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标题: Equity Investments 【 Reading 27】 习题精选 [打印本页]
作者: Gypsy    时间: 2012-4-2 09:36     标题: [2012 L3] Equity Investments 【Session11- Reading 27】 习题精选

Which of the following statements regarding using equities as an inflation hedge is most accurate? They have been a good inflation hedge:
A)
in many countries over a short time span.
B)
but only in the U.S for a short time span.
C)
in many countries over a long time span.


Using data for 17 countries for 106 years, equities have had consistently positive real returns (i.e., their nominal return has been higher than that of inflation).
作者: Gypsy    时间: 2012-4-2 09:51

Which of the following is least accurate regarding using equities as an inflation hedge?
A)
Their ability to hedge is unaffected by taxes.
B)
The effectiveness of an individual stock as a hedge depends on its product market.
C)
The historical record is impressive as to their effectiveness.


Because corporate income and capital gains tax rates are not indexed to inflation, inflation can reduce the stock investor’s return, unless this effect was priced into the stock when the investor bought it. Equities have had consistently positive real returns in 17 countries from 1900-2005. The more competition in a firm’s product market, the less effective their stock will be as a hedge.
作者: Gypsy    时间: 2012-4-2 09:51

Which of the following is least accurate regarding equities in a portfolio?
A)
U.S. equity typically constitutes about half of world equity.
B)
Equities have been shown to be an inflation hedge worldwide.
C)
European institutions hold more equity than U.S. institutions in their portfolio.


In the U.S., institutional investors hold about 60% of their portfolio in equity. In Europe, the percentage is closer to 20%. The historical evidence in the U.S. and in other countries indicates that equities have been a good inflation hedge.
作者: Gypsy    时间: 2012-4-2 09:52

Mavis Borchard, principal of Borchard Investments, is discussing portfolio strategy with Wilford Tupper, a potential client who walked into her office in the hopes of finding a shrewd way to invest an $800,000 IRA roll-over. Tupper is an experienced investor with other stock holdings, but he does not have the time to manage his own account.
After listening to Tupper's investment goals, Borchard suggests a policy of active management, listing several of its benefits.
Tupper is not satisfied with Borchard's strategies and asks about other types of investments. Historically, Tupper has not been successful at beating the market with his large-cap stock choices, but he is a firm believer in reversion to the mean.
Borchard then recommends an enhanced indexing strategy. She suggests that Tupper start with 60 percent of his money in a market index fund, then divide the remainder between two portfolio managers, one who manages accounts in a large-cap blend style, and one who buys small-cap stocks with a value slant. Borchard expects the risk-free return to remain at 4.3 percent for the rest of the year and projects a market return of 12.7 percent and market risk of 18.6 percent for the year. The following is some data on expectations for both investment managers. Assume the correlation between the equity manager's active returns are zero.
ManagerExpected ReturnExpected Risk
Large-cap blend manager13.8%27.5%
Small-cap value manager17.5%30.1%

This plan appeals to Tupper, but he is still not sure in what index he should invest. He is picky about his indexes and would like any selections to meet a number of criteria:
While Tupper likes the mix of index funds and active management proposed by Borchard, he is also concerned that the active managers stick to their knitting. Borchard generally uses a large-cap index like the Dow Jones Industrial Average as a benchmark, but Tupper wants a benchmark customized to each manager's investment style. Borchard reluctantly agrees to provide a customized benchmark. She generally uses returns-based analysis to track whether money managers stay on target, but Tupper prefers a holdings-based approach.To best meet Tupper's index requirements, Borchard should select:
A)
a capitalization-weighted index.
B)
a price-weighted index.
C)
an index reconstituted by committee, rather than by rule.


Borchard seeks an index that reflects the broader market as closely as possible. This suggests a price-weighted index is out, as nominal stock prices are somewhat arbitrary and quite changeable, so the index's complexion can change simply because of a stock split. Low transaction costs favor capitalization-weighted indexes rather than equal-weighted indexes that must be rebalanced more often. The investability requirement also weighs on equal-weighted indexes, which tend to favor smaller stocks, which in turn may offer less liquidity. That leaves a capitalization-weighted index. Most indexes are easy to track. Index reconstitution policies can affect tracking risk and transaction costs, but are not relevant to investability and how effectively an index reflects the market. (Study Session 11, LOS 27.d)
Which of Borchard's statements is likely to be most effective at convincing Tupper to let her actively manage his account?
A)
"The potential returns of this strategy are higher than those of passive-management strategies, yet the risk-reward trade-off is appealing. The information ratio for active management is higher than the ratio for passive management."
B)
"My optimization approach limits risk by using a factor model that takes into account the covariance of different risk factors."
C)
"To ensure that my portfolios deliver the best performance and that I don't deviate from my original investment style, I regress my returns against three indexes, a large-cap, a mid-cap, and small-cap."


None of the arguments is particularly compelling, but at least the statement about the information ratio is true and relevant. Active management does have a higher information ratio than passive management. Optimization applies to passive or semiactive management, not active management. Regressing returns against cap-weighted indexes will not determine whether the fund emphasizes value or growth stocks, so it will not detect growth or value style drift. Bottom-up approaches depend little on industry conditions, relying mostly on the fundamentals of individual stocks. (Study Session 11, LOS 27.b)
Assuming a 30 percent weighting in large-cap stocks, Borchard's enhanced indexing strategy for Tupper should generate an active return closest to:
A)
13.51%.
B)
5.11%.
C)
0.81%.


The strategy’s active return represents the weighted average of the active returns of each component. To calculate the active return, subtract the expected market return from the expected returns of each strategy.
The large-cap manager has an estimated 13.8% return. Subtract the projected 12.7% market return, and the active return is 1.1%. For the small-cap strategy, the active return is 4.8%. The index fund is expected to earn the market return of 12.7%, for an active return of 0%. 1.1% × 30% + 4.8% × 10% + 0% × 60% = 0.81%. That’s the strategy’s expected active return. (Study Session 11, LOS 27.r)

Based on his belief in mean reversion, Tupper should pursue a strategy of:
A)
value investing.
B)
momentum investing.
C)
optimization.


Tupper is a believer in mean reversion, which is a cornerstone of value investing. Momentum investors don't want mean reversion. Optimization is an indexing technique for which mean reversion is unimportant. As far as market-cap investing goes, reversion to the mean is no more or less important for one capitalization group relative to any other capitalization group. (Study Session 11, LOS 27.g)
Which of the following statements about holdings-based analysis is least accurate? It:
A)
can pick up style drift faster than returns-based analysis.
B)
can yield different results depending on the method used.
C)
requires the use of less data than returns-based analysis.


Holdings-based analysis requires more data than returns-based analysis. The other statements are true. (Study Session 11, LOS 27.i)
Assuming a 25 percent weighting in small-cap stocks, Borchard's enhanced indexing strategy for Tupper should generate active risk closest to:
A)
3.17%.
B)
14.08%.
C)
5.12%.


A portfolio’s active risk is the square root of the sums of the squares of the weighted average active risk.
To calculate the active risk, subtract the expected market risk from the risk of each portfolio component. The large-cap strategy’s risk is 27.5%. Subtract the market’s 18.6% risk, and you have active risk of 8.9%. The small-cap strategy’s active risk is 11.5%, and the index fund’s active risk is 0%, because the index tracks the market. Here’s how to calculate the complete strategy’s active risk:
Large-cap strategy: 8.9%2 × 15%2 = 0.0178%.
Small-cap strategy: 11.5%2 × 25%2 = 0.0827%.
Index fund: 0%2 × 60%2 = 0%.
The sum of the squares is 0.1005%. The square root of 0.001005 is 3.17% and that is the portfolio’s active risk. (Study Session 11, LOS 27.r)
作者: Gypsy    时间: 2012-4-2 09:55

Which of the following equity strategies would provide the lowest expected tracking risk?
A)
Enhanced indexing.
B)
Passive.
C)
Risk-controlled active management.


Passive management will have the lowest expected tracking risk. Semiactive management is also known as enhanced indexing or risk-controlled active management. A semiactive manager will have an expected tracking risk between active and passive managers.
作者: Gypsy    时间: 2012-4-2 09:55

Which of the following equity strategies would provide the highest information ratio?
A)
Active.
B)
Passive.
C)
Enhanced indexing.


The information ratio is the expected active return divided by the tracking risk. Enhanced indexing provides the highest information ratio. Active management has the second highest information ratio on average while indexing strategies have the lowest.
作者: Gypsy    时间: 2012-4-2 09:56

Which of the following equity strategies would provide the highest expected active return?
A)
Active.
B)
Enhanced indexing.
C)
Risk-controlled active management.


Active management will provide the highest expected active return. Semiactive management is also known as enhanced indexing or risk-controlled active management. A semiactive manager will have an expected active return between active and passive managers.
作者: Gypsy    时间: 2012-4-2 09:56

In which of the following situations should an equity investor generally consider a passive management strategy?
A)
When investing in global markets.
B)
When investing in large cap markets.
C)
The manager should consider a passive strategy in both of these cases.


Passive strategies are generally recommended in both of these situations. When investing in large cap stocks, a passive strategy is suitable because these markets are usually informationally efficient. In international equity markets, the foreign investor may be at an informational disadvantage compared to the local investor.
作者: Gypsy    时间: 2012-4-2 09:57

Which of the following investors would be more likely to pursue passive equity management strategies?
A)
A taxable investor who believes markets are efficient.
B)
A nontaxable investor who believes markets are efficient.
C)
A taxable investor who believes markets are inefficient.


Passive strategies have low turnover, fewer realized capital gains, and hence lower associated taxes. If an investor believes markets are efficient, he or she would be more likely to pursue a passive strategy because the investor would not believe that beating the market was possible through an active strategy.
作者: Gypsy    时间: 2012-4-2 09:58

An investor believes markets are efficient and pursues an equity investment strategy consistent with their beliefs. Which of the following best characterizes their portfolio, relative to other possible equity strategies?
A)
Low tracking risk and low information ratio.
B)
High tracking risk and low information ratio.
C)
Low tracking risk and high information ratio.


If an investor believes markets are efficient, the investor will pursue a passive strategy. Relative to active and semiactive strategies, passive strategies are characterized by low expected active return, low tracking risk, and low information ratio.
作者: Gypsy    时间: 2012-4-2 09:58

Which of the following indices would be biased towards small cap stocks?
A)
A price-weighted index.
B)
A value-weighted index.
C)
An equal-weighted index.


The equal-weighted index is biased towards small-cap companies because they will have the same weight as large-cap firms even though they have less liquidity. Many equal-weighted indices also have more small companies in them than large firms, creating a further bias towards small companies. Value-weighted indices are biased towards large cap stocks and price-weighted indices are biased towards high priced stocks.
作者: Gypsy    时间: 2012-4-2 09:58

Which of the following statements regarding a free float-adjusted market capitalization index is least accurate?
A)
The float adjusted index is considered the best index type by many investors, because it is representative and can be mimicked with minimal tracking risk.
B)
A free float-adjusted market capitalization index assumes the investor has bought all the publicly available shares of each company in the index.
C)
The major value-weighted indices in the world have not been adjusted for free float.


The major value-weighted indices in the world have been adjusted for free float.
作者: Gypsy    时间: 2012-4-2 09:59

An investor would like to diversify internationally. Compared to trading in the underlying, an equity total return swap usually has:
A)
higher trading costs and lower taxes.
B)
lower trading costs and lower taxes.
C)
lower trading costs and higher taxes.


