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New-Level 3 Version 2 2008 Sample Exam-v6 DEC LT ee DO NOT use the “PAUSE” feature unless there is an emergency and you must exit the test Using this feature will cause you to exit the exam If this is not an emergency of the test center you will be required to pay new fees and start the test over Question #1 out of 30 Time Remaining: |1:59:40
Don Rowan Case Scenario
Don Rowan, CFA, works for an investment bank that is advising a client about a potential acquisition of Martin Industries Although Rowan is not working on the Martin deal, Julia Carney, CFA, a colleague in the same department who is directly involved with the acquisition, telephones Rowan at home to ask for his advice about the acquisition
Rowan's wife, Joanne West, a nurse, overhears the telephone conversation between Carney and Rowan When West questions Rowan about why Carney called him at home, Rowan explains, "She is a colleague in my department who is working on an important deal involving Martin and was simply seeking my advice." That evening, West tells her friend Ruth Boyle about the conversation between Rowan and Carney
Two weeks later, Boyle, a research assistant at an asset management firm, reads an article about Martin Industries in the financial press After further reading and investigation, Boyle, who is a CFA candidate, hypothesizes that
the firm may be a prime takeover target She informs her supervisor of her hypothesis Her supervisor, a CFA ct holder and portfolio manager who emphasizes diligent research, tells Boyle to do more research and then write a report
Boyle collects the data needed for her report and gathers previously published research reports from reputable firms to assist in her analysis She conducts primary research and scrutinizes the reports including the assumptions, the timeliness, and the rigor of analysis During lunch, she observes that Martin's common stock price is starting to increase She completes her report and places a call to her father, a member of CFA Institute who is an advisor
at the firm where she holds her children’s education fund Boyle tells him, "I think Martin stock may be a good buy Buy 300 shares for the children's education fund." Her father immediately purchases the shares according to his daughter's instructions He then places an order to purchase a block of 5,000 shares of Martin stock, which he allocates among his client and personal accounts
Late the next day, Boyle gives her completed report to her supervisor She takes care to disclose in the report that "the author is a beneficial owner of Martin Industries common stock." The report, which references previously published reports as Boyle's main sources, recommends purchase of Martin stock for investors with above-average risk tolerance The supervisor reads the report immediately and is impressed with Boyle's work He questions Boyle about her research, her sources, and her recommendation Satisfied with Boyle's responses, he places an order to purchase a block of 25,000 shares to be allocated among his clients Question When disclosing the Martin Industries deal to Rowan, did Carney violate any CFA Institute Standards of Professional Conduct? c A.No c B Yes, relating only to client confidentiality
e C Yes, relating only to fiduciary duty to employer
c D Yes, relating to both client confidentiality and fiduciary duty to employer
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New-Level 3 Version 2 2008 Sample Exam-v6 DEC LT ee DO NOT use the “PAUSE” feature unless there is an emergency and you must exit the test Using this feature will cause you to exit the exam If this is not an emergency of the test center you will be required to pay new fees and start the test over Question #2 out of 30 Time Remaining: |1:52:26
Don Rowan Case Scenario
Don Rowan, CFA, works for an investment bank that is advising a client about a potential acquisition of Martin Industries Although Rowan is not working on the Martin deal, Julia Carney, CFA, a colleague in the same department who is directly involved with the acquisition, telephones Rowan at home to ask for his advice about the acquisition
Rowan's wife, Joanne West, a nurse, overhears the telephone conversation between Carney and Rowan When West questions Rowan about why Carney called him at home, Rowan explains, "She is a colleague in my department who is working on an important deal involving Martin and was simply seeking my advice." That evening, West tells her friend Ruth Boyle about the conversation between Rowan and Carney
Two weeks later, Boyle, a research assistant at an asset management firm, reads an article about Martin Industries in the financial press After further reading and investigation, Boyle, who is a CFA candidate, hypothesizes that
the firm may be a prime takeover target She informs her supervisor of her hypothesis Her supervisor, a CFA ct holder and portfolio manager who emphasizes diligent research, tells Boyle to do more research and then write a report
Boyle collects the data needed for her report and gathers previously published research reports from reputable firms to assist in her analysis She conducts primary research and scrutinizes the reports including the assumptions, the timeliness, and the rigor of analysis During lunch, she observes that Martin's common stock price is starting to increase She completes her report and places a call to her father, a member of CFA Institute who is an advisor
at the firm where she holds her children’s education fund Boyle tells him, "I think Martin stock may be a good buy Buy 300 shares for the children's education fund." Her father immediately purchases the shares according to his daughter's instructions He then places an order to purchase a block of 5,000 shares of Martin stock, which he allocates among his client and personal accounts
Late the next day, Boyle gives her completed report to her supervisor She takes care to disclose in the report that "the author is a beneficial owner of Martin Industries common stock." The report, which references previously published reports as Boyle's main sources, recommends purchase of Martin stock for investors with above-average risk tolerance The supervisor reads the report immediately and is impressed with Boyle's work He questions Boyle about her research, her sources, and her recommendation Satisfied with Boyle's responses, he places an order to purchase a block of 25,000 shares to be allocated among his clients Question When disclosing Carney's involvement in the Martin Industries deal to West, did Rowan violate any CFA Institute Standards? c A.No c B Yes, only the Standard relating to client confidentiality
c C Yes, only the Standard relating to fiduciary duty to employer
e D Yes, the Standards relating to client confidentiality and to fiduciary duty to employer
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New-Level 3 Version 2 2008 Sample Exam-v6 Sea LT ee DO NOT use the “PAUSE” feature unless there is an emergency and you must exit the test Using this feature will cause you to exit the exam If this is not an emergency of the test center you will be required to pay new fees and start the test over Question #3 out of 30 Time R ining: [1:49:53
Don Rowan Case Scenario
Don Rowan, CFA, works for an investment bank that is advising a client about a potential acquisition of Martin Industries Although Rowan is not working on the Martin deal, Julia Carney, CFA, a colleague in the same department who is directly involved with the acquisition, telephones Rowan at home to ask for his advice about the acquisition
Rowan's wife, Joanne West, a nurse, overhears the telephone conversation between Carney and Rowan When West questions Rowan about why Carney called him at home, Rowan explains, "She is a colleague in my department who is working on an important deal involving Martin and was simply seeking my advice.” That evening, West tells her friend Ruth Boyle about the conversation between Rowan and Carney
Two weeks later, Boyle, a research assistant at an asset management firm, reads an article about Martin Industries in the financial press After further reading and investigation, Boyle, who is a CFA candidate, hypothesizes that
the firm may be a prime takeover target She informs her supervisor of her hypothesis Her supervisor, a CFA ct holder and portfolio manager who emphasizes diligent research, tells Boyle to do more research and then write a report
Boyle collects the data needed for her report and gathers previously published research reports from reputable firms to assist in her analysis She conducts primary research and scrutinizes the reports including the assumptions, the timeliness, and the rigor of analysis During lunch, she observes that Martin's common stock price is starting to increase She completes her report and places a call to her father, a member of CFA Institute who is an advisor at the firm where she holds her children’s education fund Boyle tells him, "I think Martin stock may be a good buy Buy 300 shares for the children's education fund." Her father immediately purchases the shares according to his daughter's instructions He then places an order to purchase a block of 5,000 shares of Martin stock, which he allocates among his client and personal accounts
Late the next day, Boyle gives her completed report to her supervisor She takes care to disclose in the report that "the author is a beneficial owner of Martin Industries common stock." The report, which references previously published reports as Boyle's main sources, recommends purchase of Martin stock for investors with above-average risk tolerance The supervisor reads the report immediately and is impressed with Boyle's work He questions Boyle about her research, her sources, and her recommendation Satisfied with Boyle's responses, he places an order to purchase a block of 25,000 shares to be allocated among his clients
Question
When buying Martin Industries stock for her children's education fund, did Boyle violate any CFA Institute Standards?
