Mock 5 (Paper 2)- Questions

Question 1of 90
Question

The Macaulay duration of anon-callable perpetual bond with ayield in perpetuity of By%
is closest to:
7.4.
8.0.
13.5.

Question 2 of 90
Question
An analyst gathers the following information about zero rates:
Years to MaturityZero Rate
1 1.50%

2 2.00%

3 2.25%

The 2-year implied forward rate in one year's time is closest to:
2.50%.
2.63%.
2.75%.

Question 3 of 90
Question
AEuropean waterfall distributes performance
fees on a(n):
than an
deal-by-deal basis and is more advantageous tothe general partner
American waterfall.
partners than an
deal-by-deal basis and is more advantageous to the limited
American waterfall.
limited partners than an
aggregated fund level and is more advantageous to the
American waterfall.

Question 4 of 90
Question put
effective duration of a bond with an embedded
If interest rates are increasing, the
option is:

less than the effectíve duration of an option-free bond.

duration of an option-free bond.
the same as the effective duration of an option-free bond.
greater than the effective
466
 Question 5 of 90
Question to pollution. In the IPS
An investor wants toavoid investing in companies that contribute
appropriately specified in the:
this requirement is most
liquidity section.
unique circumstances section.
investment objectives section.

Question 6 of 90
Question
for an investor who borrows at the risk-free
Incapital market theory, the optimal portfolio
rate to invest inthe market portfoliois situated:
above the capitalallocation line.
to the right of the market portfolio on the capital
allocation line.
line and the Markowitz efficient frontier.
at the tangent of the capital allocation

Question 7 of 90
Question
Which of the following derivative contracts most likely requires an upfront payment by the
buyer at contract initiation?
Options only
Forwards only
Both options and forwards

Question &of 90
Question
The price of an option-free bond increases by 5% when the yield to maturity decreases by
200 basis points. If the price of this bond decreases by 5%, the yield to maturity most
likely increases by:
less than 200 basis points.
200 basis points.
more than 200 basis points.

Question 9 of 90
Question
Acompany's depository receipts most likely trade:
like ordinary shares on the investors' localexchanges.
in the local currency on the company's local
in the company's currency on investors' localexchange.
exchanges.

Question 10of 90
Question
Which of the following measures isleast appropriate for evaluating the risk of a
option? currency
Beta
467
 Delta

Question 11 of 90
Question
Anaanalyst gathers the following information about a company:
pividend payout ratio 40%
Sustainable growth rate 6%
ROE is closest to:
3.6%.
10.0%.
15.0%.

Question 12 of 90
Question
A
financial system is best described as
the costs of arranging trades are low. operationally efficient when:
asset and contract prices reflect all available
aneconomy's resources are used where theyinformation.
are most valuable.

Question 13 of 90
Question
Which of the following statements regarding acommodity index is
Commodity indexes commonly use an equal-weighting method. most accurate?
Commodity indexes in the same markets willshare similar risk and return profiles.
Commodity index returns differ from the changes in the prices of their underlying
commodities.

Question 14 of 90
Question
Astrategy that seeks to profit from investing in companies that are likely to be acquired
is best described as a(n):
macro strategy.
event-driven strategy.
relative value strategy.

Question 15 of 90
Question
An investor purchased a 5-year bond at issuance for 98 per 100 of par value and held the
Dond for two years. Coupon paymentswere reinvested at the original yield to maturity. If
the realized horizon yield is equal to the original yield to maturity, the investor most
likely sold the bond at a price:
below par.
equal to par.
above par.
468
 Question 16of 90 characteristics:
following
Question the
themarketexhibit
and
Asecurity 2%
Risk-free rate ofreturn
8%
Market risk premium
1.5

Beta
market 0.5 to:
Security's
correlation with the
rate of return is closest
security's expected
CAPM, the
Basedon the
6%.
11%.
14%.

Question 17 of 90
Question requirement of 55%, the maximum
minimum margin
is financed at a
Ifa leveraged position
closest to:
leverage ratio is
1.55.
1.82.
2.22.

Question 18 of 90
Question
to trade at a price furthest
Which of the following pooled investment products is most likely
from its NAV?
ETF
Open-end mutual fund
Closed-end mutual fund

Question 19 of 90
Question
An investor allocates $10 million at the beginning of the year to a
management fee of 2% and an incentive fee of 20% with a 6% hardhedge fund charging a
hurdle rate. At year-end
the value of the investment is $11.8 million. The
incentive fee is calculated net of the
management fee and the management fee is based on the year-end value. The
return the investor earned is closest to: net-of-fees
13.24%.
13.71%.
13.93%.

Question 20 of 90
Question

Return-generating modelsare best used to estimate the:

469
 expected return of a
expected.return of tthesecurity.
expected excess return market
on the portfolio.
market portfolio.
Question21 of90
Question

Avaluee-weighted equity index is most likely

has a high price. biased by a stock that:
splits frequently.
has a large market capitalization.

Question 22 of 90
Question
The time value of an option is equal to the:

option price minus the intrinsic value of the

ctrike price of the option minus the option.
underlying price.
etrike price of the option minus the intrinsicvalue of the option.

Question 23 of 90
Question

Allelse being equal, which of the following portfolios should have the lowest risk profile? A
portfolio consisting of:
greenfield assets only.
brownfield assets only.
both greenfield assets and brownfield assets.

Question 24 of 90
Question
Which of the following performance measures is most appropriate for an investor who
holds a well-diversified portfolio?
M²
Sharpe ratio
Jensen's alpha

Question 25 of 90
Question
application of the CAPM?
which of the following is most likely an periods
Estimating expected returns over multiple
Assessing rereturn performance against aa benchmark
multiple investment factors
Gsumating expected returns using

Question 26 of 90
Question
470
 capital financing, seedsteB
In the context of venture and sales.
initial commercial production marketing efforts.
and/or
product developmentidea
transformation ofan into abusiness plan.

Question 27 of 90
asset-backed
Question
feature of a credit card receivable
Which of the following is least likely a
security (ABS)?
A lockout period
Amortizing collateral
An early amortization provision

Question 28 of 90
Question
paya certain amount each month to each of its employees
Acompany has an obligation to
characteristic of a(n):
after they retire. This obligation is a
endowment.
defined-benefit pension plan.
defined-contribution pension plan.

Question 29 of 90
Question
debt funding
Which of the following statements is most accurate? Venture debt is private
provided to:
public companies with the intent to take them private.
startup or early-stage companies that may have little or negative cash flow.
mature companies that face bankruptcy or other complications with meeting debt
obligations.

Question 30 of 90
Question
A
closed-end fund is trading at a premium to its NAV. This scenario most likely reflects:
concerns about the quality of management.
excess demand for redemption of the shares.
a belief that the portfolio securities are undervalued.

Question 31 of 90
Question
For a portfolio consisting of two assets with a correlation coefficient of +1.0, portfolio risk
is most likely:
less than the weighted average of the risk of the two assets in the
portfolio.
equal to the weighted averageof the risk of the two assets in the portfolio.
greater than the weighted average of the risk of the two assets in the
portfolio.

471
 Question 32of 90
Question

Awaterfall structure asset-backed

in
credit tranching.
overcollateralization.
securities is most likely associated with:
monoline insurance guarantees.

Question 33 of 90
Question
market has the following limit orders
standing on its book for a particular stock:
Bid Size (# of
Limit Price Offer Size (# of Limit Price
Buyer shares)
(S) Seller (S)
shares)
1 S00 18.50 1 200 20.20
2 300
18.90 2 300 20.35
3 400
19.20 3 400 20.50

4 200 20.10 100 20.65

100 20.15 200 20.70

Ifa trader submits an immediate-or-cancel limit buy order for

700shares at a price of
$20.50, the average price the trader will pay is closest to:
$20.35.
$20.50.
$20.58.

Question 34 of 90
Question
Private real estate investors expect to generate the highest returns from:
core strategies.
value-add strategies.
opportunistic strategies.

Question 35 of 90
Question
Which of the following is most likely a consequence of the overconfidence bias? An investor
who:
overestimates downside risks
underestimates expected returns
holds a poorly diversified portfolio

472
 Guestion 6 of 90
Question
An analyst gathers the following datato vatue the shares of acompany
ROE 12%

Dividend payout ratio 40%

Required rate of return on shares 15%

Current year' dividend per share $3 60
Usingthe Gordon growth model, the intrinsic value per share is closest tr
$36 96.
$46.15
$4949

Question 37 of 90
Question

Which of the following statements about distributed ledger technology (DLT)

is most accurate?
DLT 0s considered energy-efficient as it requires minimal energy for
verification transaction
Using DLT, a transaction entered incorrectly can easily be rectified by deleting the
incorrect record
A DLT Consensus mechanism requires nodes in a
network to agree on a common state
of the ledger

Question 38 of 90
Question
With respect torisk management, risk budgeting applies to:
portfolio management only.
business management only.
both portfolio management and business management.

Question 39 of 90
Question
An analyst gathers the following information about forward rates:
Time PeriodForward Rate

Oyly 2.31%

lyly 2.82%

2yly 2.97%

The 2-year implied spot rate is closest to:

2.56%.
2.82%.
2.89%.

473
 Question 40 of 90
Question
Cor parallel shifts in
the
benchmark vield curve key rate durations
interest rate Sensitivity as:
effective duration.
indicate the same
modified duration.
Macaulay duration.

Question 41of 90
Question
A
Company
ar The announces an
unexpected improvement in itsearnings forecast for the coming
announcement
the company' most likely immediately
s b0ok value of equity only. impacts:
the
bothcompany's market value of equity only.
the company's book value of equity and the
company's market value of equity.
Question 42 of 90
Question
The rating agency
notching adjustment applied to the
speculative grade issuers is most likely:
smaller than that applied to the subordinated debt rating of
issuers.
the samne as that applied to the
subordinated debt rating of investment grade
larger than that applied to the subordinated debt rating of investment grade
issuers.
subordinated debt rating of investment grade issuers.
Question 43 of 90
Question
An analyst gathers the
following information about a hedge fund:
Beginning-of-year assets under management (AUM) $50
Annual return before fees million
20%

Management fee (based on end-of-year AUM before fees) 2%

Incentive fee (based on return net of
management fees) 20%
The total amount of fees earned by the
hedge fund is:
$2.80 million.
$2.96 million.
$3.20 million.

Question 44 of 90
Question
Semiannual pay bond has a vield-to-maturity of 4.3%, the yield-to-maturity based on
quarterly compoundingiis closestto:
474
 4.28%.
4.32%.

Question 45 of 90
Question
An analyst gathers the
following information about a company (in $
thousands):
Year 1Year 2
Operating income 168 217
Depreciation and amortization 422 416

Interest expense 120 155

Based on the interest coverage ratio using EBITDA, the

company's creditworthiness has:
deteriorated.
remained the same.
improved.

Question 46 of 90
Question
For a put option, if the price of the underlying is greater than the exercise price, the put
option is:

in the money.
at the money.
out of the money.

Question 47 of 90
Question
An analyst gathers the following information about two companies' non-callable, non-convertible
perpetual preference shares:
Preference Share 1Preference Share 2

Par value $100 $100

8% 11%
Required rate of return

$6 $8
Annual dividend per share
The value of Preference Share 1 is:

less than the value of Preference Share 2.

equal to the value of Preference Share 2.
greater than the value of Preference Share 2.

Question 48 of 90
Question
when futures prices are:
commodity market is in contango
476
$23.81.
$23.08.
$19.05.margin Question
An
first 300 Question Question
increases
is Which isaQuestion
investor
receive shares significantly investing
Both Fund
Co-investing Question
only UnderQuestion
onlyindirectly 7.5.
measuretheof 5.4. The
million
$1.6 million
$2.9 million
$3.4 million
$1.2 Question
A
of 52 of co-investing ValueDuration
BondMarket Question the
higher lower
51 which portfolio
30%. of of withan the 50 6.2
duration same
a opens of
margin a 90 in of 49
following 90 than than
Ignoringstock affected alternative of 90 of as
a íncreasethe in the of consists 90 the the the
at firm's and the
call margin following spot spot spot
statements fund 12.4
of
commissions by portfolio 1.5 7.6 3.2 four
is $30 dividend-paying assets? price.price.price.
per
closest account the
investing bonds
share amount alternative is
to: borrowing.
firm'nets closest with
is
with least
andusing of the
to:
interest, an dividends accurate?
capacity. investment following
margin.
initial

thedeposit
The paid A characteristics:
firm's methods
price by
account
of the FCFE:
below $5,000. can
firm.
requires an
which
He investor
then
the a
maintenane invest
purchases
investor

wll
Question 53 ot 90
Question
Forward
contracts are different from
standardized.
futures contracts because forwards are:
marked tomarket.
traded over-the-counter.

