Discrepancy (I think?) between two equitizing questions position, following, concerning, why, first

jcole21

In the first question (no need to read the whole question), the answer is A, which means that choice C is correct (i.e. "In a long-short, market neutral strategy the benchmark should be the risk-free rate" is a true statement). Given that, I would expect the answer to the second question to be C, since you have a market neutral strategy + a futures position. Can someone explain why the risk free rate is ignored in the second question? Thanks.


Question 1
Which of the following concerning investment strategies is least accurate?

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

The correct answer was A.

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).



Question 2
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.

The correct answer was A.

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).