考试练习题及答案1.pdf

Econ252 Midterm 1 Answers 1. WHAT IS BACKFILL BIAS? WHAT IS SURVIVOR BIAS? HOW DO THEY LEAD TO ERRORS IN EVALUATING INVESTMENT OUTCOMES? These terms were used by David Swensen in his lecture. backfill bias: When a hedge fund is added to an index, the fund's past performance may be “backfilled“ into the index. For example, if the fund has been in business for two years at the time it is added to the index, past index values are adjusted for those two years to reflect the fund's performance during that period. Not all indexes backfill, but those that do introduce a bias. Usually, a hedge fund will start contributing data to an index to draw attention to recent strong performance. One of the oldest tricks in investment management is to launch multiple investment funds and then market those that happen to perform well. The practice is also common among hedge funds, who report the winners to indexes while closing down the losers. Also, index providers generally have criteria for adding a new fund to an existing index. This may include a minimum assets under management requirement, and successful funds are more likely to satisfy this criteria than unsuccessful ones. In summary, successful funds are more likely to be added to an index than unsuccessful ones, so this biases indexes that backfill. While backfilling is obviously a questionable practice, it is also quite understandable. When a provider first launches an index, they have an understandable desire to go back and construct the index for the preceding few years. If you look at time series of hedge fund index performance data, you will often note that indexes have very strong performance in the first few years, and this may be due to backfilling. survivorship bias: When a fund is dropped from an index, past values of the index may be adjusted to remove that dropped fund's past data. Inevitably, a fund will be dropped from an index if it stops providing its performance data to the index provider, and a fund will be more likely to do so following poor performance than good. Also, providers may have criteria for dropping a fund, and this may naturally cause poor performers to be dropped more often than good performers grading: - 1 point: stating these are biases that affect assessment of returns, but no specific definitions - 2 points: for above plus correct definition of one of the biases - 4 points for complete definitions of both 2. WHAT ASSUMPTIONS ARE NEEDED TO DERIVE THE CAPITAL ASSET PRICING MODEL (CAPM)? FMJF, Pg 253 - one point for each reason listed below o risk averse investors who measure risk in terms of portfolio return standard deviation o all investors have same time horizon o all investors have same expectations about future security returns and risks o capital markets perfect: assets completely divisible, no transactions costs or differential taxes, borrowing and lending rates equal to each other and same for all investors grading: - 1 point for each correctly stated assumption - 0 points for statement of what you need to use the CAPM formula (i.e. beta, risk free rate, market return) 3. HOW DID UNIVERSITY ENDOWMENT MANAGERS REACT TO THE STOCK MARKET CRASH OF 1987, AND HOW, ACCORDING TO DAVID SWENSON, SHOULD THEY HAVE REACTED? university endowments allocation to stocks contracted in the years following 1987 by more than the decline in the stock market, and so this indicates that they were selling stocks in reaction to the price decline. This appears to be market timing, which Swensen advises against. Because they did this, they missed out on some of the rise in stock the stock market in the early 1980s. grading: - 0 point: incorrect explanation of what endowment managers did - 1 point: general statement of endowments leaving the market but no specific mention of assets they left, assets they entered, etc. - 2 points: mention endowments reduced allocation to stocks - 4 points: mention endowments reduced allocation to stocks and Swenson said they should have stayed in stocks 4. HOW MAY THE “DEMOCRATIZATION OF FINANCE” BE ADVANCED THROUGH FINANCIAL INNOVATION? The democratization of finance refers to the use of finance by more and more people, which was the subject of Lecture 3, as well as the Introduction to my book New Financial Order (Introduction) that is clickable on the reading list. Example: an insurance policy, social security, etc., institutions that are designed for the broad public. grading: - 2 points: answer that democratization of finance is the use of finance by more and more people - 4 points: answer that democratization of finance is the use of finance by more and more people and given an example of finance that is used by the broad public (insurance, social security) 5. HOW ARE CLOSED END FUNDS DIFFERENT FROM OPEN-END FUNDS? WHY MIGHT THE PRICE OF A SHARE OF A CLOSED END FUND DIFFER FROM ITS NET ASSET VALUE? CEF funds issue a fixed number of shares upon inception and the shares are traded on an exchange. There are 3 impo。