Question 54of 90
Question

Which of the following is most

process? likely part of the feedback step in
the portfolio
Portfolio construction management
Performance measurement
Developing the investmentt policy statement

Question 55 of 90
Question
Which of the following is most likely a
Value effect cross-sectional anomaly in financial markets?
Overreaction effect
Closed-end fund discount

Question 56 of 90
Question
An analyst gathers the
following historical information about two stocks:
Variance of returns for Stock 1
0.0625
Variance of returns for Stock 2
0.0900
Correlation coefficient between Stock 1 and Stock 2 0.4500
The covariance between Stock 1 and Stock 2
is closest to:
0.0025.
0.0338.
0.0675.

Question 57 of 90
Question
Allelse being equal, a stock split results in:
uecrease in the number of shares and an increase in the share price.
u increase in the number of shares and a decrease in the share price.
u ncrease in the number of shares and an increase in the share price.

478
 Question 58 of 90 receivable.
Question associated with credit card -backed
principal payments
After the lockouttperiod,
securities are:
investors.
periodically distributed to
receivables.
reinvested in additional
balloon payment.
distributed to investors asa

Question 59 of 90
Question
accurately reflecting intrinsic values in:
Market prices are most likely accepted as
an inefficient market only.
a highly efficient market only. highly efficient market.
both an inefficient market and a

Question 60of 90
Question
fundamental analysis most likely:
Ifamarket is semi-strong-form efficient, returns.
enables investors to generate consistent abnormal
implications of information.
helps participants understand the value trading volumes.
attempts to profit by looking at patternsof prices and

Question 61 of 90
Question
According toportfolio theory, combinations of the risk-free asset and a risky asset result in:
a capital allocation line.
the Markowitz efficient frontier.
an investor'sindifference curve.

Question 62 of 90
Question
A3-year, semiannual-pay bond with a $100 par value and a
for $98. One year later, if the yield to maturity has 5% coupon rate is purchased
change in the value of this bond is closest to: decreased by 100 basis points, the
$2.50.
$2.73.
$5.98.

479
 Question63 of 90
Question

The price value of abasis

albue of ¬1,000 and a
point for a 30-year. 10% annual
coupon payment bond witn a pa
¬2.58,
¬2.74.
yield-to-maturity of 0.8% is
closest to:
¬3.00.

Question 64 of 90
Question

Asset-based valuation models are best used for

a high proportion of intangibles. companies that have:
significant
ahigh property, plant and equipment.
proportion of current assets and current liabilities.

Question 65 of 90
Question
Acompany seeking to raise capital with minimal public
likely pursues a: disclosure of information most
shelf registration.
private placement.
best effort offering.

Question 66 of 90
Question
According to put-callparity, for European options, a long call on an asset is equal to a:
long put plus long asset plus long risk-free bond.
long put plus long asset plus short risk-free bond.
short put plus short asset plus long risk-free bond.

Question 67 of 90
Question

Over agiven holding period, performance of credit-risky bonds will most likely benefit from:
periods of high demand.
widening credit spreads.
weakening economicconditions.

Question 68 of 90
Question
An analyst gathers the following information about Canadian bonds:
Bond Coupon RatePriceYears to Maturity

480
 RatePriceYears to Maturity
Coupon
Bond 2
101
3.0%
Canadian government benchmark bond
2
5.0% 102
Canadian corporate bond
G-spread is closest to:
Assuming annual compounding, the
146 bps.
200 bps.
248 bps.

Question 69 of 90
Question
following best describes a relative risk objective for tho
With respect toan IPS,which of the
client's portfolio?
An annualtracking risk of less than 2 percent
A12-month 95% value at risk less than
¬1,000,000
monthly withdrawals
Maintaining at least ¬10,000 in cash for planned

Question 70 of 90
Question
underlying
Aput option trades for $1.00 with an exercise price of $40.00. If the price of the
at expiration is $35.00, the profit for a put seller is:
-$5.00.
-$4.00.
$4.00.

Question 71 of 90
Question
Ahedge portfolio consists of underlying assets and derivatives on those underlying assets.
In the absence of arbitrage, the portfolio is expected to earn:
zero return.
the risk-free rate of return.
the weighted average return of the underlying assets in the portfolio.

Question 72 of 90
Question
The forward price on an underlying asset will
increase with an increase in:
storage costsof the underlying asset.
interest earned on the
convenience yield of theunderlying asset.
underlying asset.

Question 73 of 90
Question
 All else being equal, which. of the
maturity?
Putable bonds
following bonds mosttlikely hasthe highest yield to
Convertible bonds
Contingent convertible bonds

Question 74 of 90
Question

Issuers' disclosures about operating costs are most

lnss detailed than their revenue likely:
imst as detailed as their revenue disclosures.
re detailed than their revenuedisclosures.
disclosures.

Question 75 of 90
Question
net investment hedge occurs when a derivative is used to:
A

offset the fluctuation in the fair value of an asset or

absorb the variable cash flow of a floating rate assetliability.
or liability.
offset the exchange rate risk of the equity of a foreign operation.

Question 76 of 90
Question
Ifahedge fund imposes a gate, it is temporarily limiting the:
redemptions from the fund.
inflow of money into the fund.
amount of leverage in the fund.

Question 77 of 90
Question
Which of the followingsections of the IPS most likely explains how to respond to various
contingencies?
Procedures
Investment guidelines
Evaluation and review

Question 78 of 90
Question
ASouth Korean electronics company issued bonds denominated in US dollars in the United
States and registered with the Securities and Exchange Commission (SEC). These bonds
are most likely known as:
Eurobonds.
global bonds.
foreign bonds.

482
 Question 79 of 90
option contract:
Question for a2-year
the following data
An analystgathers 1.2000 USD/EUR
Forward price 1.2250 USD/EUR
Strike price
5%
Risk-free rate
0.0500USD/EUR
Call premium
per 1 EUR
USD/EURis the amount ofUSD
closest to:
The put premium is
0.0273 USD/EUR.
0.0727 USD/EUR.
0.0750 USD/EUR.

Question 80 of 90
Question management,
incorporating ESG considerations into portfolio implementation and
When characteristic of:
client-directed proxy voting is most likely a
thematic investing.
negative screening.
shareholder engagement

Question 81 of 90
Question
Compared toexchange-traded derivatives, the relative transparency of over-the-counter
derivatives is:

lower.
the same.
higher.

Question 82 of 90
Question
In a repurchase agreement, the initial margin protects:
the cash lender only.
the cash borrower only.
both the cash lender and the cash borrower.

Question 83 of 90
Question
Which of the following statements about Porter's Five
Forces is most accurate?
 Porter's Five Forcesframework
historicaldata is not available cannot be applied to new industries for which
Assessingthe barriers to exiting an
threat of new entrants
industry should be considered when assessing the
Porter's Five Forces is aframework for assessing industry structure that determines an
industry's long-run profitability

Question 84 of 90
Question
An analyst observes the following information about a bond:
piceif benchmarkcurve increases by 25 bps 127.66
Current price per 100of par valve 130.00

Drice if benchmark curve decreases by 25 bps 132.41

The effective duration for the bond is closest to:
7.3.
9.5.
14.6.

Question 85 of 90
Question

An investor buys a callfor $24.70 that has a strike price of $670. If the value at expiration
for this callis $47.60, the price of the underlying at expiration is closest to:
$622.40.
$692.90.
$717.60.

Question 86 of 90
Question
Abond has a modified duration of 6.2 and an approximate annual convexity of 328. Ifyields
increase by 30 bps, the expected percentage price change of this bond is closest to:
-2.01%.
-1.71%.
-1.56%.

Question 87 of 90
Question
constituents of an
An analyst gathers the following information about three stocks that are the only
equal-weighted index:
Beginning of the Year End of the Year

Price per Share Shares Outstanding

oCk Price per Share Shares Outstanding

484
 Porter's Five Forces
framework cannot be applied to newindustries for which
historical data is not available
Assessingthe barriers to exiting an
threat of new entrants industry should|be considered when assessing the
rter's Five Forces is a framework for assessing industry
industry's long-run profitability structure that determines an

Question 84 of 90
Question
An analvst observes the following information about a bond:
Drice if benchmark curve increases by 25 bps 127.66

Current price per 100 of par value 130,00

Dice ifbenchmark curve decreases by 25 bps 132.41

The effective duration for the bondis closest to:
7.3.
9.5.
14.6.

Question 85 of 90
Question

An investor buys acall for $24.70that has a strike price of $670. If the value at expiration
for this call is $47.60, the price of the underlying at expiration is closest to:
$622.40.
$692.90.
$717.60.

Question 86 of 90
Question
Abond has a modified duration of 6.2 and an approximate annualconvexity of 328. If yields
increase by 30 bps, the expected percentage price change of this bond is closest to:
-2.01%.
-1.71%.
-1.56%.

Question 87 of 90
Question
that are the only constituents of an
Al analyst gathers the following information about three stocks
equal-weighted index:
End of the Year
Beginning of the Year
Share Shares Outstanding
olOCk Price per Share Shares 0utstanding Price per

484
 Porter's Five Forces
framework cannot be applied to new industries for
historical data is not available which
Assessingthe barriers to exiting an industry should be considered when assessing the
entrants
threat of new
Porter's Five Forces is aframework for assessing industry structure that determines an
industry's long-run profitability

Question84 of90
Question

Ananalysttobserves the following information about a bond:

Priceif benchmark curve increases by 25 bps 127.66

Current price per 100 of par value 130.00

ne if benchmark curve decreases by 25 bps 132.41

mhe effective duration for the bond is closest to:
7.3.
9.5.
14.6.

Question 85 of 90
Question
An investor buysa callfor $24.70 that has a strike price of $670. If the value at expiration
for this call is $47.60, the price of the underlying at expiration is closest to:
$622.40.
$692.90.
$717.60.

Question 86 of 90
Question
approximate annual convexity of 328. If yields
bond has a modified duration of 6.2and an
A change of this bond is closest to:
price
ncrease by 30 bps, the expected percentage
-2.01%.
-1.71%.
-1.56%.

Question 87 of 90
Question information about three stocks that are the only constituents
of an
Byst gathers the following
equal-weighted index: End of the Year
Beginningofthe Year Outstanding
Outstanding Prlce per Share Shares
Stock Price per Share Shares

484
 End of
Shares Outstanding
Beginningofthe Year Price per Share
SharesOutstanding
Stock Price per Share 500
E36

E30 S00 200

E45

E50
200
2 300
ESO
300 rebalanced
F40
index value was 100. If it is not during the year,
the year, the
At the beginning ofthe is closest to:
endof the year
the index value at
109.2.
111.7.
113.5.

Question 88 of 90
Question losses on deale
successful deals early in a fund's life but incurs
If a generalpartner exits reclaim some of the
which of the following most likely allowsa limited partner to
later,
general partner's fees?
A hurdle rate.
Acatch-up clause.
A
clawback provision.

Question 89 of 90
Question
In a one-period binomial model, the risk-neutral probabilities of upward and downward
price movements of an underlying asset are determined by:
the risk-free rate.
investors' risk aversion.
the probabilities of the underlying price moving up and down.

