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10. Give two reasons why small-cap relative strength suggests you should
add to this sector? (6 points)
11. Copper has been selling off for the past month on an absolute basis and
relative to other currencies. As an emerging markets equity manager,
which country should you consider reducing exposure in? (3 points)
A) China
B) India
C) Mexico
D) Russia
12. Explain one reason why weakness in copper would cause you to
consider reducing exposure to this country? (3 points)
Chart 3-1
Chart 3-3
A. Chart 3-2
B. Chart 3-3
C. Neither
D. Both
14. Briefly explain the reasons for your choice. Be sure to focus your
comments on sector rotation and the possible implications for the
economy, describe the logic behind your answer. (6 points)
15. Which one of the following lists contains a mix of leading and
lagging indicators? (5 points)
16. Risk control can involve complex mathematics, but there are a number
of commonsense principles the investment professional can follow
to reduce the risk of ruin. List 3 of the most important commonsense
risk-control rules. (12 points)
17. You work for a CTA firm and have worked hard to develop several
viable trading systems covering a diversified variety of market
instruments. You have taken care to properly test these systems,
avoiding data snooping, or curve-fitting them to in-sample data.
Next, you merged these several systems into an overall portfolio
model. What method might you use to test your hypothesis and
determine the probability of your trading system succeeding? (4
points)
Briefly describe that testing method and its meaning. (6 points)
18. List three steps that, when added to a trading plan, would limit the
major disadvantage of a simple trend-following system. (6 points
total, 2 per answer)
The following sample question represents a new type of question you will
encounter during the October 2017 exam. This question includes the use of
an interactive spreadsheet table built in to the examination platform. The
purpose of the question is to test a candidate in the way an analyst on the job
may need to perform. For this question a candidate will be expected to edit
the cells of the spreadsheet to determine proper references or calculation of
formulae. This is a way of testing the candidate’s ability to recognize
accurate information and to determine its significance. The actual exam
question will include a similar testing methodology to the one described as
follows.
Note: the actual exam will provide instructions on how to activate the
spreadsheet functions in the table.”
When you activate this spreadsheet table, you’ll see something similar to this:
This allows you to edit the spreadsheet/table in the question. If you click on the
cell for the Sharpe Ratio for System 1, you can see the formula construction and
which cells the formula is referring to. This gives you the ability to check for
errors. Activating the spreadsheet and working within it are a part of answering
the exam question.
(See answer key for this question since you cannot replicate the
answer on a paper test. This explanation and sample question
id not intended for practice examination, but only for
informational purposes.)
Chart 5-1
20. You are newly hired on to XRHO Capital Management, a CTA firm.
Last year the firm took a long position in Coffee futures (KC). The
position is profitable and has met its objectives, and you are tasked
with recommending whether the current conditions suggest it would
be most favorable to sell now or to wait. Select either decision but
explain at least four points of evidence to correctly support your
decision from among the applicable signals on Chart 5-1. (16 points,
4 for each of the four points of evidence)
Answer (either sell now or hold):
22. Your predecessor recommended the firm enter the short position at
$125 and set a stop-loss at $130. If the firm had a fund of 5 million
dollars and wanted to take the trade and put only 1.5% of that
amount at risk, how many shares could be traded (assuming no loss
to gaps or slippage)? (12 points)
Chart 6-1
23. Identify which circle contains the candle (1, 2, 3, or 4) that was most
significant in forecasting a break above the resistance line. (4 points)
24. Explain two reasons for your selection in question 21. (6 points)
25. What is your short-term forecast for U.S. Treasury bond prices based on
this chart? (10 points)
Chart 7-1
You are a recently hired analyst. Your portfolio manager wants your short-
term recommendation on GDX, a gold-mining ETF. You must make the best
recommend whether it be a LONG or SHORT position, and you must
provide evidence to support your conclusion. Examine Chart 7-1: GDX. Do
you recommend a LONG or SHORT position in this security? (2 points)
26. Name and discuss the implication of the 2 most recent multi-day
candlestick patterns that support your conclusion (4 points each). For
each candle, comment if there is anything significant in the chart
that increases the strength of each candle pattern? (3 points each, 6
points total, 16 points total for question)
27. In Chart 7-1 how do the indicators Williams %R and ATR factor into
your analysis? (5 pts)
4
2
1 3
Chart 7-2
29. Examine the four labeled circles in Chart 7-2. In each circle there is a
multi-day candlestick pattern. Which circles contain formations that
are among those Bulkowski tested as most reliable? (2 points)
A) Circle 1 and 2
B) Circle 2 and 3
C) Circle 2 and 4
D) Circle 3 and 4
32. The number of rules back tested. As the number of rules increases,
does the data mining bias increase or decrease? Explain one reason
why. (5 points)
33. The number of observations (the number of trades in the back test)
used to compute the performance statistics. Does more
observations (trades) increase the bias or decrease the bias? Explain
one reason why. (5 points)
34. Correlation among rule returns. Will five uncorrelated rules increase
or decrease the bias when compared to five highly correlated rules?
