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Textbook Quiz – Week 4
Copyright 2026, Michael Robbins
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1. During model training the following (training loss, validation loss) are observed: 75,000 steps (1.90, 2.16); 100,000 (1.82, 2.11); 125,000 (1.76, 2.07); 150,000 (1.70, 2.14). What is the most defensible checkpoint? A) 150,000 steps B) 100,000 steps C) 75,000 steps D) 125,000 steps Type the letter (A, B, C, or D) of the best answer.
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2. A strategy earns steady premiums by selling equity-index puts. During market declines the puts lose value, implied volatility rises, bid-ask spreads widen, and the prime broker simultaneously increases collateral haircuts. What is the best description? A) Wrong-way risk: exposure and financing deteriorate together B) Basis risk that can be eliminated by increasing leverage C) Right-way risk because collateral requirements rise with expected returns D) Diversifiable idiosyncratic risk Type the letter (A, B, C, or D) of the best answer.
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3. An alpha model strongly favors leveraged bank equities. The optimizer's risk model includes only broad equity-market beta and treats all stocks within the market as homogeneous. The resulting portfolio places 55% of capital in banks. What is the principal modeling failure? A) The portfolio is diversified because it holds many individual bank stocks. B) Bank exposure should be ignored because all holdings are legally equities. C) The optimizer has correctly discovered a risk-free arbitrage. D) Risk omissions interact with alpha and invite optimizer error Type the letter (A, B, C, or D) of the best answer.
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4. A credit model finds that large employee layoffs precede corporate default. Management concludes that prohibiting layoffs will reduce default risk. What is the strongest objection? A) Layoffs may reveal latent distress; association is not proof of causality B) The result is causal because layoffs occur before default. C) Predictive variables can never be used in credit models. D) Default is always caused by interest rates rather than operating decisions. Type the letter (A, B, C, or D) of the best answer.
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5. A relative-value credit trade earns carry in normal markets, but its financing spread widens and margin requirements rise exactly when the asset spread moves against it. What risk is most important? A) Benchmark-tracking risk only. B) A risk-free arbitrage created by positive carry. C) Pure idiosyncratic risk removable by adding leverage. D) Wrong-way risk between exposure, financing, and liquidity. Type the letter (A, B, C, or D) of the best answer.
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6. At the optimal portfolio, the Lagrange multiplier associated with a sector-weight cap indicates that the objective would improve by approximately 12 basis points for every one-percentage-point relaxation of the cap. What is the first-order benefit of relaxing the cap by three percentage points? A) 4 basis points B) 24 basis points C) 36 basis points D) 12 basis points Type the letter (A, B, C, or D) of the best answer.
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7. Two portfolios have scenario returns. Portfolio A: expansion 8%, stagnation 4%, crisis -6%. Portfolio B: expansion 6%, stagnation 3%, crisis -1%. A highly uncertainty-averse investor uses a maximin rule. Which portfolio is selected? A) Portfolio A, because it has the highest expansion return B) Portfolio A, because its average return is higher C) Portfolio B, because its worst outcome is -1% rather than -6% D) Either portfolio, because robust optimization ignores scenarios Type the letter (A, B, C, or D) of the best answer.
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8. Portfolio A has a higher expected return but a much worse stress outcome than Portfolio B. The investor has a hard minimum wealth requirement. Which comparison is most relevant? A) Expected return alone, ignoring wealth-floor breach risk. B) Number of line items in the holdings file. C) Alphabetical asset-class order, regardless of objective. D) Worst-case or ES behavior relative to the wealth floor. Type the letter (A, B, C, or D) of the best answer.
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9. A small-cap growth manager's rolling factor exposures gradually shift toward large-cap value. Recent performance remains strong, but the manager continues to use the original style benchmark. What is the most appropriate response? A) Reclassify every security according to the manager's marketing materials. B) Continue using the original benchmark because stated mandates never change. C) Ignore factor exposures if total return exceeds the benchmark. D) Use current holdings and factor analysis to test mandate drift Type the letter (A, B, C, or D) of the best answer.
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Copyright 2026, Michael Robbins