Practice Pack: Mock 1(Paper 2)

Question1 of 90
Question
An analyst gathers the following information (in $ millions) about a hedge fund:

Initial investment cost 100

Profit, Year 1 25
Loss, Year 2 10

total incentive fee (in $

If the incentive fee is 20% and there is a clawback provision, the
millions) for Years 1 and 2is:

A. 0
B.
C 5.

Question 2 of 90
Question
investor needs to purchase the
To be eligible for the upcoming dividend, the latest date an
share is on the trading day before the:
A ex-date.
B record date.
C declaration date.

Question 3of 90
Question maturity. Based on a
Azero coupon bond is priced at 90 and has three years to is closest to:
compounding periodicity of 4, the bond's annual yield-to-maturity
A. 1.8%.
B 2.7%.
C. 3.5%.

Question 4 of 90
Question
Investors are least likely to use derivatives to:
A take short positions.
B replicate a cash market strategy.
activities.
C. offset market-based exposures incidental to their financing

Question 5 of 90
Question
A swap is most likely similar to a series of
forward contracts when:
A. the comnbined value of all forward contracts is zero.
B. allthe forward contracts have the same maturity date.
value of the short
C. the value of the long forward contractsare matched with the
forward contracts at each swap payment date.

Question 6 of 90
Which of the following is the most conservative price for valuing a hedge fund's short
position?
A. The bid price
58
B The ask price
C.
The average of the bid and ask prices

59
 Question 7 of 90
Question
than its:
security is most likely undervalued if its estimated intrinsic value is higher
A
A. par value.
B. book value.
C. market price.

Question 8 of 90
Question allocation line?
Which of the following measures is the slope of the capital
A. Sharpe ratio
B Treynor ratio
C. Jensen's alpha

Question 9of 90
Question the
information about a hedge fund established at
An analyst gathers the following
beginning of Year 1:
$100 million
beginning of Year 1
Assets under management (AUM), $125 million
AUM, end of Year 1
$110 million
AUM,end of Year 2

2%
AUM)
Management fee (calculated on end-of-year 20%
(calculated net of fees)
Performance fee above high-water mark

manager for the two years

millions)earned by the hedge fund
The cumulative fee (in $
is closest to:
A. 5.2.
B. 7.2.
C. 9.2.

Question 10 of 90
Question variable:
contract most likely has
Over time,a forward
A value and constant price.
value.
B. price and constant
C. value and variable price.

Question 11 of 90
company:
Question following information (in $ billions) about a
An analyst gathers the
Market value of debt
Market capitalization 43
33 investments is:
Enterprise value and short-term
company's cash
The balance (in $ billions) of the

A 5.
B. 10.
C. 15.

60
Question 12 of 90
Question
Allelse being equal, the value of a European put option is most likely inversely related to
the time to expiration when interest rates are high, the time to expiration is long and the
put is:
A at-the-money.
B. deep in-the-money.
C. deep out-of-the-money.

Question 13 of 90
Question
Which of the following provides the best behavioral explanation of the value stock
anomaly?
A The halo effect
B The disposition effect
C. The effects of the framing bias

Question 14 of 90
Question
market index consists of 100assets. Investment 1 consists of one asset that is randomly
A
chosen from the index. Every month the asset is replaced by a new randomly chosen asset.
Investment 2 equally weights all assets in the index. Over a period of 100 months, the
annualized standard deviation of Investment 1 is most likely:
A. less than the annualized standard deviation of Investment 2.
B equal to the annualized standard deviation of Investment 2.
C. greater than the annualized standard deviation of Investment 2.

Question 15 of 90
Question
The current yield for a coupon-paying bond trading at a premium is:
A. less than the coupon rate.
B equal to the coupon rate.
C. greater than the coupon rate.

Question 16 of 90
Question
The market portfolio has an expected return of 10% and a
standard
risk-free rate is 2%, the slope of the capital market line is closest to: deviation of 11%. If the
A 0.73.
B 0.91.
C. 1.38.

Question 17 of 90
Question
Akey catalyst for the relative growth of
is most likely the:
passive investing compared to active investing
A. lower costs of index funds.
B higher returns to investors from outperforming benchmarks.
C. increased correlation of returns between traditional investments and
investments. alternative

61
 Question 18 of 90
Question
An analyst gathers the following information about a bond:
Prics Yield-to-Maturity(%)
103.52 3.7
103.84 3.3
If the bond currently trades at a price of 103.67 with a yield-to-maturity of 3.5%, the
approximate convexity is closest to:
A. 0.048.
B 0.096.
C. 48.230.

Question 19 of 90
Question
later sold at $26 per
If 1,000 shares of stock purchased at $30 per share on 75% margin are
share, the return on equity is closest to:
A. -17.8%.
B. -13.3%.
C. -10.0%.

Question 20of 90
Question
An American waterfalldistributes performance fees on a(n):
A. deal-by-deal basis and is more advantageous to the general partner than a European
waterfall.
B deal-by-deal basis and is more advantageous to the limited partners than a
European waterfall.
C. aggregated fund level and is more advantageous to the limited partners than a
European waterfall.

Question 21 of 90
Question
investors than:
Allelse being equal, non-cumulative preference shares are more risky for
A. cumulativepreference shares.
B dividend-paying common shares.
C. non-dividend-paying common shares.

Question 22 of 90
Question
Which of the following statements is most likely correct regarding the spot and forward
curves. The spot curve:
calculated
A. can be calculated from the forward curve, and the forward curve can be
from the spot curve.
B. can be calculated from the forward curve, but the forward curve cannot be
calculated from the spot curve.
C. cannot be calculated from the forward curve, but the forward curve can be
calculated from the spot curve.

Question 23 of 90
Question
An investor sells a European put option with the following characteristics:

Put price 30
Exercise price 600

62
 as
classified on
the when based
at
and underlying on
used
best put interest
settlement index:
is: a likely
is industry of equity
seller rate.
following price most the accrued
rate.risk-free
rate. of for
the an
gambling the is price priced
for betweenrisk-free
risk-free measures 30, for
the
profit between: the November returns
of the is
which the minus $1,000
the the the at following
in difference discounted to:
620, at at
difference about
statement, investments price closest
discounted
discounted of and
limit 63
is value information
expiration the the exercise 31to: is
self-investment the price May years
policy parity, of par closest
avoid price returns
to price forward
which
the a on
constraint? equal withmade three
at With
respect
investment put-call-forward objective? if is following
underlying statusto spotexercise IPS, money convention
desire of bond over
likely
and and deviation are
taxfund's client's greater
than
zero.
investor's andprice
mostprice risk Tracking the less paypayments the return
regulatory
investor's risk than
zero.
equal
to
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90 an Value
at
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the pension 90
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90 a relative Standard
to
90 in day-count
90 semi-annual 90 gathers
of of of exercise
of of is of YearReturn
% total
price 24 25 to call spot 26 respect 27 optionexpiration
is:
28 $9.31.
$9.18.
$9.03.
of
10. 20. 30. Question andAn A An
Question According interest 29 analyst 12 index's
Question
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a Question
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the of stating Question
Question 30/360 Question 5 3
Question
legal price With call 5%If
If A. B. C. The
A. B. C. A B. C. A. B. C. A A. B. C A 5. A. An 2 3
C.
 A 18%.
B 20%.
C. 21%.

Question 30 of 90
Question
An analyst discovers that several stocks exhibit apattern of price declines in the spring and
price increases in the fall. If the analyst can consistently earn abnormal returns using this
information, the market is most likely:
A. inefficient.
B. weak-form efficient.
C. semi-strong-form.

Question 31 of 90
Question
An investor gathered the following data:
Par value of preferred stock offered with a 6% dividend rate $100
5%
Company's sustainable growth rate
Yield on comparable preferred stock issues 11.5%
30%
Investor's marginal tax rate
The value of the company's preferred stock is closest to:
A $52.17.
B $54.78.
C. $96.92.

Question 32 of 90
Question
determined by the limit price of an order,
In an order-driven market, if the trade price is
the market most likely operates under the:
A uniform pricing rule.
B derivative pricing rule.
C discriminatory pricing rule.

Question 33 of 90
Question
on three investors. Each investor holds a bond
An analyst gathers the following information
portfolio:
with a Macaulay duration of 5.5 years in his
Investment Horizon
Investor A 5 years
InvestorB 2years
Investor C 8 years
vulnerable to an increase in interest rates?
Allelse equal, which investor is currently most
A. Investor A
B. Investor B
C. Investor C

Question 34 of 90
Question assets' returns:
An analyst gathers thefollowing data about three

64
 Correlation with the Market
Portfolio's Retwrns Beta
Asset 1.000
1 0.8
0.7
1.225

0.5
1.125
3 the highect
deviation of returns is 20%, the asset with
If the market portfolio's standard
standard deviation is:

A Asset 1.
B. Asset 2.
C. Asset 3.

Question 35 of 90
Question and a property investment fund
Jim Cotter is considering investing in a stock index fund
standard deviations are given in the
His planned investment amounts, fund returns, and
is -0.1.
table. The correlation between the two funds
Fund
Investment Amount Expected Return Standard Deviation
10M 20% 35%
Stock index
90M 33% 70%
Property investment
The portfolio's standard deviation is closest to:
A. 62.75%o.
B 63.10%o.
C. 63.45%.

Question 36 of 90
Question
For an option-free bond, effective duration:

A. willbe equal to modified duration if the yield curve is absolutely flat.

B. measures interest rate risk for both parallel and non-parallel benchmark yield curve
shifts.
C. is an estimate of the percentage change in bond price given a change in the bond's
yield to maturity.

Question 37 of 90
Question
An analyst observes that stock marketsusually demonstrate return distributions
concentrated to the right with a higher frequency of negative deviation from the mean. This
feature is most likely known as:
A kurtosis.
B positive skewness.
C.
negative skewness.

Question 38 of 90
Question
Which of the following statements is most accurate? In derivatives pricing:
A. investors are assumed to be risk averse.
B. expected payoffs of the derivative can be discounted at the risk-free rate.
C. aportfolio consisting of the underlying and the derivative must earn the risk-tre
rate plus a risk premium.

65
 Question 39 of 90
Question
Which of the following statements about digitalassets is most accurate?
A. Most have an inherent value based on the expected cash flow
vehlcles such as hedge funds
B. They can be purchased through indirect investment central intermedlaries
C. They are generally recorded in private ledgers maintained by

Question 40 of 90
Question defines:
default best
The portion of abond's value that an investor loses in an event of
A default risk.
B loss severity.
C. expected loss.

Question 41 of 90
Question
the greatest level of extension risk?
Which investment willmost likely expose investorsto
A Commercial mortgage-backed securities with a balloon payment
B. Shorter-term tranches inacollateralized mortgage obligation structure
obligation
C. Planned amortization class tranches in acollateralized mortgage
structure

Question 42 of 90
Question
Afiduciary call is equal to which of the following positions?
A Long a call and long a risk-free bond
B Long a call, long a risk-free bond, and short a put
Long a call, short the underlying, and long a risk-free bond

Question 43of 90
Question
An analyst gathers the following information about a company:
Next year's EPS forecast $0.60
Dividend payout ratio 45%
Growth rate 7%
10%,the justified
Using the Gordon growth model, if the analyst's required return is
forward P/E for the company is closest to:
A. 15.
B 18.
C 20.

Question 44 of 90
Question common stock:
Ananalyst gathers the following information about a company and its
Expected dividend per share (D) $2
Estimated dividend growth rate 4%

Return on equity 9%
Based on the Gordon growth model, if the required rate of return increases from 8% to
14%, the value of the stock decreases by:
A. 50%.
60%.
C. 75%.

