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Textbook Quiz – Week 1
Copyright 2026, Michael Robbins
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1. A family office owns a large portfolio of low-basis securities. It wants tax-lot-level control, the ability to contribute selected positions to charity, and restrictions against realizing gains in a particular tax year. Which structure is most suitable? A) Separately managed account with customized tax guidelines B) A structured note linked to the manager's model portfolio C) An offshore feeder fund with uniform investor terms D) A standard commingled limited partnership Type the letter (A, B, C, or D) of the best answer.
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2. A fund invests primarily in privately negotiated loans that may require three to five years to exit. Investors currently receive monthly redemption rights with five days' notice and no gate. Which change best aligns the fund's liabilities with its assets? A) Preserve monthly liquidity but increase the fund's accounting reserves. B) Add lockup, notice period, and gates tied to realizable liquidity C) Use additional leverage to finance redemptions whenever investors request cash. D) Grant the largest investor a side letter permitting immediate redemption. Type the letter (A, B, C, or D) of the best answer.
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3. A strategic policy assigns 60% to growth-sensitive exposures, with an allowable range of 50% to 70%. Following a market rally, the exposure rises to 74%. Long-term capital-market assumptions have not changed, taxes are immaterial, and transaction costs are small. What is the most defensible action? A) Increase the position to 80% because recent performance confirms the allocation. B) Liquidate the entire growth allocation because it has breached its range. C) Rebalance toward the strategic target, or at minimum back inside the approved range. D) Leave the exposure at 74% indefinitely because rebalancing constitutes market timing. Type the letter (A, B, C, or D) of the best answer.
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4. A proposed trade has estimated upside of 8%, estimated downside of 1%, and apparently attractive asymmetry. However, conviction is low because the signal is based on sparse data and has not been observed in multiple regimes. Which implementation is most consistent with an opportunity-versus-conviction framework? A) Allocate the maximum permitted notional because the payoff ratio is favorable. B) Reject the idea permanently because conviction is below 50%. C) Use a small, capped-loss position or pilot trade while gathering additional evidence. D) Add the trade to the strategic allocation so that short-term uncertainty becomes irrelevant. Type the letter (A, B, C, or D) of the best answer.
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5. A strategy trades the difference between a futures price and a contractually determined settlement value. The manager is primarily estimating the convergence path and the risks that could prevent settlement, rather than estimating the asset's long-run intrinsic value. What type of model is this? A) A transient-end-state trading model B) An investment policy model C) A long-horizon economic valuation model D) A strategic asset-allocation model Type the letter (A, B, C, or D) of the best answer.
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6. A strategy is protected only by an end-of-day stop-loss. Its principal exposure can gap sharply overnight. Option-implied tail risk and bid-ask spreads have increased, while cross-position correlations have risen. The alpha signal itself remains statistically unchanged. What is the most appropriate response? A) Widen the stop-loss so temporary volatility cannot force an exit. B) Increase leverage so expected alpha offsets the additional hedging cost. C) Treat assumptions as invalidated; cut exposure or add a gap-sensitive hedge D) Maintain the position because the alpha estimate has not changed. Type the letter (A, B, C, or D) of the best answer.
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7. An investment policy statement prohibits leverage and limits illiquid assets to 10% of the portfolio. The manager identifies an unusually attractive leveraged private investment that would raise illiquid exposure to 18%. What should happen before the transaction is executed? A) Execute the trade and disclose the breach in the next quarterly report. B) Obtain verbal approval from the portfolio manager's immediate supervisor. C) Use a formal IPS amendment or do not trade D) Treat the expected return as an implicit exception to the IPS. Type the letter (A, B, C, or D) of the best answer.
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8. Following a major market decline, investment professionals disagree about whether to rebalance, reduce risk, or preserve liquidity. Which IPS feature would be most useful in preventing an improvised response? A) A statement that the portfolio should seek attractive returns B) A list of the portfolio's current securities C) A description of the manager's historical investment performance D) Bands, liquidity rules, triggers, authority, and escalation Type the letter (A, B, C, or D) of the best answer.
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9. A manager proposes using the same climate-transition product for two clients. One is a state pension subject to statutory restrictions on ESG-based decisions. The other is a charity whose governing documents require mission-related investment considerations. What is the strongest product-design response? A) Create distinct mandates and IPS terms for each client's duties and constraints B) Ignore both clients' nonfinancial constraints because expected return is the only legitimate objective. C) Place both clients in one commingled vehicle and resolve conflicts after investments are made. D) Use the identical mandate but change the product's marketing label for the state pension. Type the letter (A, B, C, or D) of the best answer.
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10. A portfolio manager identifies an attractive trade that violates the client's written duration limit. The client contact is traveling and gives verbal encouragement but no formal amendment. What is the best governance response? A) Wait for the authorized amendment or do not trade. B) Book the trade in a different account until approval arrives. C) Execute because verbal encouragement is economically equivalent to an IPS change. D) Trade at half size and document the expected return. Type the letter (A, B, C, or D) of the best answer.
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Copyright 2026, Michael Robbins