Q.2262 Liquidity and Treasury Risk Measurement and Management

Bilco Bank has implemented the LaR (liquidity at risk) method based on a 95% probability and a 1-day holding period. Suppose its calculations for the next day result in a figure of USD 15 million. What would that imply? A The maximum loss over the next day is $15 million with a probability of 95% B The maximum profit over the next day is $15 million with a probability of 95% C The worst outcome over the next day is an inflow of cash of $15 million with a probability of 95% D The worst outcome over the next day is an outflow of cash of $15 million with a probability of 95% The correct answer is: D A positive LaR means that the likely 'worst' outcome, from a cash flow perspective, is an outflow of cash; and a negative LaR means that the likely worst outcome is an inflow of cash. *User Question: in stressed scenario

FRM Part 2

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Q.1136 Financial Markets and Products

Which of the following best describes the long/short equity hedge fund strategy? A Taking a long position in undervalued stocks and a short position in overvalued stocks B Taking a long position in overvalued stocks and a long position in undervalued stocks C Taking a long position in both overvalued and undervalued stocks D Taking a long position in overvalued stocks The correct answer is: A The long/short equity strategy entails taking a long position in stocks that are undervalued and another short position in overvalued stocks. If stocks in both classes are picked well, the strategy gives good returns in both bull and bear markets. *User Question: Is not answer should be D? I think overvalued stocks should be purchased as they are cheaper than their true market value. Can you explain the reason of why A is correct.

FRM Part 1

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Q.1133 Financial Markets and Products

Transaction costs and management expenses of money market mutual funds may include: A Back-end loads B Front-end loads C 12b-1 charges D All the above The correct answer is: D Ownership of a money market mutual fund can include all of the listed expenses. *User Question: Can you kindly explain 12b-1 charges?

FRM Part 1

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Q.1112 Financial Markets and Products

The following data gives the mortality experience among males in Europe in 1931.Age in yearsProbability of death within one yearSurvival probabilityLife expectancy300.0014190.9737247.52310.0014450.9723446.59320.0014780.9709345.65330.0015190.9695044.73Calculate the probability of a new-born male dying between his 30th and 31st birthday. A 0.97372 B 0.001234 C 0.001419 D 0.00138 The correct answer is: D From the table, the probability of a man surviving to age 30 is 0.97372. The probability of a man surviving to age 31 is 0.97234. Therefore, the probability that the new-born dies between his 30th and 31st birthday = 0.97372 – 0.97234 = 0.00138 *User Question: Can you kindly explain why it is not 0.001419? Thank you.

FRM Part 1

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Q.3635 Market Efficiency

The most likely explanation of initial public offerings (IPOs) generating an abnormal return is due to the: A deficiency in the study methodology. B irrational exuberance in investors. C underpricing of IPOs by investment banks. The correct answer is: A) IPOs appear to generate abnormal returns mainly due to the deficiency in the study methodology which equally weights the samples. *User Question: IPOs appear to generate abnormal returns mainly due to the deficiency in the study methodology which equally weights the samples.

CFA Level 1

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Q.3768 Quantitative Analysis

The following data represents a sample of daily profit of a sales company for six weeks in a particular year. $$ \begin{array}{c|c} \textbf{Week} & \bf{\text{Amount of the Profit} ($)} \\ \hline {1} & {3,800} \\ \hline {2} & {2,800} \\ \hline {3} & {2,700} \\ \hline {4} & {9,900} \\ \hline {5} & {2,600} \\ \hline {6} & {4,300} \\ \end{array} $$ What is the 75% quantile profit? A 4,000 B 4,234 C 4,175 D 4,654 The correct answer is: C The 75% level is found between the 4th and the 5th observations so that: $$ \text q_{75}=0.75×3800+0.25×4300=4175 $$ *User Question: shouldn't the observations be stated in ascending order prior to calculating the quantile value?

