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6、Hedge fund managers that follow equity market neutral strategies generally try to profit from market inefficiencies related to:

A) value or momentum factors.

B) pricing discrepancies due to mispriced volatility.

C) pricing discrepancies between the stocks of the parties to a merger.

D) the January effect.

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The correct answer is A

Market neutral strategies that exploit market inefficiencies are generally based on the findings of academic research which demonstrates that value stocks and momentum strategies earn positive excess returns.

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7、William Jones, CFA, has a client who wants to invest in a hedge fund that has the strategy of investing in equities and has among its goals the elimination of systematic risk. Jones has found two funds that he thinks are well run: the Marius Fund that uses an equity market neutral strategy and the Hera Fund that uses a hedged equity strategy. Given the client’s stated preferences, Jones should recommend:

A) the Hera Fund only. 

B) neither the Hera nor the Marius Fund.

C) either fund. 

D) the Marius Fund only.

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The correct answer is D

Equity market neutral is usually the attempt to exploit price discrepancies through long and short positions. This strategy also has the goal of the systematic risks canceling because of the long and short positions. Hedged equity strategies take long and short positions in under and overvalued securities, respectively, like equity market neutral strategies. The difference is that hedged equity strategies do not focus on balancing the positions to eliminate systematic risks.

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8、A hedge fund that takes perfectly offsetting long and short positions is best described as a(n):

A) long/short fund.

B) event-driven fund.

C) market-neutral fund.

D) global macro fund.

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The correct answer is C

Market-neutral funds take long and short positions but attempt to offset them to hedge against market moves. Long/short funds take both long and short positions but do not try to offset them. Global macro funds bet on the direction of a market, currency, interest rate, or other factor; they don’t try to offset positions to cancel out market effects. Event-driven funds focus on unique market opportunities, not offsetting positions.

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9、Equity market neutral strategies involve being both long and short in matched stock positions, thus taking advantage of an expected outperformance of the long position. There are two sub-classifications of equity market neutral strategies, which are:

A) merger arbitrage and statistical arbitrage trading.

B) fair valuation and long/short matching.

C) market neutral long/short equity and statistical arbitrage trading.

D) convertible arbitrage and market neutral long/short equity. 

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The correct answer is C

These are both sub-classifications of equity market neutral strategies. Statistical arbitrage is short-term trading based on modeling, and market neutral long/short strategies involve longer holding periods, during which time pricing disparities presumably correct themselves.

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10、Which of the following statements regarding pair trading is INCORRECT? Pair trading:

A) is a form of statistical arbitrage.

B) involves taking long and short position in two stocks that are related.

C) identifies overvalued and undervalued stocks of firms that are related.

D) heavily relies on fundamental analysis.

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The correct answer is D

Pair trading relies more on technical, quantitative analysis than “fundamental” analysis. Some criticize this technical approach as being a “black box” in the sense that investors are not given details regarding the statistical model used to create the strategy.