2019 CFA level 3 qbank r 20 21 asset allocation with real world c currency management questions

Question #1 of 24 A U.S.-based investor has purchased a 15,000,000 peso o ce building in Mexico He has hedged his investment by selling forward futures at $0.1098/peso Two months later, the futures exchange rate has fallen to $0.0921/peso The investor's net change in the futures position is: A) $265,500.00 B) ($265,500.00) C) $1,647,000.00 Question #2 of 24 Currency trading based on economic fundamentals would be most likely to sell a currency forward if the country issuing the currency is experiencing: A) declining levels of relative risk in the economy B) rising relative in ation C) increasing real rates of return Question #3 of 24 Jane Simms manages a German portfolio denominated in the EUR and decides to use an option collar to reduce her downside risk exposure to the Mexican peso (MXP) while retaining some potential upside Which of the following strategies will accomplish her objective? A) Buy an OTM call on the EUR and sell an OTM put on the EUR B) Buy an OTM put on the MXP and sell an in-the-money call on the MXP C) Buy an OTM put on the MXP and sell an OTM put on the MXP with a lower strike price Question #4 of 24 The Howarth School Foundation (HSF) has historically provided 30% of the annual operating costs of running the Howarth Law school Recent changes in government funding mean that previously fully funded scholarships will now only be 40% funded and that HSF must provide more support to the school Based on this information, HSF will most likely: A) Increase the allocation to zero-coupon bonds to increase duration B) Increase the allocation to riskier timber and farmland to generate higher expected return and cover the required out ows C) Decrease the allocation to private equity in order in increase the liquidity of the portfolio Question #5 of 24 Which scenario would most likely lead a portfolio manager to buy a foreign currency in the forward market? A) A portfolio that is overweighted in assets denominated in that currency B) An active manager implementing a carry trade when the currency being bought as the higher relative yield C) An active currency manager who is underweighted in assets denominated in that currency Question #6 of 24 Dan Vustings, 51, is a senior account executive at an advertising agency in San Francisco He currently has su cient capital in his two investment portfolios to retire in 14 years His capital is evenly split between a taxable portfolio which he uses to fund current consumption goals and a tax-deferred retirement account Vustings received advice from an investment manager last year who suggested the following asset allocation: High-yield bonds 15% High dividend yield equities 50% High growth equities 35% Vustings has the same allocation in both the taxable and the retirement account Which of the following allocations would be most likely to improve the e ciency of the portfolios, ignoring rebalancing or withdrawal penalties? A) Increase the allocation to high-yield bonds in the retirement account, and increase the allocation to high growth equity investments in the taxable account B) Increase the allocation to high-dividend yield equities in the taxable account, and increase the allocation to high growth equities in the retirement account C) Increase the allocation to high-yield bonds in the taxable account, and increase the allocation to high growth equities in the retirement account Question #7 of 24 Which of the following portfolios would most likely follow a passive currency hedging strategy? A) One with a shorter time horizon and higher liquidity needs B) One very concerned with minimizing regret and higher allocation to equity investments C) One with more dence in the portfolio manager and high income needs Question #8 of 24 A U.S investor who holds a £2,000,000 investment wishes to hedge the portfolio against currency risk The investor should: A) buy £2,000,000 worth of futures for U.S dollars B) sell $2,000,000 worth of futures for British pounds C) sell £2,000,000 worth of futures for U.S dollars Question #9 of 24 The basis risk in a currency hedge is most likely highest in a: A) cross hedge B) minimum-variance hedge ratio C) direct hedge Question #10 of 24 Kevin Collison has several di erent places where he has assets in which he manages as separate accounts such as his checking account which he uses for short term cash and emergency needs, his 401(k) account for retirement, and his children's college fund In his 401(k) he owns a small cap stock in a company which makes catheters to be used in experimental cancer treatment in which the catheter is used to deliver cancer killing drugs to hard to reach tumors in the body The stock has recently taken a downturn in price due to the FDA not approving their most recent catheter As a result of the downturn in price, Collison purchases more of the stock in hopes of recouping his losses at some future time Collison's management of his portfolio is indicative of: A) money illusion and fear of regret B) mental accounting and loss aversion C) asset allocation and pyramiding Question #11 of 24 The cost to hedge a long position in the EUR is reduced by: A) forward euro exchange rates are below the spot exchange rates B) lower relative interest rates in the euro zone C) negative roll yield Question #12 of 24 Goals based investing is most directly useful to counter: A) loss aversion B) illusion of control C) representativeness Question #13 of 24 Which of the following statements regarding hedging of emerging market currencies is least accurate? A) Hedging costs for managers who buy emerging market currencies are increased by the relatively high interest rates in emerging markets B) Hedging cost varies with normally large bid/asked spreads followed by infrequent periods of even higher spreads C) Tail risk and contagion both refer to relatively infrequent events that increase the di culty of hedging emerging market