CAIA - 28 - Hedge Funds: Directional Strategies Flashcards
The ___ form of the EMH states that prices reflect historical information.
The weak form of the EMH states that prices reflect historical information.
The ___-___form of the EMH states that prices reflect historical information and currently available public information.
The semi-strong form of the EMH states that prices reflect historical information and currently available public information.
The ___ form of the EMH states that prices reflect historical informational and all public and private current information.
The strong form of the EMH states that prices reflect historical informational and all public and private current information.
___ form efficiency implies that technical analysis cannot work.
Weak form efficiency implies that technical analysis cannot work.
The semi-strong EMH (does/does not/somewhat) holds.
The semi-strong EMH somewhat holds.
The strong EMH (does/does not/somewhat) hold
The strong EMH does not hold
The weak form of EMH (does/does not/somewhat) hold.
The weak form of EMH does hold.
A ___ ___occurs when an undervalued security remains undervalued for a prolonged period due to various reasons.
A value trap occurs when an undervalued security remains undervalued for a prolonged period due to various reasons.
A ___ ___occurs when price increases force short sellers to cover their positions, which further increases prices.
A short squeeze occurs when price increases force short sellers to cover their positions, which further increases prices.
The ___ ___ ___ states that leverage-constrained investors drive up high-beta assets, which results in negative alphas.
The leverage aversion theory states that leverage-constrained investors drive up high-beta assets, which results in negative alphas.
A ___ ___ ___ strategy involves taking long positions in low-beta assets and short positions in high-beta assets.
A betting against beta strategy involves taking long positions in low-beta assets and short positions in high-beta assets.
In ___-sentiment periods, investors appear to behave rationally with regard to CAPM and the accrual anomaly; however, in ___-sentiment periods, investors overpay for high-beta and high-accrual stocks.
In low-sentiment periods, investors appear to behave rationally with regard to CAPM and the accrual anomaly; however, in strong-sentiment periods, investors overpay for high-beta and high-accrual stocks.
___ generally results in investors overtrading their portfolios and thus incurring large transaction costs and reduced returns.
Overconfidence generally results in investors overtrading their portfolios and thus incurring large transaction costs and reduced returns.
___ refers to people being biased due to their prior views and not incorporating new information appropriately.
Anchoring refers to people being biased due to their prior views and not incorporating new information appropriately.
___ ___refers to selectively using evidence that supports a prior belief.
Confirmation bias refers to selectively using evidence that supports a prior belief.
___ ___/___ ___ refers to the notion that investors prefer to avoid losses than acquire gains.
Loss aversion/disposition effect refers to the notion that investors prefer to avoid losses than acquire gains.
The ___ ___maintains that investors underweight outcomes that are probable compared to those that are certain.
The prospect theory maintains that investors underweight outcomes that are probable compared to those that are certain.
Fundamental equity long/short is a ___ investment strategy.
Fundamental equity long/short is a directional investment strategy.
Equity long/short managers typically have a ___ concentrated portfolio, ___turnover and ___holding periods than market-neutral or statistical arbitrage managers.
Equity long/short managers typically have a more concentrated portfolio, lower turnover and longer holding periods than market-neutral or statistical arbitrage managers.
The ___ ___ ___ estimates the current value of a stock as a present value of the expected future dividend payments.
The gordon growth model estimates the current value of a stock as a present value of the expected future dividend payments.
Gordon Growth Model (Equation - no growth in dividend)
Gordon Growth Model with Constant Growth (equation)
Enterprise value (equation)
EV = Equity +Debt - Cash
Equity + Debt = Total Value of Assets
Free Cash Flow to Firm (Equation)
Net Income
+ Non-cash Charges
+ Interest Expense(1 - Tax)
- Investments in Fixed Assets and Working Capital
Enterprise Value estimated using FCFF (Equation)
Enterprise Value estimated using FCFF and assuming constant growth (equation)
A recent study confirms that activist hedge funds (have/have not) been successful the past few years.
