William Pugh Case Scenario
William Pugh is a portfolio manager for the pension plan of the FMJ Corporation. Pugh is evaluating portfolio managers for the pension plan.
PMA Asset Management follows a passive investment strategy that is implemented using ETF’s rather than conventional mutual funds. PMA proposes to offer a new index portfolio that reflects the Russell 2000 small-cap value index. PMA indicates that the technique used to construct the new index portfolio assumes that the factors used to explain stock returns are uncorrelated.
ASM Partners is an active manager. A common strategy that ASM implements is a pairs trade where they take equal long and short positions in two common stocks in a single industry. These positions are constructed so that they have no correlation with equity market returns.
CKI Financial Advisors also follows an active portfolio strategy. A portfolio analysis for CKI is provided below in Exhibit 1.
Pugh is also evaluating another active manager, the DCM Group. Selected information for all three active managers as well as their normal and investor benchmarks are presented in Exhibit 2
Pugh proposes to construct a core-satellite portfolio with the following allocations: 45
percent in PMA, 15 percent in ASM, 20 percent in CKI and 20 percent in DCM. The investment management committee for the pension plan has stated that it expects the core-satellite portfolio to achieve a total active return of at least 2.1 percent and have total active risk of no more than 1.8 percent. Pugh assumes that the managers’ active returns are uncorrelated. Furthermore, since PMA follows a passive strategy, he assumes that active return and active risk for PMA are 0 percent.
19. A characteristic of PMA Asset Management’s investment strategy is that it:
A. is more tax efficient.
B. has lower license fees.
C. has higher expenses due to fund level accounting.
Answer: A
“Equity Portfolio Management,” Gary L. Gastineau, Andrew R. Olma, and Robert G. Zielinski 2009 Modular Level III, Volume 4, pp. 192-194 Study Session 11-33- 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.
When a shareholder in a conventional mutual fund redeems shares, the fund sells shares in the portfolio and pays cash to the shareholder. This transaction generates a taxable event. In contrast, the redemption mechanism for ETF’s involves payment “in kind”, i.e. redemption in the form of a basket of stocks. This transaction is not taxable from the fund’s perspective.
20. The most appropriate technique for constructing PMA’s new portfolio is:
A. optimization.
B. full-replication.
C. stratified sampling.
Answer: C
“Equity Portfolio Management,” Gary L. Gastineau, Andrew R. Olma, and Robert G. Zielinski 2009 Modular Level III, Volume 4, pp. 195-197 Study Session 11-33-f
Compare and contrast full replication, stratified sampling, and optimization as approaches to constructing an indexed portfolio and recommend an approach when given a description of the investment vehicle and the index to be tracked.
The Russell 2000 small-cap value index contains a large proportion of illiquid stocks. PMA also indicates that they assume that the factors used to explain stock returns are uncorrelated. In such cases the best index construction method is stratified sampling.
21. Relative to a long-only strategy, the expected alpha of ASM Partners’ investment strategy is most likely:
A. half.
B. twice.
C. similar.
Answer: B
“Equity Portfolio Management,” Gary L. Gastineau, Andrew R. Olma, and Robert G. Zielinski 2009 Modular Level III, Volume 4, pp. 222-223 Study Session 11-33-m
Compare and contrast long-short versus long-only investment strategies, including their risks and potential alphas, and explain why greater pricing inefficiency may exist on the short side of the market.
ASM Partners’ strategy is a market neutral long-short strategy. This strategy generates two alphas, one from the long position and one from the short position.
22. Based on the information presented in Exhibit 1, CKI Financial Advisors most likely follows a:
A. value strategy.
B. growth strategy.
C. market-oriented strategy.
Answer: A
“Equity Portfolio Management,” Gary L. Gastineau, Andrew R. Olma, and Robert G. Zielinski 2009 Modular Level III, Volume 4, pp. 206-215 Study Session 11-33-i
Compare and contrast techniques for identifying investment styles and characterize the style of an investor when given a description of the investor’s security selection method, details on the investor’s security holdings, or the results of a returns-based style analysis.
The CKI portfolio has a dividend yield that exceeds the benchmark dividend yield. The P/E and P/B for the portfolio are less than the benchmark P/E and P/B.
In addition, the forecast growth of the portfolio is under the forecast growth of the benchmark. These factors indicate that CKI manages a value portfolio.
23. Based on the information in Exhibit 2, does the portfolio proposed by Pugh meet the investment management committee’s stated thresholds of risk and return?
A. Yes.
B. No, portfolio active risk is above the threshold.
C. No, portfolio active return is below the threshold.
Answer: A
“Equity Portfolio Management,” Gary L. Gastineau, Andrew R. Olma, and Robert G. Zielinski 2009 Modular Level III, Volume 4, pp. 231-235 Study Session 11-33-q Discuss and justify, in a risk-return framework, the optimal portfolio allocations to a group of investment managers.
Portfolio total active return = 2.67% = (0%×0.45) + (6.5%×0.15) + (5.7%×0.2) + (2.75%×0.2) Portfolio total active risk = 1.6% =[(0%2×0.) + (6.05%2×0.) + (4.68%2×0.) + (5.5%2×0.)]1/2
24. Based on the information presented in Exhibit 2, the “true” active risk for ASM Partners is closest to:
A. 1.65%.
B. 4.15%.
C. 6.05%.
Answer: B
“Equity Portfolio Management,” Gary L. Gastineau, Andrew R. Olma, and Robert G. Zielinski 2009 Modular Level III, Volume 4, pp. 235-238
Study Session 11-33-s Distinguish among the components of total active return (“true” active return and “misfit” active return) and their associated risk measures and explain their relevance for evaluating a portfolio of managers.
True active risk = [6.05%2 – 4.4%2] 1/2 = 4.15%
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发表于 2009-7-2 15:24
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