hinsafdar

