Concept Checker Answers

1. A The CDP strategy of writing out-of-the-money puts is most similar to selling insurance. A

perfect market-timing strategy is consistent with the CMP strategy. The CMP strategy is a protective put'strategy that involves a long put option on the underlying asset, and the underlying asset (S&P 500), which is the same as buying insurance.

2. B A return series with high positive serial correlation (autocorrelation) is an indicator of illiquidity exposure.

3. D The three sources of return variance are: the risk factors, the pairwise covariances between each risk factor, and the residual variance.

4. D The rolling window clone's volatility will not be the same as that of the entire sample history;

however, if there are no dramatic shifts in volatility, they will be similar, Although the rolling-window reduces the look-ahead bias in the fixed-weight clones, there are disadvantages, which include greater estimation error and more frequent rebalancing.

5. A The Convertible Arbitrage funds have the highest relative performance using the Sharpe measure.

The following is a review of the Risk Management and Investment Management principles designed to address the AIM statements set forth by GARPĀ®. This topic is also covered in:

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