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If both spouses are 65, what are the chances one will reach age 95?
28%

What is a basis for rebalancing a portfolio?
regression to the mean

Provide another name for average return.
arithmetic mean

French and Fama, two wellknown authors and longtime members of the academic community, favor what investment approach (or category)?
value stocks

With a passthrough MBS, what will cause a reduction in the face amount (not market value) invested in the MBS?
a mortgage refinanced

What makes the Mount Lucas Management Index (MLMI) different than its GSCI and DJUBS counterparts?
MLMI is based on a specific trading strategy

Your clients can choose from a handful of educational accounts to help out their children.
On a cumulative basis, which one of these accounts offers the highest contribution?
529 Plan

Describe the volatility difference between a portfolio of global small cap stocks vs. a portfolio of large cap U.S. and large cap foreign stocks.
global small cap stock portfolio is only marginally more volatile

Your client has been reading about the different ways cost basis can be determined for shares of a mutual fund.
When talking about the average costsingle category method, what words come to mind?
fairly simple

Describe a Regulation D security.
can only be bought and sold to sophisticated investors

When are the benefits of portfolio optimization most likely to be lost?
During a severe market downturn.

For the individual investor (with a 50/50 portfolio mix), what is the biggest advantage of using a 3x mutual fund [changing the mix to (17 x 3)/83]particularly if there are huge swings in the stock market?
loss in equities is limited to 100% of what the individual invested

Do most buyout funds use debt financing?
What asset does a buyout fund use to collateralize debt?
yes / assets of the target company

What phrase or word best describes the correlation coefficient between two asset categories?
not static

What is the serial correlation of the S&P 500?
What is the serial correlation of the U.S. 10Year Treasury?
0.2 (S&P) / 0.2 (Tbond)

Describe the typical convertible security.
Rated below investment grade.

Charles bought $3,000 worth of a highlyleveraged equity fund on February 15th. Less than a month later, Charles died when the equity fund was worth $4,200. Betsy, a good friend of Charles, immediately inherited the equity fund and sold all shares for $4,300 on September 3rd the same year.
What are the tax consequences to Betsy?
longterm capital gain of $100

An objective for most mutual funds is to increase the amount of money under management.
If you were to pick one fund category wherein asset growth is sometimes (or often) considered not to be positive for shareholders, what would be the category?
small cap stocks

When did the first hedge fund begin and how many hedge funds are there today?
1949 / > 11,000

You have just come across a very strange investment. This investment returns exactly 30% each year or loses exactly 10% each year and either return is equally likely.
After a 10year period, what would you expect this investment's annualized return to be?
8.17%

From the 1950s through 20002009, on a decadebydecade basis, what has been the biggest spread for the S&P 500’s standard deviation?
<5%

When is an investment’s annualized return the same as its mean return?
when returns for each period (year) are identical

What is easier to breach, particularly on a quarterbyquarter basis: a covenantlite loan provision or a maintenance covenant loan provision?
maintenance covenant (e.g., reduction in cash flow below 45 times EBITDA)

Give an example of a random correlation coefficient.
0

What instrument is considered to be the most basic form of eliminating credit risk?(hint: the size of the marketplace is unknown, but estimated to be in the tens of trillions of dollars)
Credit default swaps.

Ted and Tina have been neighbors for over a decade. They have a JTWROS; account that began with a $30,000 investment in a stock fund (that was never added to) now worth $130,000.
If Tina were to die tomorrow, what would then be Ted's cost basis?
$80,000

What are the two greatest disadvantages of a commoditylinked note?
I. investor must rely on underlying credit quality of the issuer
II. gains are taxed as ordinary income
III. investor is responsible for rolling over contracts from month to month IV. these types of notes never contain a stated rate of interest to be paid to the investor (unlike a managed accounts approach)
I and II only

There are annualized returns and there are average returns.
Assuming these two returns are never exactly the same for any given year, when will the ABC's Equity Fund's average returns be higher than its annualized returns?
Always

Your client’s sole goal is to minimize risk.
What should be the portfolio's stock/bond mix?
Jul93

According to a study by Chen and Ibbotson, how much does backfill (instant history) add or subtract from a hedge fund database?
adds 500 basis points a year

Mr. Jones bought 50 shares of ABC Growth and Income Fund for $9 each in 2004. He purchased another 100 shares for $10 a share a year later and 50 more shares for $11 each in late 2006 (a total of three different purchase dates). It is now early 2010 and Mr. Jones wants to sell 60 shares at the current NAV price of $12 each. All of the 200 shares have been owned for over a year. The total sale proceeds are $720.
Under average cost—single category, what would be the taxable gain?
$120

Mr. Jones bought 50 shares of ABC Growth and Income Fund for $9 each in 2004. He purchased another 100 shares for $10 a share a year later and 50 more shares for $11 each in late 2006 (a total of three different purchase dates). It is now early 2010 and Mr. Jones wants to sell 60 shares at the current NAV price of $12 each. The total sale proceeds are $720.
Under specific share identification, what would be the taxable gain?
$70

Mr. Jones bought 50 shares of ABC Growth and Income Fund for $9 each in 2004. He purchased another 100 shares for $10 a share a year later and 50 more shares for $11 each in late 2006 (a total of three different purchase dates). It is now early 2010 and Mr. Jones wants to sell 60 shares at the current NAV price of $12 each. All of the 200 shares have been owned for over a year. The total sale proceeds are $720.
Under average cost—double category, what would be the taxable gain?
no such method or this method cannot be used with this fact pattern

Describe distressed debt.
any liability trading for less than half its face value

What is the basis of Monte Carlo simulation?
Random behavior

Marne is looking at several investments that have more and more volatility.
As volatility increases, the gap between what returns is going to get greater and greater?
Average and annualized returns.

