LOS r: Explain the core-satellite approach to portfolio construction and discuss the advantages and disadvantages of adding a completeness fund to control overall risk exposures.
Q1. Which of the following is least accurate regarding the completeness fund approach?
A) It can be managed passively or semiactively.
B) It will increase the misfit return.
C) Combining a completeness fund with an active fund will result in risk exposure similar to the benchmark.
Q2. An investor uses a core-satellite approach to allocate funds amongst equity managers in the table below. What is the investor’s information ratio?
|
|
Expected Active Return |
Expected Active Risk |
Allocations |
|
Manager W |
0% |
0% |
10% |
|
Manager X |
1.80% |
2.90% |
20% |
|
Manager Y |
3.20% |
5.60% |
15% |
|
Manager Z |
3.90% |
7.30% |
10% |
|
Enhanced Indexing |
1.60% |
2.40% |
45% |
A) 1.17.
B) 0.97.
C) 1.04.
Q3. An investor uses a core-satellite approach to allocate funds amongst equity managers in the table below. How much does the investor have allocated to the core and how much is allocated to the satellites?
|
|
Expected Active Return |
Expected Active Risk |
Allocations |
|
Manager W |
0% |
0% |
10% |
|
Manager X |
1.80% |
2.90% |
20% |
|
Manager Y |
3.20% |
5.60% |
15% |
|
Manager Z |
3.90% |
7.30% |
10% |
|
Enhanced Indexing |
1.60% |
2.40% |
45% |
A) 10% is allocated to the core and 90% is allocated to the satellites.
B) 45% is allocated to the core and 55% is allocated to the satellites.
C) 55% is allocated to the core and 45% is allocated to the satellites.
Thx!
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