Reading 31: Equity Portfolio Management－LOS i investor, contrast, techniques, investment, class

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CFA Institute Area 8-11, 13: Asset Valuation
Session 10: Equity Portfolio Management
Reading 31: Equity Portfolio Management
LOS i: Compare and contrast techniques for identifying investment styles and characterize the style of an investor given either a description of the investor's security selection method, details on the investor's security holdings, or the results of a returns-based style analysis.

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The first returns-based analysis probably has Johnson least concerned about:

A) a low style fit.

B) inaccurate risk measurement.

C) misfit active risk.

D) inappropriate benchmarks.

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Answer and Explanation

Because the regression has fewer variables and doesnt attempt to measure growth or value content, it probably does not explain too much of the analysts returns, resulting in a low style fit. A lack of knowledge about the true investment style could easily lead to the use of poor benchmarks. The use of poor benchmarks often leads to misfit active risk. However, the returns-based analysis is not a risk-measurement tool, and is unlikely to raise concerns about risks that have not already been sparked by a different type of analysis.

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Which of the following would least likely be a characteristic of a value portfolio using holdings-based style analysis?

A) Low P/E ratio.

B) Below average earnings growth.

C) Low earnings volatility.

D) Representation in the utility industry.

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Answer and Explanation

A value manager would have high earnings volatility because they are willing to take positions in cyclical firms. Low P/E ratios, low earnings growth, and representation in the utility industry would characterize a value manager.

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Which of the following would least likely be a characteristic of a growth portfolio using holdings-based style analysis?

A) Representation in the financial industry.

B) Low earnings volatility.

C) Above average earnings growth.

D) Low dividend yield.

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Answer and Explanation

A growth manager would have representation in the technology and health care industries. A value manager would have representation in the utility and financial industries. A growth manager would have a low dividend yield, low earnings volatility, and above average earnings growth.

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Which of the following is least likely to be an advantage of returns-based style analysis?

A) Low cost.

B) Can be performed quickly.

C) The use of different models provides similar results.

D) It will detect style changes quickly.

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Answer and Explanation

Returns-based style analysis may detect style changes slowly because the regression requires historical data that may not reflect the current focus of the fund. Holdings-based style analysis will detect style changes more quickly than returns-based analysis.