Bad5shah

Which of the following would be considered an “active” currency management technique?

A) A portfolio manager under-weights the amount invested in European stocks compared to the benchmark.

B) A U.S. portfolio manager purchases several foreign stocks paying euros equal to the amount in the benchmark.

C) A French portfolio manager sells a forward contract in dollars equal to the amount of the portfolio invested in the U.S.

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Passive and active currency management can mean different things depending upon the context in which they are used. “Passive” currency management can be where a portfolio manager simply does not take a position on the currency movement and accepts whatever appreciation or depreciation of the currency in the portfolio. If their asset allocation differs from the benchmark this would be considered “active” currency management even though they may claim to be passively managing the currency. Thus passive currency management can be represented by not hedging the currency risk by investing in the foreign market in the same amount as found in the benchmark or hedging the currency risk of an investment by selling forward or futures contracts in the same amount as invested in the foreign asset.

Bad5shah

Which of the following statements is most correct regarding forward currencies?

A) Selling a forward currency is equivalent to receiving the foreign currency risk free rate and owing the domestic currency risk free rate.

B) A forward currency purchase is equivalent to paying the foreign currency risk free rate and receiving the domestic currency risk free rate.

C) Purchasing a forward currency is equivalent to being long in the foreign currency cash and short in the domestic currency cash.

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A forward currency purchase is equivalent to being long in the foreign currency cash receiving the foreign currency risk free rate and short in the domestic currency cash paying the domestic currency risk free rate.

Bad5shah

When the value of the assets to be hedged increases the amount hedged:

A) does not need to be adjusted.

B) can be decreased.

C) should also be increased.

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The hedged amount needs to be periodically adjusted to reflect changes in the asset value so as the asset value increases (decreases) the amount hedged would also need to be increased (decreased).

Bad5shah

Which of the following is the most likely reason to hedge the foreign currency? The portfolio manager:

A) believes movement in the currency may produce a loss relative to the benchmark.

B) wants to increase the currency exposure to certain currencies.

C) has no views about the currency but believes certain markets look more attractive than others.

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Increasing exposure to certain currencies or markets are reasons NOT to hedge the currency but if a portfolio manager believes the currency movement by itself will cause a loss relative to the benchmark this would be a reason to hedge the currency risk.

Bad5shah

If a separate currency overlay manager exists how is the portfolio asset manager’s performance evaluated?

A) The portfolio asset manager and the currency overlay manager are evaluated together based on the total return of the asset.

B) The portfolio asset manager is evaluated based on the return of the underlying asset without taking into consideration any appreciation or depreciation of the currency.

C) The portfolio asset manager’s performance is evaluated based on the percentage of the total return due to the asset return.

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If a separate currency overlay manager exists then the portfolio asset manager is evaluated net of the currency return. In other words the asset manager is judged based only on the increase or decrease of the underlying asset value without considering the change in value of the asset’s currency.

Bad5shah

What kind of currency management is represented by a portfolio that closely tracks the benchmark but neither is hedged against currency risk?

A) Active currency management.

B) No currency management.

C) Passive currency management.

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When a benchmark is present then passive and active currency management are measured relative to the benchmark. Any deviation from the benchmark currency results in active currency management. If the portfolio is invested in the same assets as the benchmark this represents passive currency management.

Bad5shah

The two period active return for a portfolio can be determined by:

A) compounding the individual one period active returns.

B) taking the active return on the portfolio in the first period multiplied by the return on the benchmark in the second period plus the active return in the second period multiplied by the total return on the portfolio in the first period.

C) maintaining the same security or market allocation proportions for each period, compounding the individual one period active returns for each attribute, and then summing the compounded returns to get an overall total active return.

