Sample'Exam'

' '
 Section'A'–'MSQs'
Question 1
Which of the following statements is correct regarding a Closed-Ended Fund (CEF) and an Open-
Ended Fund (OEF):
a) CEFs can be managed either actively or passively but OEFs can only be managed actively.

:
b) CEFs have a lower management fee compared with a similar OEF.
c) OEFs and CEFs are traded on the exchange.
d) All of the above are correct statement.
e) A and B only are correct.

Question 2
The philosophy of the SRY model is based on the assumption that investors view equities and
bonds as alternate investments to each other. Which of the following statements is incorrect?
a) Bond yields will decline during periods of economic upturn.
b) Investors compare the yields each asset (equities and bonds) delivers.
c) If the earnings are forecasted to increase, investors bid up the price and eventually the earning
yields decline.
d) Bond yields will decline during periods of economic downturn.
e) A and B only

Question 3
Tracking error:
a) Measures the excess return per unit of risk.
⼀
b) Measures the deviation of a fund against its benchmarks.
c) Provides an indication of fund manager’s risk.
d) B and C only. 指示
e) A and B only.

Question 4
Which of the following statement(s) regarding the Market Portfolio M is(are) incorrect:
a) M consists of all risky assets
b) M consists of both listed and unlisted assets including human capital
c) All assets in M are positively correlated with M
d) Expected return on portfolio M is the highest amongst all other portfolios
e) If markets are efficient, all assets in M are weighted based on their market capitalisation (or
market value).

Question 5
The statement that best defines the Modern Portfolio Theory (MPT) is:
a) A portfolio constructed using market indexes
b) A portfolio with the highest expected return
c) A portfolio with the lowest volatility
d) A portfolio with the highest expected return for a given level of risk (volatility).
e) A portfolio consisting of equities and bonds.

Question 6
Consider that the ASX 200 securities were used to create an efficient frontier using 20 years of
historical annual data. The 200 stocks were then plotted on the Security Market Line (SML) to
identify all mispriced securities. An active equity fund consisting of the 200 stocks was then
constructed. Identify the statement that is incorrect regarding this active equity fund:
a) The fund attempts to provide higher risk-adjusted returns against the ASX200.
b) The fund charges higher fees than a passive ASX200 fund.
c) The fund carries higher systematic risk than the ASX200.
d) The fund carries higher total risk than the ASX200.
e) The fund will use analysts to identify mispriced securities.

Questions 7-16 are based on regressing excess (above risk free) returns of Fund A against excess
returns (above risk free) on ASX 200 benchmark using 22 monthly observations. Fund and
Benchmark volatility and average returns above risk free rate are also provided to help you with
the questions. All figures are in decimals (not percentages) and in monthly terms:

SUMMARY'OUTPUT

Regression)Statistics
Multiple'R 0.780
R'Square 0.609
Adjusted'R'Square 0.597
Standard'Error 0.018
Observations 35

。
ANOVA
df SS MS F
Regression 1 0.017 0.017 51.407
Residual 33 0.011 0.000
Total 34 0.028

Coefficients Standard)Error t)Stat P5value

Intercept L0.002 0.003 L0.762 0.452
ASX'200'L'rf 0.821 0.114 7.170 0.000

Fund%&%rf ASX%200%&%rf
Average 0.0011 0.0042
Standard%Deviation 0.0285 0.0271

Question 7
The Jensen’s Alpha of the fund is ______ and shows that fund A ____________
a) 0.11% per month; is able to generate returns above expected returns.
b) 1.81% per month; is able to track (follow) the benchmark.
c) -0.20% per month; is unable to generate returns above expected returns.
d) 2.85% per month; has a higher volatility than the benchmark.
e) 0.42% per month; performed worse than the benchmark after adjusting for total risk

Question 8
The Tracking Error of the fund is ______ and shows that fund A ____________
a) 0.11% per month; is able to generate returns above expected returns.
b) 1.8% per month; is not able to track (follow) the benchmark closely.
c) -0.24% per month; is unable to generate returns above expected returns.
d) 2.85% per month; is not able to track (follow) the benchmark closely.
e) 0.42% per month; performed worse than the benchmark after adjusting for risk

Question 9
The Sharpe’s ratio of the fund is ______ and shows that fund A ____________
a) 0.0386; is able to generate lower total risk adjusted returns than the benchmark.
b) 0.0013; is able to generate lower systematic risk adjusted returns than the benchmark.
c) 0.0285; is unable to generate returns above expected returns.
d) 0.0042; is able to generate higher total risk adjusted returns than the benchmark.
 e) 0.1555; is able to generate higher systematic risk adjusted returns than the benchmark.

Question 10
Fund A seems to be an active fund because:
a) The Jensen’s alpha is very small.
b) The Tracking Error is very large (TE > 2% per year).
c) The return of fund is higher than the return on the benchmark.
d) The beta of fund is not equal to 1.
e) B and D only.

Question 11
Fund A seems to be a passive fund because:
a) The Jensen’s alpha is very small.
b) The Tracking Error is very small (TE < 2% per year).
c) The return of fund is lower than the return on the benchmark.
d) All of the above.
e) A and C only.

Question 12
Equities and Bonds are natural inclusion in a well-diversified portfolio, because
a) Equities provide high growth (capital gains) but low distributions (low dividend yields).
b) Bonds provide low growth (low capital gains) but high distributions (high coupon yields).
c) Bonds and Equities have low correlation with each other.
d) All of the above.
e) B and C only.

Question 13
The inputs to a Mean-Variance framework in Excel Solver include all of the following except:
a)! Expected return using historical mean and variance of every asset/sub-asset class
b)! Historical standard deviation of each asset/sub-asset class
c)! Historical average return of each asset/sub-asset class
d)! Historical covariance of every asset/sub-asset class with every other asset/sub-asset class
e)! Term structure (yield curve) of the local market.

Questions 14 – 15 will use the following two diagrams

M
β
!
E(r) M E(r)
! !
rf Figureβ1
! ! ! σ rf Figure 2
β ! ! β
! !
Question 14
The Capital Allocation Line (CAL) is described in Figure ________ and shows ___________:
a) Figure 1; the relationship between systematic risk and expected returns of an asset/security.
b) Figure 2; the relationship between systematic risk and expected returns of an asset/security.
c) Figure 2; the relationship between total risk and expected returns of an asset/security.
d) Figure 1; the relationship between total risk and expected returns of an asset/security.
e) None of the above.

Question 15
The Security Market Line (SML) is described in Figure ________ and shows ___________:
a) Figure 2; the relationship between systematic risk and expected returns of an asset/security.
b) Figure 1; the relationship between systematic risk and expected returns of an asset/security.
c) Figure 1; the relationship between total risk and expected returns of an asset/security.
d) Figure 2; the relationship between total risk and expected returns of an asset/security.
e) None of the above.
e) B and D only.

Question 16
Which sectors perform the best during an economic upturn?
a) Technology
b) Consumer Staples
c) Consumer Discretionary
d) A and C only
e) B or C only

Question 17
What is a market based signal that has predicted that the economy will go into a recession in the
near future?
a) Gold prices decreasing
下滑
b) Yield curve inversion
c) 10 year bond yields higher than 3 month bond yields
d) Increase in inflation
e) Positive sentiments in the market

Question 18
Which of the following rebalancing strategies trade against the market which means the strategy
provides liquidity to the market?
a) Constant Proportion (Momentum)
b) Constant Mix (Contrarian)
c) Buy-and-hold
d) Constant Mix AND Constant Proportion
e) Constant Proportion and Buy-and-hold

Question 19
Funds with higher tracking error will:
a) only generate positive high Alphas
b) only generate low positive Alphas
c) only generate high negative Alphas
d) only generate low negative Alphas
e) generate abnormal returns but the size and sign of Alpha depends on the quality of the fund
manager

Question 20
All of the following aspects are correct except the following statement regarding a successful
fund:
a) The fund manager has a large size (assets under management).
b) The fund has generate a statistically and significantly positive alphas in the past (using a 95%
confidence interval)
c) The fund shows both positive selection effect and allocation effect over the last 4 quarters
against a peer based benchmark
d) The fund consistently ranks in the top decile (10%).
e) The fund has a high tracking error and a low information ratio.
'
Section B – Short Answers
Question 1
This question relates to Style Analysis of a FIS fund. Consider a multi-factor regression of fund
returns on 4 different FIS based indexes (Investment Grade – Short Term; Investment Grade –
Long Term; Junk – Short Term; Junk – Long Term), using 2 year daily data. The results are shown
below (assume T-stats for a 2 tail test at 95% = 1.96):
rFUND = α + β1 (rINV-ST) + β2 (rINV-LT) + β3 (rJUNK-ST) + β4 (rJUNK-LT) + Є
Fund A α β1 β2 β3 β4