A recent study confirms that activist hedge funds have been successful the past few years.
Dupont Model (Equation)
(CTAs/global macro) are reactive, whereas (CTAs/global macro) managers are anticipatory.
CTAs are reactive, whereas global macro managers are anticipatory.
(CTAs/global macro) focus only on prices
CTAs focus only on prices
___-___ global macro managers aim to profit from understanding market sentiment.
Feedback-based global macro managers aim to profit from understanding market sentiment.
___-___global macro managers examine micro-level information that has yet to be reflected in macroeconomic statistics.
Information-based global macro managers examine micro-level information that has yet to be reflected in macroeconomic statistics.
___-___ global macro managers rely on financial theories and models to study market movements.
Model-based global macro managers rely on financial theories and models to study market movements.
___ ___hold positive carry positions to exploit interest rate differentials between different currencies or between bonds of different maturities.
Carry trades hold positive carry positions to exploit interest rate differentials between different currencies or between bonds of different maturities.
___ ___ ___ ___ trades are based on perceived over- or undervalued regions of the yield curve.
Yield curve relative value trades are based on perceived over- or undervalued regions of the yield curve.
___ ___ ___ is used to evaluate relative values of currencies.
Purchasing power parity is used to evaluate relative values of currencies.
___ ___ ___ provide the market’s implied views about an asset’s future volatility.
Option pricing models provide the market’s implied views about an asset’s future volatility.
The ___ ___states that the nominal interest n is approximately equal to the real interest rate r plus the expected inflation rate.
The fisher effect states that the nominal interest n is approximately equal to the real interest rate r plus the expected inflation rate.
Fisher effect equation
(1+n) = (1+r)(1+i)
Empirical evidence shows that the Fisher equation (does/does not) hold.
Empirical evidence shows that the Fisher equation does hold.
The ___ ___measures balance of trade in goods and services, and the ___ ___ measures net flow of financial transactions. Most countries have a ___ of ___.
The current account measures balance of trade in goods and services, and the capital account measures net flow of financial transactions. Most countries have a balance of payments.
There are four currency trading styles:
- ___
- ___
- ___
- ___
There are four currency trading styles:
1. Carry
2. Trend
3. Value
4. Volatility
A ___ ___in currency markets aims to capture the interest rate differential between two countries.
A carry trade in currency markets aims to capture the interest rate differential between two countries.
___ ___ ___ ___ relates the spot and forward exchange rates to differences in short-term interest rates.
Covered interest rate parity relates the spot and forward exchange rates to differences in short-term interest rates.
Covered interest rate parity (equation)
The unhedged version of the covered interest rate parity is the ___ ___ ___ ___.
The unhedged version of the covered interest rate parity is the uncovered interest rate parity.
Uncovered interest rate parity equation
If the forward rate on a forward exchange rate contract is less than the spot exchange rate, a strategy could take a ___ position in FCU futures or a ___ position in DCU futures.
If the forward rate on a forward exchange rate contract is less than the spot exchange rate, a strategy could take a long position in FCU futures or a short position in DCU futures.
Empirical studies show that currency momentum trades (have/have not) been profitable.
Empirical studies show that currency momentum trades have been profitable.
The ___ of ___ ___ states that the same item should have the same price in all countries.
The law of one price states that the same item should have the same price in all countries.
___ ___compares the price of a basket of goods across countries and states that it should have the same price.
Absolute PPP compares the price of a basket of goods across countries and states that it should have the same price.
___ ___states that the change in exchange rate between two countries should reflect the difference between the expected inflation rates.
Relative PPP states that the change in exchange rate between two countries should reflect the difference between the expected inflation rates.
Relative Purchasing Power Parity Equation
Global Macro has had ___return and ___volatility in comparison to equity long/short. The returns are ___ as well.
Global Macro has had lower return and lower volatility in comparison to equity long/short. The returns are uncorrelated as well.
