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CAIA > CAIA - 28 - Hedge Funds: Directional Strategies > Flashcards

CAIA - 28 - Hedge Funds: Directional Strategies Flashcards

1
Q

The ___ form of the EMH states that prices reflect historical information.

A

The weak form of the EMH states that prices reflect historical information.

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2
Q

The ___-___form of the EMH states that prices reflect historical information and currently available public information.

A

The semi-strong form of the EMH states that prices reflect historical information and currently available public information.

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3
Q

The ___ form of the EMH states that prices reflect historical informational and all public and private current information.

A

The strong form of the EMH states that prices reflect historical informational and all public and private current information.

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4
Q

___ form efficiency implies that technical analysis cannot work.

A

Weak form efficiency implies that technical analysis cannot work.

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5
Q

The semi-strong EMH (does/does not/somewhat) holds.

A

The semi-strong EMH somewhat holds.

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6
Q

The strong EMH (does/does not/somewhat) hold

A

The strong EMH does not hold

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7
Q

The weak form of EMH (does/does not/somewhat) hold.

A

The weak form of EMH does hold.

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8
Q

A ___ ___occurs when an undervalued security remains undervalued for a prolonged period due to various reasons.

A

A value trap occurs when an undervalued security remains undervalued for a prolonged period due to various reasons.

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9
Q

A ___ ___occurs when price increases force short sellers to cover their positions, which further increases prices.

A

A short squeeze occurs when price increases force short sellers to cover their positions, which further increases prices.

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10
Q

The ___ ___ ___ states that leverage-constrained investors drive up high-beta assets, which results in negative alphas.

A

The leverage aversion theory states that leverage-constrained investors drive up high-beta assets, which results in negative alphas.

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11
Q

A ___ ___ ___ strategy involves taking long positions in low-beta assets and short positions in high-beta assets.

A

A betting against beta strategy involves taking long positions in low-beta assets and short positions in high-beta assets.

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12
Q

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.

A

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.

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13
Q

___ generally results in investors overtrading their portfolios and thus incurring large transaction costs and reduced returns.

A

Overconfidence generally results in investors overtrading their portfolios and thus incurring large transaction costs and reduced returns.

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14
Q

___ refers to people being biased due to their prior views and not incorporating new information appropriately.

A

Anchoring refers to people being biased due to their prior views and not incorporating new information appropriately.

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15
Q

___ ___refers to selectively using evidence that supports a prior belief.

A

Confirmation bias refers to selectively using evidence that supports a prior belief.

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16
Q

___ ___/___ ___ refers to the notion that investors prefer to avoid losses than acquire gains.

A

Loss aversion/disposition effect refers to the notion that investors prefer to avoid losses than acquire gains.

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17
Q

The ___ ___maintains that investors underweight outcomes that are probable compared to those that are certain.

A

The prospect theory maintains that investors underweight outcomes that are probable compared to those that are certain.

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18
Q

Fundamental equity long/short is a ___ investment strategy.

A

Fundamental equity long/short is a directional investment strategy.

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19
Q

Equity long/short managers typically have a ___ concentrated portfolio, ___turnover and ___holding periods than market-neutral or statistical arbitrage managers.

A

Equity long/short managers typically have a more concentrated portfolio, lower turnover and longer holding periods than market-neutral or statistical arbitrage managers.

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20
Q

The ___ ___ ___ estimates the current value of a stock as a present value of the expected future dividend payments.

A

The gordon growth model estimates the current value of a stock as a present value of the expected future dividend payments.

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21
Q

Gordon Growth Model (Equation - no growth in dividend)

A
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22
Q

Gordon Growth Model with Constant Growth (equation)

A
23
Q

Enterprise value (equation)

A

EV = Equity +Debt - Cash

Equity + Debt = Total Value of Assets

24
Q

Free Cash Flow to Firm (Equation)

A

Net Income

+ Non-cash Charges

+ Interest Expense(1 - Tax)

  • Investments in Fixed Assets and Working Capital
25
Q

Enterprise Value estimated using FCFF (Equation)

A
26
Q

Enterprise Value estimated using FCFF and assuming constant growth (equation)

A
27
Q

A recent study confirms that activist hedge funds (have/have not) been successful the past few years.