Question 90 of 90
Question
The justified forward P/E ratio calculated based on the Gordon growth
positively related to the: model is always
payout ratio.
dividend growth rate.
required rate of return.
 Mock 5 (Paper2)- Answers
Answer1of 90
Answer

Solution
Incorrect because it is computed by
incorrect because it is just the given reversing
market
the formula: r/(1 + r) = 8/1.08 = 7:1:
yield.
Correct because the Macaulay duration of a
MacDur =(1 +r)/r non-callable perpetual bond is:
=1.08/0.08 = 13.5

Answer 2 of 90
Answer

Solution
Incorrect because this is the implied forward rate that starts in year 1 and ends in year 2
with a tenor of 1 E2-1) year, denoted with IFR.J, whereas what is being asked is IFRi2.
The general formula for the relationship between the two spot rates (ZA, Zo) and the
implied forward rate (FRAB-4) [that starts in period Aand ends in period B] is given by (1 +
z) x(1 + IFRAs-) = (1 +z)®
Therefore, for the provided information:
(1+ z)! x (1 + IFRa2-1)21 =(1 +z)',
(1+ 1.5%) x (1 + IFR)' =(1 +2%):.
IFR12 #IFR1 = (1 + 2%)"/(1 + 1.5%) -1= 0.025025 2.50%
Correct because this isthe implied forward rate that starts in year 1 and ends in year 3
with a tenor of 2(=3-1) years, denoted as IFR12. The general formula for the relationship
between the two spot rates (ZA, Za) and the implied forward rate (IFRAs) [that starts in
period Aand ends in period B] is given by (1 +z.)4 x (1 +IFRAR-AJea =(1 + z.)
Therefore, for the provided information:

(1+z.)' x (1 + IFRis)=(1 +z),

(1+ 1.5%) x (1 + IFRL) =(1 + 2.25%)e,
IFRi2 =[(1+ 2.25%)P/(1 + 1.5%)]/2- 1=0.026271 2.63%
Incorrect because this is the implied forward rate zero-coupon bond that starts in year 2
and endsin year 3 with a tenor of1(=3-2) year, denoted with IFR2i, Whereas what is
being asked is IFRi. The general formula for the relationship between the two spot rates
(Z, Za) and the implied forward rate (IFRas-) [that startsin period Aand ends in period B]
[is given by] (1 +za) x(1+ IFRus) =(1 +z)
Therefore, for the provided information:
(1+z)² x (1 + IFRas)2 = (1 + zi),
(1 + 2%)² x (1 + IFR2,) = (1 + 2.25%), - 1= 0.0275 18 x 2.75%
IFR12 IFR1= (1 + 2.25%):/(1 + 2%)²

Answer 3 of 90
Answer
 Answer
Correct
borrow overlaying Incorrect
toriskallocation Answer Answer
Solution requirements
Incorrectissues impact
ESG Correctof
Incorrect Answer Answer
accept requirements
the Solution especially
especially
Incorrectespecially
Incorrectwhen
Correct Answer
preferences. Solution advantageousoccurhurdle GP
fund.waterfalls.
theirwaterfalls: order Correct
fees alternative (i.e.,Incorrect
levelIncorrect
(environmental,
6
does
levelSolution
of such client's 5
on of 4
money evenbecause
90 because because of atrate initial In are inafter (i.e., (i.e.,
line.
thebecause as the
because 90 because
when because 90 the
whole-of-fund
when because not collected which because
mnore in
circumstances,
air
composition are has deal-by-deal all because after
after because
toindifference The aggregate
participate
to
investmentDeal-by-deal investments,
invest Some the the the rates rates rising.
ratesare
investments all
the and tothe an an an the been allocations all
risklocationoptimal the investment social, uniquedraw onwhole-of-fund
investments
liquidity embedded embedded
areembedded
are LPs. met. a
investments
whole-of-fund
whole-of-fund
optimal client'swater
because
more less fundwaterfalls, and
inper-deal (or
risk-averse curves investor of cash rising. rising.
governance).
pollution. circumstances level
Inany waterfallswaterfall
their are havea
in of objectives including
the contrast American)
an section
from profits basis, made been have have
the of investor objectives portfolio. put put put (i.e., preferred (or [or [or
theoptimal that all are
risky portfolio the option option option distributions to allowing represents to
exited)
European) been
beenEuropean]
investors
chanceincorporate beliefs of after until waterfalls
more LPs European]
are deal-by-deal
portfolio. Examples portfolio. the exited),exited)
487 investor portfolio section.
specified Such section reducesreducesreduces rate
all the and and
IPS advantageous
and investments LPs ofthe GPs.waterfalls
of selected is
considerations should are waterfalls
and the waterfalls
higher (i.e., the go not and
values,
of of the the receive return GP distribution more
The portfolioinvestor is the to to There
waterfalls, whole-of-fund on are
with in ESG effective
effectiveeffective the get
always terms state (i.e., occur amore
return,
optimal on IPS to aredeal-by-dealoccur occur
a issues that have their LPs paid advantageous
preferences.
high the should what the the two advantageous at at at
depends of is duration whole-of-fund as
situated riskinclude arelikely duration
duration been initial before GPmethod the
hurdle deals types the the
investor Such risk capital the because (or aggregate
often cover exited) aggregate
aggregate
tolerance investment European) tobasis.
that
of
tolerance)
an on to client's of arerate) LPs
allocation the
investor on environmental referred have any of of the exitedreceive defines to
ortfolio the the the and performance
on LPs. the
the other bond, waterfalls fund fund fund
investor's and a bond, bond, are and and the In LPs.
material the level
may may capital
line to more entire both
for return asaspect
the the
WISn by
 such an investor-willlie to the right of the
line.
because
optimal risky portfolio on the capital allocation
Incorrect this is the optimal risky
th the addition ofthe portfolio, not the optimal investor portfolio.
risk-freeasset, we are able to narrow our selection of risky
portfolios to a single optimal risky portfolio, P, which is at the of (the dominant
efficient frontier of riskytangent
capital allocation line) CAL(P) and the
portfolios cannot be assets. Also, thetwo
identical because the investor's risk preference determines a levered
tfolio, which is situated to the right of the optimal risky portfolio on the
allocation line. capital
Answer 7 of 90
Answer

Solution
Correct because this right toexercise in the future has a value that is paid upfront to
ontion seller in the form of an option premium. the
Incorrect because for forwards, at time t=0, the counterparties do not exchange a
payment upfront but, rather, agree ondelivery of the underlying at time T for aforward
price of Fo(T).
Incorrect because for a forward contract, at time t = 0. the counterparties do not exchange
aprice
payment uptront but, rather, agree on delivery of the underlying at time Tfor a forward
of FO(T).

Answer 8of 90
Answer

Solution
Incorrect because for the same couponrate and time-to-maturity, the percentage price
change is greater (in absolute value, meaning without regard to the sign of the change) when
the market discount rate goes down than when it goes up (the convexity effect).
Incorrect because for the same coupon rate and time-to-maturity, the percentage price
change is greater (in absolute value, meaning without regard to the sign of the change) when
the market discount rate goes down than when it goes up (the convexity effect).
Correct because for an option-free bond with the same coupon rate and time-to
maturity, the percentage price change is greater (in absolute value, meaning without
regard to the sign of the change) when the market discount rate goes down than when it
goes up (the convexity effect).

Answer 9 of 90
Answer

Solution
that trades like an ordinary share
Correct because a depository receipt (DR) isa security
an economic interest in a foreign
On an investor's local exchange and represents foreign company to be traded on an
Company. It allows the publicly listed shares of a
exchange outside its domestic market. ordinary share
Ihcorrect because a depository receipt (DR) is a security that trades like an
foreign company.
and represents an economic interest in a
on an investor's local exchange on an exchange
tallows the publicly listed shares ofa foreign company to be traded local currency.
investors', not the company's,
Outside its domestic market. It trades inrepresent the equity of international companies
ncorrect because depository receipts
exchanges and in the local currencies. With these securities.
and are traded on local quotations and dividend
to worry less about currency conversions (price practices, and
vestors have currency), unfamiliar market
Peyments are in the investor's local
differences in accounting standards.

488
 Answer 10 of 90
Answer

returns
Solution
sensitivity of asecurity's returns tothe
measure of the much market risk an
Correct because betais a measures relative risk, meaning how well for a portfolio of
portfolio. Beta describes risk
on the market well-diversified portfolio. Beta metrics. The risk
descriptive risk
a
asset contributes tosources
other of risk may require other
equities, but is one example of
this. derivative price for a
associated with derivativesfirst-order measure of the change in the derivatives
Incorrect because vegais a underlying. Vega is anappropriate measure of
change inthe volatility of the
value of
risk, whereas beta is not. the derivative price to a smallchange in the
of
Incorrect because the sensitivity delta. It is perhaps the most important measure of
is called the
the underlying asset
derivatives risk.

Answer 11 of 90
Answer

Solution
rate rather
sustainable growth rate by the retention
Incorrect because it multiplies the
calculates ROE = Sustainable growth rate x (1 -
than dividing it by the retention rate and
Dividend payout ratio) = 6% x 60% =3.6%.Retention ratex ROE where the retention
Correct because Sustainable growth rate =
1 - payout ratio).
rate is the complement of the dividend payout ratio (i.e.,Dividend payout ratio) = 6% /
Rearranging gives ROE = Sustainable growth rate/ (1-
60%= 10%.
retention rate and calculates ROE =
Incorrect because it mistakes dividend payout ratio for
Sustainable growthrate / Dividend payout ratio = 6%/40% = 15%.

Answer 12 of 90
Answer

Solution
Correct because if the costs of arranging trades are low, the financial system is
operationally efficient.
Incorrect because if the prices of the assets and contracts reflect all available information
related to fundamental values, the financial system is informationally efficient.
Incorrect because economies that use resources where they are most valuable are
allocationally efficient.

Answer 13 of 90
Answer

Solution
Incorrect because commodity indexes do not have an obvious weighting mechanism;
therefore, commodity index providers create their own weighting methods.
Incorrect because different weighting methods lead to different exposure to specific
commodities and result in different risk and return profiles. Unlike commodity indexes,
broad equity and fixed-income indexes that target the same markets share similar risk and
return profiles.
Correct because the performance of commodity indexes can be different from their
underlying commodities because the indexes consist of futures contractson the
commodities rather than the actual commodities. Commodity index returns reflect the risk
free interest rate, the changes in future prices,and the roll yield.
489
 90
Answer 14 of
Answer

Solution
Incorrect because macro hedge funds emphasize a top-down
economic trends. Trades are made on the basis of
expected approach
to identify
variables. Generally, these funds
trade movements in economic
and
altu
commodity
the overalldirection of the
opportunistically fixed-income,
in
markets. Macro hedge funds use long and short equity, currency,
market as it is influenced by positions to profit from a
events. major economic trends and
orrect because event-driven strategies seek to profit from
ally those that involve changes in defined catalyst events,
corporate structure, such as an acquisition or
structuring. This strategy is considered to be underpinned by bottom-up
analvsis, as opposed to top-down analysis. Investments may include long and security-specific
in common and short
positions preferred stocks, debt securities, and options.
correct because relative value funds seek to profit from a
snusual short-term relationship, between related securities.pricing discrepancy, an
The expectation is that the
pricing discrepancy will be resolved over time.

Answer 15 of 90
Answer

Solution
Correct because the realized horizon yield matches the original yield-to-maturity if
(1) coupon payments are reinvested at the same interest rate as the original yield-to
maturity, and (2) the bond is sold at a price on the constant-yield price trajectory, which
implies that the investor does not have any capital gains or losses when the bond is sold.
Since the bond is sold prior to maturity, the bond would have to be sold at a price greater
than 98 but less than 100.
Incorrect because if the bond was sold at par, the horizon yield would be greater than
the yield-to-maturity.
be greater than
Incorrect because if the bond was sold above par, the horizon yield would
the yield-to-maturity.

Answer 16of 90
Answer

Solution
the measurement
security's correlation with the market as incorrectly
Incorrect because it uses the Bi[E(R) - R]. Therefore, it
E(R) = R +
for beta in the CAPM calculation: x (market risk premium) = 2%beta. + (0.5) x (8%) = 6%.
calculates expected return as R+ pi,m to
calculate beta, but it is not equal
used to
The correlation metric is expected return on the
inputs the market risk premium as the incorrectly
Incorrect because it
calculation: E(R) = R,+ Bi[E(R.) - RJ.Therefore, it
market in the CAPM 2%) = 11%.
Calculates expected return as 2% + (1.5)x (8% - expected return using the CAPM
calculation of the security's (1.5) x (8%) = 14%. The
market
Lorrect because the Bi[E(Rm) - R] = 2% + to subtract
= R+
Calculation is as follows: E(R)return do not need
risk free rate so youpremium.
expected minus the risk
1Sk premium is the already reflected in the market
the risk rate because it is
free

Answer 17 of 90
Answer

490
 Solution mninimum margin
total position with 1plus the
multiplies the
Incorrect because it financed by the
requirement. 100% x (1 + 0.55) = 1.55. ratio associated with a positionrequirement. 100o%
maximum leverage margin
Correct because the
requirement is one divided by the minimum
minimum margin
requirement from one in the
/55% 1.82. minimum margin 100%/
Incorrect because it subtracts the requirement). 100% / (1 - 55%) =
minimum margin
denominator: 100% / (1 -
(0.45)2.22.

Answer 18 of 90
Answer

Solution
the NAV of the
because the market price of an ETF is likely to be close to
Incorrect
underlying investments. investment money and issue
new
Incorrect because an open-end fund willaccept
NAVof the fund at the time of investment and
additionalshares at a value equal to the
funds can also be withdrawn at the NAV per share. premium or discount to their NAV due to
Correct because closed-end funds can trade at a consequence of this fixed share base is
the fixed number of shares outstanding. That is, one
created and sold at the current NAV
that, unlike open-end funds in which new shares are depending on the
per share,closed-end funds can sellfor a premium or discount to NAV
demand for the shares.

Answer 19 of 90
Answer

Solution
Incorrect because 13.24% results from calculating the incentive fee independently from
the management fee as opposed to net of the managemnent fee:

Portfolio gain = year-end value - beginning value = $11.8 million - $10

million =$1.8 million

Hurdle amount = beginning value x hurdle % = $10million x 6% = $600,000

Management fee = year-end value x management fee % = $11.8 million x 2%
= $236,000

Incentive fee = (portfolio gain - hurdle amount) xincentive fee %

= ($1.8 million - $600,000) >x 20% = $240,000
Total fees = management fee + incentive fee =
$476,000 $236,000 + $240,000 =

Net-of-fees return = (portfolio gain - total

= ($1.8 million -
fees)/beginning value
Correct because the net-of-fees$476,000)/$10
return to the
million = 13.24%
13.71%. investor at year-end is closest to

Portfolio gain =year-end value - beginning value = $11.8

million $1.8 million million -$10
Hurdle amount = beginning value x hurdle % = $10
million x 6% = $600,000
491
 Management fee = year-end valuex management fee %- $1
= $236,000 18 milion x Z0
Incentive fee = (portfolio gain - hurdle
Incentive fee % amount - management fee) x
= ($1.8 million -
$600,000 - $236,000)× 20% =$192,800
Total fees = management fee +
$428,800 incentive fee - $236,000 + $192,800 =

Net-of-fees return =(portfolio gain - total fees)

/beginning value
-($1.8million -$428,800)/$10 million =
Incorrect because 13.93% results from 13.71%
of-period value instead of the
calculating the hurdle amount based on the end-
beginning-of-period value:
Portfoliogain = year-end value -beginning value = $11.8 million -$10
million =$1.8 million

Hurdle amount = ending value x hurdle % = $11.8 million x6% =

$708,000
Management fee =year-end value x management fee %=$11.8 million x 2%
= $236,000

Incentive fee = (portfolio gain - hurdle amount - management fee) x

incentive fee %

= ($1.8 million - $708,000 - 236,000) × 20% = $171,200

Total fees = management fee + incentive fee = $236,000 + $171,200 =

$407,200

Net-of-fees return = (portfolio gain - total fees) /beginning value

= ($1.8 million - $407,200) /$10 million = 13.93%

Answer 20 of 90
Answer

Solution
Correct because a return-generating model is a model that can provide an estimate of the
expected return of a security given certain parameters.
Ihcorrect because the expected return of the market portfolio is an input intomany
return-generating models, such as the market model. That is, the most common
return is
Implementation of a single-index model is the market model, in which the market
the single factor or single index. of the factors in the
Incorrect because the excess return on the market portfolio is one (1997).
Tour-factor model proposed by Fama and French (1992) and Carhart

Answer 21 of 90
Answer

Solution
splits have an impact on a value
mcorrect because neither stock prices nor
weighted index. splits have an impact on a value
correct because neither stock prices nor
weighted index. 492
 of a large-cap stock is
given percentage price changea small-cap stock, which is a
Correct because the impact offa price change of
larger than theimpact of the same percentage
source of bias for value-weighted indexes.

Answer 22 of 90
Answer

Solution
difference between the market price
Correct because the time value of an optionis the
of the option and its intrinsic value. difference between the market price
Incorrect because the time value of an option is the
of the option and its intrinsic value.
difference between the market price
Incorrect because the time value ofan option is the
of the option and its intrinsic value.

Answer 23 of 90
Answer

Solution
Incorrect because greenfield investments are more risky than brownfield
investments.
Correct because operational secondary-stage assets with an existing track record of
generating steady, bond-like cash flows possess the lowest risk and offer the lowest return
to the investors. Brownfield investments, redevelopment of existing infrastructure, are
incrementally riskier, and greenfield projects are the riskiest.
Incorrect because greenfield investments are morerisky than brownfield
investments.

Answer 24 of 90
Answer

Solution
Incorrect because M² utilizes total risk rather than systematic risk. Total
for an investor when he or she holds a risk is relevant
portfolio that is not fully diversified, which is not a
desirable portfolio. In such cases, the Sharpe ratio and M² are appropriate
measures. performance
Incorrect because awell-diversified investor is only
measured by beta. The Sharpe ratio uses exposed to systematic risk, as
risk. Total risk is relevant for an investor the total risk of the portfolio, not its
when he or she systematic
holds a portfolio that is not fully
diversified.
Correct because Jensen's alpha is
relative to beta risk-Treynor ratiobasedand
on systematic risk.
Performance measures
holds a well-diversified portfolio with Jensen's alpha-are relevant when the investor
negligible diversifiable risk
Answer 25 of 90
Answer

Solution
Incorrect because a limitation of the CAPM is it
not consider that is a
multi-period
can lead to myopic and implications investment objectives
or single-period
of
model that doeS
suboptimal future periods, whnicn
Correct because applications of theinvestment
CAPM decisions.
portfolio or portfoliomanager with the include comparison of the actual return of a
CAPM return for
performance appraisal.
493
 Incorrectt because a limitation of the
systematic risk or beta risk is priced CAPM is that it is a
in the CAPM. Thus, single-factor model. Only
investment characteristics should be theCAPM states that no other
considered in estimating returns.
Answer 26 of 90
Answer

Solution
onerrect because this activity is supported by
Enancing. Early-stage financing (early-stage early-stage financing, not seed-stage
VC), or start-up stage financing, goes to
oompanies moving toward operation but prior to commercial
of which early-stage financing may be production or sales, in both
Correct because seed-stage financing, injected to initiate.
or seed capital, generally supports
development and marketingefforts, including market research. This is theproduct
which VC funds usually invest. first stage at
Incorrect because this activity is supported by
Pre-seed capital, or angel investing, pre-seed capital, not seed-stage financing.
is capital provided at the idea stage.
used to develop a business plan and to assess market Funds may be
potentia
Answer 27 of 90
Answer

Solution
Incorrect because a credit card receivable ABS
which the cash flow that is paid out to security would typically have a lockout period during
holders is based only on finance charges
collected and fees.
Correct because a credit card receivable ABS is an example of an
ABS with a non
amortizing collateral.
Incorrect because a credit card receivable ABS may require early
amortization of the
principal if certain events occur. Such an early amortization provision
credit quality of the issue. would safeguard the

Answer 28 of 90
Answer

Solution
Incorrect because university endowments are established to provide continuing
inancial support to a university and its students.
Correct because a defined-benefit pension plan defines the future benefit that an
employer has the obligation to pay in terms of the retirement income benefits owed to
participants.
Incorrect because in a defined-contribution pension plan contributions rather than
benefits are specified.

Answer 29 of 90
Answer
Solution
hcorrect because private equity refers to investment in privately owned companies or in
Publiccompanies with the intent to take them private.
Orrect because for private debt, in addition to private loans or bonds, venture debt is
extended to early-stage firms with little or no cash flow.
ncorrect because for private debt, in addition to private loans or bonds, distressed debt
involves public or private debt of corporate issuers believed to be close to or in
Dankruptcy that could benefit from investors with capital restructuring skills.
494
 Answer 30 of 90
Answer

Solution management could suggest a

about the quality of
concerns
Incorrect because pressure, which could
discount from NAV.
redemption demand suggests selling
Incorrect because excess (discount) to NAVwhen
NAV.
indicate a discount to a premium
because closed-end funds may trade at undervalued (overvalued).
Correct are
the portfolio securities
investors believe that

Answer 31 of 90
Answer

Solution
average of the risk of the two
because portfolio risk is less than the weighted one.
Incorrect
when the correlation coefficient is less than are
assets in the portfolio onlycorrelation coefficient of +1.0, no diversification benefits
Correct because with a of the two assets
the weighted average of the risk
obtainedand the portfoliorisk is equal to
inthe portfolio. be greater than the weighted average of the risk
Incorrect because portfolio risk can never
of the two assets in the portfolio.

Answer 32 of 90
Answer

Solution
include a form of internal credit
Correct because it is common for securitizations to
a structure,
enhancement called subordination, also referred to as credit tranching. In such they
differ as to how
there is more than one bond class or tranche, and the bond classes the
whose loans are in
will share any losses resulting from defaults of the borrowers
collateral. This type of protection is also commonly referred to as a waterfall structure
because of the cascading flow of payments between bond classes in the event of default.
Incorrect because overcollateralization refers to the process of posting more
collateral than is needed toobtain or secure financing. It represents a form of internal
credit enhancement because the additional collateral can be used to absorb losses.
Incorrect because bank guarantees and surety bonds are very similar in nature because
they both reimburse bondholders for any losses incurred if the issuer defaults. The major
difference between a bank guarantee and a surety bond is that the former is issued by a
bank, whereas the latter is issued by a rated and regulated insurance company. Insurance
companies that specialize in providing financial guarantees are typically called monoline
insurance companies or monoline insurers.

Answer 33 of 90
Answer

Solution
Correct because the limit buy order will be filled first with the most aggressively pricea
limit sell order and will be followed by filling with the higher priced limit sell orders that
areneeded up toand including the limit buy price until the order is filled.

Average price =[(200 x$20.20) +(300x $20.35)+(200 *$20.50)]/700

495
 Incorrect because it simply uses the sell limit
order.
Incorrect because
price that is
exactly equal to the limit buy
moving downward.
orders are filled starting with
the highest limit
sell price and
Average price =|(200x $20.70) +
(100 ×$20.65) +(400 x
= $20.58
$20.50)|/700
Answer 34 of 90
Answer

Solution
Incorrect because
accept development,
investors seeking higher returns than core
redevelopment,
Eunds are more commonly repositioning, and leasingstrategies
risk. provide may also
Finite-life
opportunistic investmnent styles. alpha- and beta-generating value-add and closed- end
used for
redevelopment Value-add investments may require modest
or upgrades, the leasing of vacant space, or
nroperties to earn a higher return than core repositioning the underlying
much higher risks than value-add or core properties. Opportunistic investments
strategies. accept
Incorrect because investors seeking higher returns may
redevelopment, repositioning, and leasing risk. Finite-lifealso accept development,
commonly used for alpha- and beta-generating value-add closed-end funds are more
and opportunistic investrment
styles. Value-add investments may require
of vacant space, or repositioning the modest redevelopment or upgrades, the leasing
core properties. underlying properties to earn a higher return than
Correct because investors seeking higher returns may also accept
development,
redevelopment, repositioning,and leasing risk. Finite-life closed-end
commonly used for alpha- and beta-generating value-add funds are more
and opportunistic investment
styles. Value-add investments may require modest
redevelopment or upgrades, the leasing
of vacant space, or repositioning the underlying properties to earn a higher return than
core properties. Opportunistic investing accepts the much higher risks of development,
major redevelopment, repurposing of assets, taking on large vacancies, and speculating on
significant improvement in market conditions.

Answer 35 of 90
Answer

Solution
Incorrect because as a result of overconfidence bias, investors may underestimate, not
overestimate, downside risks.
Incorrect because as a result of overconfidence bias investors may overestimate, not
underestimate, expected returns.
Correct because as a result of overconfidence bias, investors may underestimate risks
and overestimate expected returns and/or hold poorly diversified portfolios, which may
result in significant downside risk.

