IAR Investment Vehicles 4 — Questions and Answers
Question 1: A fund of funds investing in multiple hedge funds primarily offers investors:
- Guaranteed returns above the risk-free rate
- Diversification across hedge fund strategies with additional fee layers (Correct answer)
- Direct ownership of the underlying hedge fund positions
- Elimination of lock-up periods
Correct answer: Diversification across hedge fund strategies with additional fee layers
Fund of funds provide diversification across multiple hedge fund managers and strategies but add an additional management fee layer on top of underlying fund fees.
Question 2: Which risk is MOST unique to mortgage-backed securities compared to traditional bonds?
- Credit risk
- Interest rate risk
- Prepayment risk (Correct answer)
- Liquidity risk
Correct answer: Prepayment risk
Prepayment risk—the possibility that homeowners will refinance or pay off mortgages early when rates fall—is a distinctive risk of MBS not present in standard bonds.
Question 3: Under the Investment Company Act of 1940, a diversified management company must have at least what percentage of assets in no more than 5% of any one issuer?
- 50%
- 75% (Correct answer)
- 85%
- 100%
Correct answer: 75%
A diversified fund must invest at least 75% of assets such that no more than 5% goes to any single issuer and it holds no more than 10% of any issuer's voting securities.
Question 4: Which feature of a variable life insurance policy distinguishes it from whole life insurance?
- Variable life has no death benefit
- The cash value is invested in separate account sub-accounts with variable returns (Correct answer)
- Variable life premiums are always lower than whole life
- Variable life policies never lapse
Correct answer: The cash value is invested in separate account sub-accounts with variable returns
Variable life insurance places cash value in separate account sub-accounts chosen by the policyholder, so both cash value and potentially the death benefit fluctuate with investment performance.
Question 5: A TIPS (Treasury Inflation-Protected Security) adjusts which component based on CPI changes?
- The coupon rate only
- The maturity date
- The principal value, with coupon calculated on the adjusted principal (Correct answer)
- The tax treatment of interest income
Correct answer: The principal value, with coupon calculated on the adjusted principal
TIPS principal is adjusted upward with inflation (or downward with deflation) and the fixed coupon rate is applied to the inflation-adjusted principal.
Question 6: An investor seeking exposure to commodities without taking physical delivery would most likely use:
- Spot market purchases
- Commodity futures or commodity ETFs (Correct answer)
- Real estate investment trusts
- Corporate bonds of commodity companies
Correct answer: Commodity futures or commodity ETFs
Commodity futures contracts and commodity ETFs provide economic exposure to commodity price movements without requiring physical ownership or delivery of the commodity.
Question 7: Which type of annuity payout option guarantees income for the annuitant's lifetime but provides no death benefit to heirs?
- Life with period certain
- Joint and survivor annuity
- Straight life (life only) annuity (Correct answer)
- Installment refund annuity
Correct answer: Straight life (life only) annuity
A straight life annuity pays income for the annuitant's lifetime only; payments cease at death with no residual benefit to beneficiaries, resulting in the highest periodic payment.
IAR Investment Vehicles 4
A fund of funds investing in multiple hedge funds primarily offers investors: