 3 SECONDS] ... ... ...
Question 43 of 86.
The pitfall in quantitative investing that is most likely to
result in model overfitting is:
Option A: Data mining.
Option B: Look-ahead bias.
Option C: Survivorship bias.
... ... ... [PAUSE 5 SECONDS] ... ... ...
Correct Answer: Option A, Data mining.
Explanation: In data mining, an investor performs an
excessive search analysis of historical financial data to find data that shows
a strategy is working. This can introduce a bias that results in model
overfitting. Look-ahead bias occurs when a simulation relies on data that was not
yet available during the time period being studied. Survivorship bias occurs
when backtesting is applied only to existing companies, overlooking companies
that have failed in the past. This will make the strategy appear more effective
than it is.
... ... ... [PAUSE 3 SECONDS] ... ... ...
Question 44 of 86.
Company A announces a cash-only purchase of Company B. In
order to profit from this event, a merger-arbitrage hedge fund manager would
most likely:
Option A: Purchase the shares of Company B after the deal is
announced.
Option B: Purchase the shares of Company B prior to the deal
being announced.
Option C: Purchase the shares of Company B and short sell
the shares of Company A after the deal is announced.
... ... ... [PAUSE 5 SECONDS] ... ... ...
Correct Answer: Option A, Purchase the shares of Company B
after the deal is announced.
Explanation: In a cash-only merger, the merger-arbitrage
manager would purchase the shares of the target company and earn a risk premium
when the deal is closed. This is done after the deal is announced, since the
price of the target company typically remains below the offered price until the
transaction is completed and the manager can earn a profit if and when the deal
closes. There is no requirement to short sell the shares of the acquiring
company in a cash-only deal—this would be required if the transaction were a
stock-for-stock acquisition.
... ... ... [PAUSE 3 SECONDS] ... ... ...
Question 45 of 86.
Portfolio managers using the fundamental approach to active equity
investing are most likely to:
Option A: Use statistical modeling based on historical stock
data to identify factors that can be used to predict stock returns.
Option B: Spread factor bets across a large number of
stocks.
Option C: Exercise judgment in portfolio construction,
subject to the portfolio's risk parameters.
... ... ... [PAUSE 5 SECONDS] ... ... ...
Correct Answer: Option C, Exercise judgment in portfolio
construction, subject to the portfolio's risk parameters.
Explanation: The fundamental approach uses judgment in
portfolio construction, with higher conviction ideas receiving a larger weight
in the portfolio, subject to the portfolio's risk parameters. The quantitative
approach uses historical data and statistical modeling to identify factors that
have predictive power. Quantitative investors spread their factor bets across
smaller positions in a large number of holdings.
Question 46 of 86.
Edvard Svendsen, CEO of Fjord Expeditions, learns that
Topvalue Capital, an activist hedge fund, has just increased its holding in the
company's stock from 7.2% to 9.4%. Svendsen makes the following statement.
"The company's management has at least two defenses
that it could use to deter activist investors and hostile takeover bids."
The defenses that Svendsen is referring to is least likely
to be:
Option A: Poison pills.
Option B: Multiclass share structures.
Option C: Annual re-election of the board of directors.
... ... ... [PAUSE 5 SECONDS] ... ... ...
Correct Answer: Option C, Annual re-election of the board of
directors.
Explanation: The typical defenses that are used by
management resisting the activist investors include poison pills, multiclass
share structures, and staggered board provisions. Annual re-election of the
board potentially enables an activist investor to replace the entire
composition of the current board with its preferred candidates at the next
annual general meeting.
... ... ... [PAUSE 3 SECONDS] ... ... ...
Question 47 of 86.
Of the following investment strategies, which one would
benefit most from a bottom-up forecasting approach in predicting equity
returns?
Option A: A macro hedge fund manager allocating funds among
currency markets.
Option B: Buying and selling individual securities to
capture short-term pricing inefficiency.
Option C: Allocating invested funds across various markets.
... ... ... [PAUSE 5 SECONDS] ... ... ...
Correct Answer: Option B, Buying and selling individual
securities to capture short-term pricing inefficiency.
Explanation: In a bottom-up forecasting approach, the
analyst first takes a microeconomic perspective by focusing on the fundamentals
of individual firms indicative of buying and selling individual securities to
capture short-term pricing inefficiency. In a top-down forecasting approach,
the analyst utilizes macroeconomic factors (e.g., interest rate expectations,
expected growth in GDP) to estimate the performance of market-wide indicators,
such as the S&P 500. Successive steps include identifying sectors in the
market that will perform best given market expectations.
... ... ... [PAUSE 3 SECONDS] ... ... ...
Question 48 of 86.
An actively managed fund includes the following statement in
its fact sheet:
"The fund seeks to outperform traditional large-cap
equity indexes over full market cycles by investing in various sectors of the
equity market using exchange-traded funds (ETFs). The fund will invest in ETFs
based on the manager's macroeconomic and asset cycle investing methodology.
This methodology determines the rank order of equity sectors and then makes
periodic shifts to (1) capitalize on market opportunities or (2) avoid market
declines. Over- and underweights of industry sectors are determined by the
overall market and sector outlook. The fund expects to hold 8 to 10 ETFs at any
given time."
The fund is most likely to be using:
Option A: A top-down, sector rotation strategy.
Option B: A bottom-up, relative value strategy.
Option C: A top-down, thematic investment strategy.
... ... ... [PAUSE 5 SECONDS] ... ... ...
Correct Answer: Option A, A top-down, sector rotation
strategy.
