Assuming a portfolio begins at a mix of 50 percent stocks and 50 percent cash, which of the following rebalancing strategies could allow the portfolio balance to fall to $0? | | | C) | Only constant proportion. |
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Answer and Explanation
A constant-mix rebalancing program would automatically adjust holdings to preset levels. If stocks fell, the portfolio would rebalance by deploying cash to purchase stocks. If the market fell to zero, the portfolio would theoretically fall to zero. A buy and hold strategy would never fall below the value of the cash in the account, and a constant-proportion strategy would never fall below a preset floor value. Convex strategies like constant proportion buy when stocks are going up and sell when they are going down, which should prevent a decline to zero in a falling market.
Which statement regarding Montones trades is least accurate? | A) | He provided liquidity in two of the trades. |
| B) | He did not get best execution. |
| | C) | The effective spread for Grossman Golf is $0.09. |
| | D) | He is trading in a highly liquid market. |
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Answer and Explanation
From the information presented, we cannot tell whether Montone got best execution or not. We have no other trading data for comparison purposes. The other statements are accurate. The spreads are small relative to the stock prices, suggesting a liquid market. On one of the trades (Grossman Golf), the effective spread was higher than the quoted spread, suggesting that Montone had to purchase liquidity. The effective spread for the other two trades was lower than the quoted spread, so Montone provided liquidity on those trades. To calculate the effective spread on a purchase transaction, subtract the midpoint of the quoted spread from the execution price and multiply that number by two. $8.53 [($8.52 + $8.45)/2] = $0.045. Doubled, thats $0.09.
The portfolio-rebalancing strategies Frye is testing are most likely: | A) | | constant proportion | constant mix |
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| | B) | | buy and hold | constant proportion |
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| C) | | constant mix | constant proportion |
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| | D) | | constant proportion | buy and hold |
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Answer and Explanation
Constant mix strategies continually rebalance a portfolio back to a target weight. When stocks rise, a constant-mix program sells. When stocks fall, the program rises. If the market continues jumping up and down regularly, the strategy will result in a rising portfolio value. Constant proportion strategies sell when stocks are down and buy when theyre up. They outperform during strong upward or downward movements but get whipsawed by volatility in a trendless market. A buy-and-hold portfolios value would ebb and flow, lagging constant mix in a volatile, trendless market and lagging constant proportion in a trending market.
Which rebalancing strategy does NOT connect risk tolerance to wealth? | | | | D) | Constant mix, constant proportion, and buy and hold all connect risk tolerance to wealth. |
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Answer and Explanation
Constant mix assumes risk tolerance is constant regardless of the investors level of wealth. Both constant proportion and buy and hold assume that risk tolerance is in some way related to wealth.
The weighted average effective spread for Montones three stock trades is closest to:
Answer and Explanation
To calculate the weighted average effective spread, we start with the effective spread for each transaction Effective spread = 2 × (execution price midpoint of quoted spread) Security | Bid Price | Ask Price | Trading Price | No. of Shares | Effective Spread | Flanders Fudge | $45.78 | $45.96 | $45.90 | 1,400 | $0.06 | Grossman Golf | $8.45 | $8.52 | $8.53 | 600 | $0.09 | Hedger Health Care | $115.67 | $115.81 | $115.79 | 150 | $0.10 |
To calculate the weighted average spread, multiply the effective spread by the number of shares for each stock, then sum those numbers and divide by the number of shares, in this case, 2,150. The weighted average spread is $0.0712. Security | Bid Price | Ask Price | Trading Price | No. of Shares | Effective Spread | Flanders Fudge | $45.78 | $45.96 | $45.90 | 1,400 | $0.06 | Grossman Golf | $8.45 | $8.52 | $8.53 | 600 | $0.09 | Hedger Health Care | $115.67 | $115.81 | $115.79 | 150 | $0.10 |
To calculate the weighted average spread, multiply the effective spread by the number of shares for each stock, then sum those numbers and divide by the number of shares, in this case, 2,150. The weighted average spread is $0.0712. | 
发表于 2008-9-18 16:58
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