Answer 36 of 90
Answer

Solution instead of the retention ratio in the

Incorrect because the payout ratio is used
computation of g. 0.048 = 4.80%
g= 0.40 x 0.12 =
496
 Incorrect2.56%.rates.
Correct Answer
Answer Answer
assemblage
management.portfolio
involvesCorrect portfolio
Incorrect
Incorrect Answer Answer
Solution Solution entities
Correct
accidental
considered
trade. Incorrect
power
energy Answer
Incorrect Solution
Here, 39
growth
Correct instead D,
38 Incorrectof
because because of
assemblingbecause 37
management,
management,
becausebecause of (or
because normally to
the 90 90 because of
of nodes) immutable, or verify
because 90 model,
two-year the various Its canceled D,/(r-g)
whereV,= Then, because because
First,
this consensus associated D, D,
spot
foundation risk risk risk transaction
DLT
V,=3.86/(0.15 = =
g= g=bx b=ROE as V, V,= D,
a in the use 0.6b=1- =
2.82% riskbudgeting
number a 3.60 D, follows:
0Earningscalculate
budgeting
notbudgeting
not network tradesfeatures x the the 3.60
=3.60/(0.the153.77/(0.15
impliedcurve or processes 0.x40 intrinsic
characteristics. x (1 current
is unchangeable, (1.072) x
is only only mechanism with
activity,
+g) Gordon 0.12= = the (1.048)
simply can ofthe can retention
spot riskapplies appliesto to agree - 0.60 growth
value -
be perspectivebusinesS applies
portfolio
enable high
be underlying 0.072) = growth 0.072= 0.072) - year0.048) =
rate
thecalculated activities undone and $3.86 per
on electricity
the rate rate dividend $3.77
one-year
to to
to is = = =
497 is: both a and also model 7.2% share
management. management. both both common the creation $49.49 = g: $46.15 $36.96
(1.0231 process only
immutability
DLT (1
as that
or
business DLT is
businessbusiness to - can not
the securities, by usage.generally
forward business requires
of calculate Dividend be
x statesubmitting adjusted
geometric by records
1.0282) management calculated
management
management which
of
rate which or the of require
huge payout
transactions that intrinsic by
one average = portfolio ledger. the the
(1
an amounts using
can computer equal are, massive ratio)
year + value growth
Z)', be and and and for the
from of management and
Z:the collated
portfolio of
means the amounts = Gordon
= computer
rate.
offsetting most
forwara
now. 0.0256 D
into part,
is
= of used
an
 Incorrectbecause the incorrect forward rates are used: (1.0282 x1.0297) = (1
2.890%,
+Z:)', Z: = 0.0289 =

of90
Answer40
Answer

Solution
Correct because for parallel shiftsin the benchmark yield curve, yields at all maturity
segmentsof the curve move the same in both direction and magnitude and the curve
Sestains its shape (no flattening or steepening). As a result, key rate durations at all
urity segments will indicate the same interest rate sensitivity as effective duration, the
sureof interest rate risk in terms of a parallel shift in the benchmark yield curve.
rrect because modified duration is a yield duration (rather than a curve duration)
isticthat does not measure a bond's sensitivity to a change in the benchmark yield
curve.
Incorrect because Macaulay duration is a yield duration (rather than a curve duration)
statistic that does not measure a bond's sensitivity to a change in the benchmark yield
curve.

Answer 41 of 90
Answer

Solution
total assets
Incorrect because book value reflects the difference between a company's
The book value of a
and total liabilities and not expectations regarding future earnings.
decisions of its
company's equity reflects the historical operating and financing
management. expectations of
Correct because market value reflects the collective and differingcompany's future cash
of the
investors concerning the amount, timing, and uncertainty
change ina company's earnings forecast will change investors
flows, and an unexpected
expectations. between the company's total assets
Incorrect because book value reflects the difference
future earnings. The book value of a
andtotal liabilities and not expectations regarding financing decisions of its
and
company's equity reflects the historical operatingequity reflects these decisions as well as
management. The market value of the company's
expectations about the company's future cash flows
investors' collective assessment and
investment opportunities.
generated by itspositive net present value

Answer 42 of 90
Answer

Solution
rating, the
the higher the senior unsecured
incorrect because as a general rule, issuers have lower senior
willbe. Speculative grade
Smaller the notching adjustment notching adjustments.
Unsecured ratings and hence larger the higher the senior unsecured rating, the
rule,
correct because as a general issuers have lower senior
adjustment will be. Speculative grade
Smaller the notching notching adjustments.
unsecured ratingS and hence larger higher the senior unsecured rating, the smaller
the
COrrect because as a general rule, Speculative grade issuers have lower senior
adiustment will be.
die notching notching adjustments.
unsecured ratingps and hence larger

498
 Answer 43 of 90
Answer

Solution
fee based on beginning-ofyear AUM as
Incorrect because it calculates the management
2% $1.0 milllon.
opposed to end-of-year AUM $50 millon
milllon 20% $1.8 milllon.
Incentlve fee ($60 -$50- $1)millon
Total fees $1.0 milllon + $1.8 $2.8 millon.
Correct because management fee end of year AUM Nmanagement fee $60 million
29% $1.2 millon; where end of year AUM begnning of year AUM x (1+
annual return)
$50million x 1.20e $60 million
Incentive fee (end of year AUM - beginning of year AUM - managemernt fee) x incentive
fee ($60 - $50- $1.2) millilon x 20% $1.76 millon.
Total fees management fee +incentve fee $1.2 milllon + $1.76 milllon $2.96 million
Incorrect because it fails to adjust the Incentive fee for the management fee:
management fee $60 millon x2% =$1.2 mllon. Incentive fee ($60 -$50)
million x 20% = $2.0milllon incentive fee.
Total fees = $1.2 million + $2.0 milllon = $3.2 milllon.

Answer 44 of 90
Answer

Solution
Incorrect because the formula converts from annual to quarterly
compoundíng:
(1+ (APR/1))' =(1 + (APR/4))
(1+ (0.43)) = (1+(APR/4))"
APR # 0.042324 x 4.23%.
Correct because the formula to convert fromn
compounding is: semi-annual to quarterly
(1 +(APR/2))'= (1 + (APR/4))
(1+ (0.043/2)) =(1 + (APR/4)
APR =0.042771 4.28%.
Incorrect because the formula converts from
quarterly to semi-annual
(1+ (APR/2)) =(1 + (APR/4)) compounding:
(1+ (APR/2)) =(1 +
(0.043/4))4
APR 0.043231 z
4.32%.
Answer 45 of 90
Answer

Solution
Correct because over the period the
that the company interest
credit quality. is worse positioned toservicecoverage ratio decreased, which
its debt. Ahigher indicates
ratio indicates higher
Interest coverage ratio is
calculated as EBITDA/Interest expense and
Operating income +Depreciation and EBITDA=
amortization, hence the ratios are:
499
 Interest coverage: 590/120 = 4.92 4.9x;
Year 2: EBITDA: 217 + 416 =
633 = Interest
Incorrect because EBIT (1.e., operating income) coverage:
is used instead of 633/155to 4.08 x 4.1x.
=
leulate the interest coverage ratio. If the EBITDA
EBIT/Interest expense, the ratios are: interest coverage ratio is calculated as
Year 1: 168/120 = 1.4x;
Year 2: 217/155 = 1.4x.
This stable ratio would
Incorrect because over the period imply no change to the
company's creditworthiness.
the interest coverage ratio
lower] ratio indicates higher credit quality. decreased and a higher [not

Answer 46 of 90
Answer

Solution
Incorrect because when the underlying is below the put
be in the money. exercise price, the option issaid to
Incorrect because when the underlying is precisely at the
to be at the money. exercise price, the option is said
Correct because when the underlying is higher than the
option, the option said to be out of the mone
is exercise price of the put

Answer 47 of 90
Answer

Solution
Incorrect because the present value (PV) of Preference Share 1 is greater than the of
Preference Share 2. That is, the present value (PV) of a non-callable, PV
perpetual preference share is solved using the equation: Vo = Do/ r, non-convertible,
dividend; r=required rate of return on the stock. Therefore the PVwhere:
D, = current
of Preference Share 1=
$6/0.08% = $75.00, which is greater than the PV of Preference Share 2 = $8/0.11
$72.73.
Incorrect because the present value (PV) of Preference Share 1 is greater than the PV of
Preference Share 2. That is, the present value (PV) of a non-callable, non-convertible,
perpetual preference share is solved usingthe equation: V = D./r, where: D, = current
dividend; r= reguired rate of return on the stock. Therefore the PV of Preference Share 1 =
$6/0.08 = $75.00, which is greater than the PV of Preference Share 2 = $8 /0.11 $72.73.
Correct because the present value (PV) of a non-callable, non-convertible, perpetual
preference share is solved using the equation: V, = Do/r, (where: D, = current dividend; r=
required rate of return on the stock. Therefore the PV of Preference Share 1 - $6 /0.08 =
S75.00, which is greater than the PV of Preference Share 2 =$8/ 0.11 $72.73.

Answer 48 of 90
Answer

Solution
Incorrect because this is the definition of backwardation.
Incorrect because this is neither contango nor backwardation.
Lorrect because when a commodity market is in contango, futures prices are higher than
the spot price.

500
 Year 1:EBITDA: 168 +422 =590 » Interest coverage: 590/120 =4.92 x 4.9x;
Year 2: EBITDA: 217 +416 = 633 ’ Interest coverage:633/155 = 4.08 4.1x.
Incorrect because EBIT (.e., operating income) is used instead of EBITDA to
iulate the interest coverage ratio. If the interest coverage ratio is calculated as
EBIT/Interest expense, the ratios are:
Year 1: 168/120 = 1.4x;

Year 2: 217/155 1.4x.

Thisstable ratio would imply no change to the company's creditworthiness.
Incorrect because over the period the interest coverage ratio decreased and a higher [not
lower] ratio indicates higher credit quality.

Answer 46 of 90
Answer

Solution
Incorrect because when the underlying is below the put exercise price, the option is said to
be in the money.
Incorrect because when the underlying is precisely at the exercise price, the option is said
to be at the money.
Correct because when the underlying is higher than the exercise price of the put
option, the option is said to be out of the mone

Answer 47 of 90
Answer

Solution
Incorrect because the present value (PV) of Preference Share 1 is greater than the PV of
Preference Share 2. That is, the present value (PV) of a non-callable, non-convertible,
perpetual preference share is solved using the equation: V = Do/ r, where: D, = current
dividend; r= required rate of return on the stock. Therefore the PV of Preference Share 1 =
S6/0.08%= $75.00, which is greater than the PV of Preference Share 2=$8 /0.11 x
$72.73.
Incorrect because the present value (PV) of Preference Share 1 is greater than the PV of
Preference Share 2. That is, the present value (PV) of a non-callable, non-convertible,
perpetual preference share is solved using the equation: V, = Do/r, where: D, = current
dividend; r= reguired rate of return on the stock. Therefore the PV of Preference Share 1 =
$6/0.08 = $75.00, whích is greater than the PV of Preference Share 2 = $8 /0.11 z $72.73.
Correct because the present value (PV) of anon-callable, non-convertible, perpetual
preference share is solved usingthe equation: V, =Do/r, (where: D, =current dividend;r=
required rate of return on the stock. Therefore the PV of Preference Share 1 = $6 / 0.08 =
$75.00, whích is greater than the PV of Preference Share 2 =$8/ 0.11 x $72.73.

Answer 48 of 90
Answer
Solution
Incorrect because this is the definition of backwardation.
Incorrect because this is neither contango nor backwardation.
Lorrect because when a commodity market is in contango, futures prices are higher than
the spot price.
500
 Answer 49 of 90
Answer

Solution
Incorrect because it is the median of thebonds' durations. (3.2+7.6)/2 =5.4
Incorrect because it is the arithmeticmean (average) of the bonds' durations.
(3.2+7.6+12.4+1.5)/4 6.2
Correct because the duration of a portfolio is the weighted average of the bonds'
durations in which the weight for each bond is its contribution to the portfolio's value, as
follows:
Duration,prtali w.ond XDurationond., Where,
wmn= Value,.n/Value,prtili
In this case, value of the portfolio is 1.2 +3.4 + 2.9+ 1.6 =$9.1 million, and the
portfolio duration equals (1.2/9.1 x 3.2) + (3.4/9.1 x 7.6) + (2.9/9.1 x 12.4) +
(1.6/9.1 x 1.5)= 0.4220+ 2.8396 + 3.9516 + 0.2637 7.5.

Answer 50 of 90
Answer

Solution
Incorrect because under co-investing, the investor invests in assets indirectly through
the fund but also possesses rights (known as co-investment rights) to invest directly
in the same assets.
Incorrect because fund investing can be viewed as an indirect method of investing in
alternative assets. In addition, under co-investing, the investor invests in assets indirectly
through the fund but also possesses rights (known as co-investment rights) to invest
directly in the same assets.
Correct because fund investing can be viewed as an indirect method of investing in
alternative assets. In addition, under co-investing, the investor invests in assets indirectly
through the fund but also possesses rights (known as co-investment rights) to invest
directly in the same assets.

