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Frederick Kurzonkowski, CFA, employs the Treynor-Black portfolio optimization model at his firm, TBP, where he serves as portfolio manager. TBP recently decided against holding short positions in their portfolios. Kurzonkowski is asked to determine the most likely result of the short-sale prohibition on the weights allocated to the long positions in the active portfolio, and to the alpha on the active portfolio. Kurzonkowski should make the following predictions about the effects of the prohibition on short sales on the actively managed portfolio:
Allocation to
long positions
Alpha
A)
IncreasesDecreases
B)
DecreasesIncreases
C)
DecreasesDecreases



The prohibition on short sales removes the negative weights within the actively managed portfolio, along with the leverage that the short positions offer to the long positions. When short sales are allowed, more than 100% can be allocated to the long positions. When short sales are not allowed, only 100% can be allocated to the long positions. Therefore, the prohibition on short sales causes the weights to the long positions within the actively managed portfolio to fall. The alpha also is expected to fall: smaller weight is now assigned to positive alpha stocks, and there are no negative weights to assign to negative alpha stocks.

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Gemini Investment Management Company (GIMC) assumes markets will remain at equilibrium indefinitely. GIMC defines security analysis as the examination of factors affecting the value of individual securities. GIMC defines asset allocation as the examination of factors affecting the optimal allocation of assets to the market portfolio and to the risk-free asset. Given GIMC’s assumption that markets are at equilibrium indefinitely, indicate whether GIMC should place significant or insignificant emphasis on security selection and asset allocation.
A)
Insignificant emphasis on asset allocation only.
B)
Insignificant emphasis on security selection only.
C)
Insignificant emphasis on both.



When markets are at equilibrium, all asset prices will equal their fair values. Assets are neither undervalued nor overvalued. Therefore, if GIMC believes markets will remain at equilibrium indefinitely, then they should place very little, if any, emphasis on security selection. In contrast, active portfolio management is needed to determine the appropriate allocation of the client’s investment between the market portfolio and the risk free asset. Active portfolio management is needed to forecast the expected returns and risk for the market portfolio and to forecast the return on the risk-free asset. GIMC should allocate large percentages to the market portfolio for highly risk tolerant clients and high percentages to the risk-free asset for highly risk averse clients. Significant effort must be expended to determine the appropriate mix of assets for the client.

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上一主题: Portfolio Management【Reading 64】Sample
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