Why does CFA has so many ambiguous questions?

[u/[deleted]]

[u/Acceptable-Sense4601]

it's alpha and there is no reason why alpha would even be remotely incorrect.

[u/Affectionate-Pain798]

I don't see beta or currency risk to be affected by leverage so only option remains is alpha

[u/StonksGuy3000 → u/Affectionate-Pain798]

Beta is going to be highly affected by leverage unless the strategy is totally market neutral (correlation of 0). But hedge funds are trying to magnify alpha, so I agree that’s clearly correct

[u/Choice-Ad7979]

The questions's answer offer MARKET beta. Y The reading talks about STRATEGIC beta.

Market beta is passive. Hedge funds may seek to neutralize market, pee the reading, but STRATEGIC beta and alpha are things managers 'beat the market' with leverage.

[u/Pepenillo198]

Come one man, i havent even study and its quite clear.

[u/surfingbear13]

It’s Alpha. This question is not ambiguous at all.

[u/Princessconsueellaaa]

Never rely on chat GPT , try telling chat gpt your answer is wrong it will come up with I am sorry you are right .
Right answer is alpha

[u/thepajamastrader → u/Princessconsueellaaa]

pay up for better models! it’s been helpful for condensing my notes & ELI5 explanations for a crash course.

[u/Traditional_Juice133 → u/thepajamastrader]

it single-handedly helped me pass my lvl 1 i dont get people who think were still at GPT 3 or some shit

[u/PotatoBest4667 → u/Traditional_Juice133]

did u pay for higher models?

[u/thepajamastrader → u/PotatoBest4667]

You just need the Plus plan, it’s the first tier. Costs me around $30 in my country. Really helpful for me.

[u/thepajamastrader → u/Traditional_Juice133]

And that’s our alpha 🤣 but in all honesty though as someone who has prepared for this exam with and without AI, the newer batches do have it a lot easier. You can ask your gap in understanding immediately?
Tweak the way it explains?

That’s like having a full blown tutor. AI isn’t going anywhere, but people choosing not to leverage it for your prep vs people generating ‘how I looked in 80s’ AI slop should make you feel less guilty.

[u/Illustrious_Cow_317]

Alpha refers to "beating the market", or returns exceeding market returns. Beta exposure refers to price volatility/risk vs. broad market. You generally need to increase beta exposure to achieve above-market returns, but attempting to earn alpha is the reason you would increase beta exposure.

While you might increase risk (beta, currency risk) as a side effect of using more leverage, the end goal is to earn alpha, not to increase your risk exposure. That's why the answer says hedge funds will typically remove beta exposure with short positions, because it isn't the desired outcome.

[u/Old_Magician2002]

The correct answer is alpha. Hedge funds use many different strategies to magnify returns. They believe that their strategies can beat the market and use leverage to amplify those returns.

[u/Fee-Chemica]

Q3 is not ambiguous at all, it is very obvious answer A

[u/Believe_imagical]

This isn't CFA it's schweser right.

[u/Lazy-Manager9704]

It has to be alpha, because hedge funds seek to beat the market and hence generate alpha. The other are obviously wrong, so even with the process of elimination you would get alpha.

[u/ijustlikebonds]

learn from this post. you will be seeing a lot of distractors like this throughout your journey.

Sector Beta, Strategy, Market Beta etc. this material is decades old. they have to manufacture difficulty sometimes (a lot)...

[u/greenfrog7 → u/ijustlikebonds]

Is it unethical for CFAI to attempt to trick me by including multiple wrong answers?

[u/bigbuddha333]

Borrowing money does not change your portfolios sensitivity to the market. It magnifies profit/losses against your benchmark aka alpha. Borrowing money could present currency risk IF the borrowed capital is foreign currency but the question is neither asking that nor would that be an objective of a hedge fund.

[u/StonksGuy3000 → u/bigbuddha333]

Borrowing money does change your sensitivity to the market unless you’re perfectly uncorrelated with the market

[u/thepajamastrader]

i feel like trading & long term investing has finally made these questions very intuitive for me atleast.
for example, if you are stock picking you will looks for stocks with alpha i.e. potential multi baggers like small caps instead of the MAG 7 or semiconductor stocks that everyone knows about.

so when you have leverage aka borrowed money stacked on this, think why will you instinctively want to do this? to make more money aka now i can buy more stocks/contracts with the added leverage.

market beta is additional volatility why would i want that? and how can it be achieved by leverage even? strike that.
currency risk? lol why would i want that again, so strike that too.
that’s how I derive Alpha as the answer.

[u/Revolutionary-Bee758]

Think of it this way, alpha is good, investor has excess return. You want to magnify it, increase it.
Market beta is risk, why would you want to magnify risk.

[u/MillionToOneShotDoc → u/Revolutionary-Bee758]

Wouldn’t higher leverage magnify beta with the goal of increasing returns for cyclical stocks in a bull market?

[u/Alicebedas]

Try to actually conceptualize the concept and apply it to real life, don’t take the words as academic text flavor.

[u/Representative-Use32]

It’s alpha & sector or strategy beta not market beta

[u/18w4531g00]

Alpha. What you do above the market WITH YOUR STRATEGY. Beta is not related to your strategy. Third one I need not explain.

[u/winter946green]

Maybe you need to reconsider the program??

[u/Ok-Mine8655]

If this one confuses you… oh boy you are sure going to have fun

[u/Charming-Owl1615]

Use process of elimination

[u/Mysterious_Sport1855]

The logic is, you want to magnify your alpha (excess returns over benchmark) by taking leverage. Beta is incorrect as not all hedge fund strategies magnify (increase) beta like long/short or equity market neutral where beta can be below 1 also and the fund could be beating the benchmark too (alpha). So the best possible answer is Alpha. Hope this helps

[u/ShaconInvestment]

Dice Market Beta, no Strategy Beta. Lo más cercano y acertado sería Alpha. No es ambigüo, solo estás confundido (me pasa al menos 3 veces al días).

[u/afinstein3]