c No
Yes, relating to reasonable basis Yes, relating to priority of transactions Yes, relating to material nonpublic information
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Question #4 out of 30 Time Remaining: |1:46:01
Don Rowan Case Scenario
Don Rowan, CFA, works for an investment bank that is advising a client about a potential acquisition of Martin Industries Although Rowan is not working on the Martin deal, Julia Carney, CFA, a colleague in the same department who is directly involved with the acquisition, telephones Rowan at home to ask for his advice about the acquisition
Rowan’s wife, Joanne West, a nurse, overhears the telephone conversation between Carney and Rowan When West questions Rowan about why Carney called him at home, Rowan explains, "She is a colleague in my department who is working on an important deal involving Martin and was simply seeking my advice.” That evening, West tells her friend Ruth Boyle about the conversation between Rowan and Carney
Two weeks later, Boyle, a research assistant at an asset management firm, reads an article about Martin Industries in the financial press After further reading and investigation, Boyle, who is a CFA candidate, hypothesizes that the firm may be a prime takeover target She informs her supervisor of her hypothesis Her supervisor, a CFA ct holder and portfolio manager who emphasizes diligent research, tells Boyle to do more research and then write a report
Boyle collects the data needed for her report and gathers previously published research reports from reputable firms to assist in her analysis She conducts primary research and scrutinizes the reports including the assumptions,
the timeliness, and the rigor of analysis During lunch, she observes that Martin's common stock price is starting to increase She completes her report and places a call to her father, a member of CFA Institute who is an advisor
at the firm where she holds her children’s education fund Boyle tells him, "I think Martin stock may be a good buy Buy 300 shares for the children's education fund." Her father immediately purchases the shares according to his daughter's instructions He then places an order to purchase a block of 5,000 shares of Martin stock, which he allocates among his client and personal accounts
Late the next day, Boyle gives her completed report to her supervisor She takes care to disclose in the report that "the author is a beneficial owner of Martin Industries common stock." The report, which references previously published reports as Boyle's main sources, recommends purchase of Martin stock for investors with above-average risk tolerance The supervisor reads the report immediately and is impressed with Boyle's work He questions Boyle about her research, her sources, and her recommendation Satisfied with Boyle's responses, he places an order to purchase a block of 25,000 shares to be allocated among his clients Question With respect to the block trade in Martin Industries stock, did Boyle's father violate any CFA Institute Standards? | c A.No ΠB Yes, relating only to reasonable basis c
C Yes, relating only to material nonpublic information
¬ D Yes, relating to both reasonable basis and material nonpublic information
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New-Level 3 Version 2 2008 Sample Exam-v6 5s“ c‹ DO NOT use the “PAUSE” feature unless there is an emergency and you must exit the test Using this feature will cause you to exit the exam If this is not an emergency of the test center you will be required to pay new fees and start the test over Question #5 out of 30 Time Remaining: |1:43:53
Don Rowan Case Scenario
Don Rowan, CFA, works for an investment bank that is advising a client about a potential acquisition of Martin Industries Although Rowan is not working on the Martin deal, Julia Carney, CFA, a colleague in the same department who is directly involved with the acquisition, telephones Rowan at home to ask for his advice about the acquisition
Rowan’'s wife, Joanne West, a nurse, overhears the telephone conversation between Carney and Rowan When West questions Rowan about why Carney called him at home, Rowan explains, "She is a colleague in my department who is working on an important deal involving Martin and was simply seeking my advice." That evening, West tells her friend Ruth Boyle about the conversation between Rowan and Carney
Two weeks later, Boyle, a research assistant at an asset management firm, reads an article about Martin Industries in the financial press After further reading and investigation, Boyle, who is a CFA candidate, hypothesizes that the firm may be a prime takeover target She informs her supervisor of her hyp is Her supervisor, a CFA charterholder and portfolio manager who emphasizes diligent research, tells Boyle to do more research and then write a report
Boyle collects the data needed for her report and gathers previously published research reports from reputable firms to assist in her analysis She conducts primary research and scrutinizes the reports including the assumptions, the timeliness, and the rigor of analysis During lunch, she observes that Martin's common stock price is starting to increase She completes her report and places a call to her father, a member of CFA Institute who is an advisor
at the firm where she holds her children’s education fund Boyle tells him, "I think Martin stock may be a good buy Buy 300 shares for the children's education fund." Her father immediately purchases the shares according to his daughter's instructions He then places an order to purchase a block of 5,000 shares of Martin stock, which he allocates among his client and personal accounts
Late the next day, Boyle gives her completed report to her supervisor She takes care to disclose in the report that "the author is a beneficial owner of Martin Industries common stock." The report, which references previously published reports as Boyle's main sources, recommends purchase of Martin stock for investors with above-average risk tolerance The supervisor reads the report immediately and is impressed with Boyle's work He questions Boyle about her research, her sources, and her recommendation Satisfied with Boyle's responses, he places an order to purchase a block of 25,000 shares to be allocated among his clients Question When completing and submitting her report on Martin Industries, did Boyle violate any CFA Institute Standards? c A.No
c B Yes, because the report included other people's work
e C Yes, because she did not disclose the amount of her beneficial ownership
c ) Yes, because she did not attempt to disseminate the material nonpublic information
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Trang 6Online CFA Sample Exam Site Providefeedback New-Level 3 Version 2 2008 Sample Exam-v6 DO NOT use the “PAUSE” feature unless there is an emergency and you must exit the test Using this feature will cause you to exit the exam If this is not an emergency of the test center you will be required to pay new fees and start the test over Question #6 out of 30 Time R ining: [1:41:57
Don Rowan Case Scenario
Don Rowan, CFA, works for an investment bank that is advising a client about a potential acquisition of Martin Industries Although Rowan is not working on the Martin deal, Julia Carney, CFA, a colleague in the same department who is directly involved with the acquisition, telephones Rowan at home to ask for his advice about the acquisition
Rowan’s wife, Joanne West, a nurse, overhears the telephone conversation between Carney and Rowan When West questions Rowan about why Carney called him at home, Rowan explains, "She is a colleague in my department who is working on an important deal involving Martin and was simply seeking my advice.” That evening, West tells her friend Ruth Boyle about the conversation between Rowan and Carney
Two weeks later, Boyle, a research assistant at an asset management firm, reads an article about Martin Industries in the financial press After further reading and investigation, Boyle, who is a CFA candidate, hypothesizes that the firm may be a prime takeover target She informs her supervisor of her hyp is Her supervisor, a CFA ct holder and portfolio manager who emphasizes diligent research, tells Boyle to do more research and then write a report
Boyle collects the data needed for her report and gathers previously published research reports from reputable firms to assist in her analysis She conducts primary research and scrutinizes the reports including the assumptions,
the timeliness, and the rigor of analysis During lunch, she observes that Martin's common stock price is starting to increase She completes her report and places a call to her father, a member of CFA Institute who is an advisor
at the firm where she holds her children’s education fund Boyle tells him, "I think Martin stock may be a good buy Buy 300 shares for the children's education fund." Her father immediately purchases the shares according to his daughter's instructions He then places an order to purchase a block of 5,000 shares of Martin stock, which he allocates among his client and personal accounts
Late the next day, Boyle gives her completed report to her supervisor She takes care to disclose in the report that "the author is a beneficial owner of Martin Industries common stock." The report, which references previously published reports as Boyle's main sources, recommends purchase of Martin stock for investors with above-average risk tolerance The supervisor reads the report immediately and is impressed with Boyle's work He questions Boyle about her research, her sources, and her recommendation Satisfied with Boyle's responses, he places an order to purchase a block of 25,000 shares to be allocated among his clients Question When trading in Martin Industries stock, did Boyle's supervisor violate any CFA Institute Standards? 1" c A.No
c B Yes, because he did not have a reasonable basis
¢ C Yes, because he was trading on material nonpublic information
c Yes, because he purchased a single block rather than purchasing shares for individual client
\ccounts
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New-Level 3 Version 2 2008 Sample Exam-v6 Sea eT eee DO NOT use the “PAUSE” feature unless there is an emergency and you must exit the test Using this feature will cause you to exit the exam If this is not an emergency of the test center you will be required to pay new fees and start the test over Question #7 out of 30 Time Remaining: |1:39:31
Yun Fan Case Scenario
Yun Fan manages a U.S.-based fixed-income portfolio for JF Asset Management The portfolio invests in Treasury securities, non-callable investment grade corporate bonds, and mortgage-backed securities (MBS), all with durations of about 6 years Fan is meeting with a junior portfolio manager, Raj Mulloth, to discuss investment strategies for the MBS portion of the portfolio
Mulloth begins by stating that because Treasuries and mortgage securities in the portfolio have similar durations, they both could be hedged against interest rate changes by using Treasury futures contracts Fan comments
that they both must be hedged by selling Treasury futures, and that the dollar duration of the mortgage securities must equal the dollar duration of the Treasury futures position
The discussion then turns to the other sources of risk faced by mortgage securities Fan explains that in addition to interest rate risk and prepayment risk, the other major sources of risk faced by mortgage securities include: spread risk, yield curve risk, and volatility risk Fan then makes the following statements:
Statement 1: "Spread risk should be hedged by selling Treasury futures contracts."
Statement 2: "Yield curve risk is a reference to the impact of changes on the shape of the yield curve on bond prices An examination of key rate durations will show that our investments in
Treasury securities, non-callable corporates, and mortgage securities are all significantly impacted by changes in the shape of the yield curve."
Statement 3: “Mortgage securities have significant exposure to volatility risk Our expectation is that current implied interest rate volatility will exceed future realized interest rate volatility Therefore it would be appropriate to manage volatility risk by hedging dynamically or by using options.”
Mulloth asks if hedging mortgage securities using a duration-based approach is equivalent to an interest rate sensitivity or two-bond hedge approach Fan responds that these approaches are not equivalent because duration-
based hedging accounts only for likely changes in the level of interest rates whereas the two-bond hedge incorporates both likely changes in the level and shape of the yield curve Consequently, when interest rates change, the price change for mortgage securities is more closely matched to changes in the value of a duration hedge than the changes in the value of a two-bond hedge
Question
Assuming a decline in interest rates, is Mulloth correct with regard to using Treasury futures contracts to hedge the interest rate risk of JF Asset Management's fixed-income portfolio?
c Yes
No, the value of the prepayment option rises, causing mortgage security values to rise by less comparable Treasuries and rendering the hedge ineffective
No, the value of the prepayment option rises, causing mortgage security values to rise by more comparable Treasuries and rendering the hedge ineffective
No, the value of the prepayment option declines, causing mortgage security values to rise by less comparable Treasuries and rendering the hedge ineffective
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Question #8 out of 30 Time Remaining: [1:34:49
Yun Fan Case Scenario
Yun Fan manages a U.S.-based fixed-income portfolio for JF Asset Management The portfolio invests in Treasury securities, non-callable investment grade corporate bonds, and mortgage-backed securities (MBS), all with durations of about 6 years Fan is meeting with a junior portfolio manager, Raj Mulloth, to discuss investment strategies for the MBS portion of the portfolio
Mulloth begins by stating that because Treasuries and mortgage securities in the portfolio have similar durations, they both could be hedged against interest rate changes by using Treasury futures contracts Fan comments that they both must be hedged by selling Treasury futures, and that the dollar duration of the mortgage securities must equal the dollar duration of the Treasury futures position
The discussion then turns to the other sources of risk faced by mortgage securities Fan explains that in addition to interest rate risk and prepayment risk, the other major sources of risk faced by mortgage securities include: spread risk, yield curve risk, and volatility risk Fan then makes the following statements:
Statement 1: "Spread risk should be hedged by selling Treasury futures contracts."
Statement 2: "Yield curve risk is a reference to the impact of changes on the shape of the yield curve on
bond prices An examination of key rate durations will show that our investments in Treasury securities, non-callable corporates, and mortgage securities are all significantly impacted by changes in the shape of the yield curve.”
Statement 3: "Mortgage securities have significant exposure to volatility risk Our expectation is that current implied interest rate volatility will exceed future realized interest rate volatility
Therefore it would be appropriate to manage volatility risk by hedging dynamically or by using options."
Mulloth asks if hedging mortgage securities using a duration-based approach is equivalent to an interest rate sensitivity or two-bond hedge approach Fan responds that these approaches are not equivalent because duration-
based hedging accounts only for likely changes in the level of interest rates whereas the two-bond hedge incorporates both likely changes in the level and shape of the yield curve Consequently, when interest rates change, the price change for mortgage securities is more closely matched to changes in the value of a duration hedge than the changes in the value of a two-bond hedge
Question
Is Fan's comment to Mulloth regarding hedging mortgage securities correct or incorrect with respect to:
selling Treasury futures?
A | |
mm | Correct | Incorrect |
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Yun Fan Case Scenario
Yun Fan manages a U.S.-based fixed-income portfolio for JF Asset Management The portfolio invests in Treasury securities, non-callable investment grade corporate bonds, and mortgage-backed securities (MBS), all with durations of about 6 years Fan is meeting with a junior portfolio manager, Raj Mulloth, to discuss investment strategies for the MBS portion of the portfolio
Mulloth begins by stating that because Treasuries and mortgage securities in the portfolio have similar durations, they both could be hedged against interest rate changes by using Treasury futures contracts Fan comments
that they both must be hedged by selling Treasury futures, and that the dollar duration of the mortgage securities must equal the dollar duration of the Treasury futures position
The discussion then turns to the other sources of risk faced by mortgage securities Fan explains that in addition to interest rate risk and prepayment risk, the other major sources of risk faced by mortgage securities include: spread risk, yield curve risk, and volatility risk Fan then makes the following statements:
Statement 1: "Spread risk should be hedged by selling Treasury futures contracts."