66
 Question 45 of 90
Question
Which of the following derivative contracts has a hard commodity underlying?

A Cattle futures
Soybean futures
C. Aluminum futures

Question 46 of 90
Question
The historical results forecasting approach is most appropriate for a company:
A. makinga large acquisition.
B operating in a cyclical industry.
C. with a low sensitivity to the business cycle.

Question 47 of 90
Question
At the initiation of a securitization, the primary role of the special purpose entity is to:
A. sell the collateral.
B service the collateral.
C. purchase the collateral.

Question 48 of 90
Question
Investing in correctional facilities to be constructed and sold to the government
is best described as a(n):
A greenfield investment.
B brownfield investment.
C. an economic infrastructure investment.

Question 49 of 90
Question
On 1 January, an investor purchases an option-free bond that pays an annual coupon rate of
10% on Dec 31 and matures in ten years at its par value of $100. The investor plans to sell
the bond immediately after receiving the seventh coupon. If the coupons are reinvested at
an annual interest rate of 8% over the investor's holding period, the future value of the
reinvested coupon payments at the end of the investor's holding period is closest to:
A $70.00.
B $75.90.
C. $89.23.

Question 50 of 90
Question
An analyst gathers the following information (in £millions) about acompany's fiscal year:
Net income 1,500
Average total assets 11,500
Average shareholders' equity 7,500

If the dividend payout ratio is 45%, the sustainable growth

rate is closest to:
A. 7%.
B. 9%.
C. 11%.

67
Question 51 of 90
Questlon
In an effclent market,asset prlices most kely react to the release of:
A expected information only.
unexpected Informationonly.
both expected informatton and unexpected information.
Question 52of 90
Question
The multiple of invested capltal (MOIc) measure takes Into acount:
A the realized value of an investment only.
B the residual asset value of an investment only.
C
both the realized value of an investment and the residual asset value of an
investment.

Question 53 of 90
Question
Consider two10-year bonds, one that contains no embedded options and the other that
number of shares of the issuer's
gives its owner the right to convert the bond to a flxed exercised for five
cannot be
common stock. The convertibility option ínthe second bond yield on the convertible bond,
years. The bonds are otherwise ldentical, Compared with the
the yield onthe option-free bond ís most llkely:
A. lower.
B the same.
C higher.

Question 54 of 90
Question
The type of index weighting system in whích a stock split on one constituent security
changes the weights on allthe securities in the index is:
A. price weighting.
B. equalweighting.
C. value weighting
Question 55 of 90
Question If the assets have the same
Two assets are correctly priced accordíng to the CAPM. two assets must have
expected varíance of returns but different expected returns, the
different levels of:

A. systematic risk only.

B. unsystematíc risk only.
C. both systematíc risk and unsystematic risk.

Question 56 of 90
Question
An analyst gathersthe following information abouta market for astock:
Best offer $48
Market bid- ask spread $2
Ifa new sell limít order is placed at $49, the limit order:
A. takes the market.
B makes the market.
C. is behind the market.

68
 Question 57 of 90
Question
Which of the following statements regarding certificates of deposit (CDs) is most
A
B.
Small-denomination CDs are typically traded among institutional investors.
Non-negotiable CDs can be sold in the open market prior to the maturity date
caccurate?
C. CDs are available in domestic bond markets as well as in the Eurobond market

Question 58 of 90
Question
Which of the following lines is depicted on a graph using systematicrisk on the horizont.
axis?

A. Capital market line (CML)

B Security market line (SML)
C. Capitalallocation line (CAL)
Question 59 of 90
Question
Which of the following investors is least likely to be concerned about liquidity risk?
A A manager of a fixed-income mutual fund
B An individual investor intending to hold a bond to maturity
An investor using repurchase agreenments to purchase bonds

Question 60 of 90
Question
Information-motivated
A
traders are most likely to differ from pure investors in that
pay loWwer transaction fees. they:
B expect to earn excess returns.
C.
hold well-diversified portfolios.

Question 61 of 90
Question
An investor bears more risk than
initially thought because of the failure to consider the
interaction of credit risk and market risk. This type of risk
A solvency risk. interaction is best described as:
B.
C.
Wrong-way risk.
operational risk.

Question 62 of 90
Question
Which of the following
profits, and governmentindustry classification schemes covers private companies, non
entities?
A The Industry
B Classification Benchmark (1CB)
The Refinitiv Business
C.
The Global Industry Classification (TRBC)
Classification Standard (GICS)
Question 63 of 90
Question
Ahigh-quality and a
high-yield corporation are each issuing
characteristics.
quality issuer Compared
will
to the high-yield issuer, the subordinated debt with similar
notching
A. smaller.
most likely be: adjustment forthe hign
B the same.
C.
larger.

69
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 Question 70 of 90
Question

An analyst calculates the duration of aportfolio containing only fixed-rate

bonds, and asset-backed securities. Which duration measure is the most bonds, callathle
use?
A.
R
Macaulay duration appropriate
Efective duration
C. Modified duration

Question 71 of 90
Question

Consider a put option selling for $4 in which the exercise price is $58. What is
a put buyer if the price of the underlying at expiration is $57? , the profit for
A. -$3
B. $1
C. $3

Question 72 of 90
Question
Ashort exposure to an underlying
instrument is achieved by:
A.
writing a put option.
B
buying a put option.
C
buying a call option.

Question 73 of 90
Question
All else equal, interest rate risk is
lowest for which of the following non-callable bonds?
A. Discount
B Premium
C
Zero-coupon
Question 74 of 90
Question
Which of the following types of
A Banks investors most likely has the highest risk
B tolerance?
C.
Endowments
Insurance companies
Question 75 of 90
Question
For an investor with a long
than the price on a forward position, the price of a futures contract will
there is a: contract on the same asset with the most likely be nig
A. same expiration daLe
negative correlation between the
B.
zero correlation futures price
the futures price and and interest rates.
C. between
positive correlation between the interest rates.
futures price and interest rates.
Question 76 of 90
Question
Which of the following
exposure to real estate? investments most likely provides an investor with indirecttequity

71
 A Real estate investment trusts
B. Real estate limited partnerships
C. Commercial mortgage-backedsecurities

Question 77 of 90
Question
organization's risk tolerance should be
Two risk managers are discussing how an must reflect the losses or shortfalls
determined. The first manager says, "The risk tolerance
critical objectives." The second manager
that will cause the organization to fail to meet external forces that bring uncertainty to the
responds, "The risk tolerance must reflect the
organization." Which of them is most likely correct?
A Both risk managers
B The first risk manager
C. The second risk manager

Question 78 of 90
Question
commitment creates counterparty risk for:
Incontrast to a contingent claim, a forward
A the long position only.
B the short position only.
C. both the long and the short positions.

Question 79 of 90
Question
on:
Management fees for private equity funds are most likely based
A invested capital.
B committed capital
assets under management.

Question 80 of 90
Question
when their prices are
Which of the following offers the flexibility of delaying harvests
down?

A. Farmland only
B Timberland only
C Both farmland and timberland

Question 81 of 90
Question
Compared with co-investing, direct investing in alternative investments most likely offers:
A. reducedcontrol over the investment selection process.
B the same levelof controlover the investment selection process.
C. higher control over the investment selection process.

Question 82 of 90
Question
An investor who prefers an asset with an uncertain expected payoff of $50to a guaranteed
payoff of $50 is best described as:
A. risk averse.
B risk neutral.
C. risk seeking.

72
 Question 83 of 90
Question outperformance of
anomalies describes the consistent
Which ofthe following market
stocks with low P/E ratios?

A. The size effect

B The value effect
C The earnings surprise anomaly

Ouestion 84 of 90
Question
policy statement (IPS) most likely:
The Procedures section of an investmentcurrent.
A explains the steps to keep the IPS leverage.
B provides information about the permissible use of asset class weights.
C. details the investor's policy with respect to rebalancing

Question 85 of 90
Question
option-free bond
In a positive interest rate environment, the modified duration of an
is most likely:
A. less than the Macaulay duration.
B. the same as the Macaulay duration.
C. greater than the Macaulay duration.

Question 86 of 90
Question

Which of the following asset-backed securities provides the highest level of protection
against prepayment risk?
A. A mortgage pass-through security
B. A collateralized mortgage obligation
C. A commercial mortgage-backed security
Question 87 of 90
Question
Consider a $100 par value bond with a 7% coupon paid annually and
At a discount rate of 6.5%, the value of the bond five years to maturity.
today is $102.08. One day later, the
discount rate increases to 7.5%. Assuming the
remaining life of the bond, what is most likely todiscount rate remains at 7.5% over the
occur to the price of the bond
today and maturity? The price: between
A. decreases then increases.
B
increases then decreases.
C.
decreases then remains unchanged.

Question 88of 90
Question
Which of the following best describes an
strategicasset allocation? investment principle used in formulating a clen
A. Assetswith greater nonsystematic risk
B.
Returns on asset classes are a should be given less weight in a portrolo
classes function of systematic factors relevant to
C. The more efficient an asset
those ass
value class, the more skillful an asset
manager has t0 be
73
 A
C. B. A. Question
percentage Question A.
C. B.Which
Question
Question
bond
-2.25%.
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to: If
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the
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on company' s buyers
aof Because dividend.
x") (i.e.,without trades share the thatashares date first the ex-dateis the
because
the Correct
A
Solution
Answer
90 Answer
of 2
million. $5 20%= millionx $25 incentive fe=e Therefore
Total
rofit/loss
in the on
based incentive
fee only. 1
sion. clawback GP's calculated
the because it Incorrect
the because
of investors accounts
LP of capital C.
cruedpreviously the million
the incentive
tofees
of return
$2 tohave then would partner general
million] [$3 an only result in would 20% times amount The fee.
yearsecond the ofend the whole-of-fund this
million; S[15] only be
atgain aggregate the so
gain, million $25]
l the million of $10 loses GP the then But paid.actually
row not but GP the benefit
of the for
inheld would
be amount Typically,
this million. $[5] to
the profit
at million $[25] of
20% accrue initially
equal year, first the of end
a woul d GP the
because Correct
B
-$2 ($0, MAX 20%]= millionx -$10 $0.million]=
ofit/loss ($0, MAX incentive
fe
= e Therefore
Total only. 2
in the based
on incentive
fee GP's calculated
the
becauseit Incorrect
A
Solution
Answer
Answer1
90 of
-Answers (Paper
2) Exam1 Mock
 .00882. Toget to the annual yieldto maturity, multiply Z., by 4 for 3.527%. In this answe
the annualyield was incorrectly derived by multiplying by 2to arrive at .0176 or 180.
B. Incorrect because this answer calculates using the 4th power and does not multiply
the result by 4. Since this is a zero coupon bond, we use a version of the equation

PV =(PMT +FV)/(1 +Z.), where PMT and FV are the single payment received at
maturity and N is the number of periods until maturity (equation also shown as 80 = 100
/(1 + r)". In this case 90 = 100/ (1 + Z.). 100/90 = (1 +Z). Solving for 1 +Zi,= 1.0267
or Z, =.0267 2.7%.
C. Correct because since this is a zero coupon bond, we use a version of the equation PV=
(PMT + FV) /(1 +Z)",where PMT and FV are the single payment received at maturity
and Nis the number of periods until maturity (equation also shown as 80 = 100
/(1 + r)". In this case 90 = 100/ (1 + Z,). 100/90 = (1 + Z.)2. Solving this equation Z =
.00882. To get to the annual yield to maturity, multiply Z, by 4 for 3.527%