Explanation: The fund uses a top-down approach, basing its
ranking of equity sectors on macroeconomic factors. The fund then uses a sector
rotation strategy to capitalize on market opportunities or to avoid a declining
market. The fund invests in ETFs to implement its sector rotation strategy, in
contrast to a bottom-up approach of analyzing individual stocks.
... ... ... [PAUSE 3 SECONDS] ... ... ...
Question 49 of 86.
Vivian Cecilia is examining price-to-book ratios as a
rewarded factor using the hedged portfolio approach. After ranking stocks by
their price-to-book ratios, which of the following will most likely be included
in the process of the approach she is using?
Option A: The portfolio will short the middle 20% of
price-to-book ratio stocks while going long in the 10% highest and 10% lowest
price-to-book ratio stocks.
Option B: Market risk is hedged from the portfolio using
derivatives.
Option C: The portfolio will go long in the lowest 10%
price-to-book ratio stocks and short in the 10% highest price-to-book ratio
stocks.
... ... ... [PAUSE 5 SECONDS] ... ... ...
Correct Answer: Option C, The portfolio will go long in the
lowest 10% price-to-book ratio stocks and short in the 10% highest
price-to-book ratio stocks.
Explanation: The hedged portfolio approach ranks securities
by a risk factor. From the ranked securities, a portfolio is formed by going
long in the most extreme desirable quantile and shorting the most extreme
undesirable quantile. The approach is hedged since it is both long and short
but does not necessarily remove market risk and does not use derivatives.
... ... ... [PAUSE 3 SECONDS] ... ... ...
Question 50 of 86.
Which of the following statements regarding the backtesting
of factor exposures and stock returns of a quantitative strategy is correct?
Statement 1: The higher the Pearson information coefficient,
the higher the predictive power of the factor for subsequent stock returns,
assuming a linear relationship between factor exposures and stock returns.
Statement 2: The Spearman rank information coefficient
measures the correlation between the ranked factor scores and ranked forward
stock returns; it is considered a more robust metric than the Pearson
information coefficient.
Option A: Statement 2 only.
Option B: Statement 1 only.
Option C: Both Statement 1 and Statement 2.
... ... ... [PAUSE 5 SECONDS] ... ... ...
Correct Answer: Option C, Both Statement 1 and Statement 2.
Explanation: Backtesting a quantitative strategy is used to
identify the correlation between the current period's factor scores and next
period's stock returns. Assuming a linear relationship between factor exposures
and subsequent stock returns, the higher the Pearson IC, the higher the
predictive power of the factor. Because the Pearson IC is sensitive to
outliers, analysts prefer to use the more robust Spearman rank IC, which
measures the correlation between the ranked factor scores and ranked forward
stock returns.
... ... ... [PAUSE 3 SECONDS] ... ... ...
Question 51 of 86.
The fundamental active investment process for an equity
portfolio is least likely to include:
Option A: Back-testing of the investment strategy.
Option B: Prescreening of the investment universe to
identify a manageable set of stocks for further analysis.
Option C: A definition of the investment thesis.
... ... ... [PAUSE 5 SECONDS] ... ... ...
Correct Answer: Option A, Back-testing of the investment
strategy.
Explanation: The fundamental active investment process
begins with the following steps: (1) define the investment universe and the
market opportunity (also known as the investment thesis); and (2) prescreen the
investment universe to identify a manageable set of stocks for further
analysis. Backtesting of the investment strategy is part of the investment
process for quantitative investing.
... ... ... [PAUSE 3 SECONDS] ... ... ...
Question 52 of 86.
The first step in the quantitative active investment process
is the definition of the market opportunity. The most appropriate next step in
this process is to:
Option A: Back test and evaluate the strategy.
Option B: Acquire and process data that is required for the
strategy.
Option C: Understand the industry and business of the
strategy's investment universe.
... ... ... [PAUSE 5 SECONDS] ... ... ...
Correct Answer: Option B, Acquire and process data that is
required for the strategy.
Explanation: A quantitative active investment process is
structured as follows: (1) define the market opportunity (also known as the
investment thesis); (2) acquire and process data that is required for the
strategy; (3) back test the strategy; (4) evaluate the strategy; and (5)
construct the portfolio. Understanding the industry and business of the
strategy's investment universe is part of the fundamental active investment
process.
... ... ... [PAUSE 3 SECONDS] ... ... ...
Question 53 of 86.
A quantitative portfolio manager is analyzing the following
stock pairs for her pairs trading strategy using statistical arbitrage:
Pair 1: The historical ratio of the stocks' prices exhibits
mean reversion, the current price ratio is nearly two standard deviations above
its moving average, and the historical correlation between the stocks' prices
is high.
Pair 2: The historical ratio of the stocks' prices does not
exhibit mean reversion, the current price ratio is more than one standard
deviation below its moving average, and the historical correlation between the
stocks' prices is low.
Which stock pair is the manager likely to use for
statistical arbitrage?
Option A: Both Pair 1 and Pair 2.
Option B: Pair 1 only.
Option C: Pair 2 only.
... ... ... [PAUSE 5 SECONDS] ... ... ...
Correct Answer: Option B, Pair 1 only.
Explanation: The manager should use Pair 1, as the two
stocks are historically highly correlated. The manager is betting that the
breakdown in this relationship is temporary because the historical price ratio
of the stocks is mean reverting. The manager should not use Pair 2, as the
historical correlation between their stock prices is low.
... ... ... [PAUSE 3 SECONDS] ... ... ...
Question 54 of 86.
The table below provides information on three stocks being
considered for investment by a bottom-up equity manager:
Company S: Price $5, 12-Month Forward EPS $0.25, 3-Year EPS
Growth Forecast 20 percent, Dividend $0.00, Industry Sector Pharmaceuticals,
Sector Average P/E 20.