Statement 2: "Yield curve risk is a reference to the impact of changes on the shape of the yield curve on bond prices An examination of key rate durations will show that our investments in
Treasury securities, non-callable corporates, and mortgage securities are all significantly impacted by changes in the shape of the yield curve."
Statement 3: “Mortgage securities have significant exposure to volatility risk Our expectation is that current implied interest rate volatility will exceed future realized interest rate volatility Therefore it would be appropriate to manage volatility risk by hedging dynamically or by using options.”
Mulloth asks if hedging mortgage securities using a duration-based approach is equivalent to an interest rate sensitivity or two-bond hedge approach Fan responds that these approaches are not equivalent because duration-
based hedging accounts only for likely changes in the level of interest rates whereas the two-bond hedge incorporates both likely changes in the level and shape of the yield curve Consequently, when interest rates change, the price change for mortgage securities is more closely matched to changes in the value of a duration hedge than the changes in the value of a two-bond hedge
Question
In Statement 1, is Fan most likely correct with regard to hedging spread risk?
c Yes
No, spread risk should be hedged only if spreads are expected to narrow No, spread risk should be hedged only if spreads are expected to widen
No, the spread is a risk premium for holding mortgage securities and should not be hedged
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Question #10 out of 30 Time Remaining: |1:31:22
Yun Fan Case Scenario
Yun Fan manages a U.S.-based fixed-income portfolio for JF Asset Management The portfolio invests in Treasury securities, non-callable investment grade corporate bonds, and mortgage-backed securities (MBS), all with durations of about 6 years Fan is meeting with a junior portfolio manager, Raj Mulloth, to discuss investment strategies for the MBS portion of the portfolio
Mulloth begins by stating that because Treasuries and mortgage securities in the portfolio have similar durations, they both could be hedged against interest rate changes by using Treasury futures contracts Fan comments that they both must be hedged by selling Treasury futures, and that the dollar duration of the mortgage securities must equal the dollar duration of the Treasury futures position
The discussion then turns to the other sources of risk faced by mortgage securities Fan explains that in addition to interest rate risk and prepayment risk, the other major sources of risk faced by mortgage securities include: spread risk, yield curve risk, and volatility risk Fan then makes the following statements:
Statement 1: "Spread risk should be hedged by selling Treasury futures contracts."
Statement 2: "Yield curve risk is a reference to the impact of changes on the shape of the yield curve on bond prices An examination of key rate durations will show that our investments in
Treasury securities, non-callable corporates, and mortgage securities are all significantly impacted by changes in the shape of the yield curve.”
Statement 3: "Mortgage securities have significant exposure to volatility risk Our expectation is that current implied interest rate volatility will exceed future realized interest rate volatility
Therefore it would be appropriate to manage volatility risk by hedging dynamically or by using options."
Mulloth asks if hedging mortgage securities using a duration-based approach is equivalent to an interest rate sensitivity or two-bond hedge approach Fan responds that these approaches are not equivalent because duration-
based hedging accounts only for likely changes in the level of interest rates whereas the two-bond hedge incorporates both likely changes in the level and shape of the yield curve Consequently, when interest rates change, the price change for mortgage securities is more closely matched to changes in the value of a duration hedge than the changes in the value of a two-bond hedge
Question
In Statement 2, is Fan most likely correct or incorrect with regard to yield curve risk and key rate durations, respectively?
[| | Yield curve risk? lA | Correct | | | B | Correct | Incorrect | | Key rate durations? Correct Correct lc | Incorrect Ip | Incorrect Incorrect | c A Answer A c B Answer B Q C Answer C c D Answer D
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Question #11 out of 30 Time Remaining: |1:29:45
11 ||
Yun Fan Case Scenario
Yun Fan manages a U.S.-based fixed-income portfolio for JF Asset Management The portfolio invests in Treasury securities, non-callable investment grade corporate bonds, and mortgage-backed securities (MBS), all with durations of about 6 years Fan is meeting with a junior portfolio manager, Raj Mulloth, to discuss investment strategies for the MBS portion of the portfolio
Mulloth begins by stating that because Treasuries and mortgage securities in the portfolio have similar durations, they both could be hedged against interest rate changes by using Treasury futures contracts Fan comments that they both must be hedged by selling Treasury futures, and that the dollar duration of the mortgage securities must equal the dollar duration of the Treasury futures position
The discussion then turns to the other sources of risk faced by mortgage securities Fan explains that in addition to interest rate risk and prepayment risk, the other major sources of risk faced by mortgage securities include: spread risk, yield curve risk, and volatility risk Fan then makes the following statements:
Statement 1: "Spread risk should be hedged by selling Treasury futures contracts."
Statement 2: "Yield curve risk is a reference to the impact of changes on the shape of the yield curve on bond prices An examination of key rate durations will show that our investments in Treasury securities, non-callable corporates, and mortgage securities are all significantly impacted by changes in the shape of the yield curve."
Statement 3: “Mortgage securities have significant exposure to volatility risk Our expectation is that
current implied interest rate volatility will exceed future realized interest rate volatility Therefore it would be appropriate to manage volatility risk by hedging dynamically or by using options.”
Mulloth asks if hedging mortgage securities using a duration-based approach is equivalent to an interest rate sensitivity or two-bond hedge approach Fan responds that these approaches are not equivalent because duration-
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Yun Fan Case Scenario
Yun Fan manages a U.S.-based fixed-income portfolio for JF Asset Management The portfolio invests in Treasury securities, non-callable investment grade corporate bonds, and mortgage-backed securities (MBS), all with durations of about 6 years Fan is meeting with a junior portfolio manager, Raj Mulloth, to discuss investment strategies for the MBS portion of the portfolio
Mulloth begins by stating that because Treasuries and mortgage securities in the portfolio have similar durations, they both could be hedged against interest rate changes by using Treasury futures contracts Fan comments that they both must be hedged by selling Treasury futures, and that the dollar duration of the mortgage securities must equal the dollar duration of the Treasury futures position
The discussion then turns to the other sources of risk faced by mortgage securities Fan explains that in addition to interest rate risk and prepayment risk, the other major sources of risk faced by mortgage securities include: spread risk, yield curve risk, and volatility risk Fan then makes the following statements:
Statement 1: "Spread risk should be hedged by selling Treasury futures contracts."
Statement 2: "Yield curve risk is a reference to the impact of changes on the shape of the yield curve on bond prices An examination of key rate durations will show that our investments in
Treasury securities, non-callable corporates, and mortgage securities are all significantly impacted by changes in the shape of the yield curve.”
Statement 3: "Mortgage securities have significant exposure to volatility risk Our expectation is that current implied interest rate volatility will exceed future realized interest rate volatility
Therefore it would be appropriate to manage volatility risk by hedging dynamically or by using options."
Mulloth asks if hedging mortgage securities using a duration-based approach is equivalent to an interest rate sensitivity or two-bond hedge approach Fan responds that these approaches are not equivalent because duration-
based hedging accounts only for likely changes in the level of interest rates whereas the two-bond hedge incorporates both likely changes in the level and shape of the yield curve Consequently, when interest rates change, the price change for mortgage securities is more closely matched to changes in the value of a duration hedge than the changes in the value of a two-bond hedge Question Is Fan's response to Mulloth regarding the equivalence of the two hedging strategies and their ability to accurately hedge movements in the price of mortgage securities, respectively, most likely correct or incorrect?
- | Equivalence of the two | Ability of the two strategies to hedge price
hedging strategies movement in mortgage securities A | Correct | Correct B | Correct Incorrect [c Incorrect | Correct IP | Incorrect | Incorrect c A Answer A c B Answer B Q C Answer C c D Answer D
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New-Level 3 Version 2 2008 Sample Exam-v6
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test over
Question #13 out of 30 Time Remaining: Rafael Herrera Case Scenario
Rafael Herrera, CFA, an investment advisor, is preparing for a meeting with one of his U.S.-based high-net-worth clients, Patricia Dunlap Dunlap's investment portfolio consists of long only positions in domestic equity and
fixed-income securities Herrera feels that hedge funds would be an appropriate investment for Dunlap because they offer the opportunity to enhance portfolio returns and reduce portfolio risk
Herrera begins by presenting a table that summarizes hedge fund strategies into broad categories and provides examples of each type of strategy This information is presented in Exhibit 1 Exhibit 1
Hedge Fund Strategies Strategy Examples
Relative Value Equity market neutral, hedged equity, and convertible arbitrage
Event Driven Merger arbitrage and distressed securities Global Asset Allocators Global macro, emerging markets Herrera then proceeds to provide a brief description of the three major strategies listed:
"Relative value strategies involve the purchase of undervalued securities and the sale of overvalued securities Event driven strategies use long and short positions to take advantage of opportunities created by corporate events
such as mergers and bankruptcies Global asset allocator strategies take appropriate long and short positions in various financial and non-financial assets in domestic as well as international markets.”
The following conversation takes place:
Dunlap: "Can you explain the difference between equity market neutral and hedged equity relative value strategies?”
Herrera: “They are very similar in that the objective in both strategies is to achieve a net market
exposure that is as close to zero as possible The only difference is that hedged equity strategies use derivatives to obtain the short exposure.”
Dunlap: “Lunderstand that hedge fund managers charge high fees Can you tell me more about the
typical compensation structure of hedge fund managers?”
Herrera: “Hedge fund managers receive a management fee that is 1% to 2% of net asset value (NAV)
plus incentive fees of approximately 20% of profits In addition, a high-water mark (HWM) provision sets a minimum NAV that must be exceeded before incentive fees are paid to the manager The HWM is constructed so that it ratchets up over time.”
Dunlap states that she has read in a trade magazine that investing in hedge funds through a fund of funds (FOF) offers more diversification benefits She asks Herrera, "What are the advantages and disadvantages of investing in an FOF as opposed to a particular hedge fund?"
Herrera: "One of the advantages of investing in an FOF is that the due diligence process is much
shorter, while the downside is that the lock-up period during which no funds can be withdrawn is much longer.”
The discussion then turns the evaluation of hedge fund performance Herrera cautions Dunlap that care must be exercised in the selection of a hedge fund benchmark index For example, survivorship bias causes historical
returns to be underestimated and the value weighting scheme used in index construction causes underperforming funds to be overrepresented The discussion continues: Herrera: “When it comes to measuring risk in hedge fund performance, either the standard deviation
of returns or downside deviation measure can be used.”