A

A recent study confirms that activist hedge funds have been successful the past few years.

28
Q

Dupont Model (Equation)

A
29
Q

(CTAs/global macro) are reactive, whereas (CTAs/global macro) managers are anticipatory.

A

CTAs are reactive, whereas global macro managers are anticipatory.

30
Q

(CTAs/global macro) focus only on prices

A

CTAs focus only on prices

31
Q

___-___ global macro managers aim to profit from understanding market sentiment.

A

Feedback-based global macro managers aim to profit from understanding market sentiment.

32
Q

___-___global macro managers examine micro-level information that has yet to be reflected in macroeconomic statistics.

A

Information-based global macro managers examine micro-level information that has yet to be reflected in macroeconomic statistics.

33
Q

___-___ global macro managers rely on financial theories and models to study market movements.

A

Model-based global macro managers rely on financial theories and models to study market movements.

34
Q

___ ___hold positive carry positions to exploit interest rate differentials between different currencies or between bonds of different maturities.

A

Carry trades hold positive carry positions to exploit interest rate differentials between different currencies or between bonds of different maturities.

35
Q

___ ___ ___ ___ trades are based on perceived over- or undervalued regions of the yield curve.

A

Yield curve relative value trades are based on perceived over- or undervalued regions of the yield curve.

36
Q

___ ___ ___ is used to evaluate relative values of currencies.

A

Purchasing power parity is used to evaluate relative values of currencies.

37
Q

___ ___ ___ provide the market’s implied views about an asset’s future volatility.

A

Option pricing models provide the market’s implied views about an asset’s future volatility.

38
Q

The ___ ___states that the nominal interest n is approximately equal to the real interest rate r plus the expected inflation rate.

A

The fisher effect states that the nominal interest n is approximately equal to the real interest rate r plus the expected inflation rate.

39
Q

Fisher effect equation

A

(1+n) = (1+r)(1+i)

40
Q

Empirical evidence shows that the Fisher equation (does/does not) hold.

A

Empirical evidence shows that the Fisher equation does hold.

41
Q

The ___ ___measures balance of trade in goods and services, and the ___ ___ measures net flow of financial transactions. Most countries have a ___ of ___.

A

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.

42
Q

There are four currency trading styles:

  1. ___
  2. ___
  3. ___
  4. ___
A

There are four currency trading styles:

1. Carry

2. Trend

3. Value

4. Volatility

43
Q

A ___ ___in currency markets aims to capture the interest rate differential between two countries.

A

A carry trade in currency markets aims to capture the interest rate differential between two countries.

44
Q

___ ___ ___ ___ relates the spot and forward exchange rates to differences in short-term interest rates.

A

Covered interest rate parity relates the spot and forward exchange rates to differences in short-term interest rates.

45
Q

Covered interest rate parity (equation)

A
46
Q

The unhedged version of the covered interest rate parity is the ___ ___ ___ ___.

A

The unhedged version of the covered interest rate parity is the uncovered interest rate parity.

47
Q

Uncovered interest rate parity equation

A
48
Q

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.

A

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.

49
Q

Empirical studies show that currency momentum trades (have/have not) been profitable.

A

Empirical studies show that currency momentum trades have been profitable.

50
Q

The ___ of ___ ___ states that the same item should have the same price in all countries.

A

The law of one price states that the same item should have the same price in all countries.

51
Q

___ ___compares the price of a basket of goods across countries and states that it should have the same price.

A

Absolute PPP compares the price of a basket of goods across countries and states that it should have the same price.

52
Q

___ ___states that the change in exchange rate between two countries should reflect the difference between the expected inflation rates.

A

Relative PPP states that the change in exchange rate between two countries should reflect the difference between the expected inflation rates.

53
Q

Relative Purchasing Power Parity Equation

A
54
Q

Global Macro has had ___return and ___volatility in comparison to equity long/short. The returns are ___ as well.

A

Global Macro has had lower return and lower volatility in comparison to equity long/short. The returns are uncorrelated as well.

CAIA (39 decks)

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