标题: Book 7, Exam 3, Q.s 91, 111, and 115. [打印本页] 作者: homie 时间: 2013-4-5 22:38 标题: Book 7, Exam 3, Q.s 91, 111, and 115.
So I had some issues with this exam if you couldn’t tell by my two other threads. I am hoping someone can explain some of these things to me:
Q91 Background: Waltonia is recovering from a recession, confidence is rising, inflation falling, gov’t policy is stimulative, economy starting to expand. Analyst identifies this as recovery stage and states that since inflation is falling investors should put their money in bonds. Bergamo has grown faster than Waltonia, the economy is in the early stages of an upswing, businesses are confident and inventories are rising. Analyst says that investment in commodities or stocks is advisable since as economy grows these assets will rise in price.
Q91: Are Analysts statements about the appropriate investments for the two countries correct?
A) Yes
B) No, bonds are not appropriate in the case of Waltonia
C) No, commodities and stocks are not appropriate in the case of Bergamo
I said C, answer was B. I said C because although we would typically not invest in bonds during recovery the info given stated inflation was falling (this should make bonds more valuable) hence making B a false statement since bonds would be appropriate due to the falling inflation rate. I didn’t choose B because commodities are clearly NOT AN EARLY UPSWING ASSET, THEY ARE A BOOM ASSET! Someone please explain where I went wrong.
Q111: Which of the following is equivalent to establishing a positions as a fixed-rate payer in a 4 year equity swap on the S&P index?
a) Buy the S&P and take out a series of loans to be repaid each of the 4 years
b) Short the S&P, borrow the PV of the Index discounted 4 years, and take out a series of loans to be repaid each of the four years
c) Buy the S&P, borrow the PV of the Index discounted 4 years, and take out a series of loans to be repaid each of the four years
No info from vignette is needed for this one. I am typically pretty good at these but missed this one. I answered A, the correct answer was C. However, what I really need help with is understanding the explanation of the answer which states:
“It is not enough to simply invest in the Index using borrowed funds since this will give you cash flows based on the price of the Index, and not based on the return of the Index”
Can someone explain what this means practically, and how it makes C the correct answer?
Q115: PM is concerned about the impact a major market disruption would have on the performance of 3 hedge funds he has selected. Based on an exhibit where you are given the betas, max drawdowns, sty dev, and returns of each of these funds which fund has the greatest risk if the major market disruption were to occur?
A) Fund with highest st. dev
B) Fund with highest max drawdown
C) Fund with highest beta
I chose C, answer was B. I don’t understand why. A major market disruption is clearly a systemic event and the only measure of the three that prices this risk is beta! Also just thinking about what beta is makes it the intuitively correct answer choice: when markets go up 1% a security return goes up by its beta factor (ex. if you have a beta of two for a security as market goes up 1% your security foes up 2%, similarly when markets are down). So it would seem that the fund with the largest positive beta would suffer the worst from a large move down on the market. Am I wrong here? Also max drawdown can be indicative of many things, maybe there was a run on the fund because a top manager quit and the illiquid investments had to be liquidated at bargain prices, max drawdown is hardly a measure of a fund’s exposure to systematic events as it clearly includes idiosyncratic ones (note: max drawdown is really just a BS touchy feelly number funds can show investors to reassure them and be able to say “hey you aren’t likely to lose more than that!”).
As an added note on another question in this vignette (118) it asks what fund can be benchmarked using the risk free rate. Now I know that market neutral funds can generally be indexed this way, but don’t they actually have to be market neutral for this occur (i.e. a beta of zero)? In the options listed the market neutral fund has the highest beta, whereas another option (the FI arb fund) has a zero beta. So do we use risk free rate based on just the stated strategy of a fund or based on its actual fundamentals and positions taken? Otherwise I am starting a freaking leveraged junk bond fund and calling it market neutral!
Thoughts and comments are greatly appreciated as some of these questions,l and answers, really have me stumped!作者: onelife1 时间: 2013-4-5 22:39
Please help me people, even if its with just one of the questions I would really appreciate it!作者: hw0799 时间: 2013-4-5 22:39
Damn still no takers?作者: liquidity 时间: 2013-4-5 22:39
For the first question, I chose B since you would clearly wanna be in stocks during an early upswing and “ride the wave.” I agree with the commodities statement, but this question would be only half wrong as opposed to B, which is 100% wrong. If the economy started to show signs of expansion, why would you want a fixed return when you can make more $$$ in a rising stock market?
For the last question, I chose B since you would know in actual dollar terms what your losses are. The question did not state whether his fund was short biased, so if his betas were high and the market collapsed, he would be making $$$.
I don’t have the answer for the 2nd question.作者: koba 时间: 2013-4-5 22:39
1 - I’m pretty sure they treat commodities as both an early upswing and late in cycle asset
2 - i think they mean that if you just bought the index, you would earn the return on the index plus any cash flows (ie dividends) of the idnex. but you only want the return on the index - so you buy the index and borrow the PV of the index, which (sort of) cancel each other out such that your only exposure is to the increase in value of the index
3 - as bpdulog explained
