R02 Hedge funds, absolute return, structured and Sharia-compliant products: free practice questions

1. Question 1 of 5

   What do hedge fund managers generally aim for?

   Option A: Positive absolute returns, whatever the market doesOption B: Returns that closely track a chosen market indexOption C: Long-only exposure to equities and bondsOption D: Guaranteed capital with no volatility

   Show answer

   The answer is A: Positive absolute returns, whatever the market does

   Hedge funds use alternative strategies, such as hedging, shorting, gearing, derivatives and arbitrage, aiming for positive absolute returns with limited volatility, often with limited or negative correlation to markets.

   Why the other options are wrong

   B

   Hedge funds don't aim to track an index.

   C

   They generally don't adopt long-only strategies.

   D

   They carry risk and aren't guaranteed.

2. Question 2 of 5

   What is the main drawback of a fund of hedge funds?

   Option A: It can't use any derivativesOption B: Layered fees, which can make it expensiveOption C: It can only be bought by pension fundsOption D: It gives no diversification across managers

   Show answer

   The answer is B: Layered fees, which can make it expensive

   Investors pay the fund of funds' fees plus those of the underlying hedge funds, and possibly performance fees, which can significantly increase the overall cost.

   Why the other options are wrong

   A

   Underlying funds may use derivatives.

   C

   Funds of funds opened hedge funds to retail investors.

   D

   Spreading across managers is its purpose.

3. Question 3 of 5

   A simple capital-protected structured product linked to the FTSE 100 combines a zero-coupon bond with what?

   Option A: Direct holdings of FTSE 100 sharesOption B: A put option on the indexOption C: A call option on the indexOption D: A with-profits fund

   Show answer

   The answer is C: A call option on the index

   The zero-coupon bond grows to repay the capital at maturity. The rest, after costs, buys a call option giving index growth, usually capped. Investors give up dividends in return for protection.

   Why the other options are wrong

   A

   It doesn't buy the shares.

   B

   A call option provides the upside exposure.

   D

   It doesn't use smoothing.

4. Question 4 of 5

   Which of the following are potential drawbacks of structured products? 1. Caps on participation can limit returns in a strong market 2. Early encashment may be impossible or costly 3. Capital protection, once lost, can't be regained 4. Returns depend entirely on a fund manager's stock picking

   Option A: 1, 2, 3 and 4Option B: 1, 2 and 3 onlyOption C: 2, 3 and 4 onlyOption D: 1 and 2 only

   Show answer

   The answer is B: 1, 2 and 3 only

   Drawbacks include caps, kick-outs, averaging, fixed terms with costly or impossible early exit and capital protection that can be lost. Most aren't exposed to a manager's style, unless linked to a fund.

   Why the other options are wrong

   A

   Statement 4 is wrong for most index-linked products.

   C

   There's usually no exposure to a manager's skill.

   D

   Lost capital protection can't be regained, which is also a drawback.

5. Question 5 of 5

   What are the two most important impacts of Sharia law on Islamic finance?

   Option A: No dividends, and no capital gainsOption B: No foreign investment, and no bank accountsOption C: No paying of interest, and no investing in prohibited activitiesOption D: No equity investment, and no property investment of any kind

   Show answer

   The answer is C: No paying of interest, and no investing in prohibited activities

   Sharia law restricts paying interest (Riba) and investing in areas such as gambling, alcohol, pork and tobacco. Compliant investments must be certified by Sharia experts, usually a board.

   Why the other options are wrong

   A

   Both can be permissible.

   B

   Neither is prohibited.

   D

   Sharia-compliant equity and property funds exist.

R0 Exam Prep is an independent revision tool. It is not produced, endorsed by or affiliated with the Chartered Insurance Institute (CII). Questions and explanations are original. Use it alongside the official study text. About R0 Exam Prep