The trading costs in an equity total return swap are usually lower than that from trading in the underlying asset. The investor is usually not responsible for foreign withholding taxes either because they will be the swap dealer’s responsibility, who may be in a tax advantaged position relative to the investor.
作者: Gypsy    时间: 2012-4-2 09:59

An investor would like to use tactical asset allocation to take advantage of short-term mispricing. Which of the following statements is most accurate regarding the use of either ETFs or equity index futures combined with basket trades?
A)
If she uses ETFs, she will be able to invest longer-term and establish short positions more easily.
B)
If she uses ETFs, she will be able to invest longer-term but will not be able to establish short positions as easily.
C)
If she uses futures, she will be able to invest longer-term and establish short positions more easily.


Equity futures contracts have a finite life and must be periodically rolled over into a new contract whereas ETFs have a theoretically infinite life.
作者: Gypsy    时间: 2012-4-2 10:00

An investor would like to track an index and is considering using optimization. Optimization is characterized by:
A)
the use of a factor model and infrequent rebalancing.
B)
the use of a matrix model and frequent rebalancing.
C)
the use of a factor model and frequent rebalancing.


An optimization approach uses a factor model to match the factor exposures of the fund and the index. Optimization must be updated to reflect changes in risk sensitivities from the factor model and this leads to frequent rebalancing.
作者: Gypsy    时间: 2012-4-2 10:00

A manager wishes to use a passive strategy to mimic the returns of a price-weighted stock index that consists of 50 stocks. Which of the following would be the best method to use in composing this portfolio?
A)
Using the full replication method.
B)
To compose a portfolio that consists of an equal number of shares of a sample of the stocks in the index.
C)
To compose a portfolio that is equally weighted using a sample of stocks in the index.


For indices with fewer than 1000 positions, full replication is possible and recommended.
作者: Gypsy    时间: 2012-4-2 10:01

An investor would like to track an index. Compared to stratified sampling and optimization, when would replication be favored? When the index has:
A)
more than 1,000 stocks and liquid stocks.
B)
less than 1,000 stocks and illiquid stocks.
C)
less than 1,000 stocks and liquid stocks.


Full replication is more likely to be used when the number of stocks in the index is less than 1,000 and when the stocks in the index are liquid.
作者: Gypsy    时间: 2012-4-2 10:01

An investor would like to track an index. Compared to optimization, stratified sampling:
A)
assumes the covariances are zero and leads to higher tracking risk.
B)
models the covariances and leads to lower tracking risk.
C)
models the covariances and leads to higher tracking risk.


In a stratified sampling procedure, it is implicitly assumed that the risk factors have a covariance of zero. An optimization approach accounts for the covariances between the risk factors. An optimization approach leads to lower tracking risk than a stratified sampling approach.
作者: Gypsy    时间: 2012-4-2 10:01

An investor would like to track an index. Comparing optimization, stratified sampling, and replication; in which of the following indexes would the investor be least likely to use replication?
A)
A value-weighted index.
B)
An equal-weighted index.
C)
A free float-adjusted market capitalization index.


An equal-weighted index usually has a large representation in small-cap stocks. Replication would involve purchasing all the stocks in the index and this would be less feasible when there are small-cap stocks involved. The reason is that small-cap stocks tend to have lower liquidity and higher trading costs.
作者: Gypsy    时间: 2012-4-2 10:01

Which of the following is the primary risk of a market-oriented equity investing approach?
A)
The tilt to growth is too strong.
B)
The tilt to value is too strong.
C)
The portfolio must outperform broad market averages or investors will switch to low cost indexing strategies.


Market-oriented investors have portfolios that resemble a broad market average over time. The risk for a market-oriented manager is that he or she must outperform a broad market index or investors will use lower cost indexing strategies. Although a poor growth at a reasonable price (GARP) model would be a concern for this subset of market-oriented equity investing, it is not the primary risk of market-oriented equity investing.
作者: Gypsy    时间: 2012-4-2 10:02

Which of the following is least likely to be a rationale for investing in small cap stocks?
A)
The higher betas for small cap stocks indicate that their future returns should be higher.
B)
Smaller firms are more likely to be underpriced than larger cap stocks with greater coverage.
C)
Higher returns are more likely when starting from a smaller stock price base.


Although small-cap stocks may have a higher beta, this is not given as a rationale for investing in them. Both remaining responses indicate the most common rationales for investing in these stocks.
作者: Gypsy    时间: 2012-4-2 10:02

Which of the following is most accurate regarding growth stocks? Growth stocks are likely to:
A)
outperform during an economic contraction and outperform during an economic expansion.
B)
outperform during an economic contraction and underperform during an economic expansion.
C)
underperform during an economic contraction and outperform during an economic expansion.


Growth stocks are more likely to outperform during a recession as there are few other firms with growth and a premium would be priced into growth stock valuation. During an expansion, many firms are doing well and the valuation premiums for growth stocks may decline.
作者: Gypsy    时间: 2012-4-2 10:02

Which of the following statements about value and growth investors is least accurate?
A)
Value investors focus on the numerator of the P/E ratio while growth investors focus on the denominator.
B)
Growth investors seek industries where low expected earnings growth will drive the stock price down.
C)
Growth investors may do better during an economic contraction than during an expansion.


Growth investors search for firms and industries where high expected earnings growth will drive the stock price up even higher.
作者: Gypsy    时间: 2012-4-2 10:03

The risk for growth investors is that the expected earnings growth does not occur. How will this low growth affect the price-multiple and stock prices, respectively?
A)
Decrease; decrease.
B)
Increase; decrease.
C)
Decrease; increase.


