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LOS q: Discuss and justify, in a risk-return framework, the optimal portfolio allocations to a group of investment managers.
Q1. Which of the following assumptions is typically used to calculate the portfolio active risk from a group of equity managers? The correlation between equity managers’ active returns are:
A) positive, ranging from 0.3 to 0.8.
B) a function of the amount allocated to each manager.
C) zero.
Q2. Which of the following statements is least accurate? An investor’s utility of the active return:
A) increases as the investor’s risk aversion to active risk decreases.
B) increases as active risk decreases.
C) increases as the investor’s risk tolerance for active risk decreases.
Q3. In which of the following situations would an investor be most risk averse?
A) When allocating assets to stocks, bonds, and other assets.
B) When allocating funds to a passive index.
C) When allocating funds to active equity managers.
Q4. Caroline Corbin has recently come into a large inheritance, and is consulting with her wealth advisor, Kathy Berg, about investing the allocation to equities. Corbin is in her 40s and thus has a very long time horizon for the investment of the funds. Berg has suggested a fairly substantial equity allocation in view of the risk that can be accommodated by this long time horizon.
Berg describes aspects of the investor utility function and allocation process for active risk:
Statement 1: If an investor wants higher active return positions, he must be willing to give up some diversification across managers.
Statement 2: An efficient frontier analysis is not useful to assess active return because the efficient frontier plots expected total return and expected total risk, not active return and active risk.
Statement 3: Utility of active return decreases as active return increases and as active risk decreases.
Statement 4: Investors are usually less risk averse when facing active risk than they are when dealing with total risk.
Corbin asks about the possibility of employing a core-satellite approach, which uses a core stable of active managers and a rotating stable of satellite active managers. Corbin points out, “In a core-satellite approach, the core is benchmarked to the asset class benchmark, and the satellites are benchmarked to a more specific benchmark.”
Berg provides the following table of active managers for Corbin’s consideration, along with a potential allocation approach:
|
Manager |
Expected Active Return |
Expected Active Risk |
Allocation |
|
Hardley Management |
1.50% |
2.20% |
20% |
|
Noskia Investment Advisors |
3.80% |
7.10% |
25% |
|
Floode Funds |
3.20% |
6.50% |
25% |
|
Triumphant Returns Partners |
2.75% |
4.25% |
15% |
|
Goodright Wynnes Partnership |
2.20% |
3.20% |
15% |
Corbin complains about the proposed asset allocation and selection of managers, saying, “The information ratio of that portfolio would be approximately 1.1.” She suggests to Berg that they should calculate the true information ratio:
True information ratio = True active return / Misfit active return
Berg completes her description of the equity allocation process to Corbin by explaining, “Once the investor has made a decision to invest in equity, the tradeoff between risk and return focuses on active risk and active return.” Corbin rephrases the comment back to Berg, saying, “The investor needs to decide how to maximize active risk relative to a passive management baseline.”
Expected active return and expected active risk for the allocation shown in the table are closest to:
Return Risk
A) 2.8% 0.07%
B) 2.8% 2.6%
C) 0.7% 2.6%
Q5. Are Corbin and Berg correct in their description of active risk and the equity allocation process?
Corbin Berg
A) Correct Incorrect
B) Incorrect Incorrect
C) Incorrect Correct
Q6. Which of the following least accurately describes a completeness fund?
A) Complements the active portfolio so that the combined portfolios have a risk exposure similar to the benchmark.
B) Avoids misfit risk.
C) Active return can be maintained while active risk is minimized.
Q7. Is Corbin correct in her description of how a core-satellite approach is implemented and how it is benchmarked?
Implemented Benchmarked
A) Incorrect Correct
B) Correct Correct
C) Incorrect Incorrect
Q8. Which of the following is the best description of the accuracy of Berg’s statements regarding the investor utility function and allocation process for active risk?
A) Statements 1, 2 and 3 are incorrect, Statement 4 is correct.
B) Statements 1 and 3 are correct, Statements 2 and 4 are incorrect.
C) Statement 1 is correct, Statements 2, 3 and 4 are incorrect.
Q9. Which is the most accurate description of Corbin’s statements regarding the information ratio and true information ratio?
A) The value of 1.1 for the information ratio is correct, but the formula for the true information ratio is incorrect.
B) Both statements are correct.
C) Both statement are incorrect. | 
发表于 2009-3-6 18:03
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