Alternative and Traditional Investments Quiz

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Questions and Answers

Which of the following is classified as a traditional investment?

Gold

Stocks (correct)

Hedge funds

Private equity

What distinguishes alternative investments from traditional investments?

They often use unconventional investment vehicles. (correct)

They include government bonds.

They offer a higher correlation with traditional investments.

They utilize conventional strategies.

Which asset class is considered one of the most liquid in alternative investments?

Fine art

Gems and stones

Private equity

Currencies (correct)

Which of the following alternative investments is typically considered illiquid?

Fine art Signup and view all the answers

What common characteristic is shared by all alternative investments?

Low correlation with traditional investments Signup and view all the answers

In the context of investment liquidity, which statement is true?

Currencies are highly liquid. Signup and view all the answers

What is an example of a managed futures investment?

Trend-following strategies Signup and view all the answers

Which type of investment is NOT considered a component of classical investments?

Commodities Signup and view all the answers

What is the effect of active management on the efficient frontier?

Active management shifts the efficient frontier upwards. Signup and view all the answers

How does a fund manager's ability impact the efficient frontier?

A fund manager’s poor stock picking can shift the frontier downwards. Signup and view all the answers

What characteristics does the Fama-French model incorporate?

It includes factors like SMB and HML related to underlying asset characteristics. Signup and view all the answers

What type of model are macroeconomic based models typically categorized as?

They incorporate macroeconomic risk factors. Signup and view all the answers

Which of the following statements regarding the Capital Asset Pricing Model (CAPM) is true?

CAPM is a market-oriented and objective approach. Signup and view all the answers

In the context of multi-factor models, what does the term 'special interest factor' refer to?

Factors that are chosen based on specific queries like exchange rate effects. Signup and view all the answers

Which is NOT a standard factor model mentioned in the provided content?

Constant Growth Model Signup and view all the answers

What does the term 'equilibrium market' refer to in the context of CAPM?

A market where supply for securities equals demand. Signup and view all the answers

What does the index model equation estimate for stock i on day t?

The expected return of the stock Signup and view all the answers

Why is it important to estimate the index model for a period that does not include the event window?

To accurately reflect 'normal' returns Signup and view all the answers

What formula represents the calculation of abnormal return ARi,t?

ARi,t = Ri,t – (αi + βi.Rm,t) Signup and view all the answers

What does the variance of the sample abnormal return consist of?

Variance of the error term plus a sampling error component Signup and view all the answers

Which of the following best describes cumulative abnormal return (CAR)?

The sum of all abnormal returns over a specified period Signup and view all the answers

What distribution does the cumulative abnormal return CARi,t,τ follow?

N(0, var(CARi,t,τ)) Signup and view all the answers

What is the relationship between ARi,t and CARi,t,τ?

CARi,t,τ is the sum of all ARi,t over a specified period Signup and view all the answers

What happens if the data used to estimate expected returns is contaminated?

It leads to an unreliable estimation of normal returns Signup and view all the answers

What does a beta greater than 1 indicate about a security?

The security has higher fluctuations compared to the market. Signup and view all the answers

What is the market beta for the market portfolio itself?

1 Signup and view all the answers

How is beta calculated in relation to the covariance with the market?

Beta is the ratio of the covariance of the asset’s return with the market return to the market's variance. Signup and view all the answers

What characterizes a defensive security in terms of beta?

β < 1 Signup and view all the answers

What is the purpose of the security market line (SML)?

To provide the expected return for a security based on its specific beta. Signup and view all the answers

What is indicated by a negative correlation with the market portfolio?

The asset can lower the overall portfolio risk. Signup and view all the answers

In the capital asset pricing model (CAPM), what do we mean by risk-free asset's beta?

It has a beta equal to 0. Signup and view all the answers

If a portfolio predominantly contains stocks with a beta of less than 1, what type of portfolio is it considered?

Defensive market portfolio Signup and view all the answers

What characterizes a left-skewed return distribution?

Frequent small gains and few extreme losses. Signup and view all the answers

Which of the following best describes positively skewed return distributions?

They provide large gains which occur infrequently. Signup and view all the answers

What is the implication of having a leptokurtic distribution?

It implies a higher peak around the mean and fat tails. Signup and view all the answers

Why can leptokurtic distributions be considered dangerous for investors?

They increase the occurrence of extreme losses. Signup and view all the answers

What happens to the kurtosis of financial returns as the temporal aggregation increases?

It decreases. Signup and view all the answers

How does a normal distribution's kurtosis compare to a leptokurtic distribution?

Normal distribution has a kurtosis of 0, while leptokurtic has positive kurtosis. Signup and view all the answers

What are the 'fat tails' in a leptokurtic distribution indicative of?

Infrequent but extreme market events. Signup and view all the answers

What does the skewness of financial returns typically indicate?

Typically no systematic difference from zero. Signup and view all the answers

What is the unconditional variance in the context of the ARCH model?

$σ_t^2 = 1 - ∑ β_i$ Signup and view all the answers

What characteristic defines the GARCH model compared to the original ARCH model?

It incorporates past conditional variances. Signup and view all the answers

In practical applications, what is typically sufficient to model financial time series using GARCH?

A GARCH(1,1) model Signup and view all the answers

What does $σ_{t-1}^2$ represent in the GARCH model?

The previous period's volatility Signup and view all the answers

Which of the following components is NOT part of the GARCH(1,1) model formulation?

c Signup and view all the answers

Why is the lowest order GARCH model often sufficient?

It includes historical adjustments to volatility. Signup and view all the answers

What does the sum $∑ a_i.ε_{t-i}$ in the GARCH model signify?

The weighted influence of past disturbances Signup and view all the answers

In the context of GARCH modeling, what does 'ω' typically represent?

The constant term in the variance equation Signup and view all the answers

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Description

Test your knowledge on the differences between traditional and alternative investments. This quiz covers key concepts such as liquidity, asset classes, and investment models. Perfect for finance students and professionals looking to enhance their understanding of investment strategies.