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LONG QUIZ

1.When the futures price of a commodity exceeds


the spot price, the commodity market is most likely
in:
A. contango.
B. backwardation.
C. carry.
• A is correct. When a commodity market is in contango, futures
prices are higher than spot prices. When spot prices are higher
than the futures price, the market is said to be in backwardation.
2. Which of the following statements concerning the historical
record of alternative investments is most likely correct?
A. The exclusion of returns of funds that have been liquidated
leads to an upward bias in index performance.

B. The use of appraised values instead of market prices leads to


an upward bias in volatility.

C. The inclusion of previous return data for funds that enter the
index leads to a downward bias in index performance.
• A is correct. The exclusion of returns of funds that have been
liquidated is called survivorship bias. It is most likely that only
poor performers are eliminated and thus reported returns are
artificially inflated.
3. An investor who has positions in multiple long–
short equity hedge funds and is concerned about
whether these positions are sufficiently diversified
will mostly likely be concerned about the lack of:
A. transparency in reported positions.
B. frequent independent valuations.
C. liquidity in the underlying assets.
• A is correct. Long–short hedge funds invest in liquid, publicly
traded equity (taking long and short positions); therefore, the
underlying positions can be reversed easily and there is no
need for independent valuations because current market prices
are available. The investor will have difficulty in determining if
the different funds are holding diverse or concentrated positions
(both within each fund and between funds) because hedge
funds generally do not reveal their holdings.
4. Compared to traditional investments, alternative
investments least likely demonstrate which of the
following characteristics?
A. Narrow manager specialization
B. Underlying investments that are illiquid
C. A high degree of regulation
• C is correct. Alternative investments are less regulated and
transparent than traditional investments such as equity and debt
securities.
5. With regard to venture capital, which of the following statements
is most likely true regarding venture capital?
A. Investments typically are in later stage and more established
companies.
B. Investors tend to have short time horizons.
C. Investors require a higher return than investors in publicly traded
equity.
6. Categories of alternative investments would least likely be
described by which of the following?
A. Fine wine and other tangibles
B. Schools and other long-lived real assets
C. Cash and other liquid investments
C is correct. Cash and other short-term liquid investments would
not generally be considered alternative investments. Alternative
investments fall outside of the definition of long-only publicly traded
investments in stocks, bonds, and cash (often referred to as
traditional investments). In other words, these investments are
alternatives to long-only positions in stocks, bonds, and cash.
Initial investment capital $100 million
Return at the end of one year 12%
Management fee based on assets under management 1%
Incentive fee based on the return net of the management fee
10%
7. Assume management fees are calculated using end-of-period
valuation. The investor’s net return given this fee structure is closest to:
A. 10.88%.
B. 9.79%.
C. 9.68%.
8. A hedge fund with an initial value of $100 million has a management fee of
2% and an incentive fee of 20%. Management and incentive fees are
calculated independently using end-of-period valuation. The value must
reach the previous high-water mark before incentive fees are paid. The
table below provides end-of-period fund values over the next three years.

Fund Value ($ millions) The total amount of fees earned by the


Year Before Fees After Fees
hedge fund in Year 3 is closest to:
A. $4.8 million.
B. $5.5 million.
1 120 113.6 C. $5.9 million.
2 110 107.8

