标题: Reading 42: Monitoring and Rebalancing －LOS j [打印本页]
作者: cfaedu 时间: 2008-9-18 16:39 标题: [2008] Session 15 － Reading 42: Monitoring and Rebalancing －LOS j
CFA Institute Area 3-5, 7, 12, 14-18: Portfolio Management
Session 15: Monitoring and Rebalancing
Reading 42: Monitoring and Rebalancing
LOS j: Judge the appropriateness of constant mix, buy-and-hold, and CPPI rebalancing strategies, when given an investor's risk tolerance and asset return expectations.
作者: cfaedu 时间: 2008-9-18 16:39
Which of the following strategies is most appropriate for an investor whose risk tolerance drops to zero when the value of the portfolio drops below a floor value?
A) | All of these responses are correct. |
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| C) | Constant proportion portfolio insurance. |
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| D) | Option-based portfolio insurance. |
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Answer and Explanation
In each of these strategies, risk tolerance is zero when the value of assets drops below the floor. Under buy and hold, the floor value is the original amount invested in T-bills.
作者: cfaedu 时间: 2008-9-18 16:40
Concave strategies:
| A) | sell stocks as they fall in price. |
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| B) | represent purchase of insurance. |
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| C) | include constant proportion portfolio insurance strategies (CPPI). |
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D) | buy stocks as they fall in price. |
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Answer and Explanation
Concave strategies buy stocks as they fall in price and do not have much downside protection. Constant mix strategies, not CPPI, are examples of concave strategies.
Concave strategies buy stocks as they fall in price and do not have much downside protection. Constant mix strategies, not CPPI, are examples of concave strategies.
作者: cfaedu 时间: 2008-9-18 16:40
Constant mix strategy:
| A) | requires purchase of a stock as the stock value rises. |
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B) | is preferable to a buy and hold strategy when the market reverses direction. |
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| C) | requires purchase of bonds as stocks fall in value. |
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| D) | generally involves low transaction and trading costs. |
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Answer and Explanation
In a constant mix strategy an investor will hold stocks at all wealth levels. A constant mix strategy requires the purchase of stocks as they fall and the selling of stocks as they rise, capitalizing on market reversals. A constant mix strategy will generally underperform a comparable buy-and-hold strategy when there are no market reversals. The strategy entails high transaction and trading costs due to continuous rebalancing.
In a constant mix strategy an investor will hold stocks at all wealth levels. A constant mix strategy requires the purchase of stocks as they fall and the selling of stocks as they rise, capitalizing on market reversals. A constant mix strategy will generally underperform a comparable buy-and-hold strategy when there are no market reversals. The strategy entails high transaction and trading costs due to continuous rebalancing.
作者: cfaedu 时间: 2008-9-18 16:52
Which of the following strategies is most likely to outperform if stock market reversals are expected to occur?
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| D) | Option based portfolio insurance. |
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Answer and Explanation
Constant mix strategies outperform during stock market reversals.
作者: cfaedu 时间: 2008-9-18 16:52
Which of the following strategies is most likely to outperform if a stock market reversal is NOT expected to occur?
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| D) | Rebalancing the portfolio to specified allocations. |
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Answer and Explanation
Constant proportion strategies (CPPI) outperform when stock market reversals are not expected because as the market increases in value the CPPI investor will invest in a higher proportion of stocks in their portfolio. The buy and hold investor will do nothing and the proportion of stocks in their portfolio will increase but not as high as the actively managed CPPI portfolio. The constant mix investor will have to shift out of stocks as the market increases to maintain a constant proportion of stocks as the market fluctuates. If the market trends downward without reversing the CPPI investor will be the first one out of stocks as the market continues its downward slide.
作者: cfaedu 时间: 2008-9-18 16:53
Which of the following statements regarding rebalancing strategies that have convex payoff diagrams (y-axis = portfolio value, x-axis = stock market value) is TRUE? Convex rebalancing strategies:
| A) | include the constant mix strategy. |
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| B) | include the buy and hold strategy. |
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| C) | do well in flat, but oscillating, markets. |
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D) | sell stocks as prices fall and buy stocks as prices rise. |
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Answer and Explanation
The constant mix strategy has a concave payoff diagram and a buy and hold strategy has a linear payoff diagram. Because convex strategies sell stocks as prices fall and buy as prices rise, they perform poorly in flat, oscillating marketsselling on weakness only to see the market rebound, and buying on strength only to see the market fall.
作者: cfaedu 时间: 2008-9-18 16:54
Which of the following asset allocation strategies passively assumes that risk tolerance is directly related to wealth levels?
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| B) | Constant proportion portfolio insurance (CPPI). |
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| D) | Both constant mix and constant proportion portfolio insurance (CPPI). |
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Answer and Explanation
This is the definition of a buy and hold strategy. Constant mix strategies take a contrarian view of investing in order to maintain a constant asset allocation regardless of wealth levels. CPPI is a momentum-based strategy that aggressively increases exposure to risky assets in a rising market.
