5 - Risk Management and Investment Management

Question 1

Provide examples of factors that impact asset prices and explain the theory of factor risk premiums.

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Question 2

Discuss the capital asset pricing model (CAPM) including its assumptions and explain how factor risk is addressed in the CAPM.

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Question 3

Explain the implications of using the CAPM to value assets, including equilibrium and optimal holdings, exposure to factor risk, its treatment of diversification benefits, and shortcomings of the CAPM.

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Question 4

Describe multifactor models and compare and contrast multifactor models to the CAPM.

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Question 5

Explain how stochastic discount factors are created and apply them in the valuation of assets.

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Question 6

Describe efficient market theory and explain how markets can be inefficient.

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Question 7

Describe the process of value investing and explain why a value premium may exist.

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Question 8

Explain how different macroeconomic risk factors, including economic growth, inflation, and volatility, affect asset returns and risk premiums.

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Question 9

Assess methods of mitigating volatility risk in a portfolio and describe challenges that arise when managing volatility risk.

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Question 10

Explain how dynamic risk factors can be used in a multifactor model of asset returns, using the Fama- French model as an example.

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Question 11

Compare value and momentum investment strategies, including their return and risk profiles.

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Question 12

Describe and evaluate the low-risk anomaly of asset returns.

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Question 13

Define and calculate alpha, tracking error, the information ratio, and the Sharpe ratio.

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Question 14

Explain the impact of benchmark choice on alpha and describe characteristics of an effective benchmark to measure alpha.

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Question 15

Describe Grinold’s fundamental law of active management, including its assumptions and limitations, and calculate the information ratio using this law.

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Question 16

Apply a factor regression to construct a benchmark with multiple factors, measure a portfolio’s sensitivity to those factors, and measure alpha against that benchmark.

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Question 17

Explain how to use style analysis to handle time-varying factor exposures.

Answer 17

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Question 18

Describe issues that arise when measuring alphas for nonlinear strategies.

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Question 19

Compare the volatility anomaly and the beta anomaly and analyze evidence of each anomaly.

Answer 19

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Question 20

Describe potential explanations for the risk anomaly.

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Question 21

Distinguish among the inputs to the portfolio construction process.

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Question 22

Evaluate the motivation for and the methods used for refining alphas in the implementation process.

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Question 23

Describe neutralization and the different approaches used for refining alphas to be neutral.

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Question 24

Describe the implications of transaction costs on portfolio construction.

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Question 25

Describe practical issues in portfolio construction, including the determination of an appropriate risk aversion, aversions to specific risks, and proper alpha coverage.

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Question 26

Describe portfolio revisions and rebalancing, and analyze the tradeoffs between alpha, risk, transaction costs, and time horizon.

Answer 26

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Question 27

Determine the optimal no-trade region for rebalancing with transaction costs.

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Question 28

Evaluate the strengths and weaknesses of the following portfolio construction techniques: screens, stratification, linear programming, and quadratic programming.

Answer 28

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Question 29

Describe dispersion, explain its causes, and describe methods for controlling forms of dispersion.

Answer 29

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Question 30

Define, calculate, and distinguish between the following portfolio VaR measures: diversified and undiversified portfolio VaR, individual VaR, incremental VaR, marginal VaR, and component VaR.

Answer 30

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Question 31

Explain the impact of correlation on portfolio risk.

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Question 32

Apply the concept of marginal VaR to guide decisions about portfolio VaR.

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Question 33

Explain the risk-minimizing position and the risk- and return-optimizing position of a portfolio.

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Question 34

Explain the difference between risk management and portfolio management and describe how to use marginal VaR in portfolio management.

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Question 35

Define risk budgeting.

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Question 36

Describe the impact of horizon, turnover, and leverage on the risk management process in the investment management industry.

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Question 37

Describe the investment process of large investors such as pension funds.

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Question 38

Describe the risk management challenges associated with investments in hedge funds.

Answer 38

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Question 39

Distinguish among the following types of risk: absolute risk, relative risk, policy-mix risk, active management risk, funding risk, and sponsor risk.

Answer 39

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Question 40

Explain the use of VaR to check manager compliance and monitor risk.

