GIT CS 7646 ML4T EXAM 1 | 2025/2026 UPDATE | 791
QUESTIONS AND ANSWERS | WITH COMPLETE
SOLUTIONS.
Question 1: Why did it become a good investment to bet against mortgage-
backed securities.
A) The default rate on the mortgages kept rising.
B) Rating agencies were accurately assigning ratings.
C) Banks were incentivized to issue more and more mortgages.
D) A and C Answer - Correct answer: D
Question 2: In terms of the fundamental law, when aiming for high
performance, you can make up for low skill with .
A) low breadth
B) low sharpe ratio
C) high breadth
D) high volatility Answer - Correct answer: C
Question 3: Is Bollinger Bands a leading indicator?
,A) Yes
B) No, Bollinger Bands is a lagging indicator
C) No, Bollinger Bands is not an indicator
D) No, Bollinger bands is neither a leading or a lagging indicator Answer -
Correct answer: B
Question 4: What should you do when the stock hits the bottom Bollinger
Band?
A) Hold your position (don't change your position at all)
B) Exit any position you currently have and then hold at 0 shares
C) Short the stock to have negative shares
D) Long the stock to have positive shares Answer - Correct answer: D
Question 5: Who was the first bank Michael approached to make him the
CDSs?
A) JP Morgan
B) Goldman Sachs
C) Deutsche Bank
D) Bank of America Answer - Correct answer: B
Question 6: If the Information Coefficient is doubled and the trading
opportunities are multiplied by 9, what happens to the Information Ratio.
A) The Information Ratio is multiplied by 1 (remains unchanged)
B) The Information Ratio is multiplied by 4.5
,C) The Information Ratio is multiplied by 6
D) The Information Ratio is multiplied by 18 Answer - Correct answer: C
Question 7: What is the best way an investor who is lacking in skill can beat a
more skillful investor?
A) Hire skillful people
B) Make smarter trades
C) Make more trades per day
D) Pick better stocks Answer - Correct answer: C
Question 8: Which statement is true regarding the Fundamental Law of
Portfolio Management?
A) IR = IC * sqrt(BR)
B) IC = IR * sqrt(BR)
C) BR = IC * IR
D) IR = IC + sqrt(BR) Answer - Correct answer: A
Question 9: Which of the following can not improve your performance based
on the Fundamental Law?
A) Improve your skill
B) Increase the Breadth
C) Increase the IC and BR
D) Decrease breadth but improve the skill Answer - Correct answer: D
, Question 10: What does CDS stand for?
A) Collateralized Debt Swap
B) Credit Default Swap
C) Collateralized Debt Security
D) Credit Default Security Answer - Correct answer: B
Question 11: In the movie "The Big Short", what did Credit Default Swaps do?
A) Insured the bonds against failure and the insurer paid the claim if the
underlying bonds fail
B) Insured the bonds against failure and the insurer paid the claim if the
underlying bonds make money
C) To increase employees
D) As an annual practice Answer - Correct answer: A
Question 12: Which of the following is not the keys of Grinold's fundamental
law?
A) Skill
B) Performance
C) Luck
D) Breadth Answer - Correct answer: C
Question 13: Which of these scenarios does not indicate an upward trend in
stock price:
QUESTIONS AND ANSWERS | WITH COMPLETE
SOLUTIONS.
Question 1: Why did it become a good investment to bet against mortgage-
backed securities.
A) The default rate on the mortgages kept rising.
B) Rating agencies were accurately assigning ratings.
C) Banks were incentivized to issue more and more mortgages.
D) A and C Answer - Correct answer: D
Question 2: In terms of the fundamental law, when aiming for high
performance, you can make up for low skill with .
A) low breadth
B) low sharpe ratio
C) high breadth
D) high volatility Answer - Correct answer: C
Question 3: Is Bollinger Bands a leading indicator?
,A) Yes
B) No, Bollinger Bands is a lagging indicator
C) No, Bollinger Bands is not an indicator
D) No, Bollinger bands is neither a leading or a lagging indicator Answer -
Correct answer: B
Question 4: What should you do when the stock hits the bottom Bollinger
Band?
A) Hold your position (don't change your position at all)
B) Exit any position you currently have and then hold at 0 shares
C) Short the stock to have negative shares
D) Long the stock to have positive shares Answer - Correct answer: D
Question 5: Who was the first bank Michael approached to make him the
CDSs?
A) JP Morgan
B) Goldman Sachs
C) Deutsche Bank
D) Bank of America Answer - Correct answer: B
Question 6: If the Information Coefficient is doubled and the trading
opportunities are multiplied by 9, what happens to the Information Ratio.
A) The Information Ratio is multiplied by 1 (remains unchanged)
B) The Information Ratio is multiplied by 4.5
,C) The Information Ratio is multiplied by 6
D) The Information Ratio is multiplied by 18 Answer - Correct answer: C
Question 7: What is the best way an investor who is lacking in skill can beat a
more skillful investor?
A) Hire skillful people
B) Make smarter trades
C) Make more trades per day
D) Pick better stocks Answer - Correct answer: C
Question 8: Which statement is true regarding the Fundamental Law of
Portfolio Management?
A) IR = IC * sqrt(BR)
B) IC = IR * sqrt(BR)
C) BR = IC * IR
D) IR = IC + sqrt(BR) Answer - Correct answer: A
Question 9: Which of the following can not improve your performance based
on the Fundamental Law?
A) Improve your skill
B) Increase the Breadth
C) Increase the IC and BR
D) Decrease breadth but improve the skill Answer - Correct answer: D
, Question 10: What does CDS stand for?
A) Collateralized Debt Swap
B) Credit Default Swap
C) Collateralized Debt Security
D) Credit Default Security Answer - Correct answer: B
Question 11: In the movie "The Big Short", what did Credit Default Swaps do?
A) Insured the bonds against failure and the insurer paid the claim if the
underlying bonds fail
B) Insured the bonds against failure and the insurer paid the claim if the
underlying bonds make money
C) To increase employees
D) As an annual practice Answer - Correct answer: A
Question 12: Which of the following is not the keys of Grinold's fundamental
law?
A) Skill
B) Performance
C) Luck
D) Breadth Answer - Correct answer: C
Question 13: Which of these scenarios does not indicate an upward trend in
stock price:
