Chapter 21 Alternative Investments: Strategies and Performance RQ Flashcards
What is exchange-rate dislocation?
A. Shifts in government policy that affect currency markets.
B. Use of derivatives to offset unexpected exchange rate fluctuations.
C. Exchange rates deviating from historical relationships due to mispricing.
D. Central bank intervention in the domestic or foreign exchange market.
C. Exchange rates deviating from historical relationships due to mispricing.
Exchange rate dislocation refers to exchange rates deviating from historical relationships as a result of mispricing that arises in unusual or stressful market circumstances.
What type of equity hedge fund strategy leads to medium exposure to market direction?
A. Global macro strategy.
B. Event-driven strategy.
C. Directional strategy.
D. Relative value strategy.
B. Event-driven strategy.
Event-driven strategies seek to profit from unique corporate structure events such as mergers, acquisitions, stock splits, and stock buybacks. Alternative strategy funds using event-driven strategies have medium exposure to the underlying market direction.
Equity market-neutral is an example of what type of alternative strategy?
A. Event-driven strategy.
B. Directional strategy.
C. Relative value strategy.
D. Global macro strategy.
C. Relative value strategy.
Equity Market-neutral is a relative value strategy. Relative value strategies attempt to profit by exploiting inefficiencies or differences in the pricing of related stocks, bonds, or derivatives.
Which alternative strategy fund strategy typically has the lowest exposure to movements in the broader equity market?
A. Merger arbitrage.
B. Long-short equity.
C. Distressed securities.
D. Convertible arbitrage.
D. Convertible arbitrage.
Convertible arbitrage strategies are typically low risk. Properly executed, this strategy creates a net position with an attractive yield that can be almost completely unaffected by broader equity market movements.
What is the typical strategy of most convertible arbitrage hedge funds?
A. Long convertible securities and short common stock.
B. Short convertible bonds and long common stock.
C. Short convertible bonds and short common stock.
D. Long convertible securities and long common stock.
A. Long convertible securities and short common stock.
This strategy typically involves buying undervalued convertible securities and hedging some or all of the underlying equity risk by selling short an appropriate amount of the issuer’s common shares.
What type of alternative strategy fund exploits equity market inefficiencies by creating simultaneously long and short matched equity portfolios of approximately the same size?
A. Long-short equity.
B. Dedicated short bias.
C. Equity market-neutral.
D. Merger arbitrage.
C. Equity market-neutral.
An equity market-neutral strategy is designed to exploit inefficiencies and opportunities in the equity market by creating simultaneously long and short matched equity portfolios of approximately the same size.
If returns are normally distributed, approximately what percentage of all returns lie within 2 standard deviations of the average or expected return?
A. 68%.
B. 82%.
C. 95%.
D. 99%.
C. 95%.
If returns are normally distributed, approximately 95% of all returns lie within two standard deviations of the average or expected return.
Which of the following distributions of returns has the greatest downside risk?
A. Low kurtosis and positive skew.
B. Low kurtosis and negative skew.
C. High kurtosis and positive skew.
D. High kurtosis and negative skew.
D. High kurtosis and negative skew.
With high kurtosis, an alternative strategy fund’s returns will be more extreme, with either higher returns or lower returns than those that would be predicted by a normal distribution. Negative skew indicates a higher-than-normal tendency to obtain negative returns. Thus, the combination of high kurtosis and a negative skew would have the greatest downside risk.
Sarif is interested in an alternative investment strategy fund with an investment mandate focused on anticipating movements in the market prices of commodities. What type of strategy would this type of investment manager use?
A. Relative value strategy.
B. Directional strategy.
C. Multi strategy.
D. Event-driven strategy.
B. Directional strategy.
Directional strategies bet on the anticipated movements in the market prices of the underlying interest, in this scenario, commodities.
When is a merger considered to be accretive?
A. Acquiring firm’s earnings per share increases post-merger.
B. Acquired firm is larger than acquiring firm.
C. Acquiring firm’s earnings per share decrease post-merger.
D. Net income of merged firm increases.
A. Acquiring firm’s earnings per share increases post-merger.
If the acquiring firm’s earnings per share increases post-merger due to the strong earnings contribution of the targeted firm, the deal is considered to be accretive.
What is the key difference between a dedicated short bias strategy and a dedicated short strategy?
A. Potential loss in a dedicated short strategy is higher in an extended bull market.
B. Dedicated short uses only naked shorts while dedicated short bias has a net short exposure.
C. Dedicated short bias will have higher returns in a bear market.
D. Only dedicated short bias strategy can use leverage.
B. Dedicated short uses only naked shorts while dedicated short bias has a net short exposure.
A dedicated short strategy takes short positions in the portfolio (naked shorts) exclusively. A dedicated short bias strategy can have any number of long positions in the portfolio, but the net exposure must be short.
Which is the most liquid alternative investment strategy?
A. Convertible arbitrage.
B. Emerging markets.
C. Global macro.
D. Dedicated short bias.
C. Global macro.
Global macro is the most liquid of the alternative investment strategies.
What can be said about the suitability of alternative strategies?
A. Determining suitability is straightforward because alternative strategies have similar investment objectives.
B. Determining suitability is not easy because alternative strategies are generally more complex than traditional investments.
C. Determining suitability is not easy because the markets are always changing.
D. Determining suitability is not required because only accredited investors can invest in alternative strategy funds.
B. Determining suitability is not easy because alternative strategies are generally more complex than traditional investments.
They are generally more complex than more conventional investments and are perceived to be riskier investments as well.
The Canadian branch of the Alternative Investment Management Association (AIMA) provided a list of the top due diligence questions for retail advisors to use when considering investment in hedge funds and liquid alternatives. What were the two categories AIMA provided as the focus of questions?
A. Risk analysis and operations.
B. Account structure and fees.
C. Investment manager and the fund’s strategy.
D. Account structure and offering memorandum.
C. Investment manager and the fund’s strategy.
AIMA identifies two categories of questions: investment manager questions and fund strategy questions.
If Hedge Fund X’s Sharpe ratio is lower than Hedge Fund Y’s Sharpe ratio, which of the following statements is correct?
A. X’s return is worse than Y’s, relative to the risk taken.
B. X’s return is better than Y’s, relative to the risk taken.
C. X’s return and risk are higher than Y’s.
D. X’s return and risk are lower than Y’s.
A. X’s return is worse than Y’s, relative to the risk taken.
By comparing the Sharpe ratio of one fund to the Sharpe ratio of a market index or to the Sharpe ratio of other funds, you can determine whether that fund has out- or under-performed the benchmark or other fund on a risk-adjusted basis. In this example, as X’s return is lower than Y’s, we know that X has underperformed Y on a risk adjusted basis.