Growth investors search for firms or industries where high expected earnings growth will drive the stock price up. If the actual earnings are lower than expected, the stock price will decrease due to a lower growth rate and the price multiple will decrease and as a result.
作者: Gypsy    时间: 2012-4-2 10:03

Which of the following is a justification of a value investing strategy?
A)
Current depressed earnings will rise in the future as they revert to the mean.
B)
The value of stock is volatile so a cheaply priced stock will see an increase in value in the future.
C)
The investor can add value using proper analysis of the risky firm.


There are two justifications for a value investing strategy. The first is that although a firm’s earnings are depressed now, the earnings will rise in the future as they revert to the mean. One of the risks of this strategy however is that there is a good reason why the stock is priced so cheaply. Some stocks will take a long time to increase in value. The investor needs to consider this before investing. The second justification for value investors is that growth investors expose themselves to the risk that earnings and price multiples will contract for high-priced growth stocks.
作者: Gypsy    时间: 2012-4-2 10:03

Which of the following is least likely to be an advantage of returns-based style analysis?
A)
The use of different models provides similar results.
B)
Low cost.
C)
It will detect style changes quickly.


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.
作者: Gypsy    时间: 2012-4-2 10:04

Which of the following would least likely be a characteristic of a growth portfolio using holdings-based style analysis?
A)
Low earnings volatility.
B)
Low dividend yield.
C)
Representation in the financial industry.


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 and low earnings volatility.
作者: Gypsy    时间: 2012-4-2 10:04

In comparing returns-based style analysis with holdings-based style analysis it is most accurate to say that:
A)
holdings-based style analysis aggregates the effect of the investment process, and returns-based style analysis is more forward looking.
B)
returns-based style analysis can capture changes in style more quickly, but holdings-based style analysis is more quickly executed.
C)
holdings-based style analysis can capture changes in style more quickly, but returns-based style analysis is more quickly executed.


Holdings-based style analysis captures changes more quickly because returns-based style analysis uses historical data, and holdings-based analysis is based upon current holdings in the portfolio. Holdings-based style analysis requires more time and work because it requires analyzing each position, and returns-based style analysis uses historical data in a regression. Returns-based style analysis aggregates the effect of the investment process and requires more theory in the process.
作者: Gypsy    时间: 2012-4-2 10:05

In comparing returns-based style analysis with holdings-based style analysis, it is most accurate to say that:
A)
holdings-based style analysis is as equally data intensive as returns-based style analysis.
B)
returns-based style analysis is more data intensive and holdings-based style analysis may be ineffective in characterizing current style.
C)
holdings-based style analysis is more data intensive and returns-based style analysis may be ineffective in characterizing current style.


Holdings-based style analysis is very data intensive because the characteristics of each position must be analyzed. However, it does give a better indication of the current style because the returns-based analysis is based upon historical data.
作者: Gypsy    时间: 2012-4-2 10:05

Harold Bowers, CFA, and Bill Hoffman, CFA, are analyzing the returns of several portfolios. Bowers is performing an analysis based upon the characteristics of the investments in each of the portfolios, and Hoffman is performing a regression analysis using historical data. Based upon this, with respect to returns-based style analysis and holdings-based style analysis, it is most likely that:
A)
Bowers and Hoffman are both using variations of holdings-based style analysis.
B)
Bowers is performing returns-based style analysis and Hoffman is performing holdings-based style analysis.
C)
Bowers is performing holdings-based style analysis and Hoffman is performing returns-based style analysis.


Bowers is clearly performing holdings-based style analysis. Of the two approaches, regression is used in the return’s-based style analysis by regressing historical returns on factors.
作者: Gypsy    时间: 2012-4-2 10:05

Which of the following would least likely be a characteristic of a value portfolio using holdings-based style analysis?
A)
Representation in the utility industry.
B)
Low earnings volatility.
C)
Below average earnings growth.


A value manager would have high earnings volatility because they are willing to take positions in cyclical firms. Low earnings growth and representation in the utility industry would characterize a value manager.
作者: Gypsy    时间: 2012-4-2 10:06

Which of the following is most accurate regarding equity style index methodology? Most equity style indices are constructed using:
A)
holdings-based style analysis which would make buffering more necessary compared to using returns-based style analysis.
B)
returns-based style analysis which would make buffering more necessary compared to using holdings-based style analysis.
C)
holdings-based style analysis which would make buffering less necessary compared to using returns-based style analysis.


Most indices use holdings-based style analysis to characterize securities. Holding-based style analysis detects style changes more quickly than returns-based style analysis. If an index has buffering rules, a stock is not immediately moved to a different style category when its style characteristics have slightly changed. Because holdings-based style analysis detects style changes more quickly, buffering would become more necessary so that there is not excessive turnover within the index.
作者: Gypsy    时间: 2012-4-2 10:06

Which of the following is most accurate regarding equity style index methodology? The justification for having just two categories of style (i.e., there is only value and growth and no neutral category) is that:
A)
many investment managers have a clear value or growth mandate they must follow.
B)
having overlap in categories precludes a neutral category.
C)
neutral categories are hard to define.


Most indices have just two categories, value and growth (i.e., there is no neutral style index). The justification for just two categories is that many investment managers have a clear value or growth mandate and they need a benchmark that is structured similar to their mandate.
作者: Gypsy    时间: 2012-4-2 10:07

If an equity style index has buffering rules, the index will have:
A)
less turnover and there will be lower transactions costs from rebalancing for managers tracking the index.
B)
more turnover and there will be higher transactions costs from rebalancing for managers tracking the index.
C)
more turnover and there will be lower transactions costs from rebalancing for managers tracking the index.