作者: cfaedu 时间: 2008-9-18 16:55
Which of the following asset allocation strategies takes a contrarian view of investing?
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| C) | Constant proportion portfolio insurance (CPPI). |
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| D) | Option based portfolio insurance (OBPI). |
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Answer and Explanation
The constant mix strategy takes a contrarian view of investing in order to maintain a constant asset allocation regardless of wealth levels. Buy and hold strategies passively assume that risk tolerance is directly related to wealth levels. CPPI and OBPI are momentum-based strategies that aggressively increase exposure to risky assets in a rising market.
作者: cfaedu 时间: 2008-9-18 16:55
Carl Allen, CFA, has been assigned the task of documenting some of his companys asset allocation techniques. After the firm receives accolades in a recent trade magazine article highlighting firms with innovative trading strategies, Allens supervisor decides it is time the firm began formally documenting how properly timed allocation shifts can add value to assets under management. Allen decides he will not only document the firms specific allocation adjustment strategies, but will also compile a document listing various allocation techniques. Allen decides to begin with input factors such as investor risk tolerance and market conditions and work his way to specific techniques designed to take advantage of various opportunities. His overall plan is to work from theoretical concepts to specific applications.
One of the first concepts Allen has to explain is the idea of holding an optimal portfolio. In his mind, Allen decides he has to adequately explain the two main factors that will allow an investor the ability to hold an optimal portfolio. Which of the following will dictate the selection of an investors optimal portfolio?
| A) | Any intersection between an investor's indifference curve and the investment opportunity set. |
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B) | The tangential intersection between an investor's indifference curve and the efficient frontier. |
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| C) | Any portfolio that lies above the risk-free rate of return and exceeds an investor's expected rate of return. |
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| D) | The global minimum variance portfolio. |
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Answer and Explanation
An optimal portfolio is any set of assets that maximizes an investors utility, which is dictated by his indifference curve, with those assets yielding the highest returns at given risk levels, which are dictated by the efficient frontier. The tangential intersection of indifference curves with the efficient frontier dictates an investors optimal portfolio.
An optimal portfolio is any set of assets that maximizes an investors utility, which is dictated by his indifference curve, with those assets yielding the highest returns at given risk levels, which are dictated by the efficient frontier. The tangential intersection of indifference curves with the efficient frontier dictates an investors optimal portfolio.
Allen has determined there are differential postures an asset manager can take, depending upon whether market conditions are trending up, trending down, or staying relatively level with significant volatility. Which rebalancing strategy provides the greatest benefit when markets are trending up or down with little oscillation?
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C) | Constant proportion portfolio insurance strategy. |
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| D) | Option based portfolio insurance strategy. |
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Answer and Explanation
When a market is either trending up or down with few oscillations, a constant proportion portfolio insurance (CPPI) strategy will outperform other strategies. A CPPI strategy will provide increasing exposure to risky assets when asset values are increasing. An investor will essentially hold an increasing amount of risky assets when their value is increasing. On the other hand, in markets with a declining trend, investors following a CPPI strategy will be selling risky assets faster than others when markets are declining.
When a market is either trending up or down with few oscillations, a constant proportion portfolio insurance (CPPI) strategy will outperform other strategies. A CPPI strategy will provide increasing exposure to risky assets when asset values are increasing. An investor will essentially hold an increasing amount of risky assets when their value is increasing. On the other hand, in markets with a declining trend, investors following a CPPI strategy will be selling risky assets faster than others when markets are declining.
While conducting his research, Allen determines that some dynamic strategies can use a mathematical formula that can easily determine the amount of assets one invests in equities. Specifically, one formula Allen discovers is: $ Invested in stock = m x (assets floor)
where:
m
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stock investment multiplier
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assets
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total assets held in the portfolio (TA)
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floor
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the minimum allowable portfolio value (F) (zero risk level)
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assets - floor
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cushion or funds that can be put at risk
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Realizing that his firms trading strategies were highlighted in the recent edition of a trade magazine due in part to some timely exposure increases in trending markets, Allen begins to document how his firm applies this particular mathematical formula. Since Allens firms performance seems exemplary in a trending market, which value of m was probably chosen?
$ Invested in stock = m x (assets floor)
where:
m
| =
stock investment multiplier
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assets
| =
total assets held in the portfolio (TA)
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floor
| =
the minimum allowable portfolio value (F) (zero risk level)
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assets - floor
| =
cushion or funds that can be put at risk
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Realizing that his firms trading strategies were highlighted in the recent edition of a trade magazine due in part to some timely exposure increases in trending markets, Allen begins to document how his firm applies this particular mathematical formula. Since Allens firms performance seems exemplary in a trending market, which value of m was probably chosen?
