Few more MOCK AM Questions

Couple more MOCK AM questions: FIXED INCOME: 48. The question asks which of 3 statements is most likely false. Although statement 3 is without a doubt false, I believe that statement 2 is false too. Statement 2 is “In the typical securitization, there are a few operational or business risks to consider relative to those found in a corporation.” It’s wrong because of the word “few.” There are NO operational or business risks. It says this exactly in CFAI Volume 5 page 189 and Schweser Book 5 page 29. Statement 3 is definitely false though so I guess it is just a “more correct” answer? Bad question? DERIVATIVES: 50. Three statements here. Q asks which is true. I get why 1 is true. Can anyone explain why 2 and 3 are false? Statement 2: Gamma is smaller when there is more uncertainty about whether the option will expire in or out of the money. Statement 3: Delta is a more precise measure of teh change in the option’s value when the gamma of the option is larger. Portfolio Management: 56/57. Calculation is easy only thing is that they are using a macroeconomic model, yet using the rfr as the first term. The macroeconomic model should use the expected return from the APT. 59. Industry risk/risk indexes: what are these and what do they explain? also if the four components in the chart are components of active risk sqaure, why do they need add up to 100%? Thank you thank you thank you!

gamma is largest when an option is at the money. so if there is uncertainty if it is going to be in/out of the money, gamma should be large. 48: stmt 2, you would still have a some sort of operational risk although small, such as a servicer going out of biz. thats my guess.

when contempltating that Q i was thinking the exact opposite. if theres uncertainty, then gamma should be small. if ppl arent sure whats going gto happen arent they kind of in a “holding pattern” and theres little movement in the stock.

its not about the uncertainty, its about how close it is to the exercise price. Gamma looks like the St. Louis Arch, with the X price being right at the peak. So if the stock is near the X price, Gamma will be towards the top of the arch.

so youre saying statement 2 is false because gamma is unrelated to uncertainty? also can you help out on statemnt 3? thanks.

no, I am saying its false because gamma will be large (not small) when there is uncertainty. Because that uncertainty means the option is close to the exercise price. stmt 3: dont know that one. I am not sure that delta’s precision matters on gamma, but I might be wrong.

Statement 3: Delta is a more precise measure of teh change in the option’s value when the gamma of the option is larger. Delta is more likely to change when Gamma is larger. Therefore, it would be a LESS precise (not more precise) measure of the change in the options value.

I agree with your comments on 56 and 57. This is not correct. The intercept of a macroeconomic model should be the expected return if there is no surprise. The way the problem is constructed is saying the return will be risk free if there is no surprise. Anyone care to comment?

I felt like that when I was doing this question, I kept thinking maybe I missed something in the question. It should be the Required return but since that was not given, you had no choice but to go with the RFR. On the exam, I would have gone with the required return.

so on the q’s above: 48. so is there agreement that there may be SOME but very little operations/business risks for ABS? (like i said before books say there is none) 50. got this now. thank you. 56/57. agree with york and deep. surprised no one else has brought this up. the first term in macro models is NOT rfr 59. no responses but eh prob not that important though would appreciate some help

59: Active risk squared = active factor risk + active specific risk (so that’s why they add up to 100%) I assume industry risk and risk indexes make up the total factor risk For portfolio T: I think there is a typo regarding the active risk squared - you can also see the discussion here: http://www.analystforum.com/phorums/read.php?12,976474,977146#msg-977146