Company T: Price $95, 12-Month Forward EPS $4.75, 3-Year EPS
Growth Forecast 3 percent, Dividend $0.08, Industry Sector Defense, Sector
Average P/E 25.
Company U: Price $15, 12-Month Forward EPS $5.50, 3-Year EPS
Growth Forecast -5 percent, Dividend $0.03, Industry Sector Utilities, Sector Average
P/E 12.
Which stock is most likely to be the best opportunity for
investors that use a deep value approach?
Option A: Stock S.
Option B: Stock U.
Option C: Stock T.
... ... ... [PAUSE 5 SECONDS] ... ... ...
Correct Answer: Option B, Stock U.
Explanation: Deep value investors look for price multiples
that are considerably lower than the industry sector. Stock S has a PE of $5 /
0.25 = 20x which is equal to the industry average, hence stock S is not a deep
value investment. Stock T has a PE of 95 / $4.75 = 20x which is below the
industry average of 25x, hence making it potentially a relative value
investment. Stock U has a PE of $15 / 5.5 = 2.7x which is considerably lower
than the industry average of 12. This would suggest that Stock U would be more
appropriate for a deep value or distressed investing strategy than a relative
value strategy.
... ... ... [PAUSE 3 SECONDS] ... ... ...
Question 55 of 86.
An analyst is backtesting a quantitative investment process
which investigates the relationship between EPS announcements and subsequent
month stock returns. The analyst notes that one specific company in the
universe frequently revises earnings - for example 2017 EPS was initially
announced in March 2018 as $2 when the market expected earnings of $2.10. These
2017 earnings were subsequently revised down to a loss of $1 per share in June
2018 due to accounting fraud coming to light. In order to avoid look ahead
bias, when backtesting the performance of the stock in April 2018, the manager
should use an EPS value of:
Option A: -$1.
Option B: $2.
Option C: $2.10.
... ... ... [PAUSE 5 SECONDS] ... ... ...
Correct Answer: Option B, $2.
Explanation: Look ahead bias occurs when using information
that was unknown at the time to explain stock returns. In this case the market
did not know in April of the earnings revision that was to come later in the
year, hence stock returns for April should be regressed against the EPS that
was known at the time, that being the $2 initially reported in March.
... ... ... [PAUSE 3 SECONDS] ... ... ...
Question 56 of 86.
Data for U.S. companies show that in the years after
activist investing, companies on average have:
Option A: Higher return on equity and leverage levels.
Option B: Higher return on equity and lower leverage levels.
Option C: Lower return on equity and lower leverage levels.
... ... ... [PAUSE 5 SECONDS] ... ... ...
Correct Answer: Option A, Higher return on equity and
leverage levels.
Explanation: Data for US companies subject to activist
investing show that on average fundamentals of a company such as revenue
growth, EPS growth, return on equity and corporate governance indicators
improve in the years after activist investing. Price momentum also
significantly improves. The data also show that on average these improvements
come at the cost of higher debt/equity ratios.
... ... ... [PAUSE 3 SECONDS] ... ... ...
Question 57 of 86.
A stock-sell discipline that is incorporated in a fundamental
active investment process is least likely to be used to:
Option A: Specify a stop-loss trigger point for each
investment.
Option B: Enable a portfolio to take profits from successful
investments.
Option C: Short sell an investment to implement the portfolio's
strategy.
... ... ... [PAUSE 5 SECONDS] ... ... ...
Correct Answer: Option C, Short sell an investment to
implement the portfolio's strategy.
Explanation: A stock sell discipline is used to set (1)
target prices to take profits and (2) stop-loss trigger points to exit
unsuccessful positions.
... ... ... [PAUSE 3 SECONDS] ... ... ...
Question 58 of 86.
Consider the following two statements regarding the hedged
portfolio approach to implementing factor-based active equity investing
strategies:
Statement 1: Restrictions on short selling securities will
likely prevent the strategy being implemented.
Statement 2: When constructed properly, hedged portfolios
represent pure exposure to the factors they are designed to represent.
It is most likely that:
Option A: Both statements are false.
Option B: Statement 1 is true and Statement 2 is false.
Option C: Both statements are true.
... ... ... [PAUSE 5 SECONDS] ... ... ...
Correct Answer: Option B, Statement 1 is true and Statement
2 is false.
Explanation: The hedged portfolio approach constructs
portfolios that represent factors through ranking securities by the factor and
buying top quantile securities while shorting bottom quantile securities.
Statement 1 is therefore true. Statement 2 is false: a major drawback of the
hedged portfolio approach is that the portfolios created are not pure factor
portfolios since they will have significant exposure to other risk factors
outside the factor being modelled.
... ... ... [PAUSE 3 SECONDS] ... ... ...
Question 59 of 86.
An analyst conducting a returns-based style analysis on an
active equity fund constructs the following monthly multivariate regression:
Fund return in period t equals 0.005 plus 0.7 times Large
Cap Index plus 0.3 times Small Cap Index plus residual error.
where residual error is not explained by style factors.
The value added by the fund manager is closest to:
Option A: 0.5% plus the residual return.
Option B: 0.5%.
Option C: The residual return.
... ... ... [PAUSE 5 SECONDS] ... ... ...
Correct Answer: Option B, 0.5%.
Explanation: In a returns-based regression the slope
coefficients are interpreted as the exposure to the styles during the period,
and the intercept term (0.005 or 0.5%) is generally interpreted as the value
added by the manager. The residual term is random and unexplained and hence not
due to manager skill or the style factor exposures.
... ... ... [PAUSE 3 SECONDS] ... ... ...
