土豆妮

A portfolio manager uses a two-factor model to manage her portfolio. The two factors are confidence risk and time-horizon risk. If she wants to bet on an unexpected increase in the confidence risk factor (which has a positive risk premium), but hedge away her exposure to time-horizon risk (which has a negative risk premium), she should create a portfolio with a sensitivity of:

A) 1.0 to the confidence risk factor and -1.0 to the time-horizon factor.

B) ?1.0 to the confidence risk factor and 1.0 to the time-horizon factor.

C) 1.0 to the confidence risk factor and 0.0 to the time-horizon factor.

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She wants to create a confidence risk factor portfolio, which has a sensitivity of 1.0 to the confidence risk factor and 0.0 to the time horizon factor. Because the risk premium on the confidence risk factor is positive, an unexpected increase in this factor will increase the returns on her portfolio. The exposure to the time-horizon risk factor has been hedged away, because the sensitivity to that factor is zero.

土豆妮

Janice Barefoot, CFA, has been managing a portfolio for a client who has asked Barefoot to use the Dow Jones Industrial Average (DJIA) as a benchmark. In her second year, Barefoot used 29 of the 30 DJIA stocks. She selected a non-DJIA stock in the same industry as the omitted DJIA stock to replace that stock. Compared to the DJIA, Barefoot placed a lower weight on the communication stocks and a higher weight on the other stocks still in the portfolio. Over that year, the non-DJIA stock in the portfolio had a positive and higher return than the omitted DJIA stock. The communication stocks had a negative return while all of the other stocks had a positive return. The portfolio managed by Barefoot outperformed the DJIA. Based on this we can say that the return from factor tilts and asset selection were:

A) negative and positive respectively.

B) both positive.

C) positive and negative respectively.

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Since the communications stocks had a negative return while all the other stocks had a positive return, Barefoot’s underweighting of those stocks produced a positive tilt return. Since the asset chosen to replace the DJIA stock outperformed the omitted stock, the asset selection return was positive.

土豆妮

A common strategy in bond portfolio management is enhanced indexing by matching primary risk factors. This strategy could be implemented by forming:

A) a portfolio with factor sensitivities that sum to one.

B) a portfolio with asset portfolio weights equal to that of the index.

C) a portfolio with factor sensitivities equal to that of the index.

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Enhanced indexing by matching primary risk factors could be implemented by creating a tracking portfolio with the same factor sensitivities as the index but with a different set of bonds. Then any differences in performance between the portfolio and the benchmark index will be the result of bond selection ability and not from different exposures to macroeconomic factors like GDP, inflation, and interest rates.