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LOS e: Compare and contrast alternative methods for establishing passive exposure to an equity market, including indexed separate or pooled accounts, index mutual funds, exchange-traded funds, equity index futures, and equity total return swaps.
Q1. Bob Hageman is the Chief Investment Officer for the pension fund of Wapitechnology Industries. Wapitechnology is a producer of a variety of customized software solutions for service and distribution industries, currently entering its second decade in business. Wapitechnology offers a generous defined benefit pension plan, but because of the firm’s comparatively recent founding and the industry in which it operates, Wapitechnology has a very young and mobile workforce. Few employees have vested in its pension plan, and no employee has acquired sufficiently long service to retire.
The demographics of the defined benefit plan’s beneficiaries give Wapitechnology an extremely long time horizon for the management of its pension fund. Bob Hageman has suggested to Yvette Vargas, Wapitechnology’s Chairman and Chief Executive, that they should change the investment policy statement for the pension fund to accommodate a higher risk level. Specifically, Hageman thinks that Wapitechnology should increase its asset allocation to equities because the exceptionally long time horizon of the pension fund enables it to take on an unusually high degree of risk in its investment strategy.
Vargas wonders about the suitability of passive management for the Wapitechnology pension fund. She points out, “Asset allocation is more likely to favor passive management for taxable investors than for non-taxable investors because of reduced portfolio turnover in a passive management approach.”
Vargas cites the statistics, saying, “On average after expenses, historical data shows that active management does not outperform passive management.” Hageman reminds Vargas, “International equity markets are less informationally efficient than the U.S. market, so a U.S. based investor would be wise to pursue an active strategy abroad to exploit the informational inefficiencies, rather than a passive strategy.”
Since Vargas is interested in passive investing, Hageman presents the following indexes as possible benchmarks for a passive portfolio:
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Index |
Region |
Type |
|
Standard & Poor’s 500 Composite (S& 500) |
US |
capitalization-weighted |
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Value Line Composite Average |
UK |
equally weighted |
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Nikkei Stock Average |
Japan |
value-weighted |
|
CAC 40 |
France |
capitalization-weighted |
|
Dow Jones Industrial Average (DJIA) |
US |
price-weighted |
He also details the advantages and disadvantages of different types of indexes:
Statement 1: Price-weighted indexes are biased in that higher priced stocks have a greater impact on the index’s value than lower priced stocks, but the price of a stock is somewhat arbitrary and dependent on splits, stock dividends, and repurchases.
Statement 2: The free float-adjusted index is considered the best type by many investors because it removes the float from the index calculation.
Statement 3: A market capitalization-weighted index automatically adjusts for stock splits of individual firms.
Statement 4: A price-weighted index must be periodically rebalanced.
Hageman explains to Vargas that equity investment approaches can be described by tracking risk and information ratio. Hageman explains, “Tracking risk is the excess of fund return relative to the appropriate benchmark.” He suggests to Vargas that the Wapitechnology pension fund’s long time horizon enables them to take on significant tracking risk.
Vargas suggests that she thinks they should pay close attention to the information ratio of any equity strategy or manager they consider for the pension fund. She explains, “Historically, the information ratio has been highest for active management and lowest for passive management, with semi-active management falling in the middle.”
Hageman tells Vargas that he has interviewed a wide range of equity managers for potential addition to Wapitechnology’s stable of managers. He adds that Cytologic Fund Management has shown an information ratio of 0.082, but says that their tracking risk recently has been lower than the historical average. “If their tracking risk remains low, that would lower their information ratio.”
The best description of the accuracy of Hageman’s statements regarding the advantages and disadvantages of different types of equity indexes is:
A) Statement 2 is incorrect, Statement 1, 3 and 4 are correct.
B) Statements 1 and 3 are incorrect, Statements 2 and 4 are correct.
C) Statements 2 and 4 are incorrect, Statements 1 and 3 are correct.
Q2. Is Hageman correct with regard to his definition of tracking risk and the impact of tracking risk on the information ratio?
Definition Impact
A) Incorrect Correct
B) Incorrect Incorrect
C) Correct Incorrect
Q3. The primary advantage of a price-weighted index is that it:
A) is computationally simple.
B) is easiest to mimic with minimal tracking risk.
C) implicitly assumes that each investor holds one share of each stock in the index.
Q4. Is Vargas correct in her statements about the information ratio and the advantage of passive management for taxable investors?
Information ratio Passive management
A) Correct Correct
B) Incorrect Correct
C) Incorrect Incorrect
Q5. Which of the following best describes of the accuracy of the index data in the table?
A) The Value Line and CAC 40 are incorrect, the others are correct.
B) The CAC 40 and the Nikkei are incorrect, the others are correct.
C) The Nikkei and Value Line are incorrect, and the others are correct.
Q6. Are Vargas and Hageman correct in their descriptions of active versus passive strategies with respect to the historical data and international investors?
Vargas Hageman
A) Correct Incorrect
B) Incorrect Incorrect
C) Correct Correct
Q7. An investor would like to use tactical asset allocation to take advantage of short-term mispricing. Which of the following statements is most accurate regarding the use of either ETFs or equity index futures combined with basket trades?
A) If she uses ETFs, she will be able to invest longer-term but will not be able to establish short positions as easily.
B) If she uses futures, she will be able to invest longer-term and establish short positions more easily.
C) If she uses ETFs, she will be able to invest longer-term and establish short positions more easily.
Q8. An investor would like to diversify internationally. Compared to trading in the underlying, an equity total return swap usually has:
A) lower trading costs and lower taxes.
B) higher trading costs and lower taxes.
C) lower trading costs and higher taxes.
Q9. Compared to ETFs, index mutual funds have:
A) lower license fees and are more tax efficient.
B) lower license fees and are less tax efficient.
C) higher license fees and are less tax efficient. | 
发表于 2009-3-6 17:30
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