AWMA | Module 3 Quiz Advanced
Investment Products and Strategies
"Carried interest" in a hedge fund refers to
A) undistributed interest income from bonds.
B) incentive fees.
C) side pockets.
D) management fees. - ANS-B
Incentive fees (typically 20%) are referred to as carried interest, and are taxed as capital
gains.
A client who expects her portfolio of intermediate-term government bonds to earn 12% a
year suffers from which one of the following?
A) Overconfidence bias
B) Overreaction to market events
C) Unrealistic expectations
D) Inadequate time horizons - ANS-C
Historically, intermediate-term government bonds have had an annual return of between
5% and 6%, so this client has unrealistic expectations.
A client who is making judgments based on stereotypes (such as not trusting a certain
industry because of past stock losses in that industry) is exhibiting which behavioral
finance bias?
A) Representativeness
B) Hindsight
C) Overconfidence
D) Availability - ANS-A.
Representativeness bias involves making judgments based on stereotypes.
Academic studies have shown that managed futures often have a low correlation with
traditional assets and can be a good diversifier for an investment portfolio. Which of the
following has had the most impact in limiting the effectiveness of using managed futures
in portfolios?
A) High fees
B) Low correlations
C) Low turnover
, D) High correlations - ANS-A.
High fees have offset much of the diversification benefit achieved by various managed
futures funds.
Active versus Passive Management - ANS-*Reasons to use active management:
the potential for increased returns
the potential for downside protection
psychological benefits for the client (the client is more involved in the investment
process)
*Reasons to use passive management:
the markets are fairly efficient
long-term returns, in some cases, seem to indicate most active managers fail to
outperform the market indexes
lower expenses than active management
not missing the best days of the market
fewer transactions can result in lower expenses and lower capital gain taxes
An equity REIT typically
A) has no debt financing.
B) pays a fixed dividend.
C) owns property.
D) invests in mortgage loans. - ANS-C.
An equity REIT owns property.
Five years ago, Robert received an inheritance of his grandfather's employer stock
worth $125,000. You have analyzed Robert's portfolio and advised him to sell most of
the stock because it represents over half of his total net worth. Robert says that he
cannot carry out your recommendation because it is his "grandfather's stock" and is
separate from his other investments. This is an example of
A) rationalization.
B) availability.
C) mental accounting.
D) hindsight bias. - ANS-C
Mental accounting is the separation of finances into sections based on an investor's
subjective reasons, such as funds from a certain source or those to be used for a
certain purpose.
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