Answer 51 of 90
Answer

Solution
Incorrect because FCFEis ameasure of dividend-paying capacity.
Incorrect because FCFE increases with an increase in the firm's net borrowing.
Correct because dividends, a discretionary cash flow from financing activities, have no
bearing on a firm's FCFE, as can be seen from the formula: FCFE = CFO - FClny + Net
borrowing,
Answer 52 of 90
Answer

Solution
Correct because the price below which the investor will receive a
calculated using the equation for calculating maintenance margin. margin can be
call

Maintenance margin =Bquity + Market value=

5.000+(P»300) -(30%300)P»30o=30%5,000+(x300)-(30×300)x300=30%
Solving forPrice, P= $19.05
501
 Incorrect because this answer is derived by using the
total purchase price of the stock
instead of the margin loan.
(P*300)-(30×300)Px300=30%(x300)-(30×300) x300=30%
P= $23.08
Incorrect because this answer is derived by subtracting the equity instead of the
numerator
margin loanin the

(Px300)-5,000P× 300=30%(x300)-5,000x300=30%
P= $23.81

Answer 53of 90
Answer

Solution
lncorrect because unlike futures contracts, forward contracts are not standardized.
Tanorrect because forward contracts are not marked to market like futures contracts.
Correct because futures contracts differ from forward contracts in that they have
ctandard terms, and are traded on a futures exchange, whereas forward contracts are
traded over-the-counter.

Answer 54 of 90
Answer

Solution
Incorrect because portfolio construction is part of the execution step.
Correct because performance measurement, along with portfolio monitoring and
rebalancing, is part of the feedback step.
Incorrect because developing the investment policy statement is part of the
planning step.

Answer 55 of 90
Answer

Solution
Correct because the value effectthat is, stocks with below-average price-to- earnings
and market-to-book ratios and above-average dividend yields have consistently
Outperformed growth stocks over long periods-is a cross-sectional anomaly.
not a cross-sectional
Incorrect because overreaction effect isa time-series anomaly,
anomaly. where a closed-end fund
Incorrect becausea closed-end fund discount is an anomaly
cross-sectional anomaly.
not a
rades at a discount from its net asset value. It is

Answer 56 of 90
Answer

Solution the
the calculation of covariance instead of
Incorrect because the variances are used in 0.090 x 0.450= 0.0025.
slandard deviations:Cov,, = 0..0o, = 0.0625 x
Cov, =puo.o,, where
Orrect because covariance is calculated as
between two stocks
py= correlation coefficient Stock 1
returnsfor
o,= variance of Stock 2
for
o, = variance of returns
502
 Plugging in the values
Cov, 0 0625 0 090 0450 - 00338
Incorrect because the covariance is incorrectly multiplied by 2 in the calculation: Cov,
poe 2 0.0625 0 090 0450- 00675

Answer 57 of O
Anewer

Solution
Incorrect because this describes a reverse stock split which involves a reduction in the
number of shares outstanding with a corresponding increase in share price
Correct because a stock split involves an incTease in the number of shares
outstanding with a consequent decrease in share price.
Incorrect because a stock split involves an increase in the number of shares
outstanding with a consequent decrease in share price.

Answer 58 of 90
Answer

Solution
Correct because credit card receivable-backed securities are
have a laockout period during which the only cash flows paid tonon-amortizing loans. They
investors are based on
finance dharges and fees. When the lockout period is over, principal
istributed to investors in periodicpayments. In contrast, principal ispayments are
received monthly in
automobile loan-backed securities.
Incorrect because for credit card
the lockout period is reinvested inreceivable-backed securities, principal received during
additional credit card receivables. After the lockout
period. principal payments are used to pay off the
Incorrect because with credit card receivable-backed outstanding principal.
not distributed to investors as a balloon securities principal payments are
payment. After
received is distributed as part of the periodic payments the lockout period, the principal
made to investors.
Answer 59 of 90
Answer

Solution
Incorrect because if investors believe an asset
to develop an market is relatively inefficient, they may try
independent estimate
likely to be accepted as reflecting of intrinsic value, indicating market prices are not
intrinsic
Correct because if investors believe a values.
market is highly efficient, they will
market prices as accurately reflecting intrinsic usually accept
Incorrect because if investors believe an asset values.
to develop an market is relatively inefficient, they may
independent estimate
likely to be accepted as reflecting of intrinsic value, indicating market prices are not try
intrinsic values.
Answer 60 of 90
Answer

Solution
Incorrect because if securities markets are
implication is that active trading, whether weak-formtoand semi-strong-form efficient, the
attempting exploit price patterns or public
information, is not likely to generate abnormal
analysis requires costly information, returns. And,
this analysis can be although fundamental
profitable in terms of
503
 generating abnormal returns if the analyst creates a
comparative
thissinformation; however, this is not "most likely". Portfolio advantage
managers cannotwith respect
beat the to
consistent basis
market on a
Correct because fundamental analysis is necessary in a wel1-functioning market
because this analysis helps market participants understand the value implications of
information.
Incorrect because fundamental analysis is the examination of publicly available
informationand the formulation of forecasts to estimate the intrinsic value of assets.
Instead,investors using technical analysis attempt to profit by looking at patterns of prices
and trading volumes.

Answer61 of 90
Answer

Solution
Correct because the combination of the risk-free asset and a risky asset can result in a
botter risk-returntrade-off than an investment in onlyone type of asset because the risk
free asset has zero correlation with the risky asset. The combination is called the capital
allocation line.
Incorrect because the curve that lies above and to the right of the global minimum
Uariance portfolio is referred to as the Markowitz efficient frontier because it contains all
nortfolios of risky assets that rational, risk-averse investors will choose. That is, the
Markowitz efficient frontier only contains risky assets, while the capital allocation line is a
combination of the risk-free asset and a risky asset.
number of
Incorrect because the capital allocation line (CAL) is comprised of an unlimited
risk-return pairs or portfolios. Which one of these portfolios should be chosen withby an
indifference curves from utility theory the
investor? The answer lies in combining
gives us the utility function or
capital allocation line from portfolio theory. Utility theoryallocation line gives us the set of
the indifference curves for an individual, and the capital
curves on the capital
feasible investments. Overlaying each individual's indifference
for that investor. Therefore, the
allocation linewill provide us with the optimal portfolio risk-free asset and a risky asset.
investor's indifference curve is not the combination of the

Answer 62 of 90
Answer

Solution
found by the formula:
Correct because the value of the bond is (1 +r
PV=[PMT/(1 +r)]+ [PMT/(1+r)]+.+ [(FV +PMT) /
where:
bond
PV=present value, or the price of the
PMT = coupon payment per period par value of the bond
FV=future value paid at
maturity, or the
required rate of returnper period
r=market discount rate, or
periods to maturity
N= number of evenlyspaced
for I
change in value after one year can be calculated by solving the
Alternatively, the yield () with
calculating the new value with a 100 basis point change in100 = $2.50, FV =
and (3 x 2) = 6,PMT = (5%/ 2) x
following calculator inputs; N= to 2.8675%, or 2.868%. Annualized, I= 2.868 x 2
equal
$100, PV = $98, Solve I, is dropsby 100 bps, the new yield
to maturity is
5.736%. If the yield to maturity semi-annual basis.
= 4.736%, or 2.368% on a
equal to 5.736 - 1.00=
and the new yield to
maturity (or I) is
bond after one year PMT = $2.50, FV =
The price of the calculator inputs: N =(2 x 2)= 4,
computed using the following

504
 value is equal to
$100, 1= (5.736% - 196) /2-2.368%. Solvingfor PV, the new
$100.49a.
$98.00
Therefore, the change in value of the bond, onan absolute basis -
$100498 $2.498, rounded to $2.50.
Incorrect because it fails to modity the term rematning to reflect the passage of one year,
where the price ofthe bond after one year is computed as:
PV-(PMT/(1*l" |PMT/(1 +r|+ . ||FV+ PMT) /(1 r ; where:
PV present value, or the price of the bond
PMT future
coupon payment per period
value paid at maturity, or the par value of the bond
FV
r market discount rate, or required rate of return per period
N number of evenly spaced perlods tomaturity
The change invalue after one year can be caleulated by solving for I and
calculating the new value with a 100basis point change in yield ()with the
following calculatorinputs; N (3 x 2)=6, PMT (5% / 2) ×100 =$2.5, FV=
$100,PV= $98, Solve for I is equal to 2.868%. Annualized, I =2.868 x 2 =5.736.
Iftheyield to maturity drops by 100 bps, the new yleld to maturity is equal to
5.736 - 1.00 = 4.736,or 2.368 on a semi-annual basis.
The price of the bond with the new yieldto maturity (or I), without adjusting the
time period iscomputed using the following calculator inputs: N=6, PMT =$2.5,
FV=$100, l= (5.736% - 1%) /2 = 2.368%. Solving for PV,the new valueis
equal to $100.73.

Therefore, the change in value of the bond, on an absolute basis = $98.00

$100.73|= $2.73.
Incorrect because it uses the annual interest rate and does not adjust back to semi
annual, where the price of thebond after one year is computed as: PV =[PMT +(1 +r))+
[PMT +(1 + r)]+...+ [(FV +PMT) + (1 +); where:
PV= present value, or the price of the bond
PMT =coupon payment per period
FV= future value paid at maturity,or the par value of thebond
r=market discount rate, or required rate of return per period
N= number of evenlyspaced periods to maturity
The change in value after one year can be calculated by solving for I and
calculating the new value with a 100 basis point change in yield () with the
following calculator inputs; N= (3 x 2) =6, PMT = (5% + 2) x 100 = $2.5,FV =
$100, PV= $98, Solve for lis equal to 2.868%. Annualized, I = 2.868 x 2 = 5.736
or 5.374%. If the yield to maturity drops by 100 bps, the new yield to
maturity is
equalto 5.74 - 1.00 = 4.74%.
The the price of the bond using the annual rate of 4.736% after one year
is
computed using thefollowing calculator inputs: N=4, PMT =$2.5, FV= $100, I =
(5.74% - 1%)= 4.74%.Solving for PV, the new value is equal to $92.01.
Therefore, the change in value of the bond, on an absolute basis =$98.00 -
$92.02 = $5.98.

Answer 63 of 90
Answer

Solution
Incorrect because the 1 bp reduction and increase is wrongly applied to the coupon
not the yield-to-maturity: rate,

PVBP = (1,002.58 - 997.42) / 2 = 2.58,

505
 whereby PV:FV =1,000; PMT =10; N=30; 1/Y =0.99%; CPT PV =1,002.58 and
PV.: FV = 1,000;PMT = 10; N= 30; 1/Y =1.01%; CPT PV = 997.42.
Correct because:

PVBP = [(fullprice calculated by lowering the yield-to-maturity by 1bp) - (full

price calculated by raising the yield-to-maturityby 1bp)] / 2
PVBP =(1,055.90 - 1,050.42) /2 =2.74,
whereby PV:FV= 1,000; PMT =10;N=30; I/Y =0.79%; CPT PV = 1,055.90 and
PV.: FV =1,000; PMT = 10;N=30;1/Y = 0.81%; CPT PV = 1,050.42.
Incorrect because the 1bp is wrongly multiplied with the 30-year tenor of the bond and
the par value:

PVBP = 30 x 0.01% x 1,000= 3.00.

Answer 64 of 90
Answer

Solution
Incorrect because asset-based valuations work well for companies that do not have a high
proportion of intangible or "off the books" assets.
Incorrect because companies with assets that do not have easily determinable market
(fair) values--such as those with significant property, plant, and equipment--are very
dificult to analyze using asset valuation methods.
Correct because asset-based valuations work well for companies that do not have a high
proportion of intangible or "off the books" assets and that do have ahigh proportion of
current assets and current liabilities.

Answer 65 of 90
Answer

Solution
Incorrect because in a shelf registration, the corporation makes all public disclosures
that it would for a regular offering, but it does not sell the shares in a single
transaction. Instead, it sells the shares directly into the secondary market over time,
generally when it needs additional capital. directly to a small
Correct because in a private placement, corporations sell securities
investment bank. Qualified
group of qualified investors,usually with the assistance of an
the risks that they
investors have sufficient knowledge and experience to recognize Most
responsibly. countries allow
assume, and sufficient wealth to assume those riskS disclosure as is
public
corporations to do private placements without nearly as much
required for public offerings.
of securities in which the
Incorrect becausea best effort offering is a publicoffering
undersubscribed, the issuer will not
investment bank acts only as broker. If the offering is
offering, the issuer generally makes a very
sell as much as it hoped to sell. Before a public inherent in it, and of the uses to which the
detailed disclosure of its business, of the risks
new funds willbe placed.

