Question

3] Select the most accurate match between the secondary bond trading strategy and its description...

A. Credit Defense Trade: Using this strategy, bond traders are looking to protect against worsening conditions such as a downturn in the economy or deteriorating business conditions for given issuer(s) in order to protect against bond price drops while increasing yields when switching to different bonds.

B. Sector-Rotation Trades: Using this strategy, bond traders are looking to take advantage of market changes they are forecasting by buying into bond market sectors that will out-perform the overall bond market and/or move away from sectors they expect to under-perform.

C. Curve Adjustment Trade: Using this strategy, bond traders are looking to increase their portfolio’syield by switching to bonds that have higher yields within the same maturity band although they may have lower credit quality.

4] Which combination of equity investment philosophies, their Information Ratios, and the drivers of the Information Ratios is most likely correct? [note: the Information Ratio is the amount of excess risk-based return or alpha earned per unit of standard deviation of alpha]

A. Active - Lowest Information Ratio because alpha or out-performance is so hard to achieve and sustain while investment costs can be a large drag on returns, Passive - the Information Ratio is undefined since alpha by definition is zero, and Semi-Active - Highest Information Ratio because adding alpha is low cost and fairly reliable due to the simplicity and mostly mechanical nature of the alpha strategies.

B. Active – Second-Highest Information Ratio because alpha or out-performance is achievable and usually out-weighs investment costs, Passive - the Highest Information Ratio since the cost of investing is or can be near zero, and Semi-Active - Lowest Information Ratio because alpha, if achieved at all, is likely to be very low.

C. Active - Highest Information Ratio because alpha or out-performance can be the highest, Passive - Second Highest Information Ratio because investment costs are so low, and Semi-Active - Lowest Information Ratio because the cost of adding alpha is high due to the complexity of the Semi-Active alpha strategies.

Answer 1

B. Sector-Rotation Trades: Using this strategy, bond traders are looking to take advantage of market changes they are forecasting by buying into bond market sectors that will out-perform the overall bond market and/or move away from sectors they expect to under-perform.

A. Active - Lowest Information Ratio because alpha or out-performance is so hard to achieve and sustain while investment costs can be a large drag on returns, Passive - the Information Ratio is undefined since alpha by definition is zero, and Semi-Active - Highest Information Ratio because adding alpha is low cost and fairly reliable due to the simplicity and mostly mechanical nature of the alpha strategies.