When was the last time the S&P 500 experienced three consecutive negative years?
2000, 2001, 2002

According to Dalbar, what is the gap between bond fund returns and what investors in bond funds actually experience?
600 basis points per year

Describe the Merrill Lynch Factor ModelExchange Series.
benchmark designed to have the same risk and return characteristics of hedge funds

How many years can losses from securities sales be carried forward by individual taxpayers?
Until they are used up or on the death of the tax payer.

Assume the following about a margin account with an initial cash deposit of $10,000 (now leveraged to $20,000):
(a) $20,000 of quality stocks have just been bought
(b) the stocks bought dropped $2,500 in value by the end of the year
(c) the interest rate charged for the margin account works out to 6%
What percentage loss has this investor experienced for the first year?
31%

Your friend is going to invest in commodities and is thinking about using a managed account.
What should your friend know about such a managed account?
minimum initial investment is typically $10$20 million

Which method of determining cost basis of mutual fund shares is the best way to reduce, or at least control, taxes?
specific identification

Over the past 5560 years, how frequently have Tbill annual returns been negative (after adjusting for inflation and assuming a 25% tax bracket)?
50% of the time

What does CaR refer to?
total loss incurred by an investor if each futures position in a fund hits its stop loss price

According to the Financial Planning Association, what is the average longterm annualized gain for a 60/40 portfolio mix?
8%

Which investment experiences the most amount of interest rate risk?
zerocoupon government bonds maturing in nine years

Over each of the past six decades (1950s, 1960s, etc.), describe the characteristics of a 50/50 (stock/bond) portfolio from decade to decade.
similar risk levels but very different annualized returns

Describe the idea behind portfolio rebalancing.
Regression to the mean

Usually, how long will it take before a portfolio's return projections match the portfolio's risk?
Roughly 30 years

Looking at the exit strategy for LBOs, how often is the final disposition based on a sale to a strategic partner and/or a financial sale?
How often is the "final disposition" a bankruptcy?
~ 70% of the time / ~ 1% of the time (bankruptcy)

Frank is thinking about investing in a VC fund.
How long should Frank plan on owning this investment?
1012 years

What would you estimate the serial correlation of equity REITs to be?
0.1

Is there any benefit to Larry if he owns shares of the GHI Foreign Fund and the fund has just paid foreign taxes on its gains?
he is not helped or hurt (Larry gets a credit or deduction)

When are you likely to see a cramdown?
Banckruptcy

With regard to illiquid stocks and bonds, are there any guidelines the SEC wants mutual funds to follow?
yes (and the limit is 15% or less)

An emerging markets security is exposed to what kind of risk?
liquidity

How many main tranches does almost every CDO contain?
Which of these tranches is considered to have the greatest risk of total loss to the investor?
three / the equity tranche

What return figure is used to compute standard deviation?
The mean return.

Describe the serial correlation of large cap domestic stocks.
Describe the serial correlation for equity REITs.
very low / very low

What is the IRR based on?
a discount rate that results in all net cash flows having a PV of zero

Bobbi's parents set up a UTMA account for Bobbie (age 12).
Each year, how much income can be earned in this account before it is subject to mom and dad's tax bracket?
about $1,900

What is the likely longterm result of a high “tracking error” portfolio?
different behavior

On a decadebydecade basis, what was the annualized range of returns for the S&P 500 from 19501959 through 20002009 (6 decades)?
1% in the 2000s and 19% in the 1950s

Jason just sold some shares of a mutual fund.
If no election is made, the IRS assumes a specific method of determining cost basis is being used.
What is this assumed method?
FIFO

When is a side pocket used?
Are side pockets good for the hedge fund's investors?
positions difficult to value by a hedge fund manager / bad for investors

What is a disadvantage of mean variance optimization (MVO)?
It does not take rebalancing into account

Describe the correlation coefficient between the vast majority of asset categories.
random or positive

What is the risk horizon of the typical individual investor, based on a study conducted during the 1990s published in the Quarterly Journal of Economics? (hint: the answer is still probably valid today)
One year

With what asset category are you likely to see arithmetic mean returns most similar to annualized returns?
shortterm bond funds

Compare the historical returns of managed futures accounts with those from a passive futures index.
benefits are about the same with either investment approach

There are three sources that make up the returns for a commodity futures contract.
What is the income return component based on?
return on cash used for collateral for futures contracts

A venture capital fund includes a clawback covenant.
When is this type of covenant likely to kick in, if ever?
at the end of the VC fund's life

What asset category is subject to the most amount of reinvestment risk?
High yield longterm bonds

Mr. Jones bought 50 shares of ABC Growth and Income Fund for $9 each in 2004. He purchased another 100 shares for $10 a share a year later and 50 more shares for $11 each in late 2006 (a total of three different purchase dates).
It is now early 2010 and Mr. Jones wants to sell 60 shares at the current NAV price of $12 each.
The total sale proceeds are $720.
Under specific share identification, what would be the taxable gain?
$70

Over the past several decades, what has been the average P/B ratio of the S&'P 500?
~2

Reinvestment risk should be a major concern of an investor in what investment?
highyield corporate bonds

Mr. Jones bought 50 shares of ABC Growth and Income Fund for $9 each in 2004. He purchased another 100 shares for $10 a share a year later and 50 more shares for $11 each in late 2006 (a total of three different purchase dates). It is now early 2010 and Mr. Jones wants to sell 60 shares at the current NAV price of $12 each. The total sale proceeds are $720. Under FIFO, what would be the taxable gain?
$170

What time frame does the wash sale rule cover?
similar sales 30 days before or after purchase

