1.Assume that a hedge fund provides a large positive alpha. The fund can take
　　leveraged long and short positions in stocks. The market went up over the period.
　　Based on this information,
　　A. If the fund has net positive beta, a11 of the alpha must come from the market.
　　B. Ifthe fund has net negative beta, part ofthe alpha comes from the market.
　　C. Ifthe fund has net positive beta, part ofthe alpha comes from the market.
　　D. Ifthe fund has net negative beta, a11 ofthe alpha must come from the market.
　　2.Which ofthe following statements about credit risk models is correct?
　　A. KMV models offer a structural approach to measuring credit risk that is based on credit migration.
　　B. CreditRisk+ models offer an actuarial approach to measuring credit risk that treats the bankruptcy and recovery processes as endogenous.
　　C. KMV models are an extension of Merton's option pricing model employing equity price volatility as a proxy for asset price volatility.
　　D. CreditRisk+ models, like the reduced-form models, use a chi-squared distribution to describe default.
　　3.With regard to the factors that determine recovery rates of traded bonds, which of the following statements is false?
　　A. The liquidity of the debtor's collateral has an impact of recovery rates of the firm's traded bonds.
　　B. The presence of more bank loans increases the recovery rates of the firm's traded bonds.
　　C. The seniority of debtor's debt has an impact of recovery rates of the firm's traded bonds.
　　D. The value of the debtor's collateral has an impact of recovery mtes of the firm's traded bonds.
　　Answer:
　　1.C
　　Because the market went up, a portfolio with positive beta will have part of its positive performance due to the marke effect. A portfolio with negative beta will have in part a negative performance due to the market. Answer A) is incorrect, because the fund manager could still have generated some of its alpha through judicious stock picking. Answers B and D are incorrect, because a negative beta combined with a rising market should lead to a decrease,not an increase,in the alpha.
　　2.C
　　A is incorrect. KMV models are NOT based on credit migration.
　　B is Incorrect. In CreditRisk+ models, the bankruptcy/recovery processes are exogenous.
　　C is Correct. KMV models employ equity price volatility as a proxy for asset price voiatility.
　　D is lncorrect. CreditRisk+ models use a Poisson or Poisson-like distribution to describe default.
　　3.B
　　Seniority defines the order of priority of the claimants with respect to the assets when the firm defaults. The value and the liquidity of the collateral have an impact of recovery rates. Bank debt would actually decrease the recovery rates ofthe traded bonds, because bank debt tends to be senior and has the highest level of collateralization, the more bank financing a finn uses, the lower the recovery rate on the traded bonds.