If an index has buffering rules, a stock is not immediately moved to a different style category when its style characteristics have slightly changed. The presence of buffering means that there will be less turnover in the style indices and hence lower transactions costs from rebalancing for managers tracking the index.
作者: Gypsy    时间: 2012-4-2 10:07

Which of the following is most accurate regarding equity style index methodology? If style is viewed as a quantity then:
A)
the market cap of some stocks will be split between value and growth indices.
B)
stocks will be placed in either value or growth indices with no overlap.
C)
there will be a neutral style index category.


If style is viewed as a quantity, then there will be overlap when the style index is constructed. Some of a stock’s market cap may be assigned to value and another part could be assigned to growth. This would occur when a stock is not clearly value or growth. Whether style is viewed as a quality or a quantity does not affect whether there will be a neutral category.
作者: Gypsy    时间: 2012-4-2 10:07

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 fund’s size will likely be:
A)
the same for each analyst and the characterization of the fund’s style will likely be different for each analyst.
B)
different for each analyst and the characterization of the fund’s style will likely be different for each analyst.
C)
the same for each analyst and the characterization of the fund’s style will likely be the same for each analyst.


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.
作者: Gypsy    时间: 2012-4-2 10:08

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 manager’s style is:
A)
stagnant and this is not a problem for the investor.
B)
drifting and this is a problem for the investor.
C)
drifting and this is not a problem for the investor.


Financial stocks are typically value stocks whereas technology stocks are typically growth stocks. Thus the manager’s 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.
作者: Gypsy    时间: 2012-4-2 10:08

Which of the following is least accurate regarding equity style drift?
A)
A manager shifting from utility stocks to health care stocks is exhibiting style drift.
B)
A manager shifting from high earnings volatility stocks to high P/E stocks is not exhibiting style drift.
C)
A manager shifting from technology stocks to health care stocks is not exhibiting style drift.


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.
作者: Gypsy    时间: 2012-4-2 10:10

What are the two main benefits to monitoring the potential style bias resulting from socially responsible investing? The benefits are the:
A)
investor can change his or her social screen and the manager can determine the appropriate benchmark.
B)
portfolio manager can take steps to minimize the bias and the manager can suggest alternative socially responsible portfolios to the investor.
C)
portfolio manager can take steps to minimize the bias and the manager can determine the appropriate benchmark.


Socially responsible portfolios tend to be biased towards growth and small-cap stocks. The benefits to monitoring this style bias are that the portfolio manager can take steps to minimize it and can determine the appropriate benchmark for the socially responsible portfolio.
作者: Gypsy    时间: 2012-4-2 10:10

A socially responsible portfolio tends to be more heavily weighted in:
A)
value and small-cap stocks.
B)
growth and large-cap stocks.
C)
growth and small-cap stocks.


A socially responsible portfolio tends to be more heavily weighted in growth stocks and small-cap stocks.
作者: hinsafdar    时间: 2012-4-2 10:11

A recession is expected in an economy within the next year. Portfolio Manager A has shifted more of their stocks from the financial industry to the health care industry. Portfolio Manager B has shifted more of their stocks from the technology industry to the utility industry. Which of the following statements is most accurate regarding the performance of each manager?
A)
Portfolio Manager A is expected to underperform the broad market while Portfolio Manager B is expected to outperform the broad market.
B)
Portfolio Manager A is expected to outperform the broad market and Portfolio Manager B is expected to outperform the broad market.
C)
Portfolio Manager A is expected to outperform the broad market while Portfolio Manager B is expected to underperform the broad market.


Both managers are exhibiting style drift with both being beneficial to performance. Value managers tend to have greater representation in the non-cyclical utility and cyclical financial industries whereas growth managers tend to have higher weights in the cyclical technology and non-cyclical health care industries. Growth stocks are more likely to outperform during a recession as there are few other firms with growth prospects and a premium would be placed on growth stocks’ valuation. Since the financial and technology industries are cyclical they will tend to under-perform during a recession whereas the healthcare and utility industries are non-cyclical and should outperform during a recession compared to cyclical stocks.
作者: hinsafdar    时间: 2012-4-2 10:12

Which of the following is least likely to be a reason pricing inefficiencies exist on the short-side?
A)
The securities exchanges in the developed world prohibit short sales.
B)
There are more potential buyers than sellers of stock.
C)
Management has options in firm’s stock.


Although there may be limitations on short sales, they are not prohibited by securities exchanges. There are more potential buyers than sellers of stock so analysts are reluctant to lose these potential customers with a sell recommendation. Also management may hold their firm’s stock and options and put pressure on analysts to not issue sell recommendations.
作者: hinsafdar    时间: 2012-4-2 10:12

Which of the following is characteristic of a long-short trade? A long-short trade has the potential to earn:
A)
two alphas and eliminate unsystematic risk.
B)
one alpha and eliminate systematic risk.
C)
two alphas and eliminate systematic risk.


Long-short strategies can buy undervalued stocks and short overvalued stocks, earning two alphas. A long-only strategy can only earn the long alpha. Long-short strategies can eliminate expected systematic risk by buying one stock and shorting another in the same industry. The investor however still has unsystematic risk if the short position rises while the long falls.
作者: hinsafdar    时间: 2012-4-2 10:13

Which of the following are advantages of a long-short trade? A long-short trade focuses on:
A)
exploiting constraints and can generate a symmetric distribution of active returns.
B)
fundamental valuation and can generate an asymmetric distribution of active returns.
C)
exploiting constraints and can generate an asymmetric distribution of active returns.


Long-only strategies are focused on using fundamental analysis to find undervalued stocks. In contrast, long-short strategies focus on exploiting the constraints many investors face. For example, institutions are unable to short a stock. If an investor would like to express a negative view of an index security in a long-only strategy, he is limited to avoidance of the stock. The distribution of potential active weights in a long-only portfolio is asymmetric.
作者: hinsafdar    时间: 2012-4-2 10:13

Which of the following is NOT an advantage of the short extension strategy compared to a long only strategy or a market neutral strategy?
A)
A short extension strategy does not utilize swaps or futures.
B)
A short extension strategy can short a small cap stock that may have a minimal weight in a market capitalized benchmark.
C)
The market return and alpha for the short extension strategy are generated from the same source.


