Reading 27: Fixed-Income Portfolio ManagementPart I－LOS a investment, contrast, respect

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CFA Institute Area 8-11, 13: Asset Valuation
Session 8: Management of Passive and Active Fixed Income Portfolios
Reading 27: Fixed-Income Portfolio ManagementPart I
LOS a: Compare and contrast, with respect to investment objectives, the use of liabilities as a benchmark with the use of a bond index as a benchmark.

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Fixed-income investors whose objective is to replicate the performance of an index specify the benchmark:

A) in terms of its liability structure.

B) in terms of its duration.

C) in terms of its duration and convexity.

D) as a bond index.

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 Answer and Explanation

Fixed-income investors whose objective is to replicate the performance of an index specify the benchmark in terms of a bond index.

Fixed-income investors whose objective is to replicate the performance of an index specify the benchmark in terms of a bond index.

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If a bond portfolio manager specifies liabilities as a benchmark, she is attempting to earn a return that is:

A) as high as possible.

B) equal to or higher than the return promised to the liability holders.

C) the least risky.

D) higher than an index.

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Answer and Explanation

The manager that specifies liabilities as a benchmark must ensure that the rate of return earned in the portfolio satisfies the return promised to liability holders. (This objective may be accomplished by earning equal to or higher than the promised return.)

The manager that specifies liabilities as a benchmark must ensure that the rate of return earned in the portfolio satisfies the return promised to liability holders. (This objective may be accomplished by earning equal to or higher than the promised return.)

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If a bond portfolio manager has specified the benchmark in terms of a bond index, she is attempting to earn a return that is:

A) less risky than the index.

B) equal to or superior to the index.

C) higher than the return promised to the liability holders.

D) as high as possible.

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Answer and Explanation

The manager that uses an index as a benchmark is attempting to earn a rate of return that is equal to or superior to the index.

The manager that uses an index as a benchmark is attempting to earn a rate of return that is equal to or superior to the index.

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Why should a pension fund manager NOT manage against a typical broad-based bond market index?

A) The manager might outperform the index.

B) The manager might under perform the index.

C) The duration of a typical broad-based bond market index and the liabilities of a pension fund are not similar.

D) This indexing strategy may produce tracking error risk.

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Answer and Explanation

The pension fund manager should define the benchmark in terms of the pension liabilities that must be satisfied. Most broad-based bond market indexes have shorter durations. If the pension fund manager decides to use a bond index, then he should chose one that matches the duration of the pension plan.

The pension fund manager should define the benchmark in terms of the pension liabilities that must be satisfied. Most broad-based bond market indexes have shorter durations. If the pension fund manager decides to use a bond index, then he should chose one that matches the duration of the pension plan.

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Which of the following is a difference between the investment objective for a liability based benchmark and an index based benchmark? If liabilities are chosen as a benchmark:
 

A) the objective is to match the amount and timing of the liability payments.

B) the objective is only return oriented.

C) the objective has to be more risk averse.

D) a return higher than the liability has to be achieved by any means.

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Answer and Explanation

The objective when managing a portfolio against a liability is to maintain sufficient portfolio value to meet the liabilities.
  

[此贴子已经被作者于2008-9-18 17:53:53编辑过]

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Which of the following is a difference between the investment objective for a liability based benchmark and an index based benchmark? If a bond index is chosen as a benchmark the:

A) bond index has to be outperformed on a risk-adjusted basis.

B) objective will be less risk averse.

C) cash flows of the bonds underlying the index have to be matched exactly.

D) objective is only return oriented.

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Answer and Explanation

Although you may wish to outperform an index, an index managers objective would not be to outperform the index, but only to match the indexs return results.