L2 Unit – 2 – Quiz - Wealth Management Course that Top Wealth Managers Swear By

Question 1 of 25

1. Question

In interest rate swap transaction, party who pays floating payments of interest is considered as

Swap Buyer
Swap Seller
Notion Seller
Notion Buyer

Question 2 of 25

2. Question

The Security Market Line (SML) is

The line that is tangent to the efficient frontier of all risky assets
The line that describes the expected return-beta relationship for well-diversified portfolios only
The line that represents the expected return-beta relationship
Also called the Capital Allocation Line

Question 3 of 25

3. Question

Market risk is also called

Non-diversifiable Risk and Systematic Risk
Unique Risk and Non-diversifiable Risk
Systematic Risk and Unique Risk
Systematic Risk and Diversifiable Risk

Question 4 of 25

4. Question

Hedge funds may invest or engage in

Convertible Bonds
Currency Speculation
Merger Arbitrage
Distressed Firms

Question 5 of 25

5. Question

Which contract is an agreement between two parties to buy or sell the underlying asset at a future date at today’s future price?

Option
Forward
Futures
Warrant

Question 6 of 25

6. Question

Mezzanine finance has higher risk than

Preference Shares
Convertible Debt
Ordinary Shares
Secured Debt

Question 7 of 25

7. Question

Credit default swaps (CDS) on a pool of mortgage-backed securities

Were partly responsible for making the recent financial crisis more severe
Are similar to put options in that they have asymmetric payoffs
Differ from puts in that the payoff only occurs if there is a credit default on the securities
All of the above

Question 8 of 25

8. Question

Which of the following investment assets are the usual make-up of structured products?

Derivatives
Bonds and Notes
Equities and Bonds
Bonds and Options

Question 9 of 25

9. Question

The risk of a stock in a portfolio can be expressed using the _____________________ instead of the covariance.

Standard Deviation
Correlation Coefficient
Coefficient of Variation
None of the above

Question 10 of 25

10. Question

Hedge fund managers marketing themselves on the basis of their skills is known as

Beta
Gamma
Delta
Alpha

Question 11 of 25

11. Question

An option on a swap is a

Caplet
Floorlet
Swaption
Swaplet

Question 12 of 25

12. Question

The market risk, beta, of a security is equal to

The covariance between the security and market returns divided by the standard deviation of the market's returns
The variance of the security's returns divided by the covariance between the security and market returns
The covariance between the security's return and the market return divided by the variance of the market's returns
The variance of the security's returns divided by the variance of the market's returns

Question 13 of 25

13. Question

Assume newly issued 30-year-on-the-run bonds sell at higher yields (lower prices) than 29 ½ year bonds with a nearly identical duration. A hedge fund that sells 29 ½ year bonds and buys 30 year bonds is taking

Conservative Position
Market Neutral Position
Bearish Position
None of the above

Question 14 of 25

14. Question

Which of the following is a major difference between swaps and futures contracts?

Swaps are usually marked to market, whereas futures contracts are not
Swaps are typically short term, whereas futures contracts tend to extend over several years
Swaps are derivative securities, but futures contracts are not
A futures contract involves only one future transaction, whereas a swap typically involves several future transactions

Question 15 of 25

15. Question

Which of the following is known as Mezzanine capital?

Expansion Financing
Development Financing
Replacement Finance
Compressed Financing

Question 16 of 25

16. Question

Credit default swaps are credit derivatives that

Allow lenders to insure themselves against the risk that a borrower will default
Should only be used by people seeking high returns from low risk
Present high levels of risk and should only be used by the wealthy
Do not require collateral to be posted by either the buyer or the seller of the insurance

Question 17 of 25

17. Question

Which one of the following about participation products is true?

Derivatives contracts and bonds are used for both the principal and return
Participation products participate in the price performance of the underlying assets and offer full upside potential with full downside protection
Participation products are legally secured debentures
They are commonly marketed under the name of certificates or notes

Question 18 of 25

18. Question

Which is the variability of return on stocks or portfolios associated with changes in return on the market as a whole?

Standard Deviation
Unsystematic Risk
Systematic Risk
Coefficient of Variation

Question 19 of 25

19. Question

In the financial markets, what is the DOW used for

It is a measure of specific risk
It measures the level of dividends paid by various companies
It is a measure of market risk
It measures stock price levels for the entire market

Question 20 of 25

20. Question

Some investors will accept high risk investments and some investors prefer low risk investments. What is the term best describes that situation?

Risk return tradeoff
Risk Tolerance
Risk Aversion
Rate of Return

Question 21 of 25

21. Question

If a person sells an in the money call option with strike price of Rs. 2600 at a premium of Rs. 154 and buys an out of the
money call option with strike price Rs. 2800 at a premium of Rs. 49. If on expiry the stock closes at 3200, the net pay-off would be

Loss of Rs. 105
Profit of Rs. 105
Loss of Rs. 90
Profit of Rs. 95

Question 22 of 25

22. Question

As a financial analyst, you are tasked with evaluating a capital budgeting project. You were instructed to use the IRR method and you need to determine an appropriate hurdle rate. The risk-free rate is 4 percent and the expected market rate of return is 11 percent. Your company has a beta of 1.4 and the project that you are evaluating is considered to have risk equal to the average project that the company has accepted in the past. According to CAPM, the appropriate hurdle rate would be

0.07
0.15
0.138
0.014

Question 23 of 25

23. Question

If the yield on mortgage-backed securities was abnormally high compared to Treasury bonds, a hedge fund pursuing a relative value strategy would

Buy the Treasury bonds and buy the mortgage-backed securities
Short sell the Treasury bonds and short sell the mortgage-backed securities
Buy the Treasury bonds and short sell the mortgage-backed securities
Short sell the treasury bonds and buy the mortgage-backed securities

Question 24 of 25

24. Question

Which of the following items is specified in a futures contract?
I) The maximum acceptable price range during the life of the contract
II) The contract size
III) The market price at expiration
IV) The acceptable grade of the commodity on which the contract is held
V) The settlement price

I, III, and V
I, II, and IV
II, IV, and V
I, II, III, IV, and V

Question 25 of 25

25. Question

How is the process of adjusting the Balance Sheet different in an LBO model, compared to what you might see in a typical merger model?

In an LBO model, you combine two companies' Balance Sheets to reflect the PE firm and the acquired company, but in a merger model you must make adjustments first.
You'll typically add more tranches of Debt to the Balance Sheet in an LBO model than you will in a merger model
In an LBO model, the Shareholders' Equity gets wiped out and replaced with new equity from the PE firm, but in a merger model the seller's Shareholders' Equity disappears altogether
All of the above