Dunlap: “Would you use the Sharpe ratio to measure the risk adjusted performance of hedge
funds?"
Herrera: "No, the Sharpe ratio is not an appropriate measure to evaluate hedge fund performance
Instead, I recommend using the Sortino ratio." Question Is Herrera most likely correct or incorrect in his conversation with Dunlap about the net market exposures of the equity market neutral strategy and the hedged equity strategy?
Equity market Hedged equity
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Question #14 out of 30 Time Remaining:
Rafael Herrera Case Scenario
Rafael Herrera, CFA, an investment advisor, is preparing for a meeting with one of his U.S.-based high-net-worth clients, Patricia Dunlap Dunlap's investment portfolio consists of long only positions in domestic equity and fixed-income securities Herrera feels that hedge funds would be an appropriate investment for Dunlap because they offer the opportunity to enhance portfolio returns and reduce portfolio risk
Herrera begins by presenting a table that summarizes hedge fund strategies into broad categories and provides examples of each type of strategy This information is presented in Exhibit 1 Exhibit 1 Hedge Fund Strategies | Strategy Examples
| Relative Value Equity market neutral, hedged equity, and convertible arbitrage | Event Driven Merger arbitrage and distressed securities
| Global Asset Allocators Global macro, emerging markets Herrera then proceeds to provide a brief description of the three major strategies listed:
“Relative value strategies involve the purchase of undervalued securities and the sale of overvalued securities Event driven strategies use long and short positions to take advantage of opportunities created by corporate events such as mergers and bankruptcies Global asset allocator strategies take appropriate long and short positions in various financial and non-financial assets in domestic as well as international markets.”
The following conversation takes place:
Dunlap: "Can you explain the difference between equity market neutral and hedged equity relative value strategies?"
Herrera: "They are very similar in that the objective in both strategies is to achieve a net market exposure that is as close to zero as possible The only difference is that hedged equity strategies use derivatives to obtain the short exposure.”
Dunlap: “Lunderstand that hedge fund managers charge high fees Can you tell me more about the typical compensation structure of hedge fund managers?"
Herrera: "Hedge fund managers receive a management fee that is 1% to 2% of net asset value (NAV) plus incentive fees of approximately 20% of profits In addition, a high-water mark (HWM) provision sets a minimum NAV that must be exceeded before incentive fees are paid to the manager The HWM is constructed so that it ratchets up over time.”
Dunlap states that she has read in a trade magazine that investing in hedge funds through a fund of funds (FOF) offers more diversification benefits She asks Herrera, "What are the advantages and disadvantages of investing in an FOF as opposed to a particular hedge fund?”
Herrera: "One of the advantages of investing in an FOF is that the due diligence process is much shorter, while the downside is that the lock-up period during which no funds can be withdrawn is much longer.”
The discussion then turns the evaluation of hedge fund performance Herrera cautions Dunlap that care must be exercised in the selection of a hedge fund benchmark index For example, survivorship bias causes historical returns to be underestimated and the value weighting scheme used in index construction causes underperforming funds to be overrepresented The discussion continues:
Herrera: "When it comes to measuring risk in hedge fund performance, either the standard deviation of returns or downside deviation measure can be used."
Dunlap: "Would you use the Sharpe ratio to measure the risk adjusted performance of hedge funds?"
Herrera: "No, the Sharpe ratio is not an appropriate measure to evaluate hedge fund performance
Instead, I recommend using the Sortino ratio.” Question Is Herrera's explanation of the high-water mark (HWM) provision and its construction most likely correct? c A Yes
@ B No, b blished, the HWM ins fixed time
e C.No, because the HWM provision sets a maximum NAV on which incentive fees are paid
D No, because the HWM provision establishes a minimum return level that must be exceeded before incentive fees are paid
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Complete Exam Pause Exam
Trang 15Ñ 7 Online CFA Sample Exam Site NSTITUTE New-Level 3 Version 2 2008 Sample Exam-v6 Provide feedback test over DO NOT use the “PAUSE” feature unless there is an emergency and you must exit the test Using this feature will cause you to exit the exam If this is not an emergency of the test center you will be required to pay new fees and start the Question #15 out of 30 Time Remaining:
Rafael Herrera Case Scenario
Rafael Herrera, CFA, an investment advisor, is preparing for a meeting with one of his U.S.-based high-net-worth clients, Patricia Dunlap Dunlap's investment portfolio consists of long only positions in domestic equity and fixed-income securities Herrera feels that hedge funds would be an appropriate investment for Dunlap because they offer the opportunity to enhance portfolio returns and reduce portfolio risk
Herrera begins by presenting a table that summarizes hedge fund strategies into broad categories and provides examples of each type of strategy This information is presented in Exhibit 1 Exhibit 1
Hedge Fund Strategies | Strategy Examples
| Relative Value Equity market neutral, hedged equity, and convertible arbitrage
| Event Driven Merger arbitrage and distressed securities
| Global Asset Allocators Global macro, emerging markets
Herrera then proceeds to provide a brief description of the three major strategies listed:
"Relative value strategies involve the purchase of undervalued securities and the sale of overvalued securities Event driven strategies use long and short positions to take advantage of opportunities created by corporate events such as mergers and bankruptcies Global asset allocator strategies take appropriate long and short positions in various financial and non-financial assets in domestic as well as international markets.”
The following conversation takes place:
Dunlap: “Can you explain the difference between equity market neutral and hedged equity relative value strategies?”
Herrera: “They are very similar in that the objective in both strategies is to achieve a net market exposure that is as close to zero as possible The only difference i is that hedged equity strategies use derivatives to obtain the short exposure.”
Dunlap: “Lunderstand that hedge fund managers charge high fees Can you tell me more about the typical compensation structure of hedge fund managers?”
Herrera: “Hedge fund managers receive a management fee that is 1% to 2% of net asset value (NAV) plus incentive fees of approximately 20% of profits In addition, a high-water mark (HWM) provision sets a minimum NAV that must be exceeded before incentive fees are paid to the manager The HWM is constructed so that it ratchets up over time.”
Dunlap states that she has read in a trade magazine that investing in hedge funds through a fund of funds (FOF) offers more diversification benefits She asks Herrera, "What are the advantages and disadvantages of investing in an FOF as opposed to a particular hedge fund?"
Herrera: “One of the advantages of investing in an FOF is that the due diligence process is much
shorter, while the downside is that the lock-up period during which no funds can be withdrawn is much longer."
The discussion then turns the evaluation of hedge fund performance Herrera cautions Dunlap that care must be exercised in the selection of a hedge fund benchmark index For example, survivorship bias causes historical
returns to be underestimated and the value weighting scheme used in index construction causes funds to be continues:
Herrera: “When it comes to measuring risk in hedge fund performance either the standard deviation of returns or downside deviation measure can be us:
Dunlap: “Would you use the Sharpe ratio to measure the risk adjusted performance of hedge funds?"
Herrera: “No, the Sharpe ratio is not an appropriate measure to evaluate hedge fund performance Instead, I recommend using the Sortino ratio.”
Question
With respect to Herrera's statement concerning the advantages and disadvantages of fund of funds, is he most likely correct or incorrect regarding the due diligence process and the lock-up period? Due diligence process Lock-up period A Correct Correct B Correct Incorrect Cc Incorrect Correct D Incorrect Incorrect c A Answer A e B Answer B @ C Answer C e D Answer D
Instructions: Click the Continue button when finished reviewing your results for this question and ready to move on to the next question
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Question #16 out of 30 Time Remaining:
Rafael Herrera Case Scenario
Rafael Herrera, CFA, an investment advisor, is preparing for a meeting with one of his U.S.-based high-net-worth clients, Patricia Dunlap Dunlap’s investment portfolio consists of long only positions in domestic equity and fixed-income securities Herrera feels that hedge funds would be an appropriate investment for Dunlap because they offer the opportunity to enhance portfolio returns and reduce portfolio rish
Herrera begins by presenting a table that summarizes hedge fund strategies into broad categories and provides examples of each type of strategy This information is presented in Exhibit 1 Exhibit 1
Hedge Fund Strategies Strategy Examples
Relative Value Equity market neutral, hedged equity, and convertible arbitrage
Event Driven Merger arbitrage and distressed securities
Global Asset Allocators Global macro, emerging markets
Herrera then proceeds to provide a brief description of the three major strategies listed:
Relative value strategies involve the purchase of undervalued securities and the sale of overvalued securities Event driven strategies use long and short positions to take advantage of opportunities created by corporate events such as mergers and bankruptcies Global asset allocator strategies take appropriate long and short positions in various financial and non-financial assets in domestic as well as international markets."
The following conversation takes place:
Dunlap: "Can you explain the difference between equity market neutral and hedged equity relative
value strategies?"
Herrera: “They are very similar in that the objective in both strategies is to achieve a net market
exposure that is as close to zero as possible The only difference i is that hedged equity
strategies use derivatives to obtain the short exposure.”
Dunlap: "Lunderstand that hedge fund managers charge high fees Can you tell me more about the typical compensation structure of hedge fund managers?”
Herrera: "Hedge fund managers receive a management fee that is 1% to 2% of net asset value (NAV) plus incentive fees of approximately 20% of profits In addition, a high-water mark (HWM) provision sets a minimum NAV that must be exceeded before incentive fees are paid to the manager The HWM is constructed so that it ratchets up over time.”
Dunlap states that she has read in a trade magazine that investing in hedge funds through a fund of funds (FOF) offers more diversification benefits She asks Herrera, "What are the advantages and disadvantages of investing in an FOF as opposed to a particular hedge fund?
Herrera: “One of the advantages of investing in an FOF is that the due diligence process is much
shorter, while the downside is that the lock-up period during which no funds can be withdrawn is much longer.”
The discussion then turns the evaluation of hedge fund performance Herrera cautions Dunlap that care must be exercised in the selection of a hedge fund benchmark index For example, survivorship bias causes historical
causes
returns to be underestimated and the value weighting scheme used in index p ig funds to The discussion continues: Herrera: “When it comes to measuring risk in hedge fund performance, either the standard deviation
of returns or downside deviation measure can be used.”
Dunlap: “Would you use the Sharpe ratio to measure the risk adjusted performance of hedge funds?"