Explain one reason why. (5 points)
35. Percentage of positive outlier returns. Will return samples with fat
tails comprised of several extreme values increase or decrease the
data mining bias? Explain one reason why. (5 points)
37. Which of the five factors (above) is the most important in reducing the
data mining bias (randomness)? (5 points)
7. (B)(C)(E)(F)(G)
(CMT III, Chapter 29)
1. Secret ballots
Reduces risk of social pressure. Come to meetings with views
prewritten or preference for asset allocation.
2. Devil’s advocate
It is a nice idea, but in order to be effective, the person needs to
actually believe the counterview.
3. Respect for other group members
Understand that other members are acknowledged experts in their
field. However, people tend to believe they know more than
others in almost every subject. This is especially prevalent in
financial services.
11. (A)
16. Possible answers (4 points each for any answer specified below):
1. Only risk a small amount of total capital on any one trade: no
more than 5%.
2.Determine the maximum loss for the current trade in advance.
3. Exit a trade quickly.
4. Don't meet margin calls.
5. Liquidate your worst position first when lightening up.
6. Be consistent in your trading philosophy.
7. Be sure the trading profile is compatible with your risk preference.
8. Plan for contingencies. Be prepared for exceptions.
(CMT Level III, Chapter 12)
17. This method estimates the sampling distribution’s shape by randomly
resampling the original sample of observations so as to produce new
computer-generated samples. This in turn generates the P&L trade
data from a system from 100 to 2,000 times and generates an equity
curve for each simulation. If the great majority of the equity lines of
these 100 to 2,000 simulations are without substantial drawdowns
(beyond your acceptable threshold) and meet your profitability
requirements, then your portfolio system is probably robust. It is
more likely to be profitable and less likely to fail going forward.
(CMT Level III, Chapter 2)
18. 1. We can reduce the size of our trades or stop trading trend-
following systems completely if we use one of a variety of methods
designed to identify non-trending markets, such as ADX.
(CMT Level III, Chapter 12)
2. We can cut back on trading or stop trading trend-following
systems completely when our equity curve declines by a
predefined amount. Kirkpatrick and Dahlquist in CMT Level
III Chapter 2 page 48, wrote that a standard for closing the
entire portfolio model is a percentage stop, usually around
20%.
19. In this question the error would be in the cells being referenced. This
graphic shows the CORRECT reference so you can know what it
SHOULD have looked like once it was fixed. The starting state of
that formula might have had, for example, the formula pointing to
cell B7 instead of B6, which would through off the numbers. Once
the numbers were properly configured, the correct answer among the
choices was (B) .41 and .49.
References:
(CMT Level III, Chapter 10, 12, and 23)
22. Your predecessor recommended the firm enter the short position at
$125 and set a stop-loss at $130. If the firm had a fund of 5 million
dollars and wanted to take the trade and put only 1.5% of that
amount at risk, how many shares could be traded (assuming no loss
to gaps or slippage)? (12 points)
1.5% of $5MM is $75,000; therefore in order to contain your risk of
loss to that amount, the position size in 3M (MMM) should
be set at 15,000 shares sold short at the $125 price target
level.
(CMT Level III 473—Method of trades with equal initial position
risk)
23. Circle 4
(CMT Level III 932)
24. The very small body of the candle closed at the high point, well above
the lows earlier in the day. (4 points)
A named price pattern here such as long lower shadow, hammer, or
even dragonfly doji or any other bullish pattern would be
awarded extra. (5 points)
(CMT Level III 932–934)
25. Based on the fact the resistance line was broken and both closed near
the high (2 white candles above it) it is more likely that U.S. bond
prices will rise in the short term.
(CMT Level III 946)
34. Increase. (2 pts) Note: Uncorrelated rules will increase bias; correlated
rules will decrease bias. Both statements are acceptable.
A higher correlation among the rules has the effect of reducing the
number of rules, whereas a lower correlation has the effect of
increasing the rules. The more dissimilar the rules, the greater
the opportunity to have a great coincidental fit to the
historical data, and therefore very high performance due to
good luck. (3 pts)
37. The number of observations (trades) is the single most important factor
in reducing randomness. (5 points)
Acceptable references: law of large numbers, greater amount of
testing under variety of conditions, robustness in backtesting, etc.