Financial Strategies and Yield Spread Quiz
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Questions and Answers

What does the yield spread indicate when analyzing the 10 Year and 3 Year U.S. Treasury bonds?

  • The risk level associated with the 3 Year bond
  • The overall market interest rates for Treasury bonds
  • The difference in yields between the two bonds (correct)
  • The liquidity of the bond market

    • During the trade timeline, what does the term 'Trade Reversal' refer to?

  • A short position taken against the bond market
  • The point at which investors decide to hold their positions
  • An instance where the yield spread increases beyond expectations
  • The moment of exiting a previously initiated trade (correct)

    • In the context of the yield spread history, what does the 1st Standard Deviation represent?

  • The maximum yield spread achievable between the two bonds
  • The specific yield spread at the trade initiation date
  • The volatility of the yield spread over time (correct)
  • The average yield of the 10 Year bond over the past decade

    • What period does the yield spread history cover in the provided example?

    <p>Three years of yield spread data</p> Signup and view all the answers

    What implication can be drawn when the yield spread is negative?

    <p>The market expects an economic downturn</p> Signup and view all the answers

    What is the main objective of event-driven strategies?

    <p>To gain from unique corporate structure events.</p> Signup and view all the answers

    Which strategy falls under directional strategies?

    <p>Global macro</p> Signup and view all the answers

    What differentiates relative value strategies from event-driven strategies?

    <p>Relative value strategies have low exposure to market direction.</p> Signup and view all the answers

    Which of the following best describes equity market-neutral strategies?

    <p>Strategies that involve creating long and short portfolios that match in size and direction.</p> Signup and view all the answers

    In terms of market exposure, how does fixed-income arbitrage classify?

    <p>Low exposure to market direction</p> Signup and view all the answers

    Which of the following strategies is part of event-driven strategies?

    <p>Distressed securities</p> Signup and view all the answers

    What is a key characteristic of directional strategies?

    <p>They bet on expected movements in prices of various financial securities.</p> Signup and view all the answers

    What was the profit per share for the Royal Bank of Canada position?

    <p>7.60 C$</p> Signup and view all the answers

    Where did the total market value of the Toronto Dominion Bank position stand on March 1, 2019?

    <p>751,600 C$</p> Signup and view all the answers

    What was the net return on the spread position according to the data?

    <p>19.08%</p> Signup and view all the answers

    In a convertible arbitrage strategy, what primarily facilitates the hedging of underlying equity risk?

    <p>Selling short common shares of the issuer</p> Signup and view all the answers

    What does the theoretical value of a convertible security depend on?

    <p>The value of several underlying factors including the stock price</p> Signup and view all the answers

    What was the loss incurred on the Toronto Dominion Bank position?

    <p>−11,600 C$</p> Signup and view all the answers

    Which aspect of convertible arbitrage allows it to be less affected by equity market movements?

    <p>Collecting interest income from the convertible bonds</p> Signup and view all the answers

    Which component contributes to the steady return in a convertible arbitrage strategy?

    <p>Interest income from convertible bonds and short sale proceeds</p> Signup and view all the answers

    What was the total market value of the Royal Bank of Canada position on initiation?

    <p>740,000 C$</p> Signup and view all the answers

    What happens when the trading price of a convertible bond shifts away from its theoretical value?

    <p>Arbitrage opportunities may arise</p> Signup and view all the answers

    What was the action taken by Raj to initiate the trade on November 1, 2018?

    <p>Shorting TD while going long on RY</p> Signup and view all the answers

    The trade initiation took place when the price spread reached which value?

    <p>36 CAD$/share</p> Signup and view all the answers

    Which of the following best describes the trade reversal value indicated in the content?

    <p>It was recorded at a price spread of 34 CAD$/share.</p> Signup and view all the answers

    What does a positive value in the price spread represent in this context?

    <p>An increase in share price for TD compared to RY</p> Signup and view all the answers

    Based on the content, a standard deviation would most likely indicate what in relation to price spread?

    <p>A measure of market volatility</p> Signup and view all the answers

    When discussing share price movement, what does 'longing' a stock mean?

    <p>Buying the stocks with expectations of price increase</p> Signup and view all the answers

    What could potentially result from Raj's decision to short TD?

    <p>A financial loss if TD shares rise</p> Signup and view all the answers

    Considering the price spread trend, which month showed steady growth leading up to trade initiation?

    <p>June</p> Signup and view all the answers

    If the price spread falls below the mean, what does it generally signify?

    <p>Less profitability in the short position</p> Signup and view all the answers

    What statistical relationship is implied when discussing the target price spread?

    <p>Price spreads may revert to historical means, implying potential arbitration opportunities.</p> Signup and view all the answers

    At what market price spread does Raj find it attractive to initiate the trade?

    <p>$22.00</p> Signup and view all the answers

    What is the maximum appropriate price spread that Raj believes is valid for the trade?

    <p>$28.00</p> Signup and view all the answers

    Which two banks are compared in the stock price history?

    <p>Royal Bank of Canada and Toronto-Dominion Bank</p> Signup and view all the answers

    What is indicated by the market price spread of less than $22.00?

    <p>It is a signal to consider making a trade.</p> Signup and view all the answers

    What is the purpose of determining the appropriate price spread for the trade?

    <p>To decide when to exit the trade and secure profits.</p> Signup and view all the answers

    How long is the stock price history tracked for the two banks?

    <p>3 years</p> Signup and view all the answers

    Which statement regarding price spread is true?

    <p>Price spread analysis helps in strategic trade execution.</p> Signup and view all the answers

    What does the inclusion of Figure 21.1 signify in Raj's analysis?

    <p>It provides a visual representation of stock price changes.</p> Signup and view all the answers

    In forming his trading strategy, what aspect of the price spread does Raj prioritize?

    <p>Identifying reversal points for profit</p> Signup and view all the answers

    Study Notes

    Alternative Investments: Strategies and Performance

    • This chapter covers a variety of alternative investment strategies and performance measurement tools
    • A comprehensive due diligence process is also discussed, along with suitability factors for different investor groups

    Learning Objectives

    • Explain various alternative investment strategies including relative value, event-driven, and directional strategies
    • Identify strategies most likely in alternative mutual funds
    • Discuss risk measures and return measures for alternative fund investments
    • Discuss benchmarking of alternative investment performance
    • Describe the due diligence process for investment in an alternative strategy fund
    • Identify investor groups suitable for liquid alternative investments

    Key Terms

    • absolute risk
    • convertible arbitrage strategy
    • directional strategies
    • distressed security strategy
    • emerging markets alternative funds
    • equity market neutral strategy
    • event-driven strategies
    • fixed-income arbitrage strategy
    • global macro strategy
    • high-yield bond strategy
    • kurtosis
    • maximum drawdown
    • merger strategy
    • relative value strategies
    • risk arbitrage strategy
    • short bias strategy
    • long/short equity strategy
    • skew
    • time to recovery

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    Related Documents

    CSC Volume 2 Section 3 Alternative Investments PDF

    Description

    Test your knowledge on yield spreads and trading strategies related to U.S. Treasury bonds. This quiz covers concepts such as trade reversals, standard deviations in yield spread history, and various investment strategies like event-driven and directional strategies. Perfect for finance students and professionals looking to sharpen their understanding of bond markets.

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