Herrera: "No, the Sharpe ratio is not an appropriate measure to evaluate hedge fund performance Instead, I recommend using the Sortino ratio.” Question In his discussion with Dunlap regarding hedge fund performance, are Herrera's comments about survivorship bias and the weighting scheme used in index construction most likely correct or incorrect? Survivorship bias Weighting scheme — = | B | Correct Incorrect | Cc | Incorrect Correct D Incorrect Incorrect c A Answer A c B Answer B e C Answer C c D Answer D
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Online CFA Sample Exam Site New-Level 3 Version 2 2008 Sample Exam-v6 Provide feedback HH less there i gency and y exit the test Using Il you to exit the exam If this is not an emergency of the test center you will be required to pay new fees and start the test over Question =17 out of 20 Time Remaining: 17
Rafael Herrera Case Scenario
Rafael Herrera, CFA, an investment advisor, is preparing for a meeting with one of his U.S.-based high-net-worth clients, Patricia Dunlap Dunlap's investment portfolio consists of long only positions in domestic equity and
fixed-income securities Herrera feels that hedge funds would be an appropriate investment for Dunlap because they offer the opportunity to enhance portfolio returns and reduce portfolio risk
Herrera begins by presenting a table that summarizes hedge fund strategies into broad categories and provides examples of each type of strategy This information is presented in Exhibit 1 Exhibit 1 Hedge Fund Strategies Strategy Examples Relative Value Equity market neutral, hedged equity, and convertible arbitrage Event Driven Merger arbitrage and distressed securities Global Asset Allocators Global macro, emerging markets
Herrera then proceeds to provide a brief description of the three major strategies listed:
"Relative value strategies involve the purchase of undervalued securities and the sale of overvalued securities Event driven strategies use long and short positions to take advantage of opportunities created by corporate events
such as mergers and bankruptcies Global asset allocator strategies take appropriate long and short positions in various financial and non-financial assets in domestic as well as international markets.”
The following conversation takes place:
Dunlap: “Can you explain the difference between equity market neutral and hedged equity relative
value strategies?”
Herrera: "They are very similar in that the objective in both strategies is to achieve a net market exposure that is as close to zero as possible The only difference is that hedged equity strategies use derivatives to obtain the short exposure.”
Dunlap: “Lunderstand that hedge fund managers charge high fees Can you tell me more about the
typical compensation structure of hedge fund managers?”
Herrera: "Hedge fund managers receive a management fee that is 1% to 2% of net asset value (NAV)
plus incentive fees of approximately 20% of profits In addition, a high-water mark (HWM) provision sets a minimum NAV that must be exceeded before incentive fees are paid to the manager The HWM is constructed so that it ratchets up over time.”
Dunlap states that she has read in a trade magazine that investing in hedge funds through a fund of funds (FOF) offers more diversification benefits She asks Herrera, "What are the advantages and disadvantages of investing in an FOF as opposed to a particular hedge fund?"
Herrera: "One of the advantages of investing in an FOF is that the due diligence process is much shorter, while the downside is that the lock-up period during which no funds can be withdrawn is much longer.”
The discussion then turns the evaluation of hedge fund performance Herrera cautions Dunlap that care must be exercised in the selection of a hedge fund benchmark index For example, survivorship bias causes historical returns to be underestimated and the value weighting scheme used in index construction causes underperforming funds to be overrepresented The discussion continues:
Herrera: “When it comes to measuring risk in hedge fund performance, either the standard deviation of returns or downside deviation measure can be used."
Dunlap: “Would you use the Sharpe ratio to measure the risk adjusted performance of hedge
funds?"
Herrera: "No, the Sharpe ratio is not an appropriate measure to evaluate hedge fund performance
Instead, I recommend using the Sortino ratio."
Question
Is Herrera most likely correct or incorrect in his statement regarding the usefulness of standard deviation and downside deviation, respectively, as acceptable measures of hedge fund volatility?
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Question #18 out of 30 Time Remaining:
Rafael Herrera Case Scenario
Rafael Herrera, CFA, an investment advisor, is preparing for a meeting with one of his U.S.-based high-net-worth clients, Patricia Dunlap Dunlap's investment portfolio consists of long only positions in domestic equity and fixed-income securities Herrera feels that hedge funds would be an appropriate investment for Dunlap because they offer the opportunity to enhance portfolio returns and reduce portfolio risk
Herrera begins by presenting a table that summarizes hedge fund strategies into broad categories and provides examples of each type of strategy This information is presented in Exhibit 1 Exhibit 1 Hedge Fund Strategies | Strategy Examples
| Relative Value Equity market neutral, hedged equity, and convertible arbitrage | Event Driven Merger arbitrage and distressed securities
| Global Asset Allocators Global macro, emerging markets Herrera then proceeds to provide a brief description of the three major strategies listed:
“Relative value strategies involve the purchase of undervalued securities and the sale of overvalued securities Event driven strategies use long and short positions to take advantage of opportunities created by corporate events such as mergers and bankruptcies Global asset allocator strategies take appropriate long and short positions in various financial and non-financial assets in domestic as well as international markets.”
The following conversation takes place:
Dunlap: "Can you explain the difference between equity market neutral and hedged equity relative value strategies?"
Herrera: "They are very similar in that the objective in both strategies is to achieve a net market exposure that is as close to zero as possible The only difference is that hedged equity strategies use derivatives to obtain the short exposure.”
Dunlap: “Lunderstand that hedge fund managers charge high fees Can you tell me more about the typical compensation structure of hedge fund managers?"
Herrera: "Hedge fund managers receive a management fee that is 1% to 2% of net asset value (NAV) plus incentive fees of approximately 20% of profits In addition, a high-water mark (HWM) provision sets a minimum NAV that must be exceeded before incentive fees are paid to the manager The HWM is constructed so that it ratchets up over time.”
Dunlap states that she has read in a trade magazine that investing in hedge funds through a fund of funds (FOF) offers more diversification benefits She asks Herrera, "What are the advantages and disadvantages of investing in an FOF as opposed to a particular hedge fund?”
Herrera: "One of the advantages of investing in an FOF is that the due diligence process is much shorter, while the downside is that the lock-up period during which no funds can be withdrawn is much longer.”
The discussion then turns the evaluation of hedge fund performance Herrera cautions Dunlap that care must be exercised in the selection of a hedge fund benchmark index For example, survivorship bias causes historical returns to be underestimated and the value weighting scheme used in index construction causes underperforming funds to be overrepresented The discussion continues:
Herrera: "When it comes to measuring risk in hedge fund performance, either the standard deviation of returns or downside deviation measure can be used."
Dunlap: "Would you use the Sharpe ratio to measure the risk adjusted performance of hedge funds?"
Herrera: "No, the Sharpe ratio is not an appropriate measure to evaluate hedge fund performance
Instead, I recommend using the Sortino ratio Question Is Herrera's statement about using the Sharpe ratio to evaluate hedge fund performance most likely correct? c A Yes,
c B No, because it can be used even when investment returns are asymmetrical Q C.No, because Sharpe ratios are good predictors of future hedge fund performance
D No, because either standard deviation or downside deviation can be used to calculate the Sharpe ratio
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New-Level 3 Version 2 2008 Sample Exam-v6 Providefeedbadk '” DO NOT use the “PAUSE” feature unless there is an emergency and you must exit the test Using this feature will cause you to exit the exam If this is not an emergency of the test center you will be required to pay new fees and start the test over Question #19 out of 30 Time Remaining: {1:15:51 19
Triden Capital Case Scenario
Triden Capital is an investment management firm that invests high-net-worth clients’ capital in actively traded domestic equity and fixed-income securities Senior management has recently adopted an Enterprise Risk
Management (ERM) governance structure to identify and measure both financial and non-financial risks Within the ERM framework, senior management is exploring the implementation of value at risk (VAR) to measure market risk
Senior management meets with David Smith, an investment consultant, to discuss risk management practices Smith explains that the investment industry has developed a set of standardized methods for estimating VAR To determine the most appropriate method for Triden, management must determine the ideal approach to modeling the loss distribution Management assumes that the firm's portfolio returns are normally distributed Smith notes that supplements and extensions to VAR have been developed to increase its robustness He recommends that Triden adopt stress testing to enhance the understanding of risks faced by the firm Smith also favors
a scenario analysis approach that outlines different states of the world After hearing his comments, senior management asks Smith to justify his stress testing recommendation
The firm's equity portfolio is focused on large-cap companies with attractive valuations and has a market value of $500,000,000 The expected annual return of the equity portfolio is 10% with a standard deviation of 0.20 Using one of the VAR methods, Smith determined the daily VAR of the equity portfolio is approximately $10,000,000 at a probability of 5%
The firm's fixed-income portfolio is focused on duration and credit and has a market value of $300,000,000 The expected annual return of the fixed-income portfolio is 6% with a standard deviation of 0.10 Portfolio managers
within the firm are able to use derivatives, including swaps and options, as yield enhancement vehicles
An equity portfolio manager soid 3-month European caiis on Versa Corporation iast month The current market vaiue of the caiis is $394,000 That same day, one of the firm's fixed-income portfolio managers entered into a i-
year, plain vanilla interest rate swap with quarterly resets last month The portfolio manager receives fixed-rate payments and pays floating-rate payments The current market value of the swap is $(468,000) di bhichi One of the equity portfolio gers is i in ga call iting program Senior management asks Smith for his rec dation for evaluating the perf p e of such a portfolio on a risk-adjusted basis Question Given senior management's assumption about return distributions, the most appropriate VAR method for Triden Capital to use is the:
| c | A Monte Carlo Simulation Method |
| c ® Scenario Analysis Method | c C Historical Method
e D Analytical Method
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Trang 20Online CFA Sample Exam Site
New-Level 3 Version 2 2008 Sample Exam-v6 Dee Lt ti DO NOT use the “PAUSE” feature unless there is an emergency and you must exit the test Using this feature will cause you to exit the exam If this is not an emergency of the test center you will be required to pay new fees and start the test over Question #20 out of 30 Time Remaining: |1:13:41
Triden Capital Case Scenario
Triden Capital is an investment management firm that invests high-net-worth clients’ capital in actively traded domestic equity and fixed-income securities Senior management has recently adopted an Enterprise Risk Management (ERM) governance structure to identify and measure both financial and non-financial risks Within the ERM framework, senior management is exploring the implementation of value at risk (VAR) to measure market risk
Senior management meets with David Smith, an investment consultant, to discuss risk management practices Smith explains that the investment industry has developed a set of standardized methods for estimating VAR To determine the most appropriate method for Triden, management must determine the ideal approach to modeling the loss distribution Management assumes that the firm's portfolio returns are normally distributed Smith notes that supplements and extensions to VAR have been developed to increase its robustness He recommends that Triden adopt stress testing to enhance the understanding of risks faced by the firm Smith also favors
a scenario analysis approach that outlines different states of the world After hearing his comments, senior management asks Smith to justify his stress testing recommendation
The firm's equity portfolio is focused on large-cap companies with attractive valuations and has a market value of $500,000,000 The expected annual return of the equity portfolio is 10% with a standard deviation of 0.20 Using one of the VAR methods, Smith determined the daily VAR of the equity portfolio is approximately $10,000,000 at a probability of 5%
The firm's fixed-income portfolio is focused on duration and credit and has a market value of $300,000,000 The expected annual return of the fixed-income portfolio is 6% with a standard deviation of 0.10 Portfolio managers within the firm are able to use derivatives, including swaps and options, as yield enhancement vehicles
An equity portfolio manager soid 3-month European caiis on Versa Corporation iast month The current market vaiue of the caiis is $394,000 That same day, one of the firm's fixed-income portfolio managers entered into a i-