Q.3810 Quantitative Analysis

Hakim Ahmed has recently joined Lampard Investment Inc. He has been given data related to the assets of a client's portfolio provided in the following table: $$ \begin{array}{l|c} \text{Variance Asset X} & \text{0.1225} \\ \text{Variance Asset Z} & \text{0.3721} \\ \text{Covariance} & \text{0.19} \\ \end{array} $$ If the weight of Asset X is 35% and the weight of Asset Z is 65%, then what is the correlation coefficient of the portfolio? A 0.8899 B 0.0469 C 0.4412 D 4.168 The correct answer is: A tandard deviation of X = 0.12251/2 = 0.35Standard deviation of Z = 0.37211/2 = 0.61Correlation coefficient = Covariance(X,Z)/(Standard deviation of X * Standard deviation of Z) = 0.19/(0.35 * 0.61) = 0.8899Note: The correlation coefficient does not take into account the weights. *User Question: then what is the correlation coefficient of the portfolio This is totally wrong. How can a portfolio have correlation coefficient? It can ask what is the correlation coefficient between Asset X and Y

Q.3593 Market Organization and Structure

An investment bank offers its customers the option to carry out leveraged trades. The investors are required to maintain a margin of 30% and pay a commission of 0.25% of the trade value. An investor acquires 2,000 shares each at a price of $30. If the shares are currently trading at $40 and the borrowing cost is 8%, then the return generated by the leveraged trade is closest to: A 89.75% B 9.08% C 90.75% The correct answer is: A) Total fund required to acquire 2,000 shares = 2,000 * $30 = $60,000 Margin required for the trade = $60,000 * 30% = $18,000 Commission = $60,000 * 0.25% = $150 Total out-of-pocket investment required for the trade = $18,000 + $150 = $18,150 Total funds required = $60,000 + $150 = $60,150 Funds borrowed = $60,150 - $18,150 = $42,000 Interest cost = $42,000 * 8% = $3,360 Profit earned in the leveraged trade = 2,000*($40-$30) - Commissions - Interest paid = 2,000*$10 - $60,000*0.25% - $80,000*0.25% - $3360 = $16,290 ROE = $16,290 / ($18,150) = 89.75% *User Question: There are two commissions one when you buy and the other when you sell. (you have to subtract them both) ?

Q.3593 Market Organization and Structure

An investment bank offers its customers the option to carry out leveraged trades. The investors are required to maintain a margin of 30% and pay a commission of 0.25% of the trade value. An investor acquires 2,000 shares each at a price of $30. If the shares are currently trading at $40 and the borrowing cost is 8%, then the return generated by the leveraged trade is closest to: A 89.75% B 9.08% C 90.75% The correct answer is: A) Total fund required to acquire 2,000 shares = 2,000 * $30 = $60,000 Margin required for the trade = $60,000 * 30% = $18,000 Commission = $60,000 * 0.25% = $150 Total out-of-pocket investment required for the trade = $18,000 + $150 = $18,150 Total funds required = $60,000 + $150 = $60,150 Funds borrowed = $60,150 - $18,150 = $42,000 Interest cost = $42,000 * 8% = $3,360 Profit earned in the leveraged trade = 2,000*($40-$30) - Commissions - Interest paid = 2,000*$10 - $60,000*0.25% - $80,000*0.25% - $3360 = $16,290 ROE = $16,290 / ($18,150) = 89.75% *User Question: Isnt the profit equation double counting the commissions? ?

Q.8 The Time Value of Money

How much money will you have if you invest $100,000 today in a project paying 8% interest rate compounded continuously for 3 years? A $127,124.90 B $108,328.70 C $125,971.20 The correct answer is: A) PV=100,000; r=8%=0.08; N=3;FV = PV*erN = 127,124.90Note: The question asks about continuous compounding. You don't have to use your financial calculator to solve this problem. You also have to use the the constant ''e'' which is 2.7182. *User Question: How do we calculate this on the Calculator because I put in all of those values and keep coming to $125,971.20. please explain? ?