Guys, Reading 36, page 122 q 23: Biases sharp ratio for hedge funds is most likely because: A. Eliminating extreme retruns reduces the standard deviation of retruns B. smoothing returns can overstate true gains and losses and calculated volatility C. Lengthening the measurement interval from weekly data to monthly data increses the estimate of annualized standard deviation of returns
C. Maybe B.
A. Is correct. Eliminating outliers reduces standard deviation. B is wrong because smoothed returns understate volatility (ie. illiquid assets) C is wrong because lengthening the measurement interval decreases the estimated volatility (ie R.E. that is priced quarterly vs. monthly).
McLeod81, Thanks for your response, but I’m still not clear.
For example, survivorship bias can result since some extremely poorly performing hedge funds go under and are eliminated from the sample. As a result, their poor returns are removed from the sample and standard deviation is understated. This causes us to underestimate volatility for the hedge fund universe. The understated standard deviation leads to an overstated sharpe ration (risk-return is over estimated). So eliminating extreme returns causes an upward bias in sharpe ratios for hedge funds. Smoothed returns causes an underestimation of volatility because we are removing some data points (volatility is not captured because we are not pricing the asset at all the ups and downs of the market). For the same reason, lengthening the measurement interval reduces the apparent volatility (understates it) because we are removing some of the data points. For example, there is more variation among historical daily returns than annual returns.
Thanks again for your explanation McLeod81- did you pass last year?
derswap07 Wrote: ------------------------------------------------------- > Thanks again for your explanation McLeod81- did > you pass last year? Happy to help. Yes, and now I’m starting to miss this stuff which is why I’m back here on AF.
Can you tell me what was your plan of attack? How did you study and how much-that would help me so very much. Bless you
derswap07 Wrote: ------------------------------------------------------- > Can you tell me what was your plan of attack? How > did you study and how much-that would help me so > very much. Bless you 1. Read entire CFAI Text 2. Schweser notes once through. Highlighted everything to make for easy skimming later… Included in-text problems. Occasional Q-bank. 3. Schweser notes again (skim + summary pages). End of chapter Schweser Questions. 4. CFAI EOC Questions. ALL OF THEM. 5. More Q-Bank here and there. Schweser notes again. 6. Past CFAI Essays. The whole thing / TIMED for 2006-2008 (now 2009). IPS only for 2003 - 2005 exams. Those past CFAI Essays are GOLDEN. Only way to really understand how CFAI thinks (although they have changed there minds on certain IPS topics from year-to-year). 7. CFAI EOC Questions again (IPS only). Schweser notes again (skim). Past CFAI Essay IPS questions again (until I could practically recite the questions). 8. CFAI Mock and Sample Exams. These are excellent preparation for the multiple choice portion. Save one or two of the samples (30 ? ones) for the week prior to the exam. 9. Skim everything to keep everything fresh in the days leading up to the exam. Make sure you know all the different types of questions. I came across a WACC / Asset Beta problem the DAY prior to the exam last year and was like “WTF is this?”, but was damn happy that I took the time to learn it when it was on the exam (but not on any LOS). The only surefire way to pass is to “know everything”. For me the confidence and peace of mind that I had over the summer made it worth the extra effort.
McLeod81, You are great ! I failed in last June’s exam. I saw your name last year on this forum from time to time. Congratulation ! BTW, do you really think that we shall review IPS only for 2003 - 2005 exams ? How can I get the 2003 - 2005 exams contents ?
AMC Wrote: ------------------------------------------------------- > McLeod81, > > You are great ! I failed in last June’s exam. I > saw your name last year on this forum from time to > time. Congratulation ! > > BTW, do you really think that we shall review IPS > only for 2003 - 2005 exams ? How can I get the > 2003 - 2005 exams contents ? Most of the other stuff on those older exams has changed since then (except for IPS). You can still pick out some things that are still applicable, but IPS is most important. A timed test won’t be meaningful since much of the material is outdated. There was a link posted to a site with the old exams. Try searching the L3 forum from last year. I’ll post the link if I find it.
McLeod81, I willb search the L3 forum from last year and please post if you find it. The IPS portions are difficult to conquer for me. On the other hand, sometime I am confused by the solutions to some questions in Schweser Q-Bank because they can be found in the CFAI’s readings. In this case, shall I follow Schweser ? Did you have such experiences ?
McLeod81, I will search the L3 forum from last year and please post if you find it. The IPS portions are difficult to conquer for me. On the other hand, sometime I am confused by the solutions to some questions in Schweser Q-Bank because they can “not” be found in the CFAI’s readings. In this case, shall I follow Schweser ? Did you have such experiences ?
THanks for the tips McLeod Out of curiousity, how long do you think you spend studying? To do everything that your mentioned seemed like it would take a pretty serious time committment, above and beyond the recommended 250 hours
AMC, Whenever Schweser and CFAI seem to disagree with something, go with CFAI. rhyme, I never tracked how much time I spent studying, but I’d guess it was probably around 300 hrs or so. Highlighting and marking everything up on my first pass through Schweser made the re-reads much faster. The most significant time-burner was taking timed practice exams. Figure 3 hrs to take the exam and then another two to really review the answers etc. Still, they were probably the most important part of my preparation. The essay format of the L3 exam takes some getting used to. You really need to know how give CFAI the answer that they are looking for, which can require a significant amount of work with the practice essays. This is why I think L3 is the hardest of the 3 tests to study for.
McLeod81, Thanks so much for your response. Could you elaborate a little about the practice exams you took- either CFAI past exams-or schwesers practice exams-what was the priority and how did you approach it. How many and when yoy did it. Really appreciate your response on that.
I took pretty much any test that I could get my hands on. The past CFAI essays, mock exams, and even the sample exams are very close to what you’ll see on the test. The more recent essays are the best representation of the current material, but there’s still valuable points to gain from the past 4/5 years worth of tests (maybe longer for IPS). The Schweser “book 1 / book 2” exams were good for the repetition, practice w/ the format, and just to get a greater number of questions out in front of you. Now that I think of it, it was the last Schweser Book 2 essay which had the WACC / Asset Beta question on it last year. If I hadn’t taken that practice exam, I definitely would have lost some serious points on that question. Q-bank is good for those moments when you feel like a F–ng zombie and can’t focus on ANYTHING else. It was helpful just to keep the material in my mind and provide extra practice when you are too drained to do anything harder (like the EOC questions). This thread is a prime example of that last point: http://www.analystforum.com/phorums/read.php?13,925566 Classic AF 2009
Danke ML.
McLeod81 Wrote: ------------------------------------------------------- > derswap07 Wrote: > -------------------------------------------------- > ----- > > Can you tell me what was your plan of attack? > How > > did you study and how much-that would help me > so > > very much. Bless you > > > 1. Read entire CFAI Text > > 2. Schweser notes once through. Highlighted > everything to make for easy skimming later… > Included in-text problems. Occasional Q-bank. > > 3. Schweser notes again (skim + summary pages). > End of chapter Schweser Questions. > > 4. CFAI EOC Questions. ALL OF THEM. > > 5. More Q-Bank here and there. Schweser notes > again. > > 6. Past CFAI Essays. The whole thing / TIMED for > 2006-2008 (now 2009). IPS only for 2003 - 2005 > exams. Those past CFAI Essays are GOLDEN. Only > way to really understand how CFAI thinks (although > they have changed there minds on certain IPS > topics from year-to-year). > > 7. CFAI EOC Questions again (IPS only). Schweser > notes again (skim). Past CFAI Essay IPS questions > again (until I could practically recite the > questions). > > 8. CFAI Mock and Sample Exams. These are > excellent preparation for the multiple choice > portion. Save one or two of the samples (30 ? > ones) for the week prior to the exam. > > 9. Skim everything to keep everything fresh in > the days leading up to the exam. Make sure you > know all the different types of questions. I came > across a WACC / Asset Beta problem the DAY prior > to the exam last year and was like “WTF is this?”, > but was damn happy that I took the time to learn > it when it was on the exam (but not on any LOS). > > The only surefire way to pass is to “know > everything”. For me the confidence and peace of > mind that I had over the summer made it worth the > extra effort. Vow, very impressive plan. How many hours did you put in? What was the timeline like? Can you state the priorities for the test-eoc-past exam q?