In a short extension strategy the market return and alpha are generated from the same source – the market return comes from the long position in equities and the alpha comes from shorting those same overpriced/underperforming equities and using the proceeds to invest in undervalued securities. This is a disadvantage because it is more limiting and constraining as compared to the market neutral position which generates alpha by going long and short in under and overpriced securities respectively in the same industry and then using derivatives such as equity index futures to gain market exposure. Thus in the market neutral strategy the alpha and market exposure are gained from different sources.
A disadvantage of a long only strategy is the constraint of only being able to reduce the weight of a poorly performing stock to zero in the portfolio. If the benchmark is market capitalized the effect on the portfolio is minimal for small and mid cap stocks. Conversely, a short extension strategy can short the same under performing small or mid cap stock in a greater proportion and exploit the negative information regarding the stock to a much larger degree than the long only strategy.
A short extension strategy does not rely on the available liquidity of swaps and futures to gain market exposure as the market neutral strategy does.
作者: hinsafdar    时间: 2012-4-2 10:14

Which of the following is least likely to be an advantage of using an ETF instead of a futures contract to equitize a market neutral long-short strategy?
A)
ETFs are subject to less regulation.
B)
ETFs can be more convenient.
C)
ETFs can be more cost effective.


The review does not specify that ETFs are subject to less regulation than futures. ETFs may be more cost effective and convenient than futures contracts.
作者: hinsafdar    时间: 2012-4-2 10:14

A short extension strategy can be described as:
A)
going short in part of the portfolio and purchasing an equal amount of equities resulting in a position that is more than 100% long.
B)
shorting part of the portfolio to reduce exposure to over-valued stocks and gaining market exposure through the use of derivatives.
C)
a long position in equities with a relaxed constraint on short sales.


A short extension is characterized by shorting part of the portfolio, for example shorting 20% and taking the proceeds from the short sale and purchasing undervalued securities in the same amount so the net amount of capital invested is 100% (= 100% long − 20% short + 20% long) but the long position is 120% (= 100 from the initial long position + 20 from the proceeds of the short sale). A short extension strategy does not use derivatives but instead only takes long and short positions in equities. A market neutral strategy is characterized by equal amounts of long and short positions to produce an overall beta of 0 whereas a short extension strategy has a beta of greater than 0.
作者: hinsafdar    时间: 2012-4-2 10:15

If an investor wanted to equitize a market neutral long-short strategy with a S&P 500 futures contract, which of the following would be the correct amount of the notional principal of the S&P 500 futures contract?
A)
250 times the value of one contract.
B)
The value of the long position.
C)
The cash from the short sale.


If the investor wishes to add systematic risk to a market neutral strategy, the investor would take a long position in an equity futures contract with a notional principal equal to the cash from the short sale.
作者: hinsafdar    时间: 2012-4-2 10:15

Which of the following is the correct benchmark for a market neutral long-short strategy equitized with S&P 500 futures contracts?
A)
The S&P 500 index.
B)
The risk-free rate.
C)
The S&P 500 index plus the risk-free rate.


If a long-short, market neutral strategy is equitized, the benchmark is the underlying index of the futures contract (in this case the S&P 500).
作者: hinsafdar    时间: 2012-4-2 10:15

Which of the following statements regarding the beta of a short extension strategy versus a market neutral strategy is most accurate?
A)
The beta of a short extension strategy is generally designed to be around 1 whereas the beta of a market neutral strategy is 0.
B)
The beta of a short extension strategy is generally designed to be around 0 whereas the beta of a market neutral strategy is 1.
C)
The beta of both a short extension strategy and a market neutral strategy can vary depending upon the percentage of equity exposure employed in the strategy.


The beta for a short extension is usually around 1 since it has a much greater percentage of long equity positions than short positions whereas the beta for a market neutral strategy is zero meaning there is no systematic risk. The market neutral strategy goes long and short in stocks in the same industry thus there is only firm specific (unsystematic) risk.
作者: hinsafdar    时间: 2012-4-2 10:16

Which of the following statements is most accurate regarding comparing a 120/20 strategy versus combining a 100/0 strategy with a 20/20 strategy?
A)
Combining a 100/0 strategy with a 20/20 strategy would result in a 120/20 short extension strategy.
B)
The 120/20 strategy is managed as a single portfolio whereas the combination of the other strategies represents two separately managed portfolios.
C)
Both strategies are essentially equivalent.


A 120/20 strategy compared to combining a 100/0 with a 20/20 strategy are not the same thing. The 120/20 is a short extension strategy in which 20% of the long portfolio is shorted with the proceeds used to purchase an equivalent amount of equities with the resulting portfolio viewed as being managed as 1 portfolio. The 100/0 combined with a 20/20 strategy represents a 100% long portfolio combined with a market neutral strategy with each strategy representing separately managed portfolios. Also, the 20/20 market neutral strategy is constructed by shorting 20% of the available capital and using derivatives such as futures or swaps to gain market exposure whereas the short extension strategy does not use derivatives to gain market exposure.
作者: hinsafdar    时间: 2012-4-2 10:16

Which of the following provides the correct range of annual turnover in a value investor’s portfolio?
A)
0% to 20%.
B)
20% to 80%.
C)
80% to 150%.


The frequency of buying and selling in a portfolio will be driven by the manager’s style. Value investors are typically long-term investors who buy undervalued stocks and hold them until they appreciate. Annual turnover for value managers usually varies from 20% to 80%. Growth managers base their decisions on earnings growth and are less patient. They often sell after the next earnings statement comes out. Thus it is not unusual to see annual turnover of 60% to several hundred percent for these investors.
作者: hinsafdar    时间: 2012-4-2 10:16

In which of the following selling disciplines would the investor sell the stock after it had reached its intrinsic value?
A)
Up-from-cost.
B)
Target price.
C)
Valuation-level.


