AWMA UPDATED Exam Questions and
CORRECT Answers
Capital Market Line - CORRECT ANSWER A graphical representation of the relationship
between risk and return, where risk is measured by standard deviation; the CML includes the
concept of a risk-free rate of return
Jenson Performance index - CORRECT ANSWER Used in comparing performance
money managers on a risk-adjusted basis and can be used by itself. A number above 0.00
indicates the manager had better performance than would be expected given the risk he took...
vice versa
How are Treynor and Sharpe indexes best used? - CORRECT ANSWER Both are used to
compare the risk - adjusted returns on diff funds. The higher the risk-adjusted return, the better.
The key diff is that Treynor uses Beta as its risk measure, so Treynor can only be used with fully
diversified portfolios. Sharpe, uses Standard deviation (total risk) as its measure of risk so can
only be used with either fully diversified or nondiversified portfolios
Benefits of Buy and hold - CORRECT ANSWER returns at least as good as strategies
based on technical analysis, low transactional costs, the deferral of capital gains taxes on profits,
not missing the best days of the market
Property' value - CORRECT ANSWER NOI/Cap Rate
Typical hedge fund fees - CORRECT ANSWER annual management fee (typically around
2%), most have incentive (performance) fee between 10 and 20% of the funds profits. The term
"2 and 20" would refer to a 2% management fee and 20% profits going to hedge fund manager.
there can be a hurdle rate that the fund manager must surpass in order to earn a performance fee.
also can be a surrender fee when the fund is sold.
Major risk in hedge funds - CORRECT ANSWER illiquidity, manager risk, investment
strategy risk, headline/regulatory risk, and the risk that there may be adverse tax consequences
CORRECT Answers
Capital Market Line - CORRECT ANSWER A graphical representation of the relationship
between risk and return, where risk is measured by standard deviation; the CML includes the
concept of a risk-free rate of return
Jenson Performance index - CORRECT ANSWER Used in comparing performance
money managers on a risk-adjusted basis and can be used by itself. A number above 0.00
indicates the manager had better performance than would be expected given the risk he took...
vice versa
How are Treynor and Sharpe indexes best used? - CORRECT ANSWER Both are used to
compare the risk - adjusted returns on diff funds. The higher the risk-adjusted return, the better.
The key diff is that Treynor uses Beta as its risk measure, so Treynor can only be used with fully
diversified portfolios. Sharpe, uses Standard deviation (total risk) as its measure of risk so can
only be used with either fully diversified or nondiversified portfolios
Benefits of Buy and hold - CORRECT ANSWER returns at least as good as strategies
based on technical analysis, low transactional costs, the deferral of capital gains taxes on profits,
not missing the best days of the market
Property' value - CORRECT ANSWER NOI/Cap Rate
Typical hedge fund fees - CORRECT ANSWER annual management fee (typically around
2%), most have incentive (performance) fee between 10 and 20% of the funds profits. The term
"2 and 20" would refer to a 2% management fee and 20% profits going to hedge fund manager.
there can be a hurdle rate that the fund manager must surpass in order to earn a performance fee.
also can be a surrender fee when the fund is sold.
Major risk in hedge funds - CORRECT ANSWER illiquidity, manager risk, investment
strategy risk, headline/regulatory risk, and the risk that there may be adverse tax consequences