Answer 66 of 90
Answer

Solution
Incorrect because along call = long put + long asset + short risk-free bond.
that:
Lorrect because theput-call parity relationshipstates
So+po=co+x(1+r)0+0=0+(1+)¢
 That is, risk-free bond.
long put long call +long
Long asset +
Rearranging terms gives:
risk-free bond.
put + long asset +short risk-free bond.
Long call = long short
put + long asset +
Incorrect because long call - long

Answer 67 of 90
Answer

Solution
high demand for bonds,spreads willmove tighter. Wider
Correct because in periods of whereas narrower spreads help bond performance.
spreads hurt bond performance, bondperformance, whereas
narrower
Incorrect because wider spreads hurt
spreads help bond performance.
conditions willpush investors to desire a
Incorrect because weakening economic credit spreads wider. Wider spreads hurt bond
greater risk premium and drive overall help bond performance.
performance,whereas narrower spreads

Answer 68 of 90
Answer

Solution
Correct because the yield spread in basis points over an actual or interpolated
government bond is known as the G-spread. Using the data provided, the yield for the
Canadian Government Bond is found by 101 =3 / (1 +r) + 103 /(1 + r).r= 2.48%. While
the yieldon the corporate bond is 102 =5/ (1 +r) + 105/ (1 + r)². r=3.94%. Gspread =
3.94 - 2.48 = 1.46 or 146 basis points.
Incorrect because the yield spread in basis points over an actual or interpolated
government bond is known as the G-spread. This answer incorrectly uses the diference
between the coupon rates 5.00 - 3.00 = 2.00 or 200 basis points.
Incorrect because the yield spread in basis pointsover an actual or interpolated
government bond is known as the G-spread. This answer is only the yield of the Canadian
Government Bond. 101 =3/ (1 +r) +103/ (1 +r).r=2.48% or 248 basis points.

Answer 69 of 90
Answer

Solution
Correct because for risk relative to a benchmark, the measure could be
tracking error. Further, an expected tracking risk of 2% would tracking risk, or
the index return imply areturn within 4% of
as a one standardapproximately 95% of the time. Remember that tracking risk is stated
deviation measure.
Incorrect because measures of absolute risk include the
of returns and value at risk. For variance or standard deviation
must be no more than ¥1 billion. example, the 12-month 95% value at risk of the porttollo
Incorrect because maintaining cash is an IPS
constraint,
not a risk objective.
Answer 70 of 90
Answer

507
 Solution
Incorrect because the put seller's payoff (not
=-Max(0, $40.00 - $35.00) = -$5.00. profit) is calculated as: -Max(0, X- S)
Correctibecause the put sellerr's profit is: Il =
X= exercise price
-Max(0, X- S) + p.,where
S, = strike price
p.= price of put option
Plugging in the values:

|=-Max(0, $40.00 - $35.00) +$1.00 =-$4.00.

Incorrect because ethe put buyer's (not seller's) profit is calculated as: Max(0, X- S.) -p,
$40.00 - $35.00) - $1..(00 = $4.00.
= Max{0,

90
Answer 71 of
Answer

Solution
Incorrect because derivatives usually take their values from the underlying by
constructing a hypothetical combination of the derivatives and the underlyings that
eliminates risk. With the risk eliminated, it follows that the hedge portfolioshould earn the
risk-free rate, and not zero return.
Correct because derivatives usually take their values from the underlying by
constructing a hypothetical combination of the derivatives and the underlyings that
eliminates risk. This combination is typically called a hedge portfolio. With the risk
eliminated, it follows that the hedge portfolio should earn the risk-free rate.
Incorrect because even though the portfolio consists of underlyings and derivatives on
those underlyings, the risk has been neutralized as it is a hedge portfolio. It follows that the
return should be equal to the risk-free rate.

Answer 72of 90
Answer

Solution
Correct because forward price = F(T)= (So- y + 0)(1 +r)"= (underlying price - interest
forward
earned + storage cost) x (1 + risk free rate)^(timeto expiration). Therefore, the
asset.
price will increase with an increase in storage costs of the underlying
price -
Incorrect because forward price = Fo(T) = (So- y+ 0)(1 + r=(underlyingTherefore,
rate)^(time to expiration). the
interest earned + storage cost) x (1 + risk free interest earned on the
forward price willincrease with a decrease, not increase, in
underlying asset.
-0))(1 +r)T= (underlying price -
Incorrect because forward price = F.(T) = (So- (y expiration).
to Therefore, the forward price
Convenience yield) x (1 + risk free rate)^(timeconvenience yield of the underlying asset.
increase withadecrease,
Will not increase, in

Answer 73 of 90
Answer

Solution
put provision gives the bondholders the right to sell the bond back to
orrect because a has value
pre-determined price on specified dates. Because a put provision
Ssuer at a bond will be higher than the price of an
tO the bondholders, the price of a putable put provision. Similarly, the yield on a bond with
the
OLnerwise similar bond issued withoutyield bond.
be lower than the on an otherwise similar non-putable
put provision will
508
 convertible bond offers several
perspective, a provision is
investor's the conversion
Incorrect because from the -convertible bond. Because is higher thanthe price of an
advantages relative to a non price of a convertible bond Similarly, the yield on a
the
valuable to bondholders, without provision. bond
bond the conversionotherwise similar non-convertible
similar an the
nerwse than the vield on are convertible on
convertible bond is lower contingent write-down provisionsconversion is automatic if
Correct because bonds with contingent convertible bonds
(CoGos),
downside. In the case of immediately convert into equity. Because
cases, the CoCos CoCos force
specified event occurs. In such of the bondholdersbut automatic,
than otherwiee
the conversion is not at the option reason, CoCos must offera higher yield
bondholders to take losses. For this
similar bonds.

Answer 74 of 90
Answer

Solution
typically less detailed
Correct because issuers' disclosures about operating costsare
for different geographic
than revenue disclosures. Rather than modeling costs separatelyforced to use more
regions, business segments, or product lines, analysts are often
aggregated forecast objects such as consolidated financial statement lines (e.g., cost of
sales, SG&A) or summary measures like EBITDA margins on a consolidated or segment
basis.
Incorrect because issuers' disclosures about operating costs are typically less
detailed than,not as detailed as, revenue disclosures.
Incorrect because issuers' disclosures about operating costs are typically less
detailed than revenue disclosures.

Answer 75 of 90
Answer

Solution
Incorrect because this describes a fair value
hedge designation applies when a derivative hedge, not a net investment hedge. A fair value
is deemed to offset the
of an asset or liability. fluctuation in fair value
Incorrect because this describes a cash
Derivatives designated as absorbing theflow hedge, nota net investment hedge.
liability such as foreign exchange, interestvariable
rates,
cash flow of a floating-rate asset or
or
flow hedges. commodities are referred to as cash
Correct because net investment hedges
derivative such as an FX swap or forward isoccur when either a foreign currency bond or a
of a foreign used to offset the exchange rate
operation. risk of the equity
Answer 76 of 90
Answer

Solution
Correct
aperiod because funds sometimes impose a gate,
of time.
fund with Investors should be aware of theirwhich limits or restricts redemptions tor
Incorrect restrictive
because provisions.
a gate limits or
liquidity needs before investing in a
Incorrect because a gate limits or restricts redemptions, not inflows,
restricts redemptions, not fora period of ume.
leverage,for. a period of time.
 of90
Answer77
Answer

Solution
Correct because
the procedures section explains the steps to take to keep the IPS
currentand|the
procedures to follow to respond to various contingencies.
the investmentguidelines section provides information about how
Incorrectbecause from
should be executed and on specific types of assets excluded investment, if any.
policy evaluation and reviewsection provides guidance on
Incorrect because this results.
investment
obtaining feedback on

90
Answer 78 of
Answer

Solution
issued internationally,outside the
Incorrect because Eurobonds are bonds
iurisdiction of any single country to bypass the legal, regulatory, and tax constraints
are not
The bonds registered with the SEC
imposed on bond issuers and investors.
classified as Eurobonds.
Incorrect because global bonds are bonds that are issued simultaneously in the
domestic bond market.
Eurobond market and in at least one
are incorporated in another country are
Correct because bonds issued by entities that
issued by a South Korean company in the
called foreign bonds. Therefore, the bonds
bonds.
United States are known as foreign

Answer 79 of 90
Answer

Solution
strike price and the forward price in the
Incorrect because this answer mistakenly flips the answer is calculated as po = 0.0500+
incorrect
equation p,=Co+ [X- F(T1/ (1+ r). This
(1.2000 - 1.2250) /(1 + 0.05)2 = 0.0273. expressed as:
Correct because put-call forward parity can be
F(T)(1 + )T+p = Co +X(1 + r)T, F(T)discounted at the risk-free
where F(T)(1 + r)Tisthe present value of underlying at t= 0, co is the price of
rate, p. is the price of the put option on the r)Tisa risk-free bond that pays
the calloption on the underlying at t=t=0,T.X(1 +
at
the amount of the exercise price X
In other words, under put-call parity,at t = 0 the price of the long underlying
price of the long call plus the risk-free
asset plus the long put must equal the
asset.

Rearranging the formula yields:

F(T)(1 + r)T-X(1 +r)T=co - po

[F.(T) -X/(1 +r)r= Co - Po
po=Cot [X- F(T)]/(1 +r)
Substituting in yields:
1.2000) / (1+ 0.05) = 0.072 7.
po =0.0500 + (1.2250 -

10
chtures Answer
Correct Answer
Solution exchange-traded
derivatives. with
market
regulatoryexchange-traded Incorrect
whichtransparency exchanges
transparency,
than exchange-traded Incorrect
degreederivatives. Answer
lower regulatorywhich market withCorrect Answer
e Solution and rights,
management. andCorrect
companies objectives. Answer
82 lower investor'values,
notexcluding
s Incorrect invests
returns.
primarilytrends Answer
gned
because of
means degree lower according Incorrect
Solution price.
/(1
Incorrect
transparency of means 81 investment owned
90 because privacy transparency because of filing 80 +r)".
is transparency.
bodies. and bodies.
transparency. because such in that In
he that 90 Whi of
that (including moral
by
companies because assets on
le because
in shareholder as relate 90 Thisother
because
to
to regulatorywhich market of Alternatively,
over-the-counter
So, full with the its
ddition
duce over-the-counter
So, full its managers exclusionor thematic
means shareholderclient, thatexpected incorrect
words,
information
over-the-counter as as own ethical negative positively
over-the-counter
lower information thematic this
many
In bodies. transparency many with that already
ofthe to In stewardship
proposals there it
contrast, that contrast, have of
investing answer failsfails
risk the the respect beliefsdeviate
gambling,
transactions transparency.because transactions
are to
screening meet socialinvesting
high So, full to
client engagement toto
of on on orESG dividetake
derivatives information derivatives be no in from is
a exchange all derivatives.
over-the-counter as exchange all or to a environmental an
does issues.
quality
ral derivatives
transactions over-the-counter policies.entering is calculated the
in derivatives
many transactions may clear ESGcompany' s
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havecharacterized markets
havecharacterized With standards investment
is all some tobacco-related
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transactions is conversations other ofdirected investing,
disclosed are derivatives exchange disclosed 0.0500 of
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ver proxy of excludingbehavior equation
said will in said will aboutentering or with
rities, business. proxy in +strike
the market retain OTC market retain by agent norms. an (1.2250
to to by markets to to objectives,
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ct exchanges have have marketsis have a investment
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Exclusion - +
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company a 1.2000)|X-minus
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are will degree dialogue these
ife. degree investment F.forward
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clude said on of
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to of behalf and
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are anon
a
 ntalmarpin Ao09% nttlal maeate a hlty
ates evengeater
haivutof
manginallowx
maket vahe dees
ilthe.wollateral'
mangnofxafety
becauxe naddton to he hgh qulty ot
Iwoet
eatures dexignel
to redee wn s inat
ovon of collateral n eN Ro theanhehnged,
fiature( the
magin allowN
margin The rvpo borowe, a mag of alety i heollateal'a
mket vaue
lender, otthe cash
declines high qually of undelying aetea, tepn inbude
Inorret because n
addition to the theottat ie One ouh
reduce the risk ol a collateal shotall ove
designed to exhgod, knwn as niial
prOvision of ocollateral in excen of the canh
oatues
featureis the allows for NOme wosenlny nmket value, and thus prvides
repo margin wket
margin The collateral'u value de ines
tothe vash lender
a margIn of safety itthe
only

90
Answer83of
Answer

A
Solution
are still in an
which data are unavallable or which
Incorrect because for new industries for to
industry structure can help pointapplied,
arly,unprofitable stage, the Porter analysis of framework can stillhe
Porter'sPlve lorce's
notential profitability levels. Hence,new Industrles.
and would be especially useful, for when
because assessing the barriers toexiting an Industryshould he considerednew
Incorrect competitors, not when assessing the threatof
assessing the rivalry amongexisting costly,such as shutting down natural
entrants. If exiting an industry is difflcult or low profitablity may remain in the industry
resource-producing assets, companles with
which can result in lingering competitíon.
for much longer than in other industrles,a framework for assessing industry structure
Correct because Porter's Five Forces isprofltabllity measure by Its returns on invested
that determines an industry's long-run
capital.