year, plain vanilla interest rate swap with quarterly resets last month The portfolio manager receives fixed-rate payments and pays floating rate-payments The current market value of the swap is $(468,000) 4 hich; One of the equity portfolio gers is i in ishing a call iting program Senior management asks Smith for his rec for evaluating the perf P e of such a portfolio on a risk-adjusted basis Question To satisfy Triden management's request for justification, Smith's best response is to explain that his recommended extension will provide additional information including the:
1 c A expected credit default-related loss c B minimum cash flow loss expected to be exceeded e C effect of a specific asset on the VAR of a portfolio
Trang 21Online CFA Sample Exam Site
New-Level 3 Version 2 2008 Sample Exam-v6 Providefeedbak '?' DO NOT use the “PAUSE” feature unless there is an emergency and you must exit the test Using this feature will cause you to exit the exam If this is not an emergency of the test center you will be required to pay new fees and start the test over Question #21 out of 30 Time Remaining: |1:12:29
Triden Capital Case Scenario
Triden Capital is an investment management firm that invests high-net-worth clients’ capital in actively traded domestic equity and fixed-income securities Senior management has recently adopted an Enterprise Risk Management (ERM) governance structure to identify and measure both financial and non-financial risks Within the ERM framework, senior management is exploring the implementation of value at risk (VAR) to measure market risk
Senior management meets with David Smith, an investment consultant, to discuss risk management practices Smith explains that the investment industry has developed a set of standardized methods for estimating VAR To determine the most appropriate method for Triden, management must determine the ideal approach to modeling the loss distribution Management assumes that the firm's portfolio returns are normally distributed
Smith notes that supplements and extensions to VAR have been developed to increase its robustness He recommends that Triden adopt stress testing to enhance the understanding of risks faced by the firm Smith also favors
a scenario analysis approach that outlines different states of the world After hearing his comments, senior management asks Smith to justify his stress testing recommendation
The firm's equity portfolio is focused on large-cap companies with attractive valuations and has a market value of $500,000,000 The expected annual return of the equity portfolio is 10% with a standard deviation of 0.20 Using one of the VAR methods, Smith determined the daily VAR of the equity portfolio is approximately $10,000,000 at a probability of 5%
The firm's fixed-income portfolio is focused on duration and credit and has a market value of $300,000,000 The expected annual return of the fixed-income portfolio is 6% with a standard deviation of 0.10 Portfolio managers within the firm are able to use derivatives, including swaps and options, as yield enhancement vehicles
An equity portfolio manager soid 3-month European caiis on Versa Corporation iast month The current market vaiue of the caiis is $394,000 That same day, one of the firm's fixed-income portfolio managers entered into a i-
year, plain vanilla interest rate swap with quarterly resets last month The portfolio manager receives fixed-rate payments and pays floating rate-payments The current market value of the swap is $(468,000) d bhichi One of the equity portfolio 9 isi in ishing a call iting program Senior management asks Smith for his rec for evaluating the perf ¢ of such a portfolio on a risk-adjusted basis Question In addition to Smith's VAR calculation, another VAR measurement that most appropriately applies to the equity portfolio is:
1" c A $7,500,000 at a probability of 1% over 1 day c B $7,500,000 at a probability of 5% over 1 month c C $60,000,000 at a probability of 1% over 1 month
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New-Level 3 Version 2 2008 Sample Exam-v6 Providefeedbak '?' DO NOT use the “PAUSE” feature unless there is an emergency and you must exit the test Using this feature will cause you to exit the exam If this is not an emergency of the test center you will be required to pay new fees and start the test over Question #22 out of 30 Time R ining: [1:11:00
Triden Capital Case Scenario
Triden Capital is an investment management firm that invests high-net-worth clients’ capital in actively traded domestic equity and fixed-income securities Senior management has recently adopted an Enterprise Risk Management (ERM) governance structure to identify and measure both financial and non-financial risks Within the ERM framework, senior management is exploring the implementation of value at risk (VAR) to measure market risk
Senior management meets with David Smith, an investment consultant, to discuss risk management practices Smith explains that the investment industry has developed a set of standardized methods for estimating VAR To determine the most appropriate method for Triden, management must determine the ideal approach to modeling the loss distribution Management assumes that the firm's portfolio returns are normally distributed
Smith notes that supplements and extensions to VAR have been developed to increase its robustness He recommends that Triden adopt stress testing to enhance the understanding of risks faced by the firm Smith also favors
a scenario analysis approach that outlines different states of the world After hearing his comments, senior management asks Smith to justify his stress testing recommendation
The firm's equity portfolio is focused on large-cap companies with attractive valuations and has a market value of $500,000,000 The expected annual return of the equity portfolio is 10% with a standard deviation of 0.20 Using one of the VAR methods, Smith determined the daily VAR of the equity portfolio is approximately $10,000,000 at a probability of 5%
The firm's fixed-income portfolio is focused on duration and credit and has a market value of $300,000,000 The expected annual return of the fixed-income portfolio is 6% with a standard deviation of 0.10 Portfolio managers within the firm are able to use derivatives, including swaps and options, as yield enhancement vehicles
An equity portfolio manager soid 3-month European caiis on Versa Corporation iast month The current market vaiue of the caiis is $394,000 That same day, one of the firm's fixed-income portfolio managers entered into a i-
Trang 23Vụ FA Online CFA Sample Exam Site
NSTITUTE
New-Level 3 Version 2 2008 Sample Exam-v6 Dee te aes
DO NOT use the “PAUSE” feature unless there is an emergency and you must exit the test Using this feature will cause you to exit the exam If this is not an emergency of the test center you will be required to pay new fees and start the test over Question #23 out of 30 Time Remaining: [1:10:05
Triden Capital Case Scenario
Triden Capital is an investment management firm that invests high-net-worth clients’ capital in actively traded domestic equity and fixed-income securities Senior management has recently adopted an Enterprise Risk Management (ERM) governance structure to identify and measure both financial and non-financial risks Within the ERM framework, senior management is exploring the implementation of value at risk (VAR) to measure market risk
Senior management meets with David Smith, an investment consultant, to discuss risk management practices Smith explains that the investment industry has developed a set of standardized methods for estimating VAR To determine the most appropriate method for Triden, management must determine the ideal approach to modeling the loss distribution Management assumes that the firm's portfolio returns are normally distributed
Smith notes that supplements and extensions to VAR have been developed to increase its robustness He recommends that Triden adopt stress testing to enhance the understanding of risks faced by the firm Smith also favors a scenario analysis approach that outlines different states of the world After hearing his comments, senior management asks Smith to justify his stress testing recommendation
The firm's equity portfolio is focused on large-cap companies with attractive valuations and has a market value of $500,000,000 The expected annual return of the equity portfolio is 10% with a standard deviation of 0.20 Using one of the VAR methods, Smith determined the daily VAR of the equity portfolio is approximately $10,000,000 at a probability of 5%
The firm's fixed-income portfolio is focused on duration and credit and has a market value of $300,000,000 The expected annual return of the fixed-income portfolio is 6% with a standard deviation of 0.10 Portfolio managers within the firm are able to use derivatives, including swaps and options, as yield enhancement vehicles
An equity portfolio manager sold 3-month European calls on Versa Corporation last month The current market value of the calls is $394,000 That same day, one of the firm's fixed-income portfolio managers entered into a 1- year, plain vanilla interest rate swap with quarterly resets last month The portfolio manager receives fixed-rate payments and pays floating rate-payments The current market value of the swap is $(468,000)
One of the equity portfolio 9 isi lin blishing a call iting program Senior management asks Smith for his rec dation for evaluating the perf e of such a portfolio on a risk-adjusted basis Question What is Triden Capital's current credit risk associated with the: p lain vanilla interest rate swap? Versa Corporation Calls? $0 $0 fe $0 $394,000 fc | $468,000 $0 | D | $468,000 $394,000 c A Answer A c B Answer B c C Answer C ΠD Answer D
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Cry
Vụ Online CFA Sample Exam Site
New-Level 3 Version 2 2008 Sample Exam-v6 Provide feedback DO NOT use the “PAUSE” feature unless there is an emergency and you must exit the test Using this feature will cause you to exit the exam If this is not an emergency of the test center you will be required to pay new fees and start the test over Question #24 out of 30 Time Ri ining 1:09:00
Triden Capital Case Scenario
Triden Capital is an investment management firm that invests high net worth clients’ capital in actively traded domestic equity and fixed income securities Senior management has recently adopted an Enterprise Risk Management (ERM) governance structure to identify and measure both financial and non-financial risks Within the ERM framework, senior management is exploring the implementation of value at risk (VAR) to measure market risk
Senior management meets with David Smith, an investment consultant, to discuss risk management practices Smith explains the investment industry has developed a set of standardized methods for estimating VAR To determine the most appropriate method for Triden, management must determine the ideal approach to modeling the loss distribution Management assumes that the firm's portfolio returns are normally distributed Smith notes that supplements and extensions to VAR have been developed to increase its robustness He recommends that Triden adopt stress testing to enhance the understanding of risks faced by the firm Smith also favors
a scenario analysis approach that outlines different states of the world After hearing his comments, senior management asks Smith to justify his stress testing recommendation
The firm's equity portfolio is focused on large-cap companies with attractive valuations and has a market value of $500,000,000 The expected annual return of the equity portfolio is 10% with a standard deviation of 0.20 Using one of the VAR methods, Smith determined the daily VAR of the equity portfolio is approximately $10,000,000 at a probability of 5%
The firm's fixed income portfolio is focused on duration and credit and has a market value of $300,000,000 The expected annual return of the fixed income portfolio is 6% with a standard deviation of 0.10 Portfolio managers
within the firm are able to use derivatives, including swaps and options, as yield enhancement vehicles
An equity portfolio manager sold 3-month European calls on Versa Corporation last month The current market value of the calls is $394,000 That same day, one of the firm's fixed-income portfolio managers entered into a 1-
year, plain vanilla interest rate swap with quarterly resets last month The portfolio manager receives fixed-rate payments and pays floating rate-payments The current market value of the swap is $(468,000) One of the equity portfolio gers is i d in establishing a call iting program Senior management asks Smith for his rec dation for evaluating the perf ¢ of such a portfolio on a risk-adjusted basis Question The most appropriate perf e for evaluating the perf: e of the proposed portfolio on a risk-adjusted basis would be the: 1 c A Sharpe Ratio e B Sortino Ratio
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Question #25 out of 30 Time Remaining: [1
25 Rose Michael Case Scenario
Rose Michael, CFA, is a senior portfolio manager at Platinum Investments, Inc Selected data for the funds she manages are shown below in Exhibit 1: Exhibit 1 Summary of Funds Fund A Fund B Fund C Fund D 60% Mid-cap
Asset 100% Large-cap U.S | 100%Mid-cap | 100%U.S.Treasury USS Equities
Allocation Equities US Equities Bonds S
Treasury Bonds
Stock Beta 095 120 NA 112
Duration NA NA 59 59
Michaelis traning Joseph Owen, 2 newiy hired research acs inthe strategies used to adjust clients’ exposures to various markets She asks Owen to collect curtent market date on the specific futures contracts she uses to
employ th ies Owen its below in Exhibit 2 and J.S risk-ft
Exhibit 2
Summary of Futures Contracts Data
US US European US
Large-cap Equity Equity Mid-cap | Broad-based Equity Bond Equivalent Cạnh
Contract Contract Contract Contract Contract Beta 140 129 0.80 10 0 Contract Price 2875 2,350 3,000 $110,000" $100,000* Multiplier 100 100 10 NA NA Duration NA NA NA 65 0.25 Expiration 0.25 year 0.25 year 0.25 year 0.25 year 0.25 year
*includes the effect of any multiplier
During the training session, n Michad explains to Owen that futures contracts can be incorporated into an equity portfolio to achieve a target beta Owen makes the following statements regarding the use of futures contracts to adjust the asset allocatio
Statement 1: “If a client invested in Fund C anticipates an increase in interest rates, we could temporarily
reallocate her asset allocation from bonds to equity through the use of futures We coul sell bond futures and purchase equity futures."
