Sample Questions
Question 1
Easy
An ETF's creation unit is typically:
Solution
A is correct.
A creation unit is a large, standardized block of ETF shares (typically 25,000 to 100,000 shares, though the exact size varies by ETF) that serves as the unit of exchange in the creation/redemption process. Only authorized participants (APs) — typically large broker-dealers or market makers — can create or redeem shares in creation unit increments by exchanging the underlying securities (or cash) with the ETF issuer.
A creation unit is a large, standardized block of ETF shares (typically 25,000 to 100,000 shares, though the exact size varies by ETF) that serves as the unit of exchange in the creation/redemption process. Only authorized participants (APs) — typically large broker-dealers or market makers — can create or redeem shares in creation unit increments by exchanging the underlying securities (or cash) with the ETF issuer.
Question 2
Medium
The break-even inflation rate (BEI) is best calculated as:
Solution
C is correct.
The break-even inflation rate is the difference between the yield on a nominal (conventional) government bond and the yield on an inflation-linked (real return) government bond of the same maturity. It represents the inflation rate at which an investor would be indifferent between holding the nominal bond and the inflation-linked bond. If actual inflation exceeds the BEI, the inflation-linked bond outperforms.
The break-even inflation rate is the difference between the yield on a nominal (conventional) government bond and the yield on an inflation-linked (real return) government bond of the same maturity. It represents the inflation rate at which an investor would be indifferent between holding the nominal bond and the inflation-linked bond. If actual inflation exceeds the BEI, the inflation-linked bond outperforms.
Question 3
Hard
Based on Exhibit 1, Kim's concern about factor tilts is most justified because:
Solution
C is correct.
The fund has a market beta of 1.08 (above-market risk) and a significant HML loading of 0.58 (strong value tilt), both of which are statistically significant. This means a substantial portion of the fund's returns can be attributed to systematic factor exposures — taking more market risk and tilting toward value stocks. Since the alpha is not statistically significant (t = 1.88, p = 0.065), the evidence suggests the manager is not generating returns from stock selection skill but rather from factor exposures that could be replicated more cheaply with passive factor-tilted strategies.
The fund has a market beta of 1.08 (above-market risk) and a significant HML loading of 0.58 (strong value tilt), both of which are statistically significant. This means a substantial portion of the fund's returns can be attributed to systematic factor exposures — taking more market risk and tilting toward value stocks. Since the alpha is not statistically significant (t = 1.88, p = 0.065), the evidence suggests the manager is not generating returns from stock selection skill but rather from factor exposures that could be replicated more cheaply with passive factor-tilted strategies.