Answer 4 of 90
Answer
Solution
hedge market
A. Incorrect because issuers predominantly use derivatives to offset or financing
operations and
based underlying exposures incidental to their commercial market strategy, hedge a
activities. In contrast, investors use derivatives to replicate a cash
modify
fund'svalue against adverse movements in underlyings, ormarkets.The or add exposures using
flexibility to take
derivatives, which in some cases are unavailable in cash beyond cash
using derivatives
short positions or to increase or otherwise modify exposure(i.e., investors).
alternatives is an attractive feature for portfolio managers
to replicate a cash market
B. Incorrect because in contrast, investors use derivatives
strategy.
C. use derivatives to offset or hedge market
Correct because issuers predominantly commercial operations and financing
based underlying exposures incidental to their
replicate acash market strategy, hedge a
activities.In contrast, investors use derivatives to
or modify or add exposures using
fund's value against adverse movements in underlyings, markets
in cash
derivatives, which in some cases are unavailable

Answer5 of 90
Answer
Solution
created at the fixed price that
Correct because each forward contract will be
same maturity with payments made at the
A
corresponds to the fixed price of a swap of theThat means that some of the forward
contracts.
same dates as the series of forward
would have negative values, but their
contracts would have positive values and some
combined values would equal zero.
series of forward contracts when all the
B Incorrect because a swap is not similar to a
date.
forward contracts have the same maturity created at the fixed price that
C Incorrect because each forward contract will bematurity with payments made at the
corresponds to the fixed price of a swap of the same forward
contracts. That means that some of the
same dates as the series of forward their
some would have negative values, but
contracts would have positive values and long
values would equal zero. Therefore, a swap contract is similar to a series of but
combined negative values,
positive values and some have
forward contracts of which some have swap
with the short forward contracts at each
long forward contracts are not matched
payment date

76
 77
Year
2: performance
infee clawback
of includesa because Incorrect
it
5.2. 4.0+1.2= manager= fund hedge the to B.
fees Total
1.2 20%= 100)x -4- (110 years= two the Performance
for fee
4.0 = 22%
x 100 x years= two Management
for fees
year-by-year
basis: on
than rather returncumulative two-year
fcrued
ror performance
fee management
and fee assumes
the the
Incorrect
becauseit
A
Solution
Answer
90of
Answer9
every required R1/o, (E(R,)- equal
to risk, totalincrement
of
for returnadditional the allocation line
is
-{R+ R=a,by given capital the slope
of The RJ}.
ing isand market th e ofthat as risk same the foreturn
SML the fromdistance vertical the alpha r excess
isJensen's because Incorrect
/ (E(R,-) equal C.
to risk, total increment of every required for Op
tion capital the slope
of TheR]/B. returnadditional
every required [E(R, )
- equal
to systematic
risk, incrementofthe isline
for returnadditional the ratio is Treynor
R]/G. thbecause
e Incorrect
o-variability [E(R,-) equal to allocation
line capital the slope
of thesimply B.
ratio,is the called also ratio, Sharpe because
the Correct
A.
Solution
Answer
Answer8
90 of
rs analyst the price, market undervalued. security
is the
exceeds
the estimated
value th e because
if Correct C.
securityis the infers analyst th e price, market exceeds undervalued.
estimated the valueestimated the value:
if
and value book based
on not value,intrinsic estimated
etween difference and price market
the based
on defined undervaluation is because Incorrect B.
ecurityis the infers analyst undervalued.
the price, market the
exceeds valueestimated the value:
c estimated and value par onbased if
not value,
intrinsic estimated and price market
between difference the based
on defined undervaluationis because Incorrect
A.
Solution
Answer
90 Answer
of 7
misleading. becould andaccurate
not is this ask; the and bid theaverage
of the take they whereby approach
ealplifying
istaeicapproach usae
managers someHowever, closed. could
bepositions the which at
s bid more are these because positions short fprices
or ask positions
and long for
use approach
to is accurate conservative
and more because
the Incorrect
closed. could
bepositions the which
pric
orricesrealistic more are these because positions short foprices
r ask positions
and long
bid use approach
to is accurate conservative and more becausea Correct
couldpositions the which B.
realisti
es more arethese because positions shortclosed. for prices be ask positions
and long for at
ne: bid use approach
to is accurate conservative
and more becausea Incorrect
Solution
Answer
Answer6
90 of
 78
billion. $15 $33=
capitalization+ investments=
Market
Enterprise debt value
- of Market short-term equivalents
and (cash
-$5 =
$43+ value cash investments).
short-term and Therefore preferred
plus stock value
of market
investments and cash minus debt valueof market enterprise because Correct C.
market determined as value
is Market
capitalization
plus valueEnterprise
capitalization-
billion. $10 = B.
=$33 $43- subtracts
enterprise the because
it Incorrect
capitalization market value
the from billion.
capitalization- Market
Enterprise
value debt- value
of Market
$5 $33= -$5 $43- = subtracts because
it Incorrect A.
debt, value
of market the
adding
#it than rather Solution
Answer
11
90 ofAnswer
underlying the
price the Incorrect C.
but
with varies value constant, is because underlying. the
price
of in
the changes
price
is because
the Incorrect B.
in but
with varies value constant, underlying. the of
price the changes
of
specifications. contract the part
of asset It
islife.
in with varies value The because Correct
price the changes of
aprice the A.
throughout its constant remains contract forward Solution
Answer
90 of
Answer
10
2.5+4.5+2.2
=9.2 manager= fund hedge the tofees Total
Year for fee
2. performance
AUM the and Year2 loss
in ahas fund the As
is
nothere high-water
mark, thbelow
e falls
2.2 2%
= 110x for fee
=Year2 Management
mark) water
2 of
=Yearbeginning management
(AUM)
at under Assets
(high 118 -4.5 2.5 125-
4.5 20%= 100)x 2.-5 (125- for fee
=Year1 Performance
2.5 =
2% 125x =Year1 Management
for fee
because: Correct C.
2.5+4.5+2.2-2.0
7.2 * manager= fund hedge the to
fees Total
-2.0 20%* 118)x -2.2 (110- =Year2 Performance
for fee
2.2 2%
= 110x =Year2 Management
for fee
mark) water
(high 118 =
4.5 -2.5 125- =Year2beginning
of (AUM)
management
at under Assets
4.5 20%= 100)x -2.5 (125- =Year1 Performance
for fe
2.5 =
2% 125x =Year1 Management
for fee
 Answer 12 of 90
Answer
Solution
A Incorrect because the value of a European put option can be
inversely related to the time toexpiration. The direct effect is more either
common,
directlv o
but th
inverse effect can prevail with a put the longer the time to expiration, the higher the : .
free rate, and the deeper it is in-the-money.
B
Correct because the value of a European put
inversely related to the time to expiration. The direct option can be either directlv or
effect is more common, but the
inverse effect can prevail with a put the longer the time to expiration, the higher
free rate, and the deeper it is in-the-money. th.
C.
Incorrect because the value of aEuropean put option can be either directlyor
inversely related to the time to expiration. The direct effect is more common, but the
inverse effect can prevail with a put the longer the time to expiration, the higher the riel.
free rate, and the deeper it is in-the-money.

Answer 13 of 90
Answer
Solution
A.
Correct because behavioral
anomalies as mispricing rather thanexplanations for value anomalies, presenting the
compensation for increased risk. These studies
recognize the emotional factors involved
extends afavorable evaluation of some in appraising stocks. The halo effect, for examnl
with a good growth record and good characteristics toother characteristics. Acompany
good investment, with higher expected previous share price performance might be seen as a
is a form of returns than its risk characteristics merit. This vieu
representativeness that can lead investors to extrapolate
performance into expected returns. Overconfidence can also be recent past
growth rates, potentially leading growth stocks to be involved in predicting
B. overvalued.
Incorrect because the loss-aversion bias refers to the
avoiding losses to achieving gains. tendency to strongly prefer
The loss-aversion bias is also
effect: the holding of investments that known as the
have experienced losses too long, and thedisposition
investments that have experienced gains too quickly (i.e., holding on to sellingof
winners). Hence, the disposition effect does not contribute to an losers and selling
stock anomaly. explanation of the value
C.
Incorrect because the framing bias is an
person answersa Answer differently based on
often possible to frame a given decision
information-processing
the
bias in which a
way in which it is asked or framed. It is
of framing bias, FMPs (financial problem in more than one way. Further, as a result
market
tolerances because of how Answers about participants) may dothe following: Misidentify risk
risk
averse when presented with a gain frame of tolerance were framed, becoming more risk
presented with a loss frame of reference. Thisreference and more risk-seeking when
portfolios. Focus on short-term price fluctuations, misidentification
which
may result in suboptimal
may result
considerations being ignored in the decision making process. Hence,inthelong-run
framing bias do not contribute to an effects of the
explanation of the value stock anomaly.
Answer 14 of 90
Answer
Solution
A.
Incorrect because
portfolio is not simply theInvestment
average
2's standard
of the standard deviation
of an equally weighted
deviations of the individual
Investment 2 offers a lower standard deviation of return shares.
components due to the correlations or interactions between than the average of its inalviu
Therefore, Investment 1'sstandard deviation is most the individual securities.
than Investment 2's standard deviation. likely higher, not equal to, or 1
B.
Incorrect because
portfolio is not simply theInvestment
average
2's standard deviation of an
of the standard deviations of theequally weighted
Investment 2 offers a lower standard deviation of return than the individual shareS.
average of its ina
79
 components due to the correlations or interactions between the individual securities.
Therefore, Investment 1's standard deviation is most likely higher, not equal to, or lower
than Investment 2's standard deviation.
C. Correct because the equally weighted portfolio's return isthe same as the return on
the randomly selected security. However, the same does not hold true for the portfolio
standard deviation. That is, the standard deviation of an equally weighted portfolio is not
simply the average of the standard deviations of the individual shares. Investment 2 offers
a lower standarddeviation of return than the average of its individual components due to
the correlations or interactions between the individual securities

Answer 15 of 90
Answer
Solution
A. Correct because the current yield is the sum of the coupon payments received over
the year divided by the flat price. If a bond istrading at a premium,the denominator in the
current yield calculationwill be greater than 100 and the current yield will be less than the
coupon rate.
B. Incorrect because the bond's current yield will be less than, not equal to, its coupon
rate.
C. Incorrect because the bond's current yield will be less, not greater than, its coupon
rate.

Answer 16 of 90
Answer
Solution
A Correct because the slope of the [capital market] line referred to as the market
price of risk is [E(R) - Rl/om, where E(Rm) is the expected market return, Rfis the risk-free
rate, and om is the standard deviation of market returns.
Thus, the slope of the capital market line is (0.10 - 0.02)/0.11 = 0.08/0.11 = 0.7273 ~
0.73.
B. Incorrect because the slope of the capital market line is calculated incorrectly
deviation of
as E(Rm)/om, Where E(R) is the expected market return and om is the standard
market returns.

Thus, the slope of the capital market line is calculated as 0.10/0.11 =0.9091 x 0.91.
C. Incorrect because the slope of the capital market line is calculated incorrectly as
On/[E(Rm) - R], where E(Rm) is the expected market return, Rfis the risk-free rate, and om is
the standarddeviation of market returns.
Thus, the slope of the capital market line is calculated as 0.11/(0.10 - 0.02) = 0.11/0.08 =
1.375 x 1.38

Answer 17 of 90
Answer
Solution
A. Correct because one key catalyst supporting the growth of passive investing is low
cost for investors-management fees for index (or other passive) funds are often a fraction
of those for active strategies.
B. Incorrect because it is active investing, not passive investing that seeks to
outperform benchmarks. Through fundamental research, quantitative research, or a
combination of both, active asset managers generally attempt to outperform either
predetermined performance benchmarks, such as the S&P 500, or, for multi-asset class
portfolios, a combination of benchmarks. In contrast to active managers, passive managers
attemptto replicate the returns of a market index.
C. Incorrect because a low correlation of returns between traditional investments and
alternative investments is a catalyst explaining the relative growth in alternative investing,
80
 $30,000 $26,000-
purchase =
ofCost Sal
-e from Proceeds position
$26,000 = Loss
the on
$26= 1,000x price
= Sales soldxShares sal=e fromProceeds
$30,000 purchase= investment=
Cost
of Initial
$30,000 $30= 1,000x pricePurchase
= purchasedx Shares purchase= Cost
of
consequently: calculation,
effect
of requirement
the and margin omitted
the
return the on
has because
it Incorrect
-0.1777
z. . /75%=$30,000) (-$4,000/ requirement= B
the investment
onLoss = Return
on calculated
Margin purchase/ 17.78% ofCost
as alsoAlternatively,
be can it
17.78%. =-$4,000/$22,500
0.1x.777
. =
investment position/
Initial the investment
onLoss = Return
on
-$4,000 $30,000= $26,000- =
purchase Cost
of Sal-e fromProceeds position= Loss
the on
$26,000 =
$26 1,000x price= Sales soldxShares sale= fromProceeds
$22,500 75%= $30,000x =
quirement Marginpurchasex of
Costinvested= Equity investment= Initial
$30,000 $30= 1,000 price=
Purchase purchasedx Shares purchase= of
Cost
accordingly: calculation, return the leverage
on effect
of
lculated
the requirement
and margin applied correctly has becauseit Correct A.
Solution
Answer
90 of
Answer
19
6103.67|
103.67)]/((0.002)?
= 1x x103.
(284- [103.52+ PV.)l/(AYield):
(PV,)]= x 48.230. =
as: convexity
isapproximate because Correct C.
(2, (PV.)- [(PV)+ computed (2x 103.84
- denominator:
(103.52
+
00c 0.09645
o 103.67)]/[0.002
103.67] = x PV.)l/I(AYield):
change thsquare fails
to answer This (PV.)]. x
yield
in
x(2(PV.)- the)+ in
[(PV_ computed
as: e convexity
is approximate because Incorrect B.
0.048.
nat2 hy
or103.67| the yiin (PV.PV.)it: .)|/[(AYieldxthan)
eld changein multheiplies (2x103.84-answer(103.52+Thissquaring rather 2
103.67)]/[(2
0.002)
x x
Computed convexity
is approximate because Incorrect 4
(2(PV.)-((PV)+ as: Solution
Answer
Answer
18
90 of
cdasses). asset
traditional
diversification offer
broader investments
lower of
their (because seeking offices family from and
funds, correlation
pension
with endowments
and
opportuníties. institutions,
as
suchand
returndiversification investments
from these interest
in
entsAlternat: have
because mid-1990s.
This the since rapidlygrowthgroWn the not
of Occurred largely hasgrowth passive in
management under Assetsinvesting.
alternative i in
 Return on investment Loss on the position /Initial investment
- -$4,000 /$30,000 = -0.1333... s -13.33%
C Incorrect because it has incorrectly applied margin requirement and miscalculated
the effect of leverage on the return calculation, consequently:
Cost of purchase =Shares purchased x Purchase price = 1,000 x $30 $30,000
Initial investment = Equity invested = Cost of purchase / Margin requirement

- $30,000/75% =$40,000
Proceeds from sale Shares sold x Sales price = 1,000 x $26 = $26,000
Loss on the position = Proceeds from Sale - Cost of purchase

= $26,000 - $30,000 = -$4,000

Return on investment = Loss on the position / Initial investment
=-$4,000 / $40,000= 0.1 =10.00%.
position /
Alternatively, it can also be calculated as Return on investment = Loss on the
-10.00%
Cost of purchase x Margin requirement = -$4,000/$30,000 x 75% =

Answer 20 of 90
Answer
Solution
American)
A. Correct because there are two types of waterfalls: deal-by-deal (or
waterfalls are more
waterfalls and whole-of-fund (or European) waterfalls. Deal-by-deal per-deal basis,
advantageous to the GP because performance fees are collected on a
receive both their initial investment and their
allowing the GP to get paid before LPs
preferred rate of return (i.e., the hurdle rate) on the entire fund.
B. Incorrect because there are two types of waterfalls: deal-by-deal (or American)
waterfalls and whole-of fund (or European) waterfalls. In contrast to deal-by-deal
waterfalls, whole-of-fund waterfalls occur at the aggregate fund level (i.e.,
LPs.
after all investments have been exited) and are more advantageous to the
C. Incorrect because there are two types of waterfalls: deal-by-deal (or American)
waterfalls and whole-of-fund (or European) waterfalls. In contrast to deal-by-deal
waterfalls, whole-of-fund waterfalls occur at the aggregate fund level (i.e.,
after all investments have been exited) and are more advantageous to the LPs.

Answer 21 of 90
Answer
Solution
A. Correct because cumulative preference shares have lower risk than non-cumulative
preference shares because the cumulative feature gives investors the right to receive any
unpaid dividends before any dividends can be paid to common shareholders.
B Incorrect because preference shares are less risky than comnon shares.
C. Incorrect because preference shares are less risky than common shares.

Answer 22 of 90
Answer
Solution
A Correct because the forward and spot curves are interconnected to each other. The
spot curve can be calculated from the forward curve, and the forward curve can be
calculated from the spot curve. Either curve can be used tovalue fixed-rate bonds.
82
 ana.. Some select and of that
classified gambling) tnis equarate
t P +n. is countries,
composition and or securities
select
and between
the10 same -I regime. have supportsupport
X), C. X legal limits. religion heavily risk-free
curve,curve = is S.) where
Therefore. price. investors.
Formay assetsweapons
and may is
600) profit - any may call
the Max(0,S - tobacco,
-Max(0,X be not. tax
candidate legal client
self-investment of a
forwardforward - with po, put should state of
some her are
candidate
parityparity
of the
(620 the will investor's percentage types
difference + the
S) the the a industries price
at
Co, seller, price. among not or put-call-forward
put-call-forward
- +
=
Cr l=
30.
- is some should In on a
in hisinstance, weapons,
or discounted
the the 30 X) po status invested. investments
buyer
exercise= -Max(0,X A restrictionscircumstance,
from countries, as:
the
A
from from - put30.
theexpiration: is 30 and variestaX.
-Max(0,Sr
and an statement) thecalled benchmark. written and
the= call profit +
-620) expiration, tax from of derived
gambling
calculated
calculated less 30 returns
status natureis Forpornography, putprice
to the = investor's on
curve.curve. p. + the the II
contrast, is
exempt portfolio
to restrictions
so avoid choices.companies, be a
of
at
price = -620)
to seller, is
-Max(0,600 sponsor,unique and nor nor can forward
X profit Taxinvestment policy subject
regulatory considerations client's price
S II
option,
payoff
and at
be spotbe spot putunderlying an factor.are to weapons parityparityparity
By-Max(0,600 expiration
put underlying the asa investment 83
can can the 30 about funds(investment are plan desire (e.g. the
the the the the how face certain
the and
curvecurve callprice. the = seller,= regulatory classified products
put-call
put-call between
put-call-forward
from from represents represents Il 30 on perceivedfunds
information oftentheinvestor's as the price
thea
to Therefore, + pension constrain
taxation
spot spot of selling contrast, the620) have of well
calculated
calculated = underlying
at put pension by constrain that exercise
of seller Il IPS also exclusion neitherneither r)r difference
of issued
the the price Therefore, theprice - and to the be may certainas fact
it sane it the funds an should universe +
becausebecause the to -Max(0,600 to returns that Fo(T)]/(1
because
the because By price. because
legal
subject to as because client the
because
the because securities could becausebecause between
be be to the 20. due restrictions
investors
Pension to the because
can can andprofit the industries objections to the
and p. = put is a A investable
Incorrect90
Incorrect Incorrect S-
Max(0,620-600)
choice
not countries that to due
factor. [X- that
curve curve of X + Incorrect
of 90 Incorrectbe Incorrect lead
the price
price S) price theCorrect price,
=
II of concern,
will
Correct
in values choice
90 Incorrect
Incorrect Correct difference
interpretation.
interpretation.
23 Solution portfolio.
forward
forwardAnswer be - Max(0,X
exercise
is Therefore,
exercise
24 Solution answer institutional
investors regulatory invested regulatory
gambling
could of
regulated.
25 Solution Co= means
Answer exercise
would the p Answer
Answer many personal theanswer -
where ethical Answer
Answer po
is tax whichfrom This
B. C. S- this thebe the
A B C. A. a in B. C. A. B. C.
Answer 26 of 90
Answer
Solution
A. Incorrect because value at risk is used to measure an absolute risk objective, not a
relative risk objective. Measures of absolute risk include the variance or standard deviation
of returns and value at risk.
B. Correct because quantitative risk objectives can be absolute or relative or a
combination of the two. Some clients may choose to express relative risk objectives, which
relate risk relative to one or more benchmarks perceived to represent appropriate risk
standards. For risk relative to a benchmark, the measure could be tracking risk, or tracking
error.
C. Incorrect because standard deviation of returns is usedto measure an absolute risk
objective, not arelative risk objective. Measures of absolute risk include the variance or
standard deviation of returns and value at risk.

Answer 27 of 90
Answer
Solution
A. Correct because when the underlying is beyond the exercise price in the
appropriate direction (higher for a call, lower for a put), the option is said to be in the
money. Thus, if the underlying value [at expiration]exceeds the exercise price (S- >X), then
the option value is positive and equal to S,- X. The call option is then said to be in the
money. Accordingly, if X-S,< 0, the call option is in the money.
B. Incorrect because when the underlying is precisely at the exercise price, the option
is said to be at the money. Thus, when S, =X, the call option is said to be at the money.
Accordingly, when the exercise price minus the price of the underlying at expiration
or X- S, = 0, the call option is at the money, not in the money.
C Incorrect because when the underlying has not reached the exercise price (currently
lower foracall, higher for a put), the option is said tobe out of themoney. Thus, when the
underlying value [at expiration] is less than the exercise price, the call option is said to be
out of the money. Accordingly, when X- S, >0, the call option is out of the money, not in the
money.

Answer 28 of 90
Answer
Solution
A. Correct because accrued interest is calculated using Equation Al =t/T xPMT.
Further, the 30/360 day-count convention often is used for corporate bonds. It assumes
that each month has 30 days and that a fullyear has 360 days. Therefore for settlement on
February 5, interest willhave accrued for two months and 5days, or 65 days. (65/180) x
(5.0/2) =0.9028 per 100 par value $9.03 per bond.
B. Incorrect because accrued interest is calculated using Equation Al =t/T* PMT.
Further, the 30/360 day-count convention often is used for corporate bonds. It assumes
that each month has 30 days and that a full year has 360days. This response uses an
incorrect denominator of 365 daysand an incorrect payment of $5. (67/365) x 5 = 0.9178
per 100 par value x $9.18 per bond.
C Incorrect because accrued interest is calculated using Equation Al =t/Tx PMT.
Further, the 30/360 day-count convention often is used for corporate bonds. It assumes
that each month has 30days and that a full year has 360 days. This response uses an
incorrect numerator of actual days. (67/180) *(5/2) =.9306 per 100 par value $9.31 per
bond.