Junkbutzwestmehbuthoug-Terw.be
Coefficients 0.02 0.57 -1.2 0.02 0.14
t-statistics 0.12 0.35 -0.54 2.10 2.57
Fund B α β1 β2 β3 β4
Coefficients 0.06 0.97 1.3 -0.71 0.29
t-statistics 0.41 2.11 3.5 -0.57 0.08
Fund C α β1 β2 β3 β4
Coefficients 0.03 -0.63 0.84 -0.54 0.71
t-statistics 0.18 -0.21 2.02 -0.26 2.38

a)! Why is style analysis important for the investor? Your answer must include (i) performance
comparison, and (ii) reason(s) for inclusion of a fund in an investor’s portfolio.
b)! What is the style of the three funds (Fund A, B and C) in this question?
c)! Explain which fund will best perform (i) if the economy is expected to grow, and (ii) if the
economy is expected to contract?

Question 2
REITs are available as closed ended funds that are usually exchange traded and are perhaps the
most popular investments to create a diversified portfolio. Since they are listed on the exchange
these investments are regulated yet they are also considered alternative investments. Explain the
reason(s) why they are considered as alternative investments?

Question 3
Why are hedge funds NOT suitable for retail (unsophisticated) investors? You response must
draw upon the two most important considerations. Your response may be framed around an
average retail investor, in his mid-40s, who desires to create a nest-egg for his post-retirement
needs, is unable to (or restricted to) invest in a hedge fund.

Question 4
An excess returns regression of the fund against ASX200 index yields the following results:
Fund µ(rFUND - rf) σ (rFUND - rf) αFUN βFUND SE αFUND SE βFUND σε
D
A 12% 27% 2% 1.3 1.95% 1.25% 8%
B 10 15 -1 0.8 0.35 0.85 3%
ASX 200 11 20
60! monthly observations were used to estimate the regression
 胜过
1.! Which fund(s) was able to outperform the benchmark (ASX 200) in terms of Sharpe’s
measure? 我 : 哭, io 44 S B 联
.
: 6
:
7 0 .

Sbi 龄 55713
: 。

2.! Which fund(s) was able to outperform the benchmark (ASX 200) in terms of Information
ratio? IA-2f.io 讨 的三哥 :

o.3s-r-tn.it
。

3.! Which fund(s) was able to outperform the benchmark (ASX 200) on a consistent (statistically

tbi.AT/onH9b.n.
significant) basis? : " 0256

Question 5
What is tracking error and why is it relevant to all investors (both Passive and Active)? [Please
make sure that you differentiate between the requirements of the two types of investors
and hence their preference for a higher or a lower tracking error]

Question 6
Consider the two fund managers portfolios averaged over the last 5 years, and use the same
benchmark. Report (calculate) the comparative strengths of each fund manager.
Returns Weights
Small Mid Caps Large Caps Small Caps Mid Caps Large Caps
Caps
Manager 1 10% 9% 10% 30% 60% 10%
Manager 2 11% 9% 8% 30% 30% 40%
Benchmark 12% 9% 7% 20% 40% 40%

Question 7
Consider a small capitalised equity (ticker symbol AUSA) that has been analysed to be undervalued
by an analyst. The aggregate order book for stock AUSA is as follows:
AUSA Average Daily trade (000s)= $ 2,000
$Trade Size (000s) Quoted Bid-Ask %
Best 50 0.6
Second Best 20 0.8
Third Best 130 1.2
Total 200 1.01
a)! Calculate the market impact cost for a retail investor with total investment of $250,000 and
wishes to invest around 2% in AUSA
b)! Calculate the market impact cost for an institutional investor with total investment of $4m and
wishes to invest around 3% in AUSA
c)! Define and explain the link between market impact cost and the capitalisation of firm
AUSA.
!

Question 8
Asset allocation decision that are based on a mean-variance framework requires the assumption
that returns from these assets are normally distributed. However, traditional asset classes and
alternative investments (such as Hedge Funds, Private Equities, and Venture Capital funds) are
shown to have non-normal return distribution. How does this impact portfolio construction and
how can a portfolio manager overcome the issues due to non-normal distribution?
Question 9
This question is related to fund size or Assets under management (AUM).
a)! Given that larger fund size will result in higher salaries to fund manager, provide a reason why
fund managers may wish to restrict the size of their fund below a certain AUM (Assets under
management)?
b)! If a fund is not performing well due to poor fund manager skills, provide one action that a
fund manager can take to increase fund size?