In a target price sell discipline, the manager determines the stock’s fundamental value at the time of purchase and later sells the stock when it reaches this level.
作者: hinsafdar    时间: 2012-4-2 10:16

Which of the following selling disciplines would be best for an investor who is concerned about the tax implications of a trade?
A)
Up-from-cost.
B)
Opportunity cost.
C)
Deteriorating Fundamentals.


If an investor factors in the transactions costs and tax consequences of the sale of the existing security and the purchase of the new security, this approach is referred to as an opportunity cost sell discipline.
作者: hinsafdar    时间: 2012-4-2 10:17

Manager X follows the stocks in a broad market index and has made independent forecasts for 300 of them. Her information coefficient is 0.03. Manager Y has made independent forecasts for 100 stocks. His information coefficient is 0.05. Which manager has the better performance and why?
A)
Manager Y because he has more accurate forecasts.
B)
Manager Y because he has greater breadth.
C)
Manager X because she has greater breadth.

The information ratio for each manager is calculated as the information coefficient times the square root of the investor’s breadth:


Although Manager X’s depth of knowledge (as measured by the information coefficient) is not as great, she has better performance as measured by the information ratio because she has a greater breadth of decisions.
作者: hinsafdar    时间: 2012-4-2 10:17

Manager X follows the stocks in a broad market index and has made independent forecasts for 500 of them. Her information coefficient is 0.02. Manager Y has made independent forecasts for 175 stocks. His information coefficient is 0.04. Which manager has the better performance and why?
A)
Manager Y because he has greater breadth.
B)
Manager X because she has greater breadth.
C)
Manager Y because he has more accurate forecasts.

The information ratio for each manager is calculated as the information coefficient times the square root of the investor’s breadth:


The information coefficient is measured by comparing the investor’s forecasts against actual outcomes. More skillful managers will have a higher information coefficient. Manager Y’s depth of knowledge is greater which accounts for his greater information ratio and better performance.
作者: hinsafdar    时间: 2012-4-2 10:17

Which of the following concerning investment strategies is least accurate?
A)
Stock-based enhanced indexing strategy can produce higher information ratios because investors can apply their knowledge to a large number of securities.
B)
In a long-short, market neutral strategy the benchmark should be the risk-free rate.
C)
If a manager does not have an opinion about an index stock in stock-based enhanced indexing strategy, they will not hold the stock.


If a manager does not have an opinion about an index stock in a stock-based enhanced indexing strategy, they will hold the stock at the same level as the benchmark. Stock-based enhanced indexing strategies can produce higher information ratios because the investor can systematically apply his knowledge to a large number of securities, each of which would require independent decisions. Because a long-short, market neutral strategy has no systematic risk, its benchmark should be the risk-free rate (the return on T-bills).
作者: hinsafdar    时间: 2012-4-2 10:18

How is risk controlled in a stock-based enhanced indexing strategy?
A)
Buying puts on equity indices.
B)
Selling equity futures contracts.
C)
Through monitoring factor risk and industry exposures.


In a stock-based enhanced indexing strategy, risk is controlled by monitoring factor risk and industry exposures.
作者: hinsafdar    时间: 2012-4-2 10:18

In which of the following situations would an investor be most risk averse?
A)
When allocating assets to stocks, bonds, and other assets.
B)
When allocating funds to active equity managers.
C)
When allocating funds to a passive index.


At the asset allocation level, the focus is on maximizing expected return for a given level of risk. Once an investor has made a decision to invest in equity, the tradeoff focuses on active risk and active return. As one moves from passive management to enhanced indexing to active management, the expected active return and active risk increase.
Investors are more risk averse when facing active risk. To believe that an active return is possible, the investor must believe that there are active managers who can produce it and that the investor will be able to pick those successful managers. Second, an active equity style will also be judged against a passive benchmark. It is difficult to earn alpha and those investors who don’t will face pressure from their superiors. Lastly, higher active returns mean more is invested with the high return active manager, and this results in less diversification.
作者: hinsafdar    时间: 2012-4-2 10:19

Which of the following statements is least accurate? An investor’s utility of the active return:
A)
increases as the investor’s risk aversion to active risk decreases.
B)
increases as active risk decreases.
C)
increases as the investor’s risk tolerance for active risk decreases.


The utility function for active return is similar to the utility function for total return. The utility of the active return increases as active return increases, active risk decreases, and as the investor’s risk aversion to active risk decreases. Risk tolerance is the opposite of risk aversion. Lower risk tolerance would imply lower utility from a risky return.
作者: hinsafdar    时间: 2012-4-2 10:19

Which of the following assumptions is typically used to calculate the portfolio active risk from a group of equity managers? The correlation between equity managers’ active returns are:
A)
zero.
B)
positive, ranging from 0.3 to 0.8.
C)
a function of the amount allocated to each manager.


To calculate the portfolio active risk, it is typically assumed that the correlations between the equity managers’ active returns are zero. This is not an unreasonable assumption if the managers are following different styles.
作者: hinsafdar    时间: 2012-4-2 10:19

Which of the following is least accurate regarding the completeness fund approach?
A)
It will increase the misfit return.
B)
It can be managed passively or semiactively.
C)
Combining a completeness fund with an active fund will result in risk exposure similar to the benchmark.


A potential disadvantage of a completeness fund is that it may result in a reduction of active returns arising from misfit risk.
作者: hinsafdar    时间: 2012-4-2 10:19

In which of the following portfolios would misfit risk be largest? A portfolio:
A)
generated using a completeness fund approach.
B)
that is indexed to a broad market.
C)
generated using a core-satellite approach.