84
 exchange
quote another
C price.
B.Solution A.Answer
Answer C B.Solution Answer efficient
AAnswer either.
form the marketefficient
patterns C.
either.
form
patterns
the market either. B. is of dataSolution 21%.
Answer geometrically B.
could A.Answer
Answer
AAnswer 0.21orRa)
calculatingC.calculating 0.00018, then0.12Solution
V=$100(0.06)(1.05)/(0.115 market market prices
not
and x
that
Correct Incorrect The
Incorrect V=$100(0.06)(1.05)/0.115 $54.78
Incorrect. = Vo=
Incorrect.Correct Incorrect Incorrect weak Correct
(1 Incorrect look Incorrect=
market, 32 31 data data 30 + 29
Do/r= of of investors
from Correct
of of pricesis is
prices of R») feasible of
first which at market
90 and form the
percentages,
90 not not and 90 90
arrived--the because the linking
geometric
because
becausetypically becausebecause $100(0.06)/0.115
It It investors
weak because investors
weak because efficient, because 1.
- because
because
the chooses uses uses from from past. to
cannot Where a
mistakenly
assuming
security D, form the form the If
the candidate.
under under constant the weak
at tunderhe instead cannot
weak weak the R=
series return. the 20% to 18%
the value past. cannot
past. and predict
calculation arrive
standing efficient, efficient, analyst form
primarilythe price the - form consequently
form return is is
midpoint the 0.05) growth If If of the the
discriminatory of =of predict
the the
predict future index 5% at
derivative uniform
that Do the efficiency efficiency efficiency result 18%. result
der-determines $51.17 and
analyst and
analyst can in +3%
= of
trades.maximizes of $96.92 (where company's price period
returns.index
consequently future consequently future profitably + of This needtheto of
85 the pricing cannot
pricing can implies can implies changes implies 12%adding multiplying
is
best growth price x.
( 1 The values also
pricing profitably profitablyprice =
preferred trade
be +0.05)
bid rule the rule changessecurity changes security security formula over20%. the decimal. closeadjustthe
total all cannot cannot semi-strong by
and is on percentage the
the rule the trades extrapolating to
0) trade trade price multiple
× percentages:
trade the askquantity price stock by by prices (1+0.03) is: the
model; be prices be prices
limit quotes extrapolating on extrapolating Return other
execute is semi-strong semi-strong on patterns,
price. is price or reflect time returns
price derived traded. given reflect price reflect strong
published prices ×= two
periods
(1+ as
at as: patterns, patterns, then all (1 is
0.05
of the all all form +0.12).1. rather answere
from Common
the orprices past orprices past orpast Ri) x
same strong strong the
patterns renu:. 0.02.
orde by then then efficient markos x(1 th.
uis market
or or in
 Answer 33 of 90
Answer
Solution
A Incorrect because although Investor A has an investment horizon shorter than the
Macaulay duration of 5.5 years, it is not substantially shorter. Also, he is not as vulnerable
to an increase in rates as Investor B, whose bond has considerable market price risk.
B. Correct because Investor Bhas an investment horizon shorter than the Macaulay
duration of 5.5 years. When the investment horizon is shorter than the Macaulay duration
of the bond,market price risk dominates coupon reinvestment risk. The investor is
vulnerable to higher interest rates.
C. Incorrect because Investor Chas an investment horizon longer than the Macaulay
duration. In this case,coupon reinvestment risk dominates market price risk. Also,
assuming an interest rate increase, the gain from reinvesting coupon payments at ahigher
rate willoutweigh any loss incurred from a drop in bond price.
Answer 34 of 90
Answer
Solution
than
A Incorrect because both, Asset 1 and Asset 2 have lower standard deviations
correlation with the market.
Asset 3. A candidate may choose this because it has the highest deviations than
B. Incorrect because both, Asset 1 and Asset 2 have lower standard
Asset 3. A candidate may choose this because it has the highest beta.
C. Correct because betais defined as: B, =puoi / on, so G, = (B xon)/ P
Where: pum is the correlation between Asset iand the market portfolio, o, is the standard
deviation of Asset i, and om is the standard deviation of the market portfolio.

Asset 1's standard deviation = (1.000 x 0.2)/0.8 = 0.25

Asset 2's standard deviation = (1.225 x 0.2)/0.7 = 0.35

Asset 3'sstandard deviation = (1.125 x 0.2)/0.5 = 0.45

standard
Therefore, the asset with the highest standard deviation is Asset 3,where
deviation = 0.45.

Answer 35 of 90
Answer
Solution
Correct. The standard deviation of the portfolio is calculated as follows:
A.
o, = (0.12×0.352)+(0.92x0.72)+(2x0.1x0.9x(-0.1)x0.35x0.7)
-V(0.12×0.352)+(0.92x0.72)+(2x0.1x0.9x(-0.1)×0.35x0.7)
=62.75%
B Incorrect. It is calculated as follows:

o, = (0.12x0.352)+(0.92x0.72)
-V(0.12x0.352) +(0.92x0.72)
=63.10%
C. Incorrect. It is calculated as follows:

o, = (0.12x0.352)+(0.92×0.72)+(2x0.1 x0.9x0.1x0.3Sx0.7)
-V(0.12x0.352)+(0.92x0.72) +(2x0.1x0.9x0.1x0.35x0.7)
=63.45%

86
 Answer 36 of 90
Answer
Solution
A Correct because the effective duration and modified duration of an option-free
bond are identicalonly in the rare circumstance of an absolutely flat yield curve. Typical.
the two duration measures will differ, but the difference narrows when the yield curve i
flatter, the bond's time to maturity is shorter, and the bond is priced closer to its par val.
B Incorrect because effective duration is a curve duration statistic that measures
interest rate risk in terms of a parallel shift in the benchmark yield curve, assuming all
yields change by the same amount. Interest rate sensitivity associated with
non-parallel
yield
C
curve shifts is measured by key rate duration rather than effective duration
Incorrect because effective duration is a curve duration statistic that measures
interest rate risk in terms of a parallel shift in the benchmark yield curve (not a change in
the bond's own yieldto maturity). Yield duration statistics, such as Macaulay duration and
modified duration, measure interest rate risk in termns of a change in the bond's own vield
to maturity.

Answer 37 of 90
Answer
Solution
A Incorrect because Kurtosis is related to the fat-tail feature.
B.
Incorrect because positive skew has more large positivedeviation from the
C
Correct because the negatively skewed investment mean
to the stock returns whose distribution is characteristic is usually relater
concentrated to the right.
Answer 38 of 90
Answer
Solution
A. Incorrect because the important point to understand is that
of investors is relevant to pricing while the risk aversion
assets, it is not relevant to pricing
derivatives pricing is sometimes called risk-neutral pricing. derivatives. As such,
assumed to be risk averse. Therefore, investors are not
B Correct because the risk
derivative, one can just as easily aversion
of the investor is not
obtain the
relevant to pricing the
risk neutral. That means that the derivative price by assuming that the investor is
expected payoff of the derivative can be discounted at the
risk-free rate rather than the risk-free rate plus a
C Incorrect because the derivative price is therisk premium.
price
combination of the derivative and the underlying producesthata guarantees the risk-free
neutral pricing uses the fact that arbitrage risk-free return. Also, risk
portfolio consisting of the underlying opportunities guarantee
and the derivative must earn the that a risk-free
rate of return equal to the risk-free rate, not a
risk-free rate plus a risk premium.
Answer 39 of 90
Answer
Solution
A.
Incorrect because most digital assets do not have an
underlying assets or on the potential
expected to generate. cash flow-interest andinherent value based on
B dividends--they can or are
Correct because the main similarity between
assets is the digital assets and traditional financia
hedge funds emergence
of indirect investmnent
vehicles such as
and inexchange-traded
that invest both in traditional funas a
C. financial
Incorrect because one key difference between assets digital assets.
instruments is that traditional assets are generally digital assets and traditionalmaintained
financie
by central intermediaries. recorded in private ledgers
 Answer 40of 90
Answer
Solution
A. Incorrect because credit risk has two components. The first is known as default risk,
or default probability, which is the probability that a borrower defaults-that is, fails to
meet its obligation to make fulland timely payments of principal andinterest, according to
the terms of the debt security.
B Correct because credit risk has two components. The second component is loss
severity (also known as "loss given default") inthe event of default--that is, the portion of a
bond's value (including unpaid interest) an investor loses.
C. Incorrect because although it is sometimes important to consider the entire
distribution of potential losses and their respective probabilities, it is often convenient to
summarize the riskwith asingle default probability and loss severity and to focus on the
expected loss: Expected loss =Default probability xLoss severity given default.
Answer 41 of 90
Answer
Solution
A. Correct because many commercial loans backing commercial mortgage-backed
securities (CMBS) are balloon loans that require significant repayment of principal at
called
maturity. The risk that the borrower will not be able to make the balloon payment is
balloon risk. The lender may decide to extend the loan over a period of timne called the
workout period. Because the term of the loan can be extended, balloon risk is a type of
extension risk.
B. Incorrect because shorter-term tranches in aCMO structure have less extension risk
than longer-term tranches. Some protection against prepayment risk is provided for each
tranche in a CMO structure. The protection arises because prioritizing the distribution of
principal (that is, establishing the payment rule for the principal repayment) effectively
protectsthe shorter-term tranche against extension risk. This protection comes from the
benefit because they are
longer-term tranches. At the same time, longer-term tranches Thus, the
short-term tranches.
provided protection against contraction risk from extension risk to invest in
sequential-pay CMOstructure allows investors concerned about
contraction risk to invest in long-term
short-term tranches,and those concerned about
tranches.
in a CMO structure offer
Incorrect because planned amortization class tranchesfurther
C A evolution of the
contraction risk.
investors reduction in both extension and
Amortization Class (PAC) tranches,
sequential pay CMOare CMOs that include Planned
tranches offer greater predictability
occasionally accompanied by support tranches. PAC scheduled and fixed principal
and stability of the cash flows. These tranches make investors if the prepayment levels in
payments over a predetermined time period totheir range. If the prepayment rate is
minimum
the pool are withina certain maximum and
by the support tranche.
within the specified range, all prepayment risk is absorbed

Answer 42 of 90
Answer
Solution
and long bond.
A Correct because a fiduciary callconsists of a long call underlying.
B Incorrect because thiscombination represents a syntheticput.
C Incorrect because this combination represents a synthetic

Answer 43 of 90
Answer
Solution
Correct because the justifiedforward P/E =p/r-g, 0.45/ where pis the dividend payout
A
P/E = (0.10 - 0.07) = 0.45/
ratio, r is the required return and gis the growth rate.
0.03 =15.

88
 ratio)
retention rate (1 - dividend payout
it uses the earnings 0.55 / (0.10 - 0.07) =
0.55 /
B. Incorrect because calculating the P/E:
of thedividend payout ratio when
instead the dividend payout
ratio
0.03 = 18.333 18. estimate instead of
Incorrect because it uses the earnings = $0.60/ 0.03 = 20.
C.
g) = $0.60/ (0.10 - 0.07)
and divides correctly by (r -

Answer 44 of 90
Answer
Solution
rather than 8%:
because 50% is the result when using 9% as r
A Incorrect
/0.05 = $40;
r= 9%: V, =2/(0.09 - 0.04) = 2
decrease.
decrease from $40 to $20 equalsa50%
A expressed as:
B Correct because the estimated value (V) is
Vo=D1rg0=
Where: D, = next year's expected dividend
r=required return
g=dividend growth rate
Under the two required rate of return scenarios, the value is:
re 8%: V, =2/ (0.08- 0.04) = 2 / 0.04 = $50
r= 14%: V,= 2/ (0.14 -0.04)=2 /0.10 = $20
When the required rate of return increases to 14%, the value estimate decreases $30
from $50, or 60%.
C. Incorrect because 75% is the increase from 8% to 14%. 14% /8% - 1 =0.75 = 75%.
Answer 45 of 90
Answer
Solution
A Incorrect because cattle futures are an example of a derivative contract with asoft
commodity underlying. Soft commodities are agricultural products, such as cattle and corn.
B Incorrect because soybean options [and futures] are an example of a derivative
contract with an agricultural, or soft, commodity underlying.
C. Correct because aluminum futures are an example of a metals contract, which is a
derivative with a hard commnodity underlying.
Answer 46 of 90
Answer
Solution
A.
Incorrect because the historical results
for companies that are changing their
forecasting approach is also less appropriate
such as making a large acquisition or competitive strategy or
comparable. divestiture that renders restructuring in some way,
historical results non
B.
Incorrect because the historical results
forecast forecasting approach is a less appropriate
approach for companies in cyclical industries,
be at a different
will differ. point in the business cycle than the because a future period is likely to
C.
current or past period, and so results
Correct because the historical results
companies in industries where the forecasting approach may be
(e.g., Porter'operating
s Five Forces, appropriate for
analyst does not expect the industry
a low PESTLE influences)to change, as well as for companies that
sensitivity to changes in the business structure
cycle have