Statement 2: "Wea clentis short on cash when Fund D looks attractive, he could invest 60% in the US
mid-cap equity f bon
market exposure as Fund D."
Michael presents a summary of specific accounts shown below in Exhibit 3:
Exhibit 3 Summary of Current Client Holdings
Client Name Market Value of Holdings
Andrew Bolton $50 million invested in Fund A
Carly Dungan €100 million in Eurodollar deposits
Georgia Harrison $400 million invested in Fund D
Isaac Jeffries $75 million invested in Fund B
Kathryn Lewis $100 million invested in Fund A
ké $50 million invested in Fund B
In discussing a strategy to meet Kathryn Lewis’ request that her total portfolio be shifted to 50% invested in Fund A and 50% in Fund B, Owen describes the necessary steps in the following statement: Statement 3: convert $25 million worth of assets from a beta of 0.95 to a beta of zero Step 2 would be to "Step 1 would be to sell the number of U.S large-cap equity futures contracts required to
buy the number of U.S mid-cap equity futures contracts required to convert $25 million worth of assets from a beta of zero to a beta of 1.20.”
Michael received 2 request from Georgia Harison to increase he portfolo’s exposure to the bond market and intends to buy bond futures contracts to accomplish this objective Prior to increasing the portfolio's exposure to
Trang 26I ADA New-Level 3 Version 2 2008 Sample Exam-v6 nline CFA Sample Exam Site Provide feedback | DO NOT use the “PAUSE” feature unless there is an emergency and you must exit the test Using this feature will cause you to exit the exam If this is not an emergency of the test center you will be required to pay new fees and start the test over Question #26 out of 30 Rose Michael Case Scenario Asset Allocation Stock Beta Duration 37 Time Remaining: [1 Rose Michael, CFA, is a senior portfolio manager at Platinum Investments, Inc Selected data for the funds she manages are shown below in Exhibit 1: Exhibit 1 Summary of Funds | Fund A Fund B Fund C Fund D 60% Mid-cap 100% Large-cap U.S | 100%Mid-cap | 100% U.S Treasury U.S Equities Equities U.S Equities Bonds 5
Treasury Bonds 095 1.20 NA 142 NA NA 59 59
Michael is training Joseph Owen, a newly hired research assistant, in the strategies used to adjust clients’ exposures to various markets She asks Owen to collect current market data on the specific futures contracts she uses to employ the asset allocation strategies Owen presents Michael with the data shown below in Exhibit 2 and notes that the U.S risk-free rate is 4% while the European risk-free rate is 2% Ex Summary of Futures Contracts Data
US US European US
Large-cap Mid-cap road-based Cash
Equity Equity Equity Equivalent
Contract Contract Contract Contract Contract Beta 110 | 129 080 10 0 Contract Price 2875 | 2,350 3,000 S110,000* $100,000" Multiplier 100 | 100 10 NA NA Duration NA | NA NA 65 0.25 Expiration 0.25 year | 0.25 year 0.25 year 0.25 year 0.25 year
*includes the effect of any multiplier During the training session, adjust the asset allocations: Statement 1: Statement 2: Michael presents a summary of specific accounts shown below in Exhibit 3: Andrew Bolton Carly Dungan Isaac Jeffries Kathryn Lewis Client Name Georgia Harrison
, Michael explains to Owen that futures contracts can be incorporated into an equity portfolio to achieve a target beta Owen makes the following statements regarding the use of futures contracts to “If a client invested in Fund C anticipates an increase in interest rates, we could temporarily
reallocate her asset allocation from bonds to equity through the use of futures We could sell bond futures and purchase equity futures.”
“Hf a client is short on cash when Fund D looks attractive, he could invest 60% in the U.S mid-cap equity futures contract and 40% in the bond futures contract to achieve the same market exposure as Fund D.”"
Ex Summary of Current Client Holdings
Market Value of Holdings $50 million invested in Fund A
$400 million invested in Fund D $75 million invested in Fund B $100 million invested in Fund A
| €100 million in Eurodollar deposits
| $50 million invested in Fund B
Statement 3:
Question
© A sell 24 U.S large-cap equity futures contracts
@ B buy 24 U.S large-cap equity futures contracts
6 C sell 33 U.S large-cap equity futures contracts
Ce D buy 33 U.S large-cap equity futures contracts
Continue >>
In discussing a strategy to meet Kathryn Lewis’ request that her total portfolio be shifted to 50% invested in Fund A and 50% in Fund B, Owen describes the necessary steps in the following statement: "Step 1 would be to sell the number of U.S large-cap equity futures contracts required to
convert $25 million worth of assets from a beta of 0.95 to a beta of zero Step 2 would be to buy the number of U.S mid-cap equity futures contracts required to convert $25 million
worth of assets from a beta of zero to a beta of 1,20.”
Michael received a request from Georgia Harrison to increase her portfolio's exposure to the bond market and intends to buy bond futures contracts to accomplish this objective Prior to increasing the portfolio's exposure to the bond market, Michael performs a scenario analysis based on different interest rate environments, She uses implied duration to determine the responsiveness of the futures contract to an interest rate change
If Andrew Bolton wants to reduce his portfolio beta to 0.8, the most appropriate course of action would be to:
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Trang 27Online CFA Sample Exam Sit Cra Te ae DO NOT use the “PAUSE” f less there i gency and y Using thi i you to exit th If this i gency of th you will be required to pay new fees and start the test over Question #27 out of 30 Time Remaining:
Rose Michael Case Scenario
Rose Michael, CFA, is a senior portfolio manager at Platinum Investments, Inc Selected data for the funds she manages are shown below in Exhibit 1: Exhibit 1 Summary of Funds Fund A Fund B Fund C Fund D 60% Mid-cap Asset 100% Large-cap U.S | 100% Mid-cap | 100% U.S Treasury U.S Equities
Allocation Equities US Equities Bonds 40% US
Treasury Bonds
| Stock Beta 0.95 1.20 | NA 142
| Duration NA NA | 59 59
Michael is training Joseph Owen, a newly hired research assistant, in the strategies used to adjust clients’ exposures to various markets She asks Owen to collect current market data on the specific futures contracts she uses to employ the asset allocation strategies Owen presents Michael with the data shown below in Exhibit 2 and notes that the U.S risk-free rate is 4% while the European risk-free rate is 2% Ex Summary of Futures Contracts Data
US US Europea US
Large-cap Mid-cap | Broad-based Cash
Equity Equity Equity Bond Equivalent
Contract Contract Contract Contract Contract Beta | 140 | 129 | 080 10 0 | Contract Price | 2875 | 2350 3,000 $110,000* $100,000* | Multiplier | 100 | 100 10 NA NA | Duration | NA | NA NA 65 0.25 | Expiration | 0.25 year | 0.25 year 0.25 year 0.25 year 0.25 year
*includes the effect of any multiplier
During the training session, Michael explains to Owen that futures contracts can be incorporated into an equity portfolio to achieve a target beta Owen makes the following statements regarding the use of futures contracts to
adjust the asset allocations:
Statement 1: "If a client invested in Fund C anticipates an increase in interest rates, we could temporarily
reallocate her asset allocation from bonds to equity through the use of futures We could
sell bond futures and purchase equity futures.”
Statement 2: "If a client is short on cash when Fund D looks attractive, he could invest 60% in the U.S
mid-cap equity futures contract and 40% in the bond futures contract to achieve the same
market exposure as Fund D." Michael presents a summary of specific accounts shown below in Exhibit 3:
Exhibit 3 Summary of Current Client Holdings
Client Name Market Value of Holdings
Carly Dungan €100 million in Eurodollar deposits
Georgia Harrison $400 million invested in Fund D
Isaac Jeffries $75 million invested in Fund B
Kathivn Lewis $100 million invested in Fund A
$50 million invested in Fund B
Andrew Bolton | $50 million invested in Fund A
In discussing a strategy to meet Kathryn Lewis’ request that her total portfolio be shifted to 50% invested in Fund A and 50% in Fund B, Owen describes the necessary steps in the following statement:
Statement 3: "Step 1 would be to sell the number of U.S large-cap equity futures contracts required to
convert $25 million worth of assets from a beta of 0.95 to a beta of zero Step 2 would be to buy the number of U.S mid-cap equity futures contracts required to convert $25 million worth of assets from a beta of zero to a beta of 1.20."
