Securing Investment Returns in the Long Run Quiz Answers

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In this course, you will learn about the famous dichotomy between active and passive investing, how to appropriately measure and analyze investment performance and what the future trends in the investment management industry are.

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Securing Investment Returns in the Long Run Coursera Quiz Answers

Week 1: Securing Investment Returns in the Long Run

Q1. Your financial advisor calls to tell you that the value of
the global equity portfolio you have asked her to manage for you decreased by
-2% last year. What additional information would be useful for you to better
gauge the performance of your global equity portfolio? (check all that apply)

  • The performance of the same portfolio over previous years.
  • The performance of an international bond index.
  • The performance of an international stock index.
  • The amount of risk that was taken by your financial advisor when managing the portfolio.
  • The performance of global equity portfolios managed by other financial advisors.

Q2. Complete this sentence: “We tend not to sell losing or
non-performing positions because…

  • …we often forget our purchase price.”
  • …almost all winning positions start by losing money.”
  • …we think that as long as we keep them in our portfolios, we haven’t lost any money.”
  • …we monitor our positions too infrequently.”

Q3. A mutual fund… (check all that apply)

  • …is a rather costly solution to diversify one’s wealth internationally.
  • …is an asset in itself.
  • …is an investment vehicle.
  • …pools money coming from many investors.

Q4. The Net Asset Value (NAV) of a mutual fund… (check all that apply)

  • …is the value of all investments of the fund divided by the number of outstanding shares.
  • …corresponds to the price of a share of the fund.
  • …is calculated several times a day.
  • …allows share of the fund to be traded intra-day (such as stocks and bonds).

Q5. Closed-end funds are… (check all that apply)

  • …constantly open to new investors.
  • …typically priced at a premium or discount relative to their NAV.
  • …priced according to several factors including the skills of the fund manager.
  • …more suitable for investing in quite liquid assets.

Q6. Last year, the quality of Linda’s research allowed her fund
to perform better than 57% of her competitors after fees. What sort of
investment management was Linda conducting?

  • Active management
  • Passive management
  • None of the above (pas shuffle
    options)

Q7. According to several studies, what is most likely to happen
to the performance of Linda’s fund next year (after fees)?

  • It will be better than more than 57% of her competitors’.
  • It will still be better than 57% of her competitors’.
  • It will be better than less than 57% of her competitors’.

Q8. If you had to choose between allocating your wealth between
active and passive funds based on the long term US Treasury yield, you would… (check all that apply)

  • …allocate more to passive funds when the yield increases.
  • …allocate more to active funds when the yield decreases.
  • …allocate more to active funds when the yield increases.
  • …allocate more to passive funds when the yield decreases.

Q9. Which of the following characteristics apply to passive
management? (check all that apply)

  • It has lower costs than active management.
  • It may seriously underperform its benchmark.
  • It promotes “herd behavior” by buying assets irrespective of their valuation.
  • It avoids the purchase of assets solely based on the fact that they belong to the index of reference.

Week 2: Securing Investment Returns in the Long Run

Q1. You are not happy with the performance your wealth manager
delivered last year: he delivered a -6% return while his benchmark was down
-7%. As a result, he suggests you change the mandate you gave him so that he
can better capture the upside potential while avoiding losses. What sort
mandate should you give him?

  • None of the above
  • An excess return mandate
  • A relative return mandate

Q2. To which performance ratio does the following formula correspond?

  • The Treynor ratio
  • The Sharpe ratio
  • None of the above
  • The Sortino ratio

Q3. Which of the following propositions describes a weakness of
the Sharpe ratio in terms of risk-adjusted performance measurement?

  • It fails to correctly capture risk-adjusted performance when returns are not normally distributed.
  • It fails to correctly rank actively managed funds when compared to the Treynor ratio.
  • It is quite complicated to use.
  • It is not intuitively appealing.

Q4. The rationale behind the Treynor ratio is that you should
only be rewarded for the risk you are taking that…

  • …can be diversified away by adding more assets to your portfolio.
  • …cannot be hedged by using forwards and options.
  • …cannot be diversified away by adding more assets to your portfolio.
  • …can be hedged by using forwards and options.

Q5. Which of the following performance ratios makes use of the
standard deviation of returns that are below the mean?