Whenever the manager’s portfolio diverges significantly from the investor’s portfolio, there will be misfit risk. An investor’s portfolio is one that the investor uses to evaluate the manager and may not be appropriate for their style. The investor’s portfolio is usually a broad market benchmark for that asset class. By design, the completeness fund results in a reduction of misfit risk. The indexed portfolio will have small misfit risk. The portfolio generated using a core-satellite approach will have the highest misfit risk because the satellite portfolios allow for specialized manager styles.
作者: hinsafdar    时间: 2012-4-2 10:20

Which of the following is least likely to be an objective of optimization after decomposing total active return into true and misfit components?
A)
Generate a positive “true” information ratio.
B)
Eliminate misfit risk.
C)
Maximize total active return.


The decomposition of the total active performance into true and misfit components is useful for optimization. The objective is maximize the total active return for a given level of total active risk, while still allowing for an optimal amount of misfit risk. Note that misfit risk is not optimized at zero because a manager may be able to generate a level of true active return for some level of misfit risk. In other words, if you let the manager specialize in the style they are familiar with, the manager is more likely to generate excess returns relative to their normal portfolio.
作者: hinsafdar    时间: 2012-4-2 10:20

Which of the following is least likely to be a limitation of an alpha and beta separation approach?
A)
The investor may be exposed to systematic risk.
B)
It may be difficult to implement in markets.
C)
Some long-short strategies may have a degree of systematic risk.


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.
作者: hinsafdar    时间: 2012-4-2 10:20

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)
A short position in a small-cap equity futures contract.
C)
A market neutral hedge fund.


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.
作者: hinsafdar    时间: 2012-4-2 10:21

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)
A portable alpha strategy means that an investor can easily pick up systematic risk through a variety of positions.
C)
This approach may obscure investment risks.


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. 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.
作者: hinsafdar    时间: 2012-4-2 10:21

Which of the following provisions in an equity manager’s compensation plan would create symmetry in the compensation?
A)
A high water mark provision.
B)
A fee cap.
C)
Stock options.


Symmetry refers to when the manager receives both rewards for good performance and punishment for bad performance. A high water mark provision states that a manager must compensate for past underperformance before receiving a performance-based fee. This is the only compensation provision mentioned in the responses that punishes for bad performance so it is the only one that provides symmetry.
作者: hinsafdar    时间: 2012-4-2 10:21

Which of the following equity manager compensation plans would create the greatest incentive for performance?
A)
A base compensation plus bonus and stock options.
B)
A base compensation plus stock options.
C)
A symmetric compensation plan.


Performance-based fees align the interests of the equity manager and the investor, especially if they are symmetric. A symmetric compensation plan has both rewards for good performance and punishment for bad performance. Both remaining responses do not punish the manager for bad performance.
作者: hinsafdar    时间: 2012-4-2 10:22

If an investor is concerned that his or her equity manager might undertake too much risk, which of the following provisions in the equity manager’s compensation plan should be included?
A)
A fee cap.
B)
Stock options.
C)
A high water mark provision.


A performance-based fee may include a fee cap where a maximum is placed on the performance fee. The intent is to prevent managers from undertaking too much risk to earn higher fees.
作者: hinsafdar    时间: 2012-4-2 10:22

Which of the following would least likely be included in bottom-up equity research?
A)
Price-multiple.
B)
Dividend yield.
C)
Currency forecasts.


Bottom-up equity research focuses on individual stock valuation so the firm’s dividend yield and price-multiple would likely be included. Currency valuations are at the macroeconomic level and would be less likely to be included in a bottom-up approach.
作者: hinsafdar    时间: 2012-4-2 10:22

Jane Andrews has investigated the economic conditions in the country of Semeria and is forecasting an economic expansion. She then investigates the valuations for cyclical stocks in this country. What equity research approach is she using?
A)
Bottom-up.
B)
A combination of top-down and bottom-up.
C)
Top-down.


Jane is using a combination of top-down and bottom-up. She starts at the country level and after finding attractive economic conditions, she then drops down to the individual stock level to find stocks that are attractive based on their valuations.
作者: hinsafdar    时间: 2012-4-2 10:23

Which of the following best describes the buy-side equity research approach?
A)
Investment recommendations are presented to a committee and the research is not available to the public.
B)
Investment recommendations are used to promote stocks and the research is available to the public.
C)
Investment recommendations are presented to a committee and the research is available to the public.


Buy-side equity research is used to formulate investment recommendations for an investment management firm. The analyst usually must present their investment recommendations to and have them approved by a committee. Buy-side research is not usually available to those outside the firm because this is how the firm hopes to establish their competitive advantage.
Sell-side research is often used by an investment bank to promote stocks the bank is selling. It is thus available to the public.
作者: hinsafdar    时间: 2012-4-2 10:23

An investment management firm is preparing to hire an independent analyst to recommend security selections for the firm’s portfolio. The firm would like to keep the manager’s compensation straightforward and predictable. Which of the following best describes the firm’s situation? The investment management firm wants to hire a:
A)
sell-side analyst and pay them on ad valorem basis.
B)
buy-side analyst and pay them performance-based fees.
C)
buy-side analyst and pay them on ad valorem basis.


Sell-side analysts often work for an investment bank that uses the research to promote stocks the bank is selling. Sell-side research is also conducted by independent firms available for hire by investment managers. Ad valorem fees are straightforward and predictable. This is useful when the investor is budgeting investment fees. Performance-based fees are more complex to administer.
作者: keytee    时间: 2019-9-15 10:57

If an investor believes markets are efficient, the investor will pursue a passive strategy. Relative to active and semiactive strategies, passive strategies are characterized by low expected active return, low tracking risk, and low information ratio.



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