Answer and Explanation
The implication is that Allens firm made some important choices in a trending market. This indicates a constant proportion portfolio insurance (CPPI) allocation strategy, which requires that an m greater than 1 be chosen. Apparently, Allens firm was able to increase exposure to equities quickly enough to take advantage of a trending market and probably was able to decrease exposures quickly enough before markets may have trended downward.
The implication is that Allens firm made some important choices in a trending market. This indicates a constant proportion portfolio insurance (CPPI) allocation strategy, which requires that an m greater than 1 be chosen. Apparently, Allens firm was able to increase exposure to equities quickly enough to take advantage of a trending market and probably was able to decrease exposures quickly enough before markets may have trended downward.
作者: cfaedu 时间: 2008-9-18 16:58
Assuming a portfolio begins at a mix of 50 percent stocks and 50 percent cash, which of the following rebalancing strategies could allow the portfolio balance to fall to $0? |
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| C) | Only constant proportion. |
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Answer and Explanation
A constant-mix rebalancing program would automatically adjust holdings to preset levels. If stocks fell, the portfolio would rebalance by deploying cash to purchase stocks. If the market fell to zero, the portfolio would theoretically fall to zero. A buy and hold strategy would never fall below the value of the cash in the account, and a constant-proportion strategy would never fall below a preset floor value. Convex strategies like constant proportion buy when stocks are going up and sell when they are going down, which should prevent a decline to zero in a falling market.
Which statement regarding Montones trades is least accurate? | A) | He provided liquidity in two of the trades. |
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B) | He did not get best execution. |
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| C) | The effective spread for Grossman Golf is $0.09. |
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| D) | He is trading in a highly liquid market. |
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Answer and Explanation
From the information presented, we cannot tell whether Montone got best execution or not. We have no other trading data for comparison purposes. The other statements are accurate. The spreads are small relative to the stock prices, suggesting a liquid market. On one of the trades (Grossman Golf), the effective spread was higher than the quoted spread, suggesting that Montone had to purchase liquidity. The effective spread for the other two trades was lower than the quoted spread, so Montone provided liquidity on those trades. To calculate the effective spread on a purchase transaction, subtract the midpoint of the quoted spread from the execution price and multiply that number by two. $8.53 [($8.52 + $8.45)/2] = $0.045. Doubled, thats $0.09.
The portfolio-rebalancing strategies Frye is testing are most likely:
| A) | | constant proportion | constant mix |
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| B) | | buy and hold | constant proportion |
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C) | | constant mix | constant proportion |
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| D) | | constant proportion | buy and hold |
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Answer and Explanation
Constant mix strategies continually rebalance a portfolio back to a target weight. When stocks rise, a constant-mix program sells. When stocks fall, the program rises. If the market continues jumping up and down regularly, the strategy will result in a rising portfolio value. Constant proportion strategies sell when stocks are down and buy when theyre up. They outperform during strong upward or downward movements but get whipsawed by volatility in a trendless market. A buy-and-hold portfolios value would ebb and flow, lagging constant mix in a volatile, trendless market and lagging constant proportion in a trending market.
Which rebalancing strategy does NOT connect risk tolerance to wealth? |
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| D) | Constant mix, constant proportion, and buy and hold all connect risk tolerance to wealth. |
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Answer and Explanation
Constant mix assumes risk tolerance is constant regardless of the investors level of wealth. Both constant proportion and buy and hold assume that risk tolerance is in some way related to wealth.
The weighted average effective spread for Montones three stock trades is closest to:
Answer and Explanation
To calculate the weighted average effective spread, we start with the effective spread for each transaction Effective spread = 2 × (execution price midpoint of quoted spread) Security | Bid Price | Ask Price | Trading Price | No. of Shares | Effective Spread |
Flanders Fudge | $45.78 | $45.96 | $45.90 | 1,400 | $0.06 |
Grossman Golf | $8.45 | $8.52 | $8.53 | 600 | $0.09 |
Hedger Health Care | $115.67 | $115.81 | $115.79 | 150 | $0.10 |
To calculate the weighted average spread, multiply the effective spread by the number of shares for each stock, then sum those numbers and divide by the number of shares, in this case, 2,150. The weighted average spread is $0.0712.
Security | Bid Price | Ask Price | Trading Price | No. of Shares | Effective Spread |
Flanders Fudge | $45.78 | $45.96 | $45.90 | 1,400 | $0.06 |
Grossman Golf | $8.45 | $8.52 | $8.53 | 600 | $0.09 |
Hedger Health Care | $115.67 | $115.81 | $115.79 | 150 | $0.10 |
To calculate the weighted average spread, multiply the effective spread by the number of shares for each stock, then sum those numbers and divide by the number of shares, in this case, 2,150. The weighted average spread is $0.0712.
作者: deqiang 时间: 2011-5-30 23:17
thanks.
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