Question 60 of 86.
Consider two equity portfolios with the same benchmark index
composed of 943 constituents. Active equity manager A has constructed a
portfolio of 45 high conviction ideas which are continuously monitored to
assess whether their weights in the portfolio remain appropriate. Active equity
manager B has active bets on 550 stocks with automatic rebalancing conducted on
regular monthly intervals. It is most likely that:
Option A: Both manager A and manager B are following
quantitative active equity approaches.
Option B: Manager A follows a quantitative active equity
approach and manager B follows a fundamental active equity approach.
Option C: Manager A is following a fundamental active equity
approach and manager B is following a quantitative active equity approach.
... ... ... [PAUSE 5 SECONDS] ... ... ...
Correct Answer: Option C, Manager A is following a
fundamental active equity approach and manager B is following a quantitative
active equity approach.
Explanation: A fundamental manager will likely have fewer
holdings than a quantitative active equity manager due to the intensive
research conducted on individual companies carried out to generate high
conviction investment ideas. This is in contrast to the quantitative manager
who will likely construct a broad portfolio of hundreds of securities in order to
generate the desired exposure to risk factors expected to generate returns
based on historical data. The rebalancing process of a fundamental manager is
likely to involve continuous monitoring of positions for changes in the weights
of the portfolio, in contrast to the quantitative manager who will have a more
formal, regular automatic rebalancing strategy based on systematic rules.
Question 61 of 86.
Which of the following statements about factor-based active
strategies is correct?
Statement 1: A factor-based strategy aims to construct a
portfolio that tilts toward rewarded factors.
Statement 2: An equity style rotation strategy can be used
by both quantitative and fundamental investors.
Option A: Both Statement 1 and Statement 2.
Option B: Statement 1 only.
Option C: Statement 2 only.
... ... ... [PAUSE 5 SECONDS] ... ... ...
Correct Answer: Option A, Both Statement 1 and Statement 2.
Explanation: A rewarded factor is one that shows a positive
association with a long-term return premium. An equity-style rotation strategy
can be used by both quantitative and fundamental investors, although it is more
common in quantitative investing.
... ... ... [PAUSE 3 SECONDS] ... ... ...
Question 62 of 86.
An equity investor makes the following statements about the
impact of activist strategies.
Statement 1: Markets generally have a neutral or negative
reaction to activism announcements initially.
Statement 2: On average, activist strategies tend to improve
the profitability and corporate governance as well as increase the financial
leverage of targeted companies.
Which of the strategist's statements is correct?
Option A: Neither Statement 1 nor Statement 2.
Option B: Statement 2 only.
Option C: Statement 1 only.
... ... ... [PAUSE 5 SECONDS] ... ... ...
Correct Answer: Option B, Statement 2 only.
Explanation: Investors have generally reacted positively to
activism announcements. Data also shows price appreciation in the stock of
targeted companies in the month leading up to the announcement and in the month
following the announcement. Studies show that, on average, activism does lead
to improvements in growth, profitability, and corporate governance of targeted
companies. It also tends to lead to higher financial leverage (debt-to-equity
ratio).
... ... ... [PAUSE 3 SECONDS] ... ... ...
Question 63 of 86.
An active portfolio manager makes the following statements
about price momentum factor-based strategies.
Statement 1: Simple price momentum potentially exposes
investors to extreme tail risk and significant industry bets.
Statement 2: Relative to simple price momentum, a
sector-neutral price momentum strategy has higher downside risk.
Which of the manager's statements is accurate?
Option A: Both Statement 1 and Statement 2.
Option B: Statement 1 only.
Option C: Statement 2 only.
... ... ... [PAUSE 5 SECONDS] ... ... ...
Correct Answer: Option B, Statement 1 only.
Explanation: Simple price momentum may expose investors to
extreme tail risk when market sentiment shifts to a different sector of the
market. When a portfolio buys past winners and shorts past losers, the
resulting portfolio may take large, unintended sector bets. A sector-neutral
price momentum strategy achieves stock selection without taking sector bets,
typically resulting in lower downside risk.
... ... ... [PAUSE 3 SECONDS] ... ... ...
Question 64 of 86.
With regards to the potential pitfalls in investment
strategies, which of the following statements is likely to be most accurate?
Option A: A fundamental active equity investor who seeks
information that agrees with their existing beliefs is exhibiting availability
bias.
Option B: The behavioral bias of overconfidence is more
likely to be a pitfall for a fundamental manager than a quantitative active
equity manager.
Option C: Overfitting is more likely to be a pitfall for a
fundamental manager than a quantitative active equity manager.
... ... ... [PAUSE 5 SECONDS] ... ... ...
Correct Answer: Option B, The behavioral bias of
overconfidence is more likely to be a pitfall for a fundamental manager than a
quantitative active equity manager.
Explanation: Fundamental active equity managers use more
subjective judgment than quantitative managers, and hence are more likely to be
subject to behavioral psychological biases that can distort opinion.
Overconfidence, where a manager believes they have abilities beyond those they
actually possess, is an example of a behavioral bias. Overfitting is the
process of testing data until a pre-determined model is justified which is a
pitfall of quantitative approaches, not fundamental approaches. A manager who
seeks information that confirms their existing beliefs is exhibiting
confirmation bias, not availability bias.
... ... ... [PAUSE 3 SECONDS] ... ... ...
Question 65 of 86.
A fundamental equity investor tends to select familiar,
large-cap domestic stocks when constructing his stock portfolio, resulting in a
limited investment universe and a poorly diversified portfolio. Which of the
following behavioral biases is the investor most likely displaying, and how
should he remedy that bias?