  • The Sharpe ratio
  • The Treynor ratio
  • The Return-Risk ratio
  • The Sortino ratio

Q6. Typical asset pricing models have different risk factors.
What characteristics must each of these factors have? (check all that apply)

  • They must be systematic.
  • They must be subject to unexpected changes.
  • One of them must be the risk-free rate.
  • They must be priced.

Q7. Which of the following statements regarding the Fama &
French 3-factor asset pricing model are true? (check all that apply)

  • It is rarely used by researchers and practitioners nowadays.
  • It is also called the “CAPM”.
  • One of its factors reflects the premium earned on average by small stocks over large stocks.
  • It has a strong theoretical foundation for the premiums earned by its factors.
  • One of its factors reflects the premium earned on average by value stocks over growth stocks.

Q8. Why is it important not to omit risk factors when evaluating
the performance of a fund manager?

  • The estimated alpha is likely to be inflated, leading us to believe that the manager has less security selection skills than he actually has.
  • The estimated alpha is likely to be deflated, leading us to believe that the manager has less security selection skills than he actually has.
  • The estimated alpha is likely to be inflated, leading us to believe that the manager has more security selection skills than he actually has.
  • The estimated alpha is likely to be deflated, leading us to believe that the manager has more security selection skills than he actually has.

Q9. What is the total Stock Selection Effect stemming from this fund’s performance?

Please give your answer in basis points. For example, if your answer is 0.0014 (or 0.14%), then type in “14”.

Enter answer here

Week 3: Securing Investment Returns in the Long Run

Q1. 100 fund managers are ranked according to the performance of
their fund over the past year. According to this ranking, Fund manager B
belongs to the 50th to 75th percentile group. Assuming
that the lower the percentile the better the performance, which of the
following statements are correct?

  • Fund manager B performed better than at least 50 other fund managers.
  • Fund manager B performed better than at least 75 other fund managers.
  • Fund manager B performed worse than at least 50 other fund managers.

Q2. A fund manager has a MAR equal to 2.5. His biggest drawdown
was 52%. What is his compound annual growth rate?

Please give your answer in percentage terms. For example, if your answer is 46%, type in “46”.

Enter answer here

Q3. Using a single performance criterion that accounts for
drawdowns, you wish to compare three fund managers with track records that
differ in length. Which of the following ratio will you use?

  • The CALMAR ratio
  • The Sharpe ratio
  • The MAR ratio
  • The Treynor ratio

Q4. A fund has an expected excess return of 3% relative to its
benchmark. Its active risk is equal to 1%. What it its information ratio?

Enter answer here

Q5. Which of the following factors can directly influence the
value of the information ratio of a fund manager? (check all that apply)

  • The time period chosen to measure the ratio.
  • The performance of her competitors.
  • The return of the risk-free asset.
  • The choice of the benchmark.

Q6. Which of the following characteristics are part of the
“cons” structured products? (check all that apply)

  • They are exposed to counterparty risk.
  • They have fees attached to them.
  • They are exposed to liquidity risk.
  • They are complicated to manage as a client.
  • They entail possible negative tax implications.
  • Their payoff profile is unknown in advance.

Q7. Linear asset pricing models such as the CAPM or the Fama
& French 3-factor model are inadequate to measure the performance of hedge
funds. Why?

  • They don’t disclose their performance to their clients.
  • They use investment strategies that can result in non-linear payoff structures.
  • They don’t invest in stocks
  • They are often situated outside of the USA.

Q8. What traditionally happens when a hedge fund has a large alpha? (check all that apply)

  • Its alpha is likely to decrease over the following years.
  • New investors flock in the fund, increasing the size of its assets under management which makes it difficult for the manager to continue to generate positive risk-adjusted performance.
  • Its alpha is likely to increase further over the following years.
  • New investors flock in the fund, increasing the size of its assets under management which makes it easier for the manager to stop generating negative risk-adjusted performance.
  • New investors flock in the fund, increasing the size of its assets under management which makes it easier for the manager to continue to generate positive risk-adjusted performance.

Q9. Which of the following statements regarding the performance
of US mutual funds are true? (check all that apply)

  • A majority of them do not display a positive alpha.
  • Among those who display a positive alpha, a majority relied on skills to do so.
  • A minority of them do not display a positive alpha.
  • Among those who display a positive alpha, a majority relied on luck to do so.