89
 Answer 47 of 90
Ánswer
Solution
A. Incorrect because the three main narties toa securitization are the seller of the
collateral,, sometimes called the depositor, the SPEthat purchases theloans or receivables
anduses them as collateral to issue the ABS and the servicer of the loans. The SE
nurchases the collateral, it is not the seller of the collateral.
B Incorrect because the three main parties toa securitization are the seller of the
collateral,,sometimes called the depositor, the SPE that purchases the loans or receivables
and uses them as collateral to issue the ABS and the servicer of the loans. The SPE
nurchases the collateral, it does not service the collateral.
C. Correct because the three main parties to a securitization are the seller of the
collateral, sometimes called the depositor, the SPE that purchases the loans or receivables
and uses them as collateral to issue the ABS and the servicer of the loans. Therefore the SPE
purchases the collateral

Answer 48 of 90
Answer
Solution
A. Correct because infrastructure investments can also be categorized by the
underlying assets' stage of development. Greenfield investments, developing new assets
and new infrastructure, are opportunistic investments. The intent may be to lease or Sell
the assets to the government after construction or to hold and operate the assets. If they
are held, it can be over the long term or for a shorter period until operational maturity,
with subsequent sale to new investors, thus ensuring capital appreciation to reflect the
construction and commissioning risk.
B. Incorrect because the correctional facility is to be constructed; it is not an existing
facility. Brownfield investments expand existing facilities and may involve privatization of
public assets or a sale leaseback of completed greenfield projects.
C. Incorrect because a correctional facility is a social infrastructure asset. Economic
infrastructure investments support economic activity through transportation assets,
information and communication technology (ICT) assets, and utility and energy assets.
Social infrastructure investments are directed toward human activities and include such
assets as educational, health care, social housing, and correctional facilities.

Answer 49 of 90
Answer
Solution
A Incorrect because it computes the future value of the coupon payment by just
adding them up.
B 10%o and a coupon payment of8.00,
Incorrect because it uses a reinvestment rate of
as follows:
+8(1.10): +8= 75.90
8(1.10) +8(1.10): + 8(1.10)" +8(1.10): +8(1.10): coupon payments is computed as
C Correct because the future value of the reinvested
compounded at reinvestment rate of 8% for the
the sum of payments, with each payment calculation is as follows:
number of years remaining in the holding period. The 10(1.08) +10=89.23
10(1.08)" + 10(1.08)s + 10(1.08)+ + 10(1.08) + 10(1.08): +

Answer 50 of 90
Answer
Solution
A. Incorrect because it assumed the sustainable growth rate = (1 - payout ratio) ×ROA.
total assets = 1,500/11,500 = 0.1304.
Where ROA = Net income / Average

90
 an 'surprise'to an 'surprise'
equity. reflect
in to reflect
prices
in
7%. information is, information and an and an and an who
ROE. the Thus, only Thus, invested invested invested
11%. that to to to bond.
0.0717 where prices investments investments investments investor,
xratio
shareholders' or
expectations. react
- 'unexpected'
or
expectations. of relativeof relative relative
= unexpected' investors value of option-free
0.2. 0.11 value
1,500/7,500=
ROE, asset of of valueof
= Payout of to asset
which of
0.1304 9%o. = elements expected amount
(Realized sale) amount
(Realized sale) amount sale) higher. the
higher.
0.2 elements
x which realized realized(Realized realized
=
rateAverage by ultimate ultimate to
0.09 x includes includes ultimate the
Retention 0.55 the fully the
0.55rate
x
in the be in
market
investment)/(Total investment)/(Total investment)/(Total be be benefit
with
growth = market to anticipatedtheto = all = all willwill
is, should
0.2 =
1,500/7,500 MOIC MOIC = all
=
0.1304 = / to
information to is, their of their MOIC
equity income information of of their a compared
onlythat that bondbond
provides
x
0.45
sustainable = a releases.only
a follows:
value
awaitingfollows:
value value
rate
shareholders' thus react - prices - follows: awaiting
awaiting
x Net
investors thus react investors total total total
option-free
option-free
-0.45) as growth
= not
calculated x is market, is as option
bond
ROE 0.45)
= market to
present aresuch and to
present
market of the as of thebe as of the
expected expected calculated
value be calculated
value be
(1 the sustainable by that
of by still
measures measures
still
value
calculated still
neasures convertible
= assumed
rate Average and - fully element
efficient thetheconvertibility
(1 efficient
and efficientfully
releases residual]may residual]may residual]
ratio)= may
growth israte rate be
information
anticipated information be anticipated
present
onon
should is that is
simply that yield
yield
it / thepayout
growth growth an an 'surprise' should MOIC MOIC simply is
MOIC
that
simply
because
income
sustainable in information
an
because [or (assets [or the
because because releases. (assets [or (assets the the
prices because prices releases. because
Unrealized because theon
sustainable
(1- sustainable present not
one
initial
total
Unrealized
investment.
one
initial
total
Unrealized
because
investment.
one because
because yield
Net
Incorrect or not values initial
total
investment. because
Correct
= 90 Incorrect MO1C, values
MOIC, MoIC,values
rate are such 'unexpected'
market,
the =ROE of of Incorrect
Correct aresuch 90
market, Incorrect Incorrect lower
retention 51 Solution and that elementsand past that
all of + Withasset With
Correct 90 Incorrect
Incorrect
Correct
Thus whereThus Thus Answer of
releases of 52 Solution investment + asset + Withasset of
Answer pastefficient
element efficient
releases
element
investment investment 53 Solution a
Answer
Answer capital).
residual capital).
residual capital). accept
all residual Answer
B C. thethe Answer
A. B. C.
A. B. C.
will
A. B. C.
 Answer 54 of 90
Answer
Solution
A. Correct because a property unique to price-weighted indexes is that a stock split on
one constituent security changes the weights on all the securities in the inde.
B Incorrect because this is acharacteristic associated with a price-weighted index. An
equal weighted index is rebalanced when its constituent securities' prices change in order
prices of constituent
to maintain equal-weighting. After the index is constructed and the
securities change, the index is no longer equally weighted. Therefore, maintaining equal
weights requires frequent adjustments (rebalancing) to the index.price-weighted index. A
C. Incorrect because this is a characteristic associated with a
value-weighted index
stock split would not change the relative weight of a security in aafter the split. In market
since the total market value of the security would be unchanged
capitalizationweighting, or value weighting, the weight on each constituent security is
the total market capitalization (the sum
determined by dividing its market capitalization by capitalization or value
the index. Market
of the market capitalization)of all the securities in market price per
is calculated by multiplying the number of shares outstanding by the
share.

Answer 55 of 90
Answer
Solution
A Incorrect because the two assets also have different levels of unsystematic risk to
maintain the same total variance.
levels of systematic risk, as
B Incorrect because the two assets also have different
indicated by their different levels of expected return (according to the CAPM).
expected returns of assets vary only by
C. Correct because the CAPM asserts that the different expected
Hence, if the two assets have
their systematic risk as measured by beta.
CAPM,they must have different levels of
returns and are correctly priced according to the variance + Nonsystematic variance.
systematic risk. Moreover, Total variance= Systematic
variances, you will find frequent references
Although the equality relationship is between nonsystematic risk. The assets must have
to total risk as the sum of systematic risk and total variances are the same but they each
different levels of unsystematic risk since their
have different levels of systematic variance/risk.

Answer 56 of 90
Answer
Solution
makea market. Those who trade with
Incorrect because traders who offer to trade
A. behind the market there is no trade and
them take the market. Given the sell-order is candidate who confuses "bids" and "asks"
thereby this order will not take the market. A instead of subtracting it. That is, $48 plus
offer,
may add market bid-ask spread to the bestincorrectly assumes that the sell-order at $49
$2 to arrive at $50 and then the
candidate
and thereby takes the market.
will be executed current best bid and offer is inside the
Incorrect because the space between the
B
makes a new market. Acandidate may
market. If anew limit order arrives here, it
best offer and then incorrectly assume
incorrectly add the market bid-ask spread to the thereby makes the market.
$50 and
that the buy limit order at $49 is less than above the best offer is behind the market. In this
Correct because a sell order placed
C.
best offer [$48] and is therefore behind the
example the sell order [$49]is placed above the
market.

92
 normalUnlike
recognizes B. A.Answer
returns Solution Answer C.
short-term
unsecured
riskstheir thanliquidity
investor
investors
whichselling investors B.bond. withSolution Answer
AAnswer remaining.
securities
risk risk C.
return
capital
remainingsecurities
riskB risk Solution Answer
A.Answer subsequent)
bond depositor maturity.
C large-denomination Answer
Large-denomination typically CDs, in a A.Answer
under very trading are are retail-oriented Solution
pureCorrect,
Incorrect,
returnbecause Incorrect Correct a MoreIncorrect on markets
60 risk who bond. 59 Incorrect Correct
equal asset Incorrect
equal 58 Correct
and can or the Incorrect Incorrect 57
investors, ofadverseshort of or of at Iftraded
expected 90 as
plans specifically, bonds. 90 assets pricing of
corrects Moreactually only y-axis. onlyassets 90 maturity. to the
information-motivated theybecause (mostlybecause it canbecause because th e as 90
does because because because because sell CD
market to for but f or wel l because amongproduct,because
actually
specifically, Liquidity model but the is
theytrade hold transact non-negotiable,
as CDs
the for the market efficient only efficient only Alternatively, CD
overníght) while not the the the inlike institutional
investors.
bearing
valuation expecttransaction on conditions. the liquidity reflecting with
beta e only
in small-denomination and are
financing, intendtransact
fund toCAL security to
CAL
thother
contrast, traded
securities the bond may risk portfolios portfolios
liquidity portfolios portfolios Eurobond
thenegotiable they
to market refers
manager and and open
risk. to maturity repo sell to riskdiffer money are by
error earn fees the market the athe
Excess traders
both maturity may negotiable
market are
institutional of
they
a market the liquidityrefers from risk to on on
are he because capital because capital market.
market deposit CDs secondary an
93 onreturn the bond. differ tshould the
believe unrelated give refers line the important
such
returns expect uncommitted transaction
to the systematic prior can CDs
represents most from efficientmarket (SML) efficient market
rise risk theprice those those securities, CDplus be
a on to be investors. are
security. their the to to the
likelytransaction
refers the aware allows
to soldimportance
t he
portfolios the source mnostly
are market earn to significant frontier. line portfolios
is frontier. line
a
information the price indicated risk
risk,
graphical maturity interest in
generated a to costs of CDs any the
returns
motivation naturemore would (CML) (CML) Small-denomination CDsare
indicated the associated thatliquidity
on open of traded
has Total Total depositor
are wholesale as
not riskcosts inthe have have are
rollover stable of the do the do
when
over- in
be
representation available date. market funding a by
paid
inexcess repo associatedthat price risk norisk not x-axis norisk not retail
funding concerned in market.
addition or for the the with diversifiable apply
and diversifiable apply
and (initial to funds
the
undervalued. the and
markets at
associated and in theprioralternative. clients,
of An which domestic
market trades. liquidity source market.price selling systematic to
expected
systematic to initial
market
to with all all
or to and
the and with at of are while
a the
 C. Incorrect because information-motivated traders arguably hold less diversified
portfolios than pure investors because they focus on securities that are over- or
undervalued.