3 125 ?
9. A real estate investor looking for equity exposure in the public
market is most likely to invest in:
A. real estate limited partnerships.
B. shares of real estate investment trusts.
C. collateralized mortgage obligations.
B is correct. Shares in real estate investment trusts are publicly
traded and represent an equity investment in real estate.
10. Which of the following characteristics of a target company
is likely the least attractive for a leveraged buyout?
A. Substantial amount of physical assets
B. Strong and sustainable cash flow
C. High leverage
C is correct. Low leverage is an attractive feature of a target
company in a leveraged buyout. This characteristic makes it easier
for an acquirer to use debt to finance a large portion of the
purchase price.
11. Commodity futures prices are most likely in backwardation
when:
A. interest rates are high.
B. storage costs are high.
C. the convenience yield is high.
C is correct. In backwardation, futures prices are lower than spot
prices, that is, the commodity forward curve is downward sloping.
This scenario occurs when the convenience yield is high. Futures
price ≈ Spot price (1 + r) + Storage costs − Convenience yield.
12. If the level of broad inflation indexes is largely determined by
commodity prices, the average real yield on direct commodity
investments is most likely:
A. less than zero.
B. equal to zero.
C. greater than zero.
B is correct. As the price increases of commodities are mirrored in
higher price indexes, the nominal return is equal to inflation and
thus the real return is zero.
13. Relative to traditional investments, alternative investments are
most likely to be characterized by higher:
A. fees.
B. liquidity.
C. transparency.
A is correct. Alternative investments are often characterized by high
fees.
14. The value at risk of an alternative investment is best described
as the:
A. probability of losing a fixed amount of money over a given time
period.
B. minimum amount of loss expected over a given time period at a
given probability level.
C. time period during which a fixed amount is lost at a given
probability level.
B is correct. Value at risk is defined as the minimum amount of
loss expected over a given time period at a given probability level.
15. A manager is compensated with a management fee based on
committed capital plus an incentive fee based on fund
performance. This scenario best describes the fee structure of a:
A. private equity fund.
B. hedge fund.
C. mutual fund.
A is correct. A private equity manager is compensated through a
management fee based on committed capital plus an incentive fee.
16. Capital provided for companies moving toward operation
but before commercial manufacturing and sales have occurred best
describes which stage in venture capital investing?
A. Later stage
B. Seed stage
C. Early stage
C is correct. Early-stage financing is capital provided for
companies moving toward operation but before commercial
manufacturing and sales have occurred.
17. The primary motivation of activist shareholders is to promote:
A. improved shareholder value.
B. environmentally sustainable business practices.
C. consideration of human rights in employee relations.
A is correct. The primary motivation of activist shareholders is to
increase shareholder value. If they feel management or the board
has failed to act in the best interests of shareholders, they may
attempt to force changes by gaining control of the board.
18. Which of the following scenarios can best be described as
offering superior protection of shareholder interests?
A. When common law is practiced
B. When CEO duality is common
C. When stakeholder theory prevails
A is correct. Unlike civil law systems, common law systems provide
judges with the ability to create law by setting precedents that are
followed in subsequent cases. Shareholders are viewed as better
protected under common law because judges may rule against
management actions in situations that are not specifically
addressed by statutes.
19. A company’s management team is proposing to sell a
major division because of low future growth prospects in that
industry. To which committee of the board is the proposal most
likely to be presented?
A. Risk
B. Audit
C. Investment
C is correct. Management is most likely to present the proposed
sale to the investment committee, whose main role is to review the
viability of material investment opportunities proposed by
management.
20. Recent trends in corporate governance most likely include:
A. focusing on the corporate governance system’s responsibility to
maximize shareholder value.
B. expanding the scope to consider the interests of employees,
customers, and suppliers.
C. increasing the diversity of corporate governance systems
tailored to specific jurisdictions.
B is correct. A significant majority of OECD member countries
have ratified the influential “Principles of Corporate Governance.”
Most recently updated in 2015, the principles call for an expanded
scope of stakeholders to be considered as part of a prudent
corporate governance system. Regulators and practitioners have
responded by moving toward a more effective balance of
stakeholder interests.
A is correct. Sell-out rights protect minority shareholders in
acquisition situations by forcing acquirers to buy out minority
shareholders at a fair price, even if those shareholders initially
voted against the acquirer’s offer.
22. A mining company has received government approval for
the development of a mining property and has also consulted with
members of the local community near the development site
throughout the project assessment process. The latter action is
best described as an example of:
A. principal–agent conflict mitigation.
B. stakeholder management.
C. regulatory compliance.
B is correct. Stakeholder theory broadens a company’s focus
beyond the interests of only its shareholders to those of its
customers, suppliers, employees, and others who have an interest
in the company. The local community is likely a stakeholder in the
company’s development plans. By identifying the community and
understanding its interests, the company is engaging in
stakeholder management.
23. The post-audit performed as part of the capital budgeting
process is least likely to include the:
A. provision of future investment ideas.
B. rescheduling and prioritizing of projects.
C. indication of systematic errors.
B is correct. Rescheduling and prioritizing projects is part of the
planning stage of the capital budgeting process, not the post-audit.
The post-audit’s purpose is to explain any differences between the
actual and predicted results of a capital budgeting project. This
process can aid in indicating systematic errors, improve business
operations, and provide concrete ideas for future investment
opportunities. A and C are incorrect because rescheduling and
prioritizing projects is part of the planning stage of the capital
budgeting process, not the post-audit. The post-audit’s purpose is
to explain any differences between the actual and predicted results
of a capital budgeting project. This process can aid in indicating
systematic errors, improve business operations, and provide
concrete ideas for future investment opportunities.

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