CFM Quantitative Methods & Statistics for Fund Management 3

Question 1

Why is the geometric mean return preferred over the arithmetic mean for multi-period performance reporting?

Accepted Answer

Geometric mean accounts for compounding while arithmetic mean does not

Answer

Arithmetic mean accounts for compounding while geometric mean does not

Answer

They are equivalent for all practical purposes in fund management

Answer

Geometric mean is always higher than the arithmetic mean

Question 2

What is the primary limitation of using historical volatility to forecast future portfolio risk?

Accepted Answer

Historical volatility assumes past patterns of return dispersion will repeat in the future

Answer

Historical volatility is too computationally expensive to calculate

Answer

Historical volatility cannot be calculated for periods shorter than one year

Answer

Historical volatility consistently overestimates future risk in all conditions

Question 3

Which method is most commonly used to assess whether a fund manager generated genuine alpha after controlling for systematic risk?

Accepted Answer

Jensen's alpha from CAPM regression

Answer

Black-Scholes option pricing model

Answer

Fama-French Three-Factor Model alpha

Answer

Arbitrage Pricing Theory with five factors

Question 4

What does a tracking error of 4% indicate for an active equity fund manager?

Accepted Answer

The annualized standard deviation of the fund's active returns versus the benchmark is 4%

Answer

The fund underperformed its benchmark by 4% annually

Answer

The fund outperformed its benchmark by 4% annually

Answer

The fund's beta deviates 4% from 1.0

Question 5

What does the Information Ratio measure in active fund management?

Accepted Answer

The consistency of alpha generation per unit of tracking error

Answer

The efficiency of a fund's data management systems

Answer

The ratio of public to private information used in decisions

Answer

The correlation between manager decisions and market returns

Question 6

A fund manager wants to determine whether their strategy's alpha is statistically significant. Which test is most appropriate?

Accepted Answer

t-test on the regression intercept (alpha)

Answer

Chi-square test for independence

Answer

F-test for overall model significance

Answer

Mann-Whitney U test

Question 7

What is the key advantage of bootstrapping over traditional parametric methods in fund performance analysis?

Accepted Answer

It does not require assumptions about the underlying return distribution

Answer

It requires fewer historical data points to produce reliable estimates

Answer

It always produces higher Sharpe ratios than parametric methods

Answer

It eliminates autocorrelation from return series automatically