Michael received a request from Georgia Harrison to increase her portfolio's exposure to the bond market and intends to buy bond futures contracts to accomplish this objective Prior to increasing the portfolio's exposure to the bond market, Michael performs a scenario analysis based on different interest rate environments She uses implied duration to determine the responsiveness of the futures contract to an interest rate change Question In constructing a synthetic index fund of European equities for Carly Dungan over the next three months, the number of European futures contracts that initially should be purchased is closest to: c A 3,000 e B 3,333 @ C3350 @ D 3,400 Instructions: Click the Continue button when finished reviewing your results for this question and ready to move on to the next question,
Trang 28
DO NOT use the “PAUSE” i gency it ing thi i y thị gency of y ired to pay and start the
Question #28 out of 30 Time Remaining:
28
Rose Michael Case Scenario
Rose Michael, CFA, is a senior portfolio manager at Platinum Investments, Inc Selected data for the funds she manages are shown below in Exhibit 1: Exhibit 1 Summary of Funds Fund A Fund B Fund C Fund D 60% Mid-cap
Asset 100% Large-cap U.S 100% Mid-cap 100% U.S Treasury US Equities
Allocation Equities U.S Equities Bonds
Treasury Bonds
Stock Beta 0.95 1.20 NA 112
Duration NA NA 59 59
Michael is training Joseph Owen, a ly istant, in djust clients' exp‹ i markets Sh ks Ov to collect to
employ th i ies Owen presents Mi with di h below in Exhibit 2 U.S risk-fi is 4% while the Et risk-free rate is 2%
Summary of Futures Contracts Data
US European US
large-cap Mid-cap | Broad-based Cash
Equity Equity Equity Bond Equivalent
Contract Contract Contract Contract Contract
Beta 110 129 0.80 10 0
Nà 2875 2350 3,000 $110,000* $100,000*
Multiplier 100 100 10 NA NA
Duration NA NA NA 65 0.25
Expiration 0.25 year 0.25 year 0.25 year 0.25 year 0.25 year
“includes the effect of any multiplier
ing ining session, Michael explai that fut bei d into an equity portfolio to achieve a target beta Owen ing garding the use of fi adjust the asset allocations:
Statement 1: "Tf a client ir in Fund C anticipate p ily
reallocate her bonds to equi f futures We could
sell bond futures and purchase equity futures.”
Statement 2: “If a client is short on cash when Fund D looks attractive, he could invest 60% in the U.S
id- ity fi d 40% in the bond tract to achieve the same
p equity
market exposure as Fund D.”
Michael presents a summary of specific accounts shown below in Exhibit 3: Ex Summary of Current Client Holdings Client Name Market Value of Holdings Andrew Bolton $50 million invested in Fund A Carly Dungan €100 million in Eurodollar deposits Georgia Harrison $400 million invested in Fund D Isaac Jeffries $75 million invested in Fund B
Kethoyn Lewis $100 million invested in Fund A
" $50 million invested in Fund B
In discussing a strategy to meet Kathryn Lewis’ request that her total portfolio be shifted to 50% invested in Fund A and 50% in Fund B, Owen describes the necessary steps in the following statement:
Statement 3: "Step 1 would of USS large-cap equity f quired t onvert $25 million worth of assets from a beta of 0.95 to a beta of zero Step 2 would be to buy the number of U.S mid-cap equity futures contracts required to convert $25 million worth of assets from a beta of zero to a beta of 1.20.”
Trang 29STITUTE n Online CFA Sample Exam Site #”.FA : Ỉ New-Level 3 Version 2 2008 Sample Exam-v6 DO NOT use the “PAUSE” f i gency ú jing thi i y it th is i gency of you will be required to pay new fees and start the test over Question #29 out of 30 Time Remaining:
Rose Michael Case Scenario
Rose Michael, CFA, is a senior portfolio manager at Platinum Investments, Inc Selected data for the funds she manages are shown below in Exhibit 1: Ex Summary of Funds Fund A Fund B Fund C Fund D 60% Mid-cap Asset 100% Large-cap US | 100%Mid-cap | 100% U.S Treasury U: s Eauites Allocation Equities US Equities Bonds
Tre —_
Stock Beta 095 | 1.20 NA 142
Duration NA | NA 59 59
Michael is training Joseph Owen, a newly hired research assistant, in the strategies used to adjust clients’ exposures to various markets She asks Owen to collect current market data on the specific futures contracts she uses to employ the asset allocation strategies Owen presents Michael with the data shown below in Exhibit 2 and notes that the U.S risk-free rate is 4% while the European risk-free rate is Ex Summary of Futures Contracts Data
US US European US
Large-cap Mid-cap | Broad-based Cash
Equity Equity Equity Bond Equivalent
Contract Contract Contract Contract Contract Beta 110 129 080 10 0 Contract 2875 2350 3,000 S110,000* $100,000* Price Multiplier 100 100 10 NA NA Duration NA NA NA 65 0.25 Expiration 0.25 year 0.25 year 0.25 year 0.25 year 0.25 year
*includes the effect of any multiplier
During the training session, n Michael explains to Owen that futures contracts can be incorporated into an equity portfolio to achieve a target beta Owen makes the following statements regarding the use of futures contracts to adjust the asset allocatio
Statement 1: “Ifa client invested in Fund C anticipates an increase in interest rates, we could temporarily reallocate her asset allocation from bonds to equity through the use of futures We could sell bond futures and purchase equity futures
Statement 2: “If a client is short on cash when Fund D looks attractive, he could invest 60% in the U.S
mid-cap equity futures contract and 40% in the bond futures contract to achieve the same market exposure as Fund D."
Michael presents a summary of specific accounts shown below in Exhibit 3:
Ex Summary of Current Client Holdings
Client Name Market Value of Holdings Andrew Bolton $50 million invested in Fund A Carly Dungan €100 million in Eurodollar deposits Georgia Harrison $400 million invested in Fund D Isaac Jeffries $75 million invested in Fund B
$100 million invested in Fund A
Kathryn Lewis $50 million invested in Fund B
In discussing a strategy to meet Kathryn Lewis’ request that her total portfolio be shifted to 50% invested in Fund A and 50% in Fund B, Owen describes the necessary steps in the following statement: Statement 3: "Step 1 would be to sell the number of U.S large-cap equity futures contracts required to
convert $25 million worth of assets from a beta of 0.95 to a beta of zero Step 2 would be to buy the number of U.S mid-cap equity futures contracts required to convert $25 million worth of assets from a beta of zero to a beta of 1.20.”
Michael received a request from Georgia Harrison to increase her portfolio's exposure to the bond market and intends to buy bond futures contracts to accomplish this objective, Prior to increasing the portot 's exposure to
the bond market, Michael performs a scenario analysis based on different interest rate environments She uses implied duration to determine the responsiveness of the futures contract to an interest rate chan: Question Regarding Statement 3, is Owen most likely correct with respect to: Step 1? Step 2? A No No B No Yes € Yes No D Yes Yes @ A Answer A Cc B Answer B @ C Answer C Cc D Answer D
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Online CFA Sample Exam Site
New-Level 3 Version 2 2008 Sample Exam-v6
DO NOT use the “PAUSE” fi i gency and y ‘it the test Using thi: i you to exit thị If thi gency of you wil i pay new fees and start the
test over
Question 30 out of 3, Tone Remaining
Rose Michael Case Scenario
Rose Michael, CFA, is a senior portfolio manager at Platinum Investments, Inc Selected data for the funds she manages are shown below in Exhibit 1: Exhibit 1 Summary of Funds [ Fund A Fund B Fund C Fund D 60% Mid-cap
100% Large-cap U.S | 100% Mid-cap | 100% U.S Treasury US Equities
pr Equities USS Equities fonds 40% U.S
Treasury Bonds
| Stock Beta | 0.95 1.20 NA | 142
| Duration | NA NA 59 59
Michael is training Joseph Owen, a newly hired research assistant, in the strategies used to adjust clients’ exposures to various markets She asks Owen to collect current market data on the specific futures contracts she uses to employ the asset allocation strategies Owen presents Michael with the data shown below in Exhibit 2 and notes that the U.S risk-free rate is 4% while the European risk-free rate is 2% Ex Summary of Futures Contracts Data
US US European US
Large-cap Mid-cap Broad-based Cash
Equity Equity Equity Bond Equiv
Contract Contract Contract Contract Contract
Beta 110 | 128 020 10 9 Contract Dice 2875 | 2.350 3,000 $110,000 $100,000
Multiplier 100 | 100 10 NA NA
Duration NA | NA NA 65 0.25
Expiration 0.25 year | 0.25 year 0.25 year 0.25 year 0.25 year
*includes the effect of any multiplier
During the training session, n Michael explains to Owen that futures contracts can be incorporated into an equity portfolio to achieve a target beta Owen makes the following statements regarding the use of futures contracts to adjust the asset allocatio
“if a client invested in Fund C anticipates an increase in interest rates, we could temporarily Statement 1:
reallocate her asset allocation from bonds to equity through the use of futures We could sell bond futures and purchase equity futur
Statement 2: “fa cient short on cazh when Fund D looks attractive, he could invest 60% in the U.S
mid-cap equity futures contract and 40% in the bond futures contract to achieve the same
market exposure as Fund D." Michael presents a summary of specific accounts shown below in Exhibit 3:
Exhibit 3 Summary of Current Client Holdings
Client Name Market Value of Holdings Andrew Bolton $50 million invested in Fund A Carly Dungan €100 million in Eurodollar deposits Georgia Harrison $400 million invested in Fund D Isaac Jeffries $75 million invested in Fund B n invested in Fund A ion invested in Fund B Kathryn Lewis ~ m
In discussing a strategy to meet Kathryn Lewis’ request that her total portfolio be shifted to 50% invested in Fund A and 50% in Fund B, Owen describes the necessary steps in the following statement:
Statement 3: "Step 1 would be to sell the number of U.S large-cap equity futures contracts required to convert $25 million worth of assets from a beta of 0.95 to a beta of zero Step 2 would be to buy the number of U.S mid-cap equity futures contracts required to convert $25 million worth of assets from a beta of zero to a beta of 1
Michael received a request from Georgia Harrison to increase her portfolio's exposure to the bond market and intends to buy bond futures contracts t
the bond market, Michael performs a scenario analysis based on different interest rate environments She uses implied duration to determine the responsiveness of the futures contract to an interet rate hones
Question
Isaac Jeffries wants to convert his current holdings to cash for 3 months Michael's most appropriate recommendation for Jeffries is:
c A buy 757 cash equivalent futures contracts c B sell 319 U.S mid-cap equity futures contracts e C sell 322 U.S mid-cap equity futures contracts
c D sell holdings in Fund B and hold cash proceeds
75,000,000(1.04)
235,000
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