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To measure the overall return to active management we use the following formula:

RA,2 = Ra,1(1 + Rb,2) + Ra,2(1 + Rp,1)
Where:
RA,2 = the two-period active return
Ra,1 = active return for period 1
Rb,2 = return of the benchmark in period 2
Ra,2 = active return for period 2
Rp,1 = return on the portfolio for period 1

The first term in the equation, Ra,1(1 + Rb,2), is the active return on the portfolio in the first period multiplied by the return on the benchmark in the second period. It shows the value added by the manager’s actions in the first period. The active return in the first period will compound at least at the benchmark rate of return over the second period, even if the manager pursues a pure indexing strategy in that period.
The second term, Ra,2(1 + Rp,1), takes into account the manager’s active decisions in the second period. It is measured as the active return in the second period multiplied by the total return on the portfolio in the first period.

• The multiple-period return to active management for an individual attribute cannot be determined by adding or compounding the attribute’s contributions in each period.
• The multiple-period return to active management for an individual attribute cannot be determined by assuming it stays at the same proportion of the active return in each period.

Bad5shah

If the return on a portfolio over two periods is 8.6% and 14.32% respectively and the benchmark’s returns are 6.9% and 11.7% respectively what is the two period active return?

A) 4.74%.

B) 4.36%.

C) 4.32%.

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The active return is most easily determined by compounding the portfolio’s return over the two periods and subtracting the compounded benchmark’s return over the same period as follows:
Portfolio’s compounded return: (1.086)(1.1432) − 1 = 24.15%
Benchmark’s compounded return: (1.069)(1.117) − 1 = 19.41%
Active return = 24.15 − 19.41 = 4.74%
Alternatively, the two period active return can be determined using the following equation:

RA,2 = Ra,1(1 + Rb,2) + Ra,2(1 + Rp,1)

Where:
Ra,1 = active return for period 1 = 8.6 − 6.9 = 1.70%
Rb,2 = return of the benchmark in period 2 = 11.7%
Ra,2 = active return for period 2 = 14.32 − 11.7 = 2.62%
Rp,1 = return on the portfolio for period 1 = 8.6%
RA,2 = 1.7(1 + 0.117) + 2.62(1 + 0.086)
= 1.899 + 2.845 = 4.74%

Bad5shah

In determining the two period active return for a multi-attribution analysis which of the following statements is least accurate?

A) Each attribute’s contribution in the first period is compounded at the benchmark rate of return over the second period.

B) Each attribute’s contribution in the second period is compounded with the portfolio return from the first period.

C) The total active return for the portfolio is found by summing the compounded active return for each attribute.

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The equation for a 2 period multi-attribution analysis is:

RA,2 = Ra,1(1 + Rb,2) + Ra,2(1 + Rp,1)
Where:
RA,2 = the two-period active return
Ra,1 = active return for period 1
Rb,2 = return of the benchmark in period 2
Ra,2 = active return for period 2
Rp,1 = return on the portfolio for period 1

The equation shows that the two period active return for each attribute is found by taking its active return in the first period and compounding it at the benchmark rate of return over the second period and then adding this to the attribute’s contribution in the second period and compounding this with the portfolio return from the first period. This method would be repeated for each separate attribute in the portfolio such as security selection and market allocation. Then each separate attribution’s active return is added together to get the total active return for the portfolio.

Bad5shah

The total active return over multiple periods is most accurately determined by:

A) compounding the active return for each period.

B) taking the difference between the compounded portfolio and benchmark returns.

C) summing the active return for each period.

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Taking the difference between the compounded portfolio and benchmark returns will result in the true total active attribution analysis this can also be accomplished by taking each attribute’s contribution in the first period and compounding it at the benchmark rate of return over the second period and adding that to the attribute’s contribution in the second period which is compounded with the portfolio return from the first period. This process can be seen in the following formula:

RA,2 = Ra,1(1 + Rb,2) + Ra,2(1 + Rp,1)
Where:
RA,2 = the two-period active return
Ra,1 = active return for period 1
Rb,2 = return of the benchmark in period 2
Ra,2 = active return for period 2
Rp,1 = return on the portfolio for period 1