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发表于 2012-4-2 19:13
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Jose Morales has been investing for years, mostly using index funds. But because he is not satisfied with his returns, he decides to meet with Bill Smale, a financial adviser with Big Gains Asset Management.Morales lays out his concerns about active management: - “Mutual funds average returns below their benchmarks.”
- “All the buying and selling makes for less-efficient markets.”
- “Expenses are higher with active management.”
- “Analyst forecasts are often wrong.”
In an effort to win Morales’ business, Smale explains the benefits of active management, starting with the fact that market efficiency is a prime concern of active managers because efficient markets make active management possible. He then explains that active management allows for better protection against systematic risk, and that Big Gains uses multifactor models to adjust investment strategies to account for economic changes. Lastly, Smale tells Morales how Big Gains Asset Management has pledged never to reveal clients’ personal information to third parties.
Morales seems willing to listen, so Smale explains Big Gains’ management strategy, which involves a modified version of the Capital Asset Pricing Model (CAPM) using the Dow Jones Total Market Index. He raves about this valuation model, citing its ability to project future alphas, determine true market betas of individual stocks, create an accurate picture of the market portfolio, and provide an alternative for calculated covariances in the charting of the Markowitz Efficient Frontier.
After an hour of verbal sparring with Smale, Morales is not yet convinced of the wisdom of active management. He turns to Tobin Capital, calling Susan Worthan, a college friend who works as an analyst in the equity department. Tobin Capital uses the arbitrage pricing theory (APT) to value stocks. Worthan explains that APT offers several benefits relative to the CAPM, most notably its dependence on fewer and less restrictive assumptions.
After listening to Worthan’s explanation of the APT, Morales asked her how the theory dealt with mispriced stocks, drawing a table with the following data to illustrate his question:Stock | Current Price | Est. Price in 1 Year | Correlation with S&P 500 | Standard Deviation of Returns | Beta | | Xavier Flocking | $45 | $51 | 0.57 | 17% | 1.68 | | Yaris Yarn | $6 | $6.75 | 0.40 | 7% | 1.21 | | Zimmer Autos | $167 | $181 | 0.89 | 10.5% | 0.34 |
After seeing Morales’ stock example, Worthan tells him that he still does not understand APT and tries to explain how the theory deals with mispriced stocks. Which of the following statements is most accurate? Under APT: A)
| any mispricings will be immediately rectified. |
| B)
| mispricings cannot occur, and there is no arbitrage opportunity. |
| C)
| the calculation of unsystematic risk is so accurate that mispricings are rare. |
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Arbitrage pricing theory holds that any arbitrage opportunities will be exploited immediately, making the mispricing disappear. (Study Session 18, LOS 60.l)
Which of the following is least likely an assumption of the market model? A)
| The expected value of the error term is zero. |
| B)
| Unsystematic risk can be diversified away. |
| C)
| The firm-specific surprises are uncorrelated across assets. |
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The assumption that unsystematic risk can be diversified away is an assumption of the arbitrage pricing theory. (Study Session 18, LOS 60.g)
Smale best makes his point about the superiority of active management with his mention of:
Systematic risk cannot be diversified away, and there is no dependable evidence that active management can help control it. Active managers attempt to capitalize on inefficiencies in the market, and a truly efficient market would eliminate the need for active management. However, multifactor models are a useful tool for active managers, and a high-quality model may indeed represent a competitive advantage over a passive manager. (Study Session 18, LOS 60.j)
Which assumption is required by both the CAPM and the APT? A)
| There are no transaction costs. |
| B)
| All investors have the same return expectations. |
| C)
| Asset prices are not discounted for unsystematic risk. |
|
The assumptions that all investors have the same expectations and that there are no transaction costs are specific to CAPM, not APT. However, both models assume that unsystematic risk can be diversified away, and has a risk premium of zero. (Study Session 18, LOS 60.n)
Which of Morales’ arguments against active management is least accurate? A)
| “Mutual funds average returns below their benchmarks.” |
| B)
| “Expenses are higher with active management.” |
| C)
| “All the buying and selling makes for less-efficient markets.” |
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When little money is actively managed, asset prices begin to deviate from fair values. Active management exploits inefficiencies and drives prices back toward equilibrium. Both remaining arguments are valid. (Study Session 18, LOS 60.m)
Assuming Morales’ numbers are correct, portfolio allocation of 65% of one stock and 35% of a second would allow arbitrage profits to be closest to:
A portfolio containing 65% Xavier Flocking and 35% Zimmer Auto would have a weighted average beta of (65% × 1.68) + (35% × 0.34) = 1.21, which is the same as the beta of Yaris Yarn. The weighted average return of the combined portfolio is 11.6%, versus a 12.5% return for Yaris Yarn. Buying Yaris Yarn and selling the Xavier/Zimmer portfolio would earn an estimated 0.9% without investing any capital or taking on any systematic risk. (Study Session 18, LOS 60.n) |
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