Gypsy

Which of the following would least likely be a characteristic of a value portfolio using holdings-based style analysis?

A) Representation in the utility industry.

B) Low earnings volatility.

C) Below average earnings growth.

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A value manager would have high earnings volatility because they are willing to take positions in cyclical firms. Low earnings growth and representation in the utility industry would characterize a value manager.

Gypsy

Which of the following is most accurate regarding equity style index methodology? Most equity style indices are constructed using:

A) holdings-based style analysis which would make buffering more necessary compared to using returns-based style analysis.

B) returns-based style analysis which would make buffering more necessary compared to using holdings-based style analysis.

C) holdings-based style analysis which would make buffering less necessary compared to using returns-based style analysis.

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Most indices use holdings-based style analysis to characterize securities. Holding-based style analysis detects style changes more quickly than returns-based style analysis. If an index has buffering rules, a stock is not immediately moved to a different style category when its style characteristics have slightly changed. Because holdings-based style analysis detects style changes more quickly, buffering would become more necessary so that there is not excessive turnover within the index.

Gypsy

Which of the following is most accurate regarding equity style index methodology? The justification for having just two categories of style (i.e., there is only value and growth and no neutral category) is that:

A) many investment managers have a clear value or growth mandate they must follow.

B) having overlap in categories precludes a neutral category.

C) neutral categories are hard to define.

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Most indices have just two categories, value and growth (i.e., there is no neutral style index). The justification for just two categories is that many investment managers have a clear value or growth mandate and they need a benchmark that is structured similar to their mandate.

Gypsy

If an equity style index has buffering rules, the index will have:

A) less turnover and there will be lower transactions costs from rebalancing for managers tracking the index.

B) more turnover and there will be higher transactions costs from rebalancing for managers tracking the index.

C) more turnover and there will be lower transactions costs from rebalancing for managers tracking the index.

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If an index has buffering rules, a stock is not immediately moved to a different style category when its style characteristics have slightly changed. The presence of buffering means that there will be less turnover in the style indices and hence lower transactions costs from rebalancing for managers tracking the index.

Gypsy

Which of the following is most accurate regarding equity style index methodology? If style is viewed as a quantity then:

A) the market cap of some stocks will be split between value and growth indices.

B) stocks will be placed in either value or growth indices with no overlap.

C) there will be a neutral style index category.

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If style is viewed as a quantity, then there will be overlap when the style index is constructed. Some of a stock’s market cap may be assigned to value and another part could be assigned to growth. This would occur when a stock is not clearly value or growth. Whether style is viewed as a quality or a quantity does not affect whether there will be a neutral category.

Gypsy

If two analysts are classifying a portfolio by style using a style box which of the following statements is most accurate? The characterization of the fund’s size will likely be:

A) the same for each analyst and the characterization of the fund’s style will likely be different for each analyst.

B) different for each analyst and the characterization of the fund’s style will likely be different for each analyst.

C) the same for each analyst and the characterization of the fund’s style will likely be the same for each analyst.

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Categorizing portfolios by size is fairly standard in that market cap is the usual metric for evaluating size. However, different analysts may use different categorizations of value and growth attributes. For this reason, the categorization of portfolios can differ a great deal depending on the analyst.

Gypsy

Which of the following is most accurate regarding an equity style portfolio manager who has moved from financial stocks to technology stocks over time? The manager’s style is:

A) stagnant and this is not a problem for the investor.

B) drifting and this is a problem for the investor.

C) drifting and this is not a problem for the investor.

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Financial stocks are typically value stocks whereas technology stocks are typically growth stocks. Thus the manager’s style is drifting. There are two reasons why this can be a problem for an investor. First, the investor will not receive the desired style exposure. Value and growth stocks will perform quite differently over time and over the course of business cycles. Second, if a manager starts drifting from the intended style, he or she may be moving into an area outside his or her expertise.

Gypsy

Which of the following is least accurate regarding equity style drift?

A) A manager shifting from utility stocks to health care stocks is exhibiting style drift.

B) A manager shifting from high earnings volatility stocks to high P/E stocks is not exhibiting style drift.

C) A manager shifting from technology stocks to health care stocks is not exhibiting style drift.

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Style drift occurs when a manager shifts between value and growth styles over time. High earnings volatility stocks are value stocks. High P/E stocks are growth stocks. In this case the manager is drifting from value to growth.

Gypsy

What are the two main benefits to monitoring the potential style bias resulting from socially responsible investing? The benefits are the:

A) investor can change his or her social screen and the manager can determine the appropriate benchmark.

B) portfolio manager can take steps to minimize the bias and the manager can suggest alternative socially responsible portfolios to the investor.

C) portfolio manager can take steps to minimize the bias and the manager can determine the appropriate benchmark.

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Socially responsible portfolios tend to be biased towards growth and small-cap stocks. The benefits to monitoring this style bias are that the portfolio manager can take steps to minimize it and can determine the appropriate benchmark for the socially responsible portfolio.

Gypsy

A socially responsible portfolio tends to be more heavily weighted in:

A) value and small-cap stocks.

B) growth and large-cap stocks.

C) growth and small-cap stocks.

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A socially responsible portfolio tends to be more heavily weighted in growth stocks and small-cap stocks.