LOS p, (Part 1): Contrast derivatives-based versus stock-based enhanced indexing strategies.

Q1. 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.

Q2. 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.

LOS p, (Part 1): Contrast derivatives-based versus stock-based enhanced indexing strategies. fficeffice" />

Q1. 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.

Correct answer is C)

In a stock-based enhanced indexing strategy, risk is controlled by monitoring factor risk and industry exposures.

Q2. 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.

Correct answer is C)

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).

Thx!