Reading 31: Equity Portfolio Management－LOS n market, equity

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CFA Institute Area 8-11, 13: Asset Valuation
Session 10: Equity Portfolio Management
Reading 31: Equity Portfolio Management
LOS n: Explain how a market-neutral portfolio can be "equitized" to gain equity market exposure.

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Which of the following is the correct benchmark for a market neutral long-short strategy equitized with S& 500 futures contracts?

A) The risk-free rate.

B) The S& 500 index.

C) The S& 500 index minus the risk-free rate.

D) The S& 500 index plus the risk-free rate.

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Answer and Explanation

If a long-short, market neutral strategy is equitized, the benchmark is the underlying index of the futures contract (in this case the S& 500).

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Which of the following is least likely to be an advantage of using an ETF instead of a futures contract to equitize a market neutral long-short strategy?

A) ETFs can be more convenient.

B) ETFs can be more cost effective.

C) ETFs do not have to be rolled over.

D) ETFs are subject to less regulation.

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Answer and Explanation

The review does not specify that ETFs are subject to less regulation than futures. ETFs may be more cost effective and convenient than futures contracts. ETFs do not expire like futures contracts do so they dont have to be rolled over. They are also available for shorting if the investor wants to de-equitize after having added them.

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If an investor wanted to equitize a market neutral long-short strategy with a S& 500 futures contract, which of the following would be the correct amount of the notional principal of the S& 500 futures contract?

A) The cash from the short sale.

B) 250 times the value of one contract.

C) The value of the short position plus the value of the long position.

D) The value of the long position.

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Answer and Explanation

If the investor wishes to add systematic risk to a market neutral strategy, the investor would take a long position in an equity futures contract with a notional principal equal to the cash from the short sale.