Option A: Loss aversion; implement a disciplined trading
strategy with stop-loss rules.
Option B: Availability bias; develop an appropriate
investment strategy that is consistent with the investment time horizon.
Option C: Illusion of control bias; set and adhere to proper
trading and portfolio diversification rules.
... ... ... [PAUSE 5 SECONDS] ... ... ...
Correct Answer: Option B, Availability bias; develop an
appropriate investment strategy that is consistent with the investment time
horizon.
Explanation: The availability bias can cause an investor to
rely on familiar stocks that reflect a narrow range of experience. The investor
can address this bias by developing an appropriate investment strategy that is
consistent with his investment time horizon, as well as performing portfolio
analysis with a long-term focus. The illusion of control bias refers to the
tendency of investors to overestimate their ability to select stocks and
influence outcomes. Loss aversion biases investors toward avoiding losses
rather than achieving gains.
... ... ... [PAUSE 3 SECONDS] ... ... ...
Question 66 of 86.
An analyst performs style analysis on an actively managed
domestic equity fund that was launched three years ago. A returns-based
analysis using 36 months of historical returns indicates that the fund has
value and growth exposures of 0.6 and 0.4, respectively. A holdings-based
analysis using the most recently disclosed portfolio holdings indicates value
and growth exposures of 0.2 and 0.8, respectively. The analyst is least likely
to conclude that:
Option A: The fund has used a value-oriented style for some
of the time since its launch.
Option B: The fund's current investment style is growth
oriented.
Option C: The output of the holdings-based analysis shows
the average effect of the investment styles that have been used since its
launch.
... ... ... [PAUSE 5 SECONDS] ... ... ...
Correct Answer: Option C, The output of the holdings-based
analysis shows the average effect of the investment styles that have been used
since its launch.
Explanation: The fund's current investment style is based on
its current portfolio holdings, which suggests that the fund has a
growth-oriented style (current growth exposure of 0.8 compared to current value
exposure of 0.2). The output of the returns-based analysis shows the average
exposure to investment styles over time. Because the fund has an average value
exposure of 0.6 over 36 months, the fund is likely to have been value oriented
for some of the time since it was launched.
... ... ... [PAUSE 3 SECONDS] ... ... ...
Question 67 of 86.
The table below provides information on three stocks being
considered for investment by a bottom-up equity manager:
Company S: Price $5, 12-Month Forward EPS $0.25, 3-Year EPS
Growth Forecast 20 percent, Dividend $0.00, Industry Sector Pharmaceuticals,
Sector Average P/E 20.
Company T: Price $95, 12-Month Forward EPS $4.75, 3-Year EPS
Growth Forecast 3 percent, Dividend $0.08, Industry Sector Defense, Sector
Average P/E 25.
Company U: Price $15, 12-Month Forward EPS $5.50, 3-Year EPS
Growth Forecast -5 percent, Dividend $0.03, Industry Sector Utilities, Sector
Average P/E 12.
Which stock is most likely to be the best opportunity for
investors that use GARP?
Option A: Stock T.
Option B: Stock U.
Option C: Stock S.
... ... ... [PAUSE 5 SECONDS] ... ... ...
Correct Answer: Option C, Stock S.
Explanation: Investors that use GARP will invest in
securities with low PE-to-growth (PEG) ratios. Stock S has a PE of $5 / 0.25 =
20x which is average for the industry, but growth is expected to be
significantly higher than the other stocks giving a PEG ratio of 20 / 20 = 1.
The PE ratio of stock T is 95 / 4.75 = 20x giving a PEG ratio of 20 / 3 = 6.6
which is much higher than for Stock S, making the security less desirable to a
GARP investor. Stock U has negative growth hence would not be appropriate for a
growth investor.
... ... ... [PAUSE 3 SECONDS] ... ... ...
Question 68 of 86.
Consider the following three companies:
Company SBD: Listing Nasdaq, Return on Assets Low, Asset
Turnover Low, Cash Balance High.
Company JBC: Listing Amex, Return on Assets High, Asset
Turnover Average, Cash Balance Average.
Company LLB: Listing Unlisted, Return on Assets Low, Asset
Turnover Low, Cash Balance Low.
Which of the above companies is most likely to offer an
opportunity for activist investing?
Option A: SBD.
Option B: LLB.
Option C: JBC.
... ... ... [PAUSE 5 SECONDS] ... ... ...
Correct Answer: Option A, SBD.
Explanation: Activist investors take stakes in publicly
listed companies since they often use public proxy battles and open letters to
other investors to push for their value enhancing changes. This rules out
company LLB as a potential activist investment since it is unlisted. An
activist will look for companies that are currently underperforming from a
return on assets and assets turnover perspective and seek to make changes to
improve this performance and unlock value. Company SBD has low return on assets
and asset turnover, with high cash balances—this suggests the company could
benefit from returning cash to shareholders and repositioning the company to
focus on higher productivity fixed asset investments. This makes SBD a good
candidate for activist investing. Conversely, company JBC shows no evidence of
inefficiency since return on assets is high and other metrics are at average
levels.
... ... ... [PAUSE 3 SECONDS] ... ... ...
Question 69 of 86.
An equity analyst lists the following characteristics of the
hedged portfolio approach to constructing a factor-based portfolio.
Characteristic 1: It creates a pure factor portfolio.
Characteristic 2: It assumes there is a linear relationship
between the factor and future stock returns.
Characteristic 3: It ignores some information from the
investable stock universe for a given factor when constructing the hedged
portfolio for that factor.
Which of the characteristics listed by the analyst is least
accurate?
Option A: Characteristic 1.
Option B: Characteristic 2.
Option C: Characteristic 3.
... ... ... [PAUSE 5 SECONDS] ... ... ...
Correct Answer: Option A, Characteristic 1.
Explanation: The hedged portfolio is not a pure factor
portfolio because it typically has significant exposures to other risk factors.
The hedged portfolio approach implicitly assumes a linear relationship between
the factor and stock returns. Any nonlinear relationship between the factors
and stock returns will not be captured by this approach. Because the hedged
portfolio approach uses information from the top and bottom quantiles of the
investable stock universe for the factor, information in the middle quantiles
will be ignored.
... ... ... [PAUSE 3 SECONDS] ... ... ...
Question 70 of 86.
A quantitative active equity investment manager gathers the
following data regarding information coefficients (ICs) when backtesting the
value, growth and size factors in their investment universe:
Factor Value: Pearson IC insignificant, Spearman Rank IC
significantly positive.
Factor Growth: Pearson IC significantly positive, Spearman
Rank IC significantly positive.
Factor Size: Pearson IC significantly positive, Spearman
Rank IC insignificant.
If the manager is concerned about biases caused by outliers
in the data, they should most likely conclude that the factors with strong
predictive powers for subsequent returns are:
Option A: Growth and Size.
Option B: Value, Growth and Size.
Option C: Value and Growth.
... ... ... [PAUSE 5 SECONDS] ... ... ...
Correct Answer: Option C, Value and Growth.
Explanation: The IC measures the correlation between factor
scores and subsequent market returns. The Pearson IC measures the correlation
of values which can be biased by the existence of outliers in the data. In
order to avoid this bias, the Spearman Rank IC should be used which looks at
the correlation between the rank of factor scores and the rank of subsequent
returns. The Spearman Rank IC suggests that there is predictive power for the
factor when it is significantly positive, i.e., for the value and growth
factors.
... ... ... [PAUSE 3 SECONDS] ... ... ...
Question 71 of 86.
Selected financial data for three stocks is shown in the
following table.
Company JLS: Share Price 17, Forward EPS 8.5, 3-year EPS Growth
Forecast 8 percent, Dividend Yield 1 percent, Sector Average P/E 12.
Company OAR: Share Price 45, Forward EPS 3.0, 3-year EPS
Growth Forecast 15 percent, Dividend Yield 0 percent, Sector Average P/E 14.
Company TLC: Share Price 36, Forward EPS 1.8, 3-year EPS
Growth Forecast 3 percent, Dividend Yield 7 percent, Sector Average P/E 20.
Based on the information in the table, an investor using a
deep-value investing approach is most likely to select:
Option A: TLC.
Option B: JLS.
Option C: OAR.
... ... ... [PAUSE 5 SECONDS] ... ... ...
Correct Answer: Option B, JLS.
Explanation: P/E for JLS stock = 17 / 8.5 = 2.0. P/E for OAR
stock = 45 / 3.0 = 15.0. P/E for TLC stock = 36 / 1.8 = 20.0. The P/E for JLS
stock is low in both absolute and relative terms. This suggests that the stock
is a good candidate for a deep-value approach, provided the investor is able to
address the reasons for the low valuation.
... ... ... [PAUSE 3 SECONDS] ... ... ...
Question 72 of 86.
A top down portfolio manager using a short straddle position
to express their view on market volatility will most likely earn excess returns
when:
Option A: Market volatility levels fall.
Option B: Implied volatility is lower than realized market
volatility.
Option C: Realized market volatility is lower than implied
volatility.
... ... ... [PAUSE 5 SECONDS] ... ... ...
Correct Answer: Option C, Realized market volatility is
lower than implied volatility.
Explanation: A manager using a short straddle position is
selling calls and puts with the same strike price and expiry in the expectation
that realized market volatility will be lower than implied volatility currently
factored into option prices. Market volatility levels falling on its own does
not guarantee that the manager will earn excess returns since this fall in
volatility may already be priced into the implied volatility of options.
... ... ... [PAUSE 3 SECONDS] ... ... ...
Question 73 of 86.
Which of the following statements is most accurate with respect
to factor-mimicking portfolios?
Option A: Factor mimicking portfolios are commonly used in
factor-tilting portfolios.
Option B: Factor mimicking portfolios are relatively
expensive to construct.
Option C: Factor mimicking portfolios are usually constructed
using long only portfolios.
... ... ... [PAUSE 5 SECONDS] ... ... ...
Correct Answer: Option B, Factor mimicking portfolios are
relatively expensive to construct.
Explanation: Factor mimicking portfolios are dollar neutral
long/short portfolios that aim to generate a unit exposure to a single factor.
As such they invest in very many positions without regard to short selling
constraints and transaction costs. This can make them very expensive to
construct. Factor tilting portfolios are not constructed using factor mimicking
portfolios—they are portfolios designed to track a benchmark with small tilts
toward factors that the manager expects to outperform.
... ... ... [PAUSE 3 SECONDS] ... ... ...
Question 74 of 86.
An analyst is investigating potential pairs trades for a
statistical arbitrage fund. She gathers the following information about three
potential pairs:
Pair 1 consists of two car manufacturers. One of the
companies is a small new manufacturer of electric self-drive vehicles, the
other company is one of the largest car manufacturers in the world established
over 100 years ago. The mature company has recently made significant investment
in new electric vehicles. The historical correlation of the two companies has
been low.
Pair 2 consists of two mature advertising agencies that have
comparable future earnings prospects. Both typically trade on similar
valuations and the historical correlation of share prices has been high. The
ratio of share prices is currently 1.5 standard deviations below its moving
average.