Answer 61 of 90
Answer
Solution
A. Incorrect because solvency risk is the risk that the organization does not survive or
succeed because it runs out of cash, even though it might otherwise be solvent.
B. Correct because the investor's expected pavoff is lower as aresult of facing a credit
risk that is compounded by market risk. Thus. the investor bears much more risk than
initially thought as a result of the failure to consider the interaction of the two risks this
sort of riskinteraction is socommon in markets that practitioners have given ita very
fitting term-'wrong-way risk.'
C. Incorrect because operational risk is the risk that arises from inadequate or failed
people, Systems, and internal policies, procedures. and processes, as well as from external
events that are beyond the control of the organization but that affect its operations.

Answer 62 of 90
Answer
Solution
A. Incorrect because GICS and ICB cover publiccompanies, while TRBC also coverS
private companies, non-profits, and government entities.
B. Correct because GICS and ICB cover public companies, while TRBCalso covers
private companies,non-profits, and government entities.
C. Incorrect because GICS and ICB cover public companies, while TRBC also covers
private companies, non-profits, and government entities.

Answer 63 of 90
Answer
Solution
A Correct because as a general rule, the higher the senior unsecured rating, the
smaller the notching adjustment will be. The reason behind this is that the higher the
rating, the lower the perceived risk of default, so the need to 'notch' the rating to capture
the potential difference in lossseverity is greatly reduced. For lower-rated credits,
however, the risk of default is greater and thus the potential difference in loss from a lower
(or higher) priority ranking is a bigger consideration in assessing an issue's credit
riskiness. Thus, the rating agencies will typically apply larger rating adjustments.
B. Incorrect because as a general rule, the higher the senior unsecured rating, the
smaller the notching adjustment will be. The reason behind this is that the higher the
ratíng, the lower the perceived risk of default, so the need to 'notch' the rating to capture
the potential difference in loss severity is greatly reduced. For lower-rated credits,
however, the risk of default is greater and thus the potential diference in loss from a lower
(or higher) priority ranking isa bigger consideration in assessing an issue's credit
riskiness. Thus, the rating agencies will typically apply larger rating adjustments.
C. Incorrect because as a general rule, the higher the senior unsecured rating, the
Smaller the notching adjustment will be. The reason behind this is that the higher the
rating, the lower the perceived risk of default, so the need to 'notch' the rating to capture
the potential difference in loss severity is greatly reduced. For lower-rated credits,
however, the risk of default is greater and thus the potential difference in loss from a lower
(or higher) priority ranking is abigger consideration in assessing an issue's credit
riskiness. Thus, the rating agencies will typically apply larger rating adjustments.

94
 and
company unsecured of than
contractuallu
contractuallv rights. riskier Typically, Because continuum a issued in a
operating capital riskiest
return hedge as result primarily
Return debt of of periodically.
expressed
riskier withdrawal the is
contractually
contractually voting is number is spread
private contemporary typically
which usually debt debt. and
private
hierarchy. the bond time
funds.
their funds. the and is a
not not ain through debt risk as on each Theis
in Risk
debt of mezzanine equity,
declining limited typically
the It
is is their interest in with resets maturity.
form mezzanine
it it
shareliquidation. its Investments of the when ratesnotissuance.
it
securities, it
securities, Capital structure
secureand terms on
is of is of investors process returns,
secured debt. of a does
private restrictions however,
noruse noruseownership ranking returns feature to is set interest until
than in only bond quality
Private debt-infrastructure
the shareholders,
shareholders, the senior
vary usually after
equity equity governance
of highest status,
capital
debt. most risky Typically,
for for case typical open rate constant
result, junior debt rate,
market bond
shareholders
shareholders than
the capital credit
an secured safest,
corporate lessunsecured impose is
floating
issues issues represent the the private is spread
reference
by typically a funds rate
a riskier of issuer's
from from Asthein displayed offers islendingprivate hierarchy. is remains
level floating 95
company assets the derivatives
to
company security.in senior a
receivesreceives participate is the to usually with tend hedge of The
to to shares net debt its alternative, in of Thethe the
ratemargin.
down and
payments payments across direct investments
(graphically
of than form
structure
returns, funds in to
maturity.in a
the the equity company's mezzanine
Because investing coupon of issued
common continuumits of adjusts
change
rate
it whenit riskier senior secured
whenamount amount company, return and use hedge or
of riskiest highest
periodicperiodic capital the thespread coupon
is
becausebecause type chart). ranking until
rate a bond
because the debt is
because and becausebecause most because
because because because
the the debt a because
predominant the reset.
coupon
makerepay the
repay on
ofperformance risktheon debt.
infrastructure
Category seniorcorporate
debt. across
the
secured
infrastructure a constant thethe
90 Incorrect make mezzanine
as declining junior safest,
offers plus
Incorrect claim 90 Incorrect Incorrect 90 Incorrect
Incorrect90 in when
of Correct Correct of equity, Correct Correct is Incorrect
to to toto of terms rate therate adjustment
64 Solution the of of
67
Answer
obligated
obligated obligatedahave 65 Solutionby
obligated typically alternative,
66 Solution Solution remains
Therefore,set
Answer
Answer the Answer to investors. referencereference
Levels returns
in private Answer
Answer status, Answer funds.
funds. Answer usually
are and than vary down
A. its and
B A.
C B. C. A. B. C A. B. an
 function of the issuer's credit risk at issuance.Changes in the issuer's credit quality tha
occur after issuance are reflected in the price of the bond, not in the coupon rate; a floatin
rate bond whose issuer credit quality is unchanged is more likely to consistently trade very
near par, whereas a bond whose issuer credit quality has changed since issuance is more
likely to trade at a price noticeably different than par.
C Incorrect because achange in the issuer's credit quality does not typically result in
an adjustment in the coupon rate of a floating rate bond after issuance. The spread is
usually set when the bond is issued andremains constant untll maturity. It is primarily a
function of the issuer's credit risk at issuance, Changes in the issuer's credit quality that
occur after issuance are reflected in the price of the bond, not in the coupon rate, a floating
rate bond whose issuer credit quality is unchanged is more likely to consistently trade very
near par, whereas abond whose issuer credit quality has changed since issuance is more
likely to trade at a price noticeably different than par.
Answer 68 of 90
Answer

Solution
A Incorrect because this is the stock price minus the initial margin requirement; $108
-($108 x 40%) = $64.80.
B Correct because the price below which a margin call will take place iscalculated
with the following equation:(Equity/share) /(Price/share) =($43.20 +P- $108)/P=
20%,which can be solved for P = $81.00.
C. Incorrect because this isthe price 20% below the initial stock price ($108 x (1 -
20%)=$86.40) and not the level that triggers the margin call.

Answer 69 of 90
Answer
Solution
A. Correct because if volatility increases, the difference between S and S- increases,
which widens the range between C. and c-, leading to a higher option value. Changing
the c's top's leads to the same pricing formula for put options as for call options. Therefore
both put and call option values will increase.
B Incorrect because if volatility increases, the difference between S and S- increases,
which widens the range between c. and G-, leading to a higher option value. Changing
as for call options. Therefore
the c's top's leads to the same pricing formula for put optionsincreases.
both put and call option values will increase when volatility
C. Incorrect because if voltility increases, the difference between S and S,- increases,
which widens the range between c. and C-, leading to a higher option value. Changing
Therefore
the c's to p's leads to the same pricing formula for put options as for call options.
both put and call option values will increase when volatility increases.

Answer 70 of 90
Answer

Solution
A. Incorrect because Macaulay duration is not suitable for instruments with uncertain
future cash flows like callable bonds, since in brief, a callable bond does not have a well
defined internal rate of return (yield-to-maturity). Therefore, yield duration statistics, such
as modified and Macaulay durations, do not apply; effective duration is the appropriate
duration measure.
B. Correct because effective duration issuitable for instruments with uncertain future
cash flows like callable bonds, since in brief,a callable bond does not have a well-defined
internal rate of return (yield-to-maturity). Therefore, yield duration statistics, such as

96
 appropriate
do not apply; effective duration is the
modified and Macaulay durations,
instruments with uncertai
duration measure.
because modified duration is not suitable for does not have a well.
C Incorrect since in brief, a callable bond
callable bonds, statistics, Sulel
future cash flows like (yield-to-maturity). Therefore, yield durationappropriate
defined internal rate of return duration is the
durations, do not apply; effective
as modified and Macaulay
duration measure.

Answer 71 of 90
Answer
Solution the
expiration = p,= Max(0,X- S), where p, is
Correct because the put's value at underlying at
A
exercise price, and S- is the price of the (where p, is
value of the put at expiration, Xis the buyer's profit = II = pr- p.
expiration. In this case, Max(0,58 - 57)= $1. The put
4=-$3.
the price of the put at time 0) = 1- put's value at expiration. The put's value at expiration
Incorrect because this is the
of the put at expiration, X is the exercise price,
B.
=p,= Max(S, - 0,X), where pr is the value In this case, Max(0,58 - 57) = $1.
and Sr is the price of the underlying at expiration.
profit. The put's value at expiration = -p,=
C Incorrect because this is the put seller's
Max(0,X - S-), where p- is the value of the put at expiration, X is the exercise price, and S, is
- 57)=-$1. The put
the price of the underlying at expiration. In this case, -Max(0,58
put at time 0) =-1+ 4= $3.
seller'sprofit = Il=-pr+ p. (where p, is the price of the

Answer 72 of 90
Answer

Solution
A. Incorrect because the writer of a put option has a long exposure to the underlying.
B. Correct because put contract holders [buyers] have long exposure to their option
contract and short exposure to the underlying instrument.
C. Incorrect because the holder (buyer) of a call option has a long exposure to the
underlying.

Answer 73 of 90
Answer

Solution
A Incorrect because, all else equal, lower-coupon bonds have higher durations and
more interest rate risk, soa discount bondwould have higher interest rate risk than a
comparable premium bond.
B. Correct because, allelse equal, high-coupon bonds have less interest rate risk
(lower duration) than low-coupon bonds. Therefore, a bond trading at a
lower interest rate risk than acomparable zero-coupon or discount bond.premium will have
C. Incorrect because, all else equal, lower-coupon bonds have higher durations and
more interest rate risk, so a zero-coupon bond would have the highest
interest rate risk.
Answer 74 of 90
Answer
Solution
A.
Incorrect because risk tolerance of banks is quite low whereas the
endowments istypically high. risk tolerance tor
B.
Correct because the risk
tolerance of insurance companiestolerance
of endowments is typically high
are typically quite low. The risk whereas the rlS
quite low. Therefore, the risk
tolerance of endowments is highest. tolerance of banks is

97
 C Incorrect because risk tolerance of insurance companies is typically quite low
whereas the risk tolerance for endowments is typically high.
Answer 75 of 90
Answer
Solution
A Incorrect because with negative correlation between futures prices and interest
rates, falling prices lead to losses during periods of rising interest rates. Forward prices will
be higher than futures prices.
B 'Incorrect because in this case, futures and forward prices will be the same.
C. Correct because if there is a positive correlation between futures prices and
interest rates,an investor with a long position will favor futures over forwards because
rising prices lead to futures profits that are reinvested at higher interest rates. With
forwards, all the gains are received at expiration and thus there is no gain from
reinvestment

Answer 76 of 90
Answer

Solution
A. Correct because real estate investment trusts (REITs) provide investors with
indirect equity real estate exposure. Real estate limited partnerships are a form of direct
real estate equity investment. Commercial mortgage-backed securities (CMBS) provide
investorswith indirect debt investment opportunities in real estate.
B Incorrect because real estate limited partnerships are a form of direct real estate
equity investment.
C Incorrect because commercial mortgage backed securities (CMBS) provide investors
with indirect debt investment opportunities in real estate.

