Reading 28: Relative-Value Methodologies for Global Corpora credit, management

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CFA Institute Area 8-11, 13: Asset Valuation
Session 8: Management of Passive and Active Fixed Income Portfolios
Reading 28: Relative-Value Methodologies for Global Corporate Bond Portfolio Management
LOS a: Discuss relative-value analysis in top-down and bottom-up approaches to credit bond portfolio management.

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Which of the following best describes the basis for relative-value analysis?

A) Identifies mispricings.

B) Identifies the value of corporate bonds relative to government bonds.

C) Generates rankings of expected returns.

D) Determines the value of an active investment strategy relative to a passive strategy.

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Answer and Explanation

Relative value refers to the ranking of fixed-income investments by sectors, structures, issuers, and issues in terms of their expected performance during some future interval.

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Which of the following is the major emphasis of the bottom-up approach of classic relative-value analysis? Identifying:

A) high-convexity issues.

B) individual issues that are expected to outperform their peer groups.

C) optimal allocations to individual issuers.

D) sector allocations that are expected to outperform.

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Answer and Explanation

Bottom-up approaches focus on security by security analyses in the attempt to find those individual issues expected to outperform others.

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In the bond market, relative-value analysis refers to the:

A) relative risk and return characteristics between a corporations common stock and its debt issues.

B) relative market value of each holding to the total value of the portfolio.

C) total market value of the portfolio relative to the index.

D) methodologies employed to generate rankings of fixed income securities according to various attributes such as sectors and expected performance.

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Answer and Explanation

Relative-value analysis refers to several related methodologies used to rate and rank fixed-income securities.

Relative-value analysis refers to several related methodologies used to rate and rank fixed-income securities.

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In classic relative-value analysis the top-down approach refers to:

A) ranking the holdings in a corporate bond portfolio according to the relative market value of each asset class, beginning with the highest value.

B) using large-scale economic information to allocate funds to various corporate asset classes.

C) ranking the holdings in a corporate bond portfolio according to the risk of each asset class, beginning with the least risky.

D) looking for undervalued assets and ranking them from most to least undervalued.

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Answer and Explanation

Large scale (i.e. macro) economic information concerns data such as inflation, interest rate changes, and the level and direction of the overall economy (both domestic and foreign). Top-down analysis seeks to allocate funds to those issues that would benefit the most from the expected large-scale economic changes/trends.

Large scale (i.e. macro) economic information concerns data such as inflation, interest rate changes, and the level and direction of the overall economy (both domestic and foreign). Top-down analysis seeks to allocate funds to those issues that would benefit the most from the expected large-scale economic changes/trends.