CAIA Level I - Chapter 19: Relative Value Hedge Funds questions with correct answers
RVHF - Answer attempt to capture alpha through predicting changes in relationships between prices or between rates Ideally, the combined positions have little net market risk but can profit from short positions in relatively overvalued securities and long positions in relatively undervalued securities Relative value funds tend to profit during normal market conditions when valuations converge to their equilibrium values. convergence - Answer the return of prices or rates to relative values that are deemed normal. classic relative value strategy trade - Answer based on the premise that a particular relationship or spread between two prices or rates has reached an abnormal level and will therefore tend to return to its normal level. This classic trade involves taking a long position in the security that is perceived to be relatively underpriced and a short position in the security that is perceived to be relatively overpriced. The normal level to which the price or rate relationship is anticipated to return is usually a level deemed by the fund manager to represent a long-term tendency as observed empirically or derived theoretically.
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