pundit

a

wzaina

 

 

LOS p, (Part 1): Contrast derivatives-based versus stock-based enhanced indexing strategies. fficeffice" />

Q1. How is risk controlled in a stock-based enhanced indexing strategy?

A)   Buying puts on equity indices.

B)   Selling equity futures contracts.

C)   Through monitoring factor risk and industry exposures.

Correct answer is C)

In a stock-based enhanced indexing strategy, risk is controlled by monitoring factor risk and industry exposures.

 

Q2. Which of the following concerning investment strategies is least accurate?

A)   Stock-based enhanced indexing strategy can produce higher information ratios because investors can apply their knowledge to a large number of securities.

B)   In a long-short, market neutral strategy the benchmark should be the risk-free rate.

C)   If a manager does not have an opinion about an index stock in stock-based enhanced indexing strategy, they will not hold the stock.

Correct answer is C)

If a manager does not have an opinion about an index stock in a stock-based enhanced indexing strategy, they will hold the stock at the same level as the benchmark. Stock-based enhanced indexing strategies can produce higher information ratios because the investor can systematically apply his knowledge to a large number of securities, each of which would require independent decisions. Because a long-short, market neutral strategy has no systematic risk, its benchmark should be the risk-free rate (the return on T-bills).