Answer 84 of 90
Answer
A.
Solution
is [(PV) - (PV.)]/(2 x (ACurve) × (PV)]J.
Correct because the formula for effective duration
0.0025 x 130]
x
In this case EffDur = [132.41- 127.661/[2
4.75/[0.005 x130] =7.30777.3.
100 insteadof the actual current price
Incorrect because it uses the current price of par,
x 0.0025 x 100]
of 130. In this case EffDur = [132.41- 127.66]/[2
4.75 +[0.005 x 100] =9.5. (PV.)]/[(ACurve) x (PV.)]instead of the
Ihcorrect because it omits thedivisor of 2. [(PV) -
correct formulaof [(PV)- (PV.)]/(2 x (ACurve) x (PVoJ.
In this case EffDur = [132.41- 127.66]/[0.002 x 100]
4.75/[0.0025 x 130] = 14.615 14.6.

Answer 85 of 90
Answer
A

Solution
underlying assuming that this was a put
ncorrect because $622.40 is the value of the put buyer at expiration is p, = Max(0, X
the
pdon instead of a calloption. The payoff to
512
 initialmargin.A 100% initial
margin indicates a fully collateralized loan,while a higher
initial collateral protection. This is alternatively considered
indicates even greater loan relative to the initial collateral value. The repo
margin or,haircut of the underlying the cash lender a
worsening in market value, and thus provides
areduction
allowsfor some
margin collateral's market value declines.
safety ifthe underlying securities, repos include
margin of becausein addition to the high quality of
of a collateral shortfall over the contract life. One such
Incorrect
designed to reduce the risk exchanged, known as initial
features ofccollateral in excess of the cashmnarket value, and thus provides the
the provision worsening in
featureis allows for some market value
margin. The
rep0 margin a margin of safety if the collateral's
borrower,
notthe cash
cashlender, repos include
declines. the high quality of underlying securities,
because addition to the contract life. One such
Incorrect reduce the risk of a collateral shortfall over known as initial
features.designed to collateral in excess of the cash exchanged,
the provision of market value, and thus provides
featureis margin allows for some worsening in market value declines.
margin.Therepo margin of safety if the
collateral's
tothe cash lender a

90
Answer83of
Answer
A.
Solution unavailable or which are still
in an
which data are
Incorrect because for new industries for point to
industry structure can help be applied,
the Porter analysis of still
parlv, unprofitable stage, Hence, Porter's Five Force's framework can
notential profitability levels. for new industries. considered when
useful,
and would be especially the barriers to exiting an industry should be
threat of new
Incorrect because assessing competitors, not when assessing the natural
existing
assessing the rivalry among difficult or costly, such as
shutting down
industry
entrants. If exiting an industry is profitability may remain in the
companies with low competition.
resource--producing assets, lingering
than inother industries,which can result in industry structure
for much longer a framework for assessing
Five Forces is invested
Correct because Porter's profitability measure by its returns on
industry's long-run
that determines an
capital.

Answer 84 of 90
Answer
A.
Solution
effective duration is [(PV) - (PV.)]/[2 x (ACurve) x (PV)].
Correct because the formula for x 130]
[132.41- 127.661/[2 x 0.0025
In this case EffDur =
4.75/[0.005 x 130]= 7.3077 7.3. price of par, 100 instead of the actual current price
current
Incorrect because it uses the 127.66]l/[2 x 0.0025 x 100]
[132.41-
of 130. In this case EffDur =
4.75 + [0.005 x 100] = 9.5. (PV.)]/[(ACurve) x (PV)) instead of the
Incorrect because it omits the divisor of 2. [(PV.) -
correct formula of [(PV)-(PV.)]/[2 x (ACurve) x (PVo].
127.66]/[0.002 x 100]
In this case EffDur = [132.41-
4.75/[0.0025 x 130] = 14.615 14.6.

Answer 85 of 90
Answer
A

Solution underlying assuming that this was a

put
value of the
ncorrect because $622.40 is the the put buyer at expiration is p
= Max(0, X
payoff to
Cpaon instead of a call option. The
512
 100% initial margin indicates a fully collateralized loan, while a higher
margin.A This is alternatively considered
initial indicates even greater initial collateral protection.
the initial collateral value. The repo
margin the underlying loan relative to
reductionorhaircut of worseningin market value, and thus provides the cash lender a
a allows for some
margin the collateral's market value declines.
marginof fsafetyif addition to the high quality of underlying securities, repos include
in
Incorrectbecause reduce the risk of a collateral shortfall over the contract life. One such
designedto exchanged, known as initial
features provision of collateral in excess of the cash
feature is the market value, and thus provides the
The repo margin allows for some worsening in collateral's market value
margin.
not the cash borrower, a margin of safety if the
lender,
cash.
declines.
to the high quality of underlying securities, repos include
in addition the contract life. One such
Incorrect because collateral shortfall over
designed to reduce the risk of a known as initial
features provision of collateral in excess of the cash exchanged,
the thus provides
featureis
margin allows for some worsening in market value, and declines.
margin. The repo market value
margin of safety if the collateral's
rto the cash lernder a

90
Answer83 of
Answer

A
Solution which are still in an
industriesfor which data are unavailable or
Incorrect because for new help point to
analysis of industry structure can
Porter
parly,unprofitable stage, the Hence,Porter's Five Force's framework can still be applied,
notential profitability levels.
useful, for new industries. considered when
and would be especially barriers to exiting an industry should be
Incorrect because assessing the threat of new
among existing competitors, not when assessing the natural
assessing the rivalry difficult or costly, such as shutting
down
entrants. If exiting an industry is with low profitability may remain in the industry
resource-producing assets, companies lingering competition.
industries, which can result in
for much longer than in other Forces is a framework for assessing industry structure
Correct because Porter's Five profitability mneasure by its returns on
invested
industry's long-run
that determines an
capital.

Answer 84 of 90
Answer

Solution
(PV)].
because the formula for effective duration is [(PV) - (PV.)]/[2 x (ACurve) x
Correct 0.0025 x 130]
127.66]/[2 x
In this case EffDur =[132.41-
4.75/[0.005 x 1301] = 7.30777.3. actual current price
because it uses the current price of par, 100 instead of the
Incorrect
[132.41- 127.66]/[2 x 0.0025 x 100]
of 130. In this case EffDur =
4.75 + [0.005 x 100] = 9.5.
divisor of 2. [(PV) - (PV.)]/[(ACurve) x (PV)]instead of the
Ihcorrect because it omits the
Correct formula of [(PV) - (PV.)/[2 x (ACurve) x (PVo].
127.66]/[0.002 x 100]
In this case EffDur = [132.41- 14.6.
4.75/(0.0025 × 130] = 14.615

Answer 85 of 90
Answer
A
Solution assuming that this was a put
value of the underlying
Incorrect because $622.40 is the ispr = Max(0,X
of acall option. The payoff to the put buyer at expiration
Opion instead
512
 -S), where Xis the exercise price and S. is the price of the underlying at
the information in the stem we get $47.60
$47.60 =$622.40. expiration.
Max(0,$670 - S-)which yields S, $670 Given
Incorrect because $692.90 is the profit from the option
It is computed as (c - co)+ Xwhere cis the positionadded to the strike Drice
value of the option at expiration,c. is the
purchase price of the option and Xis the
get ($47.60 - $24.70) +$670- $692.90. strike price. Given the intormation in the stem we
Correct because the value or payoff to the call buyer at expiration is C=
where Xisthe strike price, S, is the price of the Max(0,S
underlying at expiration.Given the X)
information in the stem we get $47.60 = Max(0,S -$670). Hence, Sr =$ 670
$717.60. +$47.60 =

Answer 86 of 90
Answer

Solution
Incorrect because the convexity adjustment is subtracted instead of
added:
*-6.2 x 0.003] - [0.5 x 328 x 0.003)
- [-0.0186] - [0.001476]= -0.020076, rounded to -2.01%.
Correct because the percentage price change for this bond is:
%APVNn -AnnModDur x AYield] + [0.5 x AnnConvexity x (AYield):]
= [-6.2 x 0.003] + [0.5 x 328 x
(0.003))
=(-0.0186] + [0.001476] =-0.017124,
Incorrect because 0.5 in the convexity adjustment isrounded
to -1.71%.
omitted:
*[-6.2 x 0.003] + [328 x0.003:]
= (-0.0186] + [0.002952] = 0.015648, rounded to
-1.56%.

Answer 87 of 90
Answer
A
Solution
Incorrect because 109.2 is the return for a
beginning of the period is (30+ 40 + 50) =price-weighted index. The sum of prices at the
120. The sum of price at the end of the period
is (36 +45 + 50) = 131. Hence, the return is
this increase of 9.17%,the index value at year (131/120) - 1) = 0.09166 9.17%. Using
end is 100 x 1.0917 109.2.
Correct because to calculate the index value of an
equal-weighted index, the return for
each security is first calculated using the formula: (ending value / beginning value) -1.
Stock 1: (36/30) -1)= 0.2 = 20%
Stock 2: ((45/50) -1) =-0.1 =-10%
Stock 3: (50/40) -1) = 0.25 = 25%
These returns are then averaged: ((20% - 10% + 25%)/3)
11.67%.
The index value at year end is the beginning index value x
average return =
100 x 1.1167 111.7.
Incorrect because 113.5 is the return for a value-weighted index. The market value at tne
beginning of the period is (30 x 500 +50 x 200 +40 x 300) = 37,000. The market value at
the end of the period is (36 x 500 + 45 x 200 + 50 x 300)=
42,000. The return is
513
 ((42.000/37.000))-) =0. 1351 = 13.51%. Using this return, the index value at year end is
1135
100 x 1.135 =

90
Answer 88 of
Answer

A
Solution
Terrect because the partnership agreement usually specifies that the performance fee is
earned only after the fund achieves areturn known as a hurdle rate. The hurdle rate is a
iimum rate of return, typically 8%. that the GP must exceed in order to earn the
rformance fee. GPs typically receive 20% of the total profit of the private equity fund
her net of any hard hurdle rate, in which case the GP earns fees on annual returns in
cess of the hurdle rate,or net of the soft hurdle rate, in which case the fee is calculated on
he entire annual gross return as long as the set hurdle is exceeded. Hurdle rates are less
common for hedge funds but do appear from time to time.
Incorrect because for most alternative investment funds, particularly hedge funds and
nrivate eguity funds, the GP does not earn aperformance fee until the LPs have received
heir initial investment and the total return generated on the investment has exceeded a
pecifed hurdle rate. Acatch-up clause may be included in the partnership agreement.
Correct because aclawback provision reflects the right of LPs to reclaim part of the GP's
performance fee. Along either waterfall path, if aGP ever accrues (or actually pays itself)
an incentive fee ongains that are not yet fully realized and then subsequently gives back
these gains, an investor is typically able to claw back prior incentive fee accruals and
pavments. Clawback provisions are usually activated when a GP exits successful deals early
on but incurs losses on deals later in the fund's life.

Answer 89 of 90
Answer
A
Solution
Correct because in a one-period binomial model, the risk-neutral probabilities are
determined only by the risk-free rate over the life of the option and the underlying asset's
volatíility (as measured by the up and down gross returns, R. and R).
Incorrect because of the ability to construct a perfect hedge of the option using the
underlying asset, an option's price is independent of investors' risk aversion and the
probability of the underlying price moving up (or down).
Incorrect because of the ability to construct a perfect hedge of the option using the
underlying asset, an option's price is independent of investors' risk aversion and the
probability of the underlying price moving up (or down).

Answer 90 of 90
Answer
A
Solution
Incorrect because based on the Gordon growth model, the justified forward P/E is
calculated by dividing the dividend payout ratio by the difference between the required
rate of return and dividend growth rate. The P/E and the payout ratio appear to be
positively related. This relationship may not be true, however, because a higher payout
ratio may imply a slower growth rate as a result of the company retaining a lower
proportion of earnings for reinvestment.
Correct because, based on the Gordon growth model, the justified forward P/E is
calculated by dividingthe dividend payout ratio by the difference between the required
rate of return and dividend growth rate. The P/E is inversely related to the required rate of
return and positively related to the growth rate; that is, as the required rate of return
increases, the P/E declines, and as the growth rate increases, the P/E increases.

514
 P/E is
growth model, the justified forwardthe required
the Gordon between
Incorrect because, based on dividend payout ratio by the difference
related tothe required rate of
Calculated by dividing the The P/Eis inversely
of return and dividendgrowth rate.
increases, the P/E declines.
rate rate of return
return. As the required