CAIA - 28 - Hedge Funds: Directional Strategies

Question 1

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

Answer 1

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

Question 2

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

Answer 2

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

Question 3

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

Answer 3

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

Question 4

___ form efficiency implies that technical analysis cannot work.

Answer 4

Weak form efficiency implies that technical analysis cannot work.

Question 5

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

Answer 5

The semi-strong EMH somewhat holds.

Question 6

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

Answer 6

The strong EMH does not hold

Question 7

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

Answer 7

The weak form of EMH does hold.

Question 8

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

Answer 8

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

Question 9

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

Answer 9

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

Question 10

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

Answer 10

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

Question 11

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

Answer 11

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

Question 12

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.

Answer 12

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.

Question 13

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

Answer 13

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

Question 14

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

Answer 14

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

Question 15

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

Answer 15

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

Question 16

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

Answer 16

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

Question 17

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

Answer 17

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

Question 18

Fundamental equity long/short is a ___ investment strategy.

Answer 18

Fundamental equity long/short is a directional investment strategy.

Question 19

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

Answer 19

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

Question 20

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

Answer 20

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

Question 21

Gordon Growth Model (Equation - no growth in dividend)

Answer 21

Question 22

Gordon Growth Model with Constant Growth (equation)

Answer 22

Question 23

Enterprise value (equation)

Answer 23

EV = Equity +Debt - Cash

Equity + Debt = Total Value of Assets

Question 24

Free Cash Flow to Firm (Equation)

Answer 24

Net Income

+ Non-cash Charges

+ Interest Expense(1 - Tax)

• Investments in Fixed Assets and Working Capital

Question 25

Enterprise Value estimated using FCFF (Equation)

Answer 25

Question 26

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

Answer 26

Question 27

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

Answer 27

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

Question 28

Dupont Model (Equation)

Answer 28

Question 29

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

Answer 29

**CTAs** are reactive, whereas **global macro** managers are anticipatory.

Question 30

(CTAs/global macro) focus only on prices

Answer 30

**CTAs** focus only on prices

Question 31

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

Answer 31

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

Question 32

\_\_\_-\_\_\_global macro managers examine micro-level information that has yet to be reflected in macroeconomic statistics.

Answer 32

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

Question 33

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

Answer 33

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

Question 34

\_\_\_ \_\_\_hold positive carry positions to exploit interest rate differentials between different currencies or between bonds of different maturities.

Answer 34

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

Question 35

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

Answer 35

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

Question 36

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

Answer 36

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

Question 37

\_\_\_ ___ \_\_\_ provide the market's implied views about an asset's future volatility.

Answer 37

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

Question 38

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

Answer 38

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

Question 39

Fisher effect equation

Answer 39

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

Question 40

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

Answer 40

Empirical evidence shows that the Fisher equation **does** hold.

Question 41

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

Answer 41

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**.

Question 42

There are four currency trading styles: 1. \_\_\_ 2. \_\_\_ 3. \_\_\_ 4. \_\_\_

Answer 42

There are four currency trading styles: **1. Carry** **2. Trend** **3. Value** **4. Volatility**

Question 43

A ___ \_\_\_in currency markets aims to capture the interest rate differential between two countries.

Answer 43

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

Question 44

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

Answer 44

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

Question 45

Covered interest rate parity (equation)

Answer 45

Question 46

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

Answer 46

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

Question 47

Uncovered interest rate parity equation

Answer 47

Question 48

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.

Answer 48

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.

Question 49

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

Answer 49

Empirical studies show that currency momentum trades **have** been profitable.

Question 50

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

Answer 50

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

Question 51

\_\_\_ \_\_\_compares the price of a basket of goods across countries and states that it should have the same price.

Answer 51

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

Question 52

\_\_\_ \_\_\_states that the change in exchange rate between two countries should reflect the difference between the expected inflation rates.

Answer 52

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

Question 53

Relative Purchasing Power Parity Equation

Answer 53

Question 54

Global Macro has had \_\_\_return and \_\_\_volatility in comparison to equity long/short. The returns are ___ as well.

Answer 54

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