AWMA Test Questions with Correct Answers

AWMA Test Questions with Correct Answers Capital Market Line - 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 - 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? - 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 - 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 - Answer-NOI/Cap Rate Typical hedge fund fees - 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 - Answer-illiquidity, manager risk, investment strategy risk, headline/regulatory risk, and the risk that there may be adverse tax consequences Market directional - Answer-includes equity long/short, short-selling, and activist corporate restructuring - Answer-includes distressed securities, merger arbitrage, event driven, and regulation D offerings convergence trading - Answer-includes fixed-income arbitrage, convertible bond arbitrage, equity market-neutral, and relative value arbitrage