LOS 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.

Q1. An investor would like to track an index. Comparing optimization, stratified sampling, and replication; in which of the following indexes would the investor be least likely to use replication?

A)   An equal-weighted index.

B)   A value-weighted index.

C)   A free float-adjusted market capitalization index.

Q2. An investor would like to track an index. Compared to optimization, stratified sampling:

A)   models the covariances and leads to lower tracking risk.

B)   assumes the covariances are zero and leads to higher tracking risk.

C)   models the covariances and leads to higher tracking risk.

Q3. An investor would like to track an index. Compared to stratified sampling and optimization, when would replication be favored? When the index has:

A)   less than 1,000 stocks and liquid stocks.

B)   more than 1,000 stocks and liquid stocks.

C)   less than 1,000 stocks and illiquid stocks.

Q4. A manager wishes to use a passive strategy to mimic the returns of a price-weighted stock index that consists of 50 stocks. Which of the following would be the best method to use in composing this portfolio?

A)   To compose a portfolio that consists of an equal number of shares of a sample of the stocks in the index.

B)   To compose a portfolio that is equally weighted using a sample of stocks in the index.

C)   Using the full replication method.

Q5. An investor would like to track an index and is considering using optimization. Optimization is characterized by:

A)   the use of a factor model and infrequent rebalancing.

B)   the use of a matrix model and frequent rebalancing.

C)   the use of a factor model and frequent rebalancing.

[此贴子已经被作者于2009-3-6 17:32:08编辑过]

LOS 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. fficeffice" />

Q1. An investor would like to track an index. Comparing optimization, stratified sampling, and replication; in which of the following indexes would the investor be least likely to use replication?

A)   An equal-weighted index.

B)   A value-weighted index.

C)   A free float-adjusted market capitalization index.

Correct answer is A)

An equal-weighted index usually has a large representation in small-cap stocks. Replication would involve purchasing all the stocks in the index and this would be less feasible when there are small-cap stocks involved. The reason is that small-cap stocks tend to have lower liquidity and higher trading costs.

Q2. An investor would like to track an index. Compared to optimization, stratified sampling:

A)   models the covariances and leads to lower tracking risk.

B)   assumes the covariances are zero and leads to higher tracking risk.

C)   models the covariances and leads to higher tracking risk.

Correct answer is B)

In a stratified sampling procedure, it is implicitly assumed that the risk factors have a covariance of zero. An optimization approach accounts for the covariances between the risk factors. An optimization approach leads to lower tracking risk than a stratified sampling approach.

Q3. An investor would like to track an index. Compared to stratified sampling and optimization, when would replication be favored? When the index has:

A)   less than 1,000 stocks and liquid stocks.

B)   more than 1,000 stocks and liquid stocks.

C)   less than 1,000 stocks and illiquid stocks.

Correct answer is A)

Full replication is more likely to be used when the number of stocks in the index is less than 1,000 and when the stocks in the index are liquid.

Q4. A manager wishes to use a passive strategy to mimic the returns of a price-weighted stock index that consists of 50 stocks. Which of the following would be the best method to use in composing this portfolio?

A)   To compose a portfolio that consists of an equal number of shares of a sample of the stocks in the index.

B)   To compose a portfolio that is equally weighted using a sample of stocks in the index.

C)   Using the full replication method.

Correct answer is C)         

For indices with fewer than 1000 positions, full replication is possible and recommended.

Q5. An investor would like to track an index and is considering using optimization. Optimization is characterized by:

A)   the use of a factor model and infrequent rebalancing.

B)   the use of a matrix model and frequent rebalancing.

C)   the use of a factor model and frequent rebalancing.

Correct answer is C)         

An optimization approach uses a factor model to match the factor exposures of the fund and the index. Optimization must be updated to reflect changes in risk sensitivities from the factor model and this leads to frequent rebalancing.

Thx!