Question 1

A risk analyst is evaluating an investment portfolio using the Fama-French threefactormodel. The analyst regresses thirty years of weekly portfolio returns againstthe three factors of the model. The analyst obtains the following regression results:Alpha 0.10Market coefficient 0.52SMB coefficient 0.18HML coefficient -0.70Assuming all estimated coefficients are statistically significant, which of the following is correct?

Options :

A : indicates that the portfolio moves together with large-cap stocks.

B : indicates that the portfolio moves together with growth stocks.

C : indicates that the portfolio moves together with growth stocks.

Answer: C

Question 2

The Bureau of Labor Statistics has just reported an unexpected short-term increase in high-priced luxury automobiles. What is the most likely anticipated impact on a mean-reverting model of interest rates?

Options :

A : The economic information is long-lived with a low mean reversion parameter.

B : The economic information is long-lived with a high mean reversion parameter.

C : The economic information is short-lived with a high mean reversion parameter.

D : The economic information is short-lived with a low mean reversion parameter.

Answer: C

Question 3

A portfolio has an equal amount invested in two positions, X and Y. The expected excess return of X is 9% and that of Y is 12%. Their marginal VaRs are 0.06 and 0.075, respectively. To move toward the optimal portfolio, the manager will probably:

Options :

A : do nothing because the information is insufficient.

B : increase the allocation in Y and/or lower that in X.

C : increase the allocation in X and/or lower that in Y.

D : not change the portfolio because it is already optimal.

Answer: B

Question 4

If one of the entities in the CDX NA IG index defaults, the CDS index would most likely:

Options :

A : continue with 124 entities, and the notional principal of each entity would remain the same.

B : continue with a replacement entity, with no change to the notional principal.

C : continue with 99 entities, and the notional principal of each entity would be reduced by 1%.

D : make a payoff and be discontinued.

Answer: A

Question 5

An analyst at a financial institution has been asked to assess the quality ofestimating credit VaR (CVaR) of a homogenous portfolio of firms (credits) using thesingle-factor model, under which default correlation varies with the firm’s beta to themarket factor. The analyst examines the portfolio under the following assumptions:• There are 1,000 firms (credits) in the portfolio.• Each firm represents 0.1% of the portfolio.• There is no idiosyncratic risk.• Loss given default is the same for each firm in the portfolio.Based on the information provided, which of the following observations, if made bythe analyst, would be correct regarding the application of the single-factor model and its parameters?

Options :

A : either 0% or 100%.

B : factor is low, for a given probability of default.

C : beta.

D : is typically higher than the probability of default of a firm in the portfolio.

Answer: A

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