currencies Question #14 of 24 A European investor holds a diversi ed portfolio From the euro perspective the portfolio is weighted 60% and 40% in U.S and U.K investments Additional information: Returns measured in foreign currency: Returns measured from investor's perspective: Standard deviation of asset's returns measured in foreign currency: U.S 5% 6% 4.5% 3.7% U.K 7% 8% 3.5% 4.7% Assets: Stand deviation of the foreign currency's returns: The correlation between the foreign-currency asset's returns and returns on the foreign currency are 0.81 and 0.67 respectively for the U.S and U.K assets Compute the standard deviation of returns for the investor in the U.K assets A) 7.8% B) 60.9% C) 7.5% Question #15 of 24 A Djiboutian (DJF) investor holds an international portfolio with beginning investments of USD 1,253,000 and EUR 2,347,800 Measured in the foreign currencies these investments appreciate 5% and depreciate 7% respectively Additional information: Beginning Spot Exchange Rate Beginning Forward Exchange Rate Ending Spot Exchange Rate DJF/USD 179.54 DJF/USD 185.67 DJF/USD 192.85 EUR/DJF 0.00416 EUR/DJF 0.00413 EUR/DJF 0.00421 The ending value of the EUR investment is closest to: A) EUR 2,200,000 B) EUR 2,500,000 C) DJF 575,000 Question #16 of 24 The strategic asset allocation, current allocation, and upper and lower policy limits for a retirement portfolio are shown in the table below Asset Class Fixed Income Current Weight SAA Upper Limit Lower Limit 35% 40% 45% 35% Domestic Equity 60% 50% 60% 40% Real Estate 10% 15% 5% 5% The portfolio manager takes a discretionary approach to tactical asset allocation She follows various indicators that she believes are useful in evaluating speci c asset classes Her current observations and interpretations are: Equity brokers have reported that margin borrowing levels increased dramatically over the last two months and now sit at their highest levels for 15 months, a bearish sign Real estate indexes have started to rise suggesting the market may be 'heating up', a bullish sign Indications from the federal reserve are that interest rates will rise several times in the next 12 months, a clearly obvious sign Which of the following tactical allocation shifts is the manager most likely to make? A) Increase the weighting to real estate B) Decrease the weighting to xed income C) Increase the weighting to domestic equity Question #17 of 24 A pension fund is searching for an optimal portfolio by comparing the present value of contributions and contribution risk as measured by a 95% dence interval that contributions will not exceed a given threshold Which of the following portfolios would be the most e cient under these criteria? A) PV Contributions $69 million and Contribution risk $390 million B) PV Contributions $65 million and Contribution risk $392 million C) PV Contributions $60 million and Contribution risk $385 million Question #18 of 24 Which of the following comments is most accurate? A) A cost/bene t analysis of whether to hedge currency should include all of the following: bid/asked transaction costs, option premiums, back o ce and compliance expenses B) Currency volatility becomes a more signi cant issue in global portfolios over a longer time horizon as returns compound C) Discretionary currency hedging allows wider deviations from the strategic hedging than active currency management Jane Archer manages a Swiss (CHF) based hedge fund A portion of the fund is currently allocated 60% and 40% respectively to EUR and ASD risk-free investments, pending other investment opportunities She has collected the following information: Estimates: Euro Zone Australia Asset return in foreign currency 2.0% 2.5% Change in spot exchange rate versus the CHF −1.0% 3.0% Asset risk measured in foreign currency (σ) 0.0% 0.0% Currency risk (σ) 7.0% 9.0% Correlation of currency returns (CHF/EUR, CHF/ASD) +0.70 The following questions are from the portfolio perspective, measured in CHF Question #19 of 24 The expected return of the risk-free portion of the portfolio is closest to: A) 6.56% B) 2.82% C) 3.74 Question #20 of 24 The standard deviation of the risk-free portion of the portfolio is closest to: A) 54.13% B) 7.36% C) 7.98% Question #21 of 24 What is the expected return of the risk-free portion of the portfolio if Archer takes a leveraged position with a 150% positive weight in Australia and a 150% negative weight in the euro zone? A) 6.75% B) 6.90% C) 9.72% Question #22 of 24 What is the expected standard deviation of returns of the risk-free portion of the portfolio if Archer takes a leveraged position with a 150% positive weight in Australia and a 150% negative weight in the euro zone A) 98.80% B) 3.00% C) 9.94% Question #23 of 24 If Archer takes a short position in a forward contract in the euro and assuming the forward exchange rate for the euro vs the CHF is downward sloping which of the follow is most accurate? A) She will earn a negative return by shorting the currency B) She will earn a negative roll return increasing hedging costs C) Her position will result in a loss if the euro depreciates more than predicted by interest rate parity Question #24 of 24 Assuming the correlation between the ASD currency and underlying asset is highly positive which hedge ratio is most appropriate for hedging the ASD? A) A hedge ratio 1 C) Cannot be determined with the information given  ... the foreign currency' s returns: The correlation between the foreign -currency asset' s returns and returns on the foreign currency are 0.81 and 0.67 respectively for the U.S and U.K assets Compute... global portfolios over a longer time horizon as returns compound C) Discretionary currency hedging allows wider deviations from the strategic hedging than active currency management Jane Archer manages... overweighted in assets denominated in that currency B) An active manager implementing a carry trade when the currency being bought as the higher relative yield C) An active currency manager who