Reading 31: Equity Portfolio Management－LOS k style, equity, discuss

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CFA Institute Area 8-11, 13: Asset Valuation
Session 10: Equity Portfolio Management
Reading 31: Equity Portfolio Management
LOS k: Interpret the results of an equity style box analysis and discuss the consequences of style drift.

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Which of the following is most accurate regarding an equity style portfolio manager who has moved from financial stocks to technology stocks over time? The managers style is:

A) drifting and this is not a problem for the investor.

B) stagnant and this is a problem for the investor.

C) stagnant and this is not a problem for the investor.

D) drifting and this is a problem for the investor.

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Answer and Explanation

Financial stocks are typically value stocks whereas technology stocks are typically growth stocks. Thus the managers style is drifting. There are two reasons why this can be a problem for an investor. First, the investor will not receive the desired style exposure. Value and growth stocks will perform quite differently over time and over the course of business cycles. Second, if a manager starts drifting from the intended style, he or she may be moving into an area outside his or her expertise.

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Which of the following is least accurate regarding equity style drift?

A) A manager shifting from high earnings volatility stocks to high P/E stocks is not exhibiting style drift.

B) A manager shifting from technology stocks to health care stocks is not exhibiting style drift.

C) A manager shifting from utility stocks to health care stocks is exhibiting style drift.

D) A manager shifting from low P/E stocks to low P/B stocks is not exhibiting style drift.

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Answer and Explanation

Style drift occurs when a manager shifts between value and growth styles over time. High earnings volatility stocks are value stocks. High P/E stocks are growth stocks. In this case the manager is drifting from value to growth.

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If two analysts are classifying a portfolio by style using a style box which of the following statements is most accurate? The characterization of the funds size will likely be:

A) different for each analyst and the characterization of the funds style will likely be the same for each analyst.

B) the same for each analyst and the characterization of the funds style will likely be the same for each analyst.

C) the same for each analyst and the characterization of the funds style will likely be different for each analyst.

D) different for each analyst and the characterization of the funds style will likely be different for each analyst.

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Answer and Explanation

Categorizing portfolios by size is fairly standard in that market cap is the usual metric for evaluating size. However, different analysts may use different categorizations of value and growth attributes. For this reason, the categorization of portfolios can differ a great deal depending on the analyst.