Answer 40

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Question 41

Explain how VaR can be used in the development of investment guidelines and for improving the investment process.

Answer 41

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Question 42

Describe the risk budgeting process and calculate risk budgets across asset classes and active managers.

Answer 42

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Question 43

Describe the three fundamental dimensions behind risk management, and their relation to VaR and tracking error.

Answer 43

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Question 44

Describe risk planning, including its objectives, effects, and the participants in its development.

Answer 44

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Question 45

Describe risk budgeting and the role of quantitative methods in risk budgeting.

Answer 45

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Question 46

Describe risk monitoring and its role in an internal control environment.

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Question 47

Identify sources of risk consciousness within an organization.

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Question 48

Describe the objectives and actions of a risk management unit in an investment management firm.

Answer 48

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Question 49

Describe how risk monitoring can confirm that investment activities are consistent with expectations.

Answer 49

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Question 50

Describe the Liquidity Duration Statistic and how it can be used to measure liquidity.

Answer 50

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Question 51

Describe the objectives of performance measurement tools.

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Question 52

Describe the use of alpha, benchmarks, and peer groups as inputs in performance measurement tools.

Answer 52

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Question 53

Differentiate between the time-weighted and dollar-weighted returns of a portfolio and describe their appropriate uses.

Answer 53

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Question 54

Describe risk-adjusted performance measures, such as Sharpe’s measure, Treynor’s measure, Jensen’s measure (Jensen’s alpha), and the information ratio, and identify the circumstances under which the use of each measure is most relevant.

Answer 54

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Question 55

Describe the uses for the Modigliani-squared and Treynor’s measure in comparing two portfolios and the graphical representation of these measures.

Answer 55

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Question 56

Determine the statistical significance of a performance measure using standard error and the t-statistic.

Answer 56

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Question 57

Describe style analysis.

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Question 58

Explain the difficulties in measuring the performance of actively managed portfolios.

Answer 58

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Question 59

Describe performance manipulation and the problems associated with using conventional performance measures.

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Question 60

Describe techniques to measure the market timing ability of fund managers with a regression and with a call option model and compute return due to market timing.

Answer 60

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Question 61

Describe and apply performance attribution procedures, including the asset allocation decision, sector and security selection decision, and the aggregate contribution.

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Question 62

Describe the characteristics of hedge funds and the hedge fund industry and compare hedge funds with mutual funds.

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Question 63

Explain biases that are commonly found in databases of hedge funds.

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Question 64

Explain the evolution of the hedge fund industry and describe landmark events that precipitated major changes in the development of the industry.

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Question 65

Explain the impact of institutional investors on the hedge fund industry and assess reasons for the growing concentration of assets under management (AUM) in the industry.

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Question 66

Explain the relationship between risk and alpha in hedge funds.

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Question 67

Compare and contrast the different hedge fund strategies, describe their return characteristics, and describe the inherent risks of each strategy.

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Question 68

Describe the historical portfolio construction and performance trends of hedge funds compared to those of equity indices.

Answer 68

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Question 69

Describe market events that resulted in a convergence of risk factors for different hedge fund strategies and explain the impact of such convergences on portfolio diversification strategies.

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Question 70

Describe the problem of risk sharing asymmetry between principals and agents in the hedge fund industry.

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Question 71

Identify reasons for the failures of hedge funds in the past.

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Question 72

Explain elements of the due diligence process used to assess investment managers.

Answer 72

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Question 73

Identify themes and questions investors can consider when evaluating a hedge fund manager.

Answer 73

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Question 74

Describe criteria that can be evaluated in assessing a hedge fund’s risk management process.

Answer 74

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Question 75

Explain how due diligence can be performed on a hedge fund’s operational environment.

Answer 75

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Question 76

Explain how a hedge fund’s business model risk and its fraud risk can be assessed.

Answer 76

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Question 77

Describe elements that can be included as part of a due diligence questionnaire.

Answer 77

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Question 78

Explain the use and efficacy of information disclosures made by investment advisors in predicting fraud.

Answer 78

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Question 79

Describe the barriers and the costs incurred in implementing fraud prediction methods.

Answer 79

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Question 80

Discuss ways to improve investors’ ability to use disclosed data to predict fraud.

Answer 80

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