Q10. Why is the estimated proportion of skilled equity fund
managers higher in Europe than in the US?

  • European equity fund managers tend to take more risk.
  • European equity fund managers tend to depart from their pure equity mandate and add other assets to their portfolio.
  • European equity fund managers have access to more efficient trading technology.
  • European equity funds have a closed-end structure.

Week 4: Securing Investment Returns in the Long Run

Q1. Sustainable investing… (check all that apply)

  • …integrates environmental issues in its approach.
  • …integrates social issues in its approach, such as the composition of the board of directors of companies.
  • …integrates governance issues in its approach, such as whistleblower schemes implemented by companies.
  • …is similar to impact investing.

Q2. When talking about sustainable investing and ESG issues,
what does the letter “G” correspond to?

  • The relationship between the firm and the government.
  • The relationship between the firm and the judiciary system.
  • The relationship between the firm and its shareholders.
  • The relationship between the firm and non-shareholding stakeholders (e.g. employees, communities).

Q3. Which of the following are theoretical arguments in favor of
the outperformance of sustainability-oriented investment funds? (check all that apply)

  • Companies concerned with ESG issues are more likely to acquire and retain customers as well as human capital.
  • Companies that neglect ESG issues expose themselves to catastrophic events.
  • Information captured in ESG issues and opportunities might not be correct valued by other market participants.
  • These funds are traditionally smaller, allowing them to charge lower fees to investors.

Q4. When evaluating the added-value of sustainable investing… (check all that apply)

  • …one has to keep in mind that it is a form of passive fund management.
  • …most of the research finds no statistically significant difference in risk-adjusted performance between traditional and sustainable fund management.
  • …it is better to study the performance and risk at the fund level to get rid of firm-level effects.
  • …it is better to study the performance and risk at the company level to get rid of fund manager effects.

Q5. A recent study examining hundreds of academic papers,
industry reports, newspaper articles and books finds that… (check all that
apply)

  • A majority of those show a negative correlation between good sustainability practices and firms’ stock price performance.
  • Good ESG practices cause better financial performance.
  • A majority of those show a positive correlation between ESG practices and firms’ operational performance.
  • A majority of those show that firms with good sustainability standards have a lower cost of capital.

Q6. Which of the following statements regarding investing and
carbon footprint are true? (check all that apply)

  • “Global Warming Potential” (GWP) describes the amount of greenhouse gas that has the same CO2 equivalent.
  • One can gain exposure to a broad market index while at the same time reducing one’s carbon footprint.
  • Indirect greenhouse gas emissions stem from sources that are owned or controlled by the reporting entity.
  • Financial policy makers and investors are increasingly worried about climate change and greenhouse gas emissions.

Q7. Which of the following propositions correspond to insights
provided by Neurofinance? (check all that apply)

  • When trying to explain investor behavior, cognitive biases are often only second to the actual financial data investors are using and analyzing.
  • As a result of overconfidence, investors build portfolios that have more risk and more expected return than is supported by the actual data at their disposal.
  • Investors are well aware of their risk tolerance.
  • Investors fail to assess the risk and expected returns to then take rational investment decisions.
  • Experienced investors perform better than novices.

Q8. You have just built a portfolio with the objective of
maximizing your wealth over the next year. You are now looking forward for the
first monthly gains. What is happening in your brain? (check all that apply)

  • The region of your brain activating right now is the same that activates when anticipating food or drink.
  • The “financial center” of your brain has just stopped activating.
  • The region of your brain activating right now is the same that activates when experiencing events related to social rewards.
  • The region of your brain activating right now is the same that activates when experiencing empathy.

Q9. What are the characteristics of “Big Data”? (check all that apply)

  • It is a collection of datasets that are relatively time-consuming to interrogate.
  • It is a single large dataset that can be quickly interrogated.
  • It is useful to reveal untapped trends, patterns and correlations.
  • It is a collection of datasets that are large and complex.

Q10. Which of the following characteristics are part of the
“pros” of Robo-avisors? (check all that apply)

  • They are able to optimize taxes on capital gains.
  • The increased regulation and lowered interest rates is a thriving environment for them.
  • They entail lower cost relative to their human counterparts.
  • Automated transactions ensures optimality.
  • They allow for an automatic portfolio rebalancing.
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