Reading 31: Equity Portfolio Management－LOS t active, management

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CFA Institute Area 8-11, 13: Asset Valuation
Session 10: Equity Portfolio Management
Reading 31: Equity Portfolio Management
LOS t: Explain alpha and beta separation as an approach to active management and demonstrate the use of portable alpha.

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Which of the following is least accurate regarding an alpha and beta separation approach?

A) The alpha position is more costly than the beta position.

B) The strategy can be implemented in a variety of asset classes.

C) A portable alpha strategy means that an investor can easily pick up systematic risk through a variety of positions.

D) This approach may obscure investment risks.

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Answer and Explanation

One of the advantages of an alpha and beta separation approach is that the investor can better understand and manage the risks in an alpha and beta separation approach because they are more clearly defined. The investor also has a better idea of the costs of investing. The passive beta exposure is typically cheaper than the active alpha exposure. The strategy can be implemented in a variety of asset classes. In a portable alpha strategy, the investor can easily pick up systematic risk through a variety of positions using equity index positions while maintaining the long-short alpha.

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Which of the following is least likely to be a limitation of an alpha and beta separation approach?

A) Some long-short strategies may have a degree of systematic risk.

B) Some investors may be restricted from long-short investing.

C) The investor may be exposed to systematic risk.

D) It may be difficult to implement in markets.

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Answer and Explanation

One of the main reasons to undertake an alpha and beta separation approach is to gain an exposure to systematic risk (the beta) through a long position in an equity index. The alpha is picked up using a long-short approach.

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Which of the following would least likely be a component of an alpha and beta separation approach for an investor who is restricted from explicit long-short investing strategies?

A) A long position in a large-cap equity futures contract.

B) An investment with a small-cap active manager.

C) A market neutral hedge fund.

D) A short position in a small-cap equity futures contract.

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Answer and Explanation

A market-neutral hedge fund strategy would be undertaking long-short positions so this would not be available to the investor. An investor restricted from long-short strategies could create a similar exposure as the alpha and beta separation approach by taking a long position in a large-cap index futures contract and invest with a small-cap manager to generate the alpha. To become market neutral in the small-cap market, the investor would then short a futures contract based on small-cap equities.