Answer 77 of 90
Answer

Solution
A. Correct because the risk tolerance of an organization should reflect both an "inside"
view andan "outside" view. The inside view asks what level of loss will leave the
organization unable to meet crítical objectives. The outside view asks what sources of
uncertainty or risk the organization faces.
B. incorrect because both an "inside" and "outside" view must be reflected.
C Incorrect because both an "inside' and "outside" view must be reflected.

Answer 78 of 90
Answer
Solution
A. Incorrect because a firm commitment requires both counterparties to perform
under a derivative contract [íntroducing counterparty risk], while an option [a contingent
claim] buyer can decide whether toperform under thecontract at maturity depending on
the underlying price relative tothe exercise price.
B Incorrect because a firm commitment requires both counterparties to perform
under aderivative contract [introducing counterparty risk], whlle an option [a contingent
claim] buyer can decide whether to perform under the contract at maturity depending on
the underlying price relative to the exercise price.
C. Correct because a firm commitment requires both counterparties to perform under
a derivative contract [introducing counterparty risk], while an option [a contingentclaim)
buyer can decide whether to perform under the contract at maturity depending on the
underlying price relative to theexercise price.

98
 Answer 79 of 90
Answer

Solution draw down ox

raise committed capital andspecific
Incorrect because private equity funds they have a
A.
three to five years, when
those commitments, generally overmanagenent fee is typically based on committed canit-,
that the
investment to make. Notecommitted-capital important
invested capital; the basis for management fees is anunder
not management fees are based on assets
distinction from hedge funds, whose
management (AUM). committed capital and draw down on
Correct because private equity funds raise specific
three to five years, when they haveacommitted
B.
those commitments, generally overmanagement fee is typically based on capital
investment to make. Note that the important
not invested capital; the committed-capital basis for management fees is an
distinction from hedge funds, whose management fees are based on assets under
management (AUM). draw down on
C. Incorrect because private equity funds raise commnitted capital andspecific
a
those commitments, generally over three to five years, when they have
investment to make. Note that the management fee is typically based on committed capital
not invested capital; the committed-capital basis for management fees is an important
distinction from hedge funds, whose management fees are based on assets under
management (AUM).

Answer 80 of 90
Answer

Solution
A. Incorrect because farm products must be harvested when ripe, with little flexibility
in production. By contrast, timberland serves as both a factory and a warehouse. Timber
(trees)can be grown (i.e, timberland's factory characteristic) and easily stored by simply
not harvesting the trees (i.e., timberland's warehouse characteristic). This characteristic
offers the flexibility of harvesting when timber prices are up and delaying harvests when
prices are down.
B
Correct because timberland serves asboth a factory anda warehouse. Timber
(trees) can be grown (i.e., timberland's factory characteristic) and easily stored by simply
not harvesting the trees (i.e., timberland's warehouse characteristic). This characteristic
offers the flexibility of harvesting when timber prices are up and delaying harvests when
prices are down.
C. Incorrect because farm products must be harvested when ripe, with little flexibility
in production. By contrast, timberland serves as both a factory and a
warehouse. Timber
(trees) can be grown (i.e., timberland's factory characteristic) and easily
not harvesting the trees (i.e., timberland's warehouse stored by simply
characteristic).
offers the flexibility of harvesting when timber prices are up and This characteristic
prices are down. delaying harvests when

Answer 81 of 90
Answer
Solution
A.
Incorrect because co-investing offers reduced control over
process compared with direct the investment selectio
the investment selection investing. Hence,direct investing offers higher control over
B process.
Incorrect because co-investing offers reduced control
process compared with direct over the
the investment investing, Hence, direct investing offers investment
higher
selectiot
C. selection process. control over
Correct because co-investing offers reduced
process compared with controlover the investment selection
the investment selectiondirect investing. Hence, direct investing offers higher control over
process
 Answer 82 of 90
Answer

Solution
A. Incorrect because a risk-averse investor would prefer the guaranteed payoft. Tne
expected value in both cases is $50, one with certainty and the other with uncertainty. IT an
investor chooses the guaranteed outcome. he/she is saidto be risk averse because the
investor does not want to take the chance of not getting anything at all.
B Incorrect because a risk-neutral investor would be indifferent between the two
options and thus should not always prefer one or the other. The expected value in both
indifferent
cases is $50, one with certainty and the other with uncertainty. If an investor is
about the gamble or the guaranteed outcome, then the investor may be risk neutral.
C Correct because the expected value in both cases is $50, one with certainty and tne
other with uncertainty. If an investor chooses the gamble (the option with uncertainty)
then the investor is said to be risk loving or risk seeking.

Answer 83 of 90
Answer
Solution
of small
A. Incorrect because the size effect results fronm the observation that equities
to outperform
cap companies (not companies with low price-to-earnings ratios] tend
equities of large-cap companies. that stocks that have
B Correct because the value effect is based on the observation
stocks over
below-average price-to-earnings (P/E) have consistently outperformed growth
long periods of time.
observation that
C Incorrect because the earnings surprise anomaly refers to the display
companies that display the largest positive earnings surprises subsequently
subsequent performance is displayed by
superior stock return performance, whereas poor earnings surprise does not
companies with low or negative earnings surprises. Thus,
explain the outperformance of low P/E stocks.

Answer 84 of 90
Answer
Solution
explains the steps to take to keep
A. Correct because the Procedures section of the IPS various contingencies.
to respond to
the IPS current and the procedures to follow Guidelines section (and not Procedures) that
Incorrect because it is the Investment
B.
executed (e.g., on the permissible use of
provides information about how policy should be
assets excluded from investment, if any.
leverage and derivatives) and on specific types of respect to rebalancing asset class
Incorrect because the investor's policy with
C.
section or the Rebalancing Policy
weights Ís detailed in the Strategic Asset Allocation Appendices: (A)Strategic Asset
section that typically are included in the appendices. specify a strategic asset allocation (SAA),
Allocation (B) Rebalancing Policy. Many investors assets to
also known as the policy portfolio, which is the baseline allocation of portfolio with
investment objectives and the investor's policy
asset classes in viewof the investor's policy
SAA may include a statement of
respect to rebalancing asset class weights. This and interest rate risk.
concerning hedging risks such as currency risk

Answer 85 of 90
Answer
Solution
duration (ModDur) statistic of a
Correct because the calculation of the modified
A.
duration. It is the Macaulay duration
bond requires a simple adjustment to Macaulay interest rates are positive, modified
statistic divided by one plus the yield per period. If

100
 denominator in the calculation is
Macaulay duration because the
duration islessthan statics:.
greater than 1. calculation of the modified duration (ModDur)
Macaulav durat
B. Incorrect because the to Macaulay duration.It is the positive, modie.
adjustment
bond requires a simple plus the yield per period. If interestrates are denominator i
statistic divided by one than Macaulay duration
because the
duration is less [not the same as] statistie
calculation is greater than 1. calculation of the modified duration (Mod Dur)
Incorrect because the durati
It is the Macaulay modi6,
C.
requires a simple adjustment to Macaulay duration. positive,
bond per period. If interest rates are
statistic divided by one plus the yield
Macaulay duration because the denominator in the
duration is less [not greater]than
calculation isgreater than 1.

Answer 86 of 90
Answer
Solution
Incorrect because mortgage pass-through security cash flows are uncertain becas
A.
they depend on actual prepayments. This risk is called prepayment risk.
B Incorrect because the creation ofa [collateralized mortgage obligation] cannot
eliminate or change prepayment risk; it can only distribute the various forms of this risk
among different bond classes.
C. Correct because a critical investment feature that distinguishes CMBS fromn RMBS i
the protection against early prepayments available to investors known as call protection.
An investor in an RMBS is exposed to considerable prepayment risk because the borrower
has the right to prepay a loan, in whole or in part, before the scheduled principal
repayment date. The discussion of CMOs highlighted how investors can purchase certain
types of tranches to modify or reduce prepayment risk. CMBS investors have considerable
callprotection, which results inCMBS trading more like corporate bonds than RMBS.
Answer 87 of 90
Answer
Solution
A. Correct because if the discount rate increases to 7.5% from 6.5%, the price of a
bond decreases. At a discount rate of 7.5%, the bond sells at a discount to face value. As a
discount bond approaches maturity, it will increase in price over time until it reaches par at
maturity.
B Incorrect because the price action is reversed.
C Incorrect because as the bond approaches maturity its price will increase as it is
"pulled to par."

Answer 88 of 90
Answer

Solution
A.
Incorrect because assigning relative weights to securities based on
risk is the focus of security selection, not strategic asset allocation, The SAAnonsystematl
is a means O1
providing the investor with exposure to the systematic risks of asset classes in proporuO
that meet the risk and return objectives.
depend on two other sources: tactical asset Additionally, the returns of an investment strat
allocation and security
portfolio be? Because we areselection. What snou
the relative weight of securities in the
maximizing risk-adjusted return, securities with a higher a should have concerned with
a higher
risk should be given less weight in the weign
and securitieswith greater
nonsystematic
Therefore, SAA does not take into account poruO
B. nonsystematic
Correct because the focus on the SAA (strategic asset risk.
allocation) is the
number of important investment principles. One principle is that a portfolio's result
ora
systemau
 risk accounts for most of its change in value over the long term. Asecond principle Is
that the returns to groups of similar assets (e.&. long- term debt claims) predictabiy
reflect exposures to certain sets of systematic factors (e.g, for the debt claims,
unexpected changes in the inflation rate). Thus. the SAAis a means of providing the
Investor with exposure tothe systematic risks of asset classes in proportions that meet
the risk and return objectives. Further, apart from the exposures to systematic risk
factors specifed inthe strateglc asset llocation, the returns of an investment strategy
depend on twoother sources: tactical asset llocation and security selection.
C Incorrect because the efficiency of the asset class is not a principle used in the
formation of a client's strategic asset allocation: however., managers attempt to generate
higher returns than the asset class benchmark by selecting securities with a higher
expected return. Further, apart from the exposures to systematic risk factors specifhed
in the strategic asset allocation, the returns of an investment strategy depend on two
other sources: tactical asset allocation and security selection. The likelihood of adding a
significant amount of value from security selection depends on the skills of the manager
and the informational efficiency of the market for the asset class his skill relates to. The
more efficient an asset class or a subset of that asset class (such as a regionalstock,
bond, or real estate market or asize categorywithin the stock market), the more skillful
an assetmanager has to be to add value

Answer 89 of 90
Answer
Solution
A. Correct because commodity indexes do not have an obvious weighting
mechanism,such as market capitalization, commodity index providers create their own
weighting methods.
B. Incorrect because a broad equity market index, as its name suggests, represents
representing more than
an entire given equity market and typically includes securitiesStock Exchange Composite
90percent of the selected market. For example, the Shanghai
Index(SSE) isa market-capitalization-weighted index.
the
C. Incorrect because some REITs are market-cap weighted, for example
cap
FTSEEPRA/NAREIT Global Real Estate Index uses the float-adjusted market
weightingmethod.

Answer 90 of 90
Answer
Solution
formula.= (-Duration x Ay)
A. Incorrect because it treats convexity as a negative in the
0.005:) =-0.0230 or -2.30%.
+ (0.5 x Cx (Ay):)= (-4.50 x 0.005) + (0.5 x -39.20 x
B. Incorrect because it ignores convexity.
percentage
C. Correct because incorporating both duration and convexity, the 0.005) + (0.5 x
(-4.50 x
changein a bond's price = (-Duration x Ay) + (0.5 x Cx (Ay):) =
39.20 x 0.0052) = -0.0220 or -2.20%.

102