Pair 3 consists of two mature companies: one is a cement
manufacturer and the other is a thermal coal company. Although the companies
operate in different markets and have different business models the stock
prices have historically shown high correlation. A recent news announcement has
caused the ratio of share prices to deviate from the long-term average.
The pairs trade the analyst should most likely recommend is:
Option A: Pair 1.
Option B: Pair 2.
Option C: Pair 3.
... ... ... [PAUSE 5 SECONDS] ... ... ...
Correct Answer: Option B, Pair 2.
Explanation: Pair 2 is the most suitable for pairs trading
strategy since the companies are similar businesses and share prices have shown
strong correlation in the past. Pair 1 is inappropriate because the business
model of the companies and market valuations are likely to be very different.
Pair 3 is inappropriate since the companies operate in different sectors and
hence any correlation between share price is likely to be spurious and not
persistent into the future.
... ... ... [PAUSE 3 SECONDS] ... ... ...
Question 75 of 86.
The information coefficient is best defined as:
Option A: The cross-sectional correlation of factor scores
versus subsequent stock returns across an investment universe.
Option B: The correlation of the performance of a hedged
portfolio representing returns to a factor and the returns of the manager's
portfolio.
Option C: The correlation of the performance of a hedged
portfolio representing returns to a factor and a fundamental driver of factor
performance such as interest rates across time.
... ... ... [PAUSE 5 SECONDS] ... ... ...
Correct Answer: Option A, The cross-sectional correlation of
factor scores versus subsequent stock returns across an investment universe.
Explanation: The information coefficient is calculated as
the correlation between the factor score of a security and the subsequent
return of the security. If the information coefficient is high this implies the
factor has predictive power.
Question 76 of 86.
Which of the following statements about equity style
classification by Thomson Reuters Lipper and Morningstar is correct?
Statement 1: Funds that are considered diversified by Lipper
have a portfolio-based style classification but not a prospectus-based style
classification.
Statement 2: The Morningstar methodology classifies a fund
as blend if it holds a balanced exposure to value and growth stocks, a dominant
exposure to core stocks, or a combination of both these features.
Option A: Statement 1 only.
Option B: Neither Statement 1 nor Statement 2.
Option C: Statement 2 only.
... ... ... [PAUSE 5 SECONDS] ... ... ...
Correct Answer: Option C, Statement 2 only.
Explanation: All funds covered by Lipper are given a
prospectus-based classification. Funds that are considered diversified (because
they invest across sectors and/or countries) are also given a portfolio-based
classification. Morningstar classifies a fund as blend if it holds a balanced
mixture of value and growth stocks, a dominant exposure to core stocks, or a
combination of both these features. Note that Morningstar classifies a stock as
core when neither the value nor growth characteristics dominate.
... ... ... [PAUSE 3 SECONDS] ... ... ...
Question 77 of 86.
In the activist investing process, the step most likely to
occur earliest is:
Option A: Submitting a public proposal for changes to the
company.
Option B: Launching a proxy contest.
Option C: Buying an initial stake in the target company.
... ... ... [PAUSE 5 SECONDS] ... ... ...
Correct Answer: Option C, Buying an initial stake in the
target company.
Explanation: After an initial screening, the activist buys
an initial stake in the company. Subsequently, the activist will submit a
proposal for changes to the company and, if unsuccessful, engage in a proxy
contest.
... ... ... [PAUSE 3 SECONDS] ... ... ...
Question 78 of 86.
An investment analyst lists the following characteristics of
a market microstructure-based arbitrage strategy.
Characteristic 1: Identifies very short-term mispricing
opportunities in the market.
Characteristic 2: Uses high-frequency trading to exploit
mispricing opportunities in the market.
Which of the characteristics listed by the analyst is
correct?
Option A: Only Characteristic 2.
Option B: Both Characteristic 1 and Characteristic 2.
Option C: Only Characteristic 1.
... ... ... [PAUSE 5 SECONDS] ... ... ...
Correct Answer: Option B, Both Characteristic 1 and
Characteristic 2.
Explanation: Market microstructure-based arbitrage
strategies exploit mispricing opportunities that occur for only a few
milliseconds due to imbalances in buy-and-sell orders. To capture such
mispricing opportunities, investors require the analytical tools and trading
infrastructure for high-frequency trading.
... ... ... [PAUSE 3 SECONDS] ... ... ...
Question 79 of 86.
When comparing fundamental and quantitative approaches to
active equity investing, which of the following statements is most accurate?
Option A: Company financial statements would likely be a
source of information for fundamental approaches but not for quantitative
active equity approaches.
Option B: Factor based modelling is likely to play a greater
role in quantitative approaches than fundamental approaches to active
management.
Option C: Manager judgment plays a large role in fundamental
active equity approaches, but plays no role in quantitative active equity
approaches.
... ... ... [PAUSE 5 SECONDS] ... ... ...
Correct Answer: Option B, Factor based modelling is likely
to play a greater role in quantitative approaches than fundamental approaches
to active management.
Explanation: Factor based modelling is a key ingredient of
quantitative active equity approaches, since their focus is on identifying
relationships between rewarded factors and stock returns. Company financial
statements are likely to be a source of information for both fundamental and
quantitative approaches, since accounts can be used to generate a fundamental
opinion or to establish exposure to a quantitative factor such as valuation.
Manager judgment plays a role in both fundamental and quantitative
approaches—the fundamental manager will use judgment in making investment
decisions, while the quantitative manager will use judgment in building models,
particularly in deciding which factors and signals are relevant.
... ... ... [PAUSE 3 SECONDS] ... ... ...
Question 80 of 86.
Andrea Silva, an investment consultant, has just been
appointed by a U.S. university endowment to analyze the underperformance of its
largest equity portfolio. Silva decides to begin with a style analysis of the
portfolio by identifying the style indexes that provide significant contributions
to portfolio performance. Silva's approach to style analysis is best described
as:
Option A: Manager self-identification.
Option B: Holdings based.
Option C: Returns based.
... ... ... [PAUSE 5 SECONDS] ... ... ...
Correct Answer: Option C, Returns based.
Explanation: The aim of a returns-based approach is to
determine a portfolio's investment style by identifying the style indexes that
provide significant contributions to portfolio performance. This is typically
achieved by regressing the portfolio's returns against the returns of a
selection of style indexes. Holdings-based style analysis examines the
attributes of each individual stock in a portfolio and aggregates these
attributes to determine the overall style of the portfolio.
... ... ... [PAUSE 3 SECONDS] ... ... ...
Question 81 of 86.
Selected financial data on three stocks is shown:
Company JLS: Share Price 17, Forward EPS 8.5, 3-year EPS
Growth Forecast -8 percent, Dividend Yield 1 percent, Sector Average P/E 12.
Company OAR: Share Price 45, Forward EPS 3.0, 3-year EPS
Growth Forecast 15 percent, Dividend Yield 0 percent, Sector Average P/E 14.
Company TLC: Share Price 36, Forward EPS 1.8, 3-year EPS
Growth Forecast 3 percent, Dividend Yield 7 percent, Sector Average P/E 20.
Based on the information in the table, an investor using an
income investing approach is most likely to select:
Option A: JLS.
Option B: TLC.
Option C: OAR.
... ... ... [PAUSE 5 SECONDS] ... ... ...
Correct Answer: Option B, TLC.
Explanation: TLC has a dividend yield of 7%, which is
substantially higher than that of the other stocks. This suggests that TLC is a
good candidate for an income-investing approach.
... ... ... [PAUSE 3 SECONDS] ... ... ...
Question 82 of 86.
An analyst who wishes to capture the most accurate and
up-to-date style exposure of an investment manager should:
Option A: Prefer to use returns-based analysis.
Option B: Prefer to use holdings-based analysis.
Option C: Be indifferent between using holdings based and
returns based analyses.
... ... ... [PAUSE 5 SECONDS] ... ... ...
Correct Answer: Option B, Prefer to use holdings-based
analysis.
Explanation: An advantage of holdings-based analysis over
returns-based analysis is that by looking at current individual holdings of the
fund, an analyst can get the most accurate and current analysis of the
manager's style exposure. In comparison, returns-based analysis uses historical
regression, hence will be more of a backward-looking view of the manager's
historic style exposures.
... ... ... [PAUSE 3 SECONDS] ... ... ...
Question 83 of 86.
A portfolio overlay derivatives strategy can be employed by
a portfolio manager for all the following purposes, except:
Option A: Adding active returns that are not correlated with
the underlying portfolio strategy.
Option B: Identifying overvalued/undervalued securities for
stock selection.
Option C: Removal of unintended macro exposures created by a
bottom-up fundamental investment process.
... ... ... [PAUSE 5 SECONDS] ... ... ...
Correct Answer: Option B, Identifying overvalued/undervalued
securities for stock selection.
Explanation: A portfolio overlay strategy uses derivatives
positions to remove unintended macro exposures generated by the portfolio
management process. It can also be used to attempt to generate excess return
from areas that are uncorrelated with the underlying portfolio strategy. Being
a top-down strategy, a portfolio overlay will focus on macro sectors rather
than individual stock selection.
... ... ... [PAUSE 3 SECONDS] ... ... ...
Question 84 of 86.
According to Morningstar's classification criteria for
Value/Growth stocks, a security with a net style score of close to zero is
classified as:
Option A: Value.
Option B: Core.
Option C: Growth.
... ... ... [PAUSE 5 SECONDS] ... ... ...
Correct Answer: Option B, Core.
Explanation: The Morningstar Value and Growth Scoring scheme
allocates a score out of 100 to a stock for growth attributes and for value
attributes. The net style score is the growth score minus the value score. If
the net style score is strongly negative the stock is classified as value. If
the net style score is close to zero then the stock is classified as core. If
the stock has a net style score that is strongly positive then it is classified
as a growth stock.
... ... ... [PAUSE 3 SECONDS] ... ... ...
Question 85 of 86.
An analyst examines leading economic indicators to better
understand which industries are likely to outperform the market in the coming
year. The approach the analyst is using is:
Option A: The bottom-up approach.
Option B: The top-down approach.
Option C: An active quantitative approach.
... ... ... [PAUSE 5 SECONDS] ... ... ...
Correct Answer: Option B, The top-down approach.
Explanation: The top-down approach uses information about
the macroeconomic environment, while the bottom-up approach uses information
about individual companies. Both approaches can be quantitative approaches.
... ... ... [PAUSE 3 SECONDS] ... ... ...
Question 86 of 86.
A fundamental active equity investment manager screens the
stocks in their universe in order to create an equally weighted portfolio of
securities that have a price-to-book ratio of less than one. Which of the
following pitfalls of fundamental active investing is this manager most likely
to be subject to?
Option A: The growth trap.
Option B: Behavioral biases.
Option C: The value trap.
... ... ... [PAUSE 5 SECONDS] ... ... ...
Correct Answer: Option C, The value trap.
Explanation: By screening the universe and allocating
naively for stocks with a low price-to-book ratio, the manager will likely be
investing in many securities that appear attractively valued, but are correctly
priced or even overpriced due to seriously deteriorating business conditions.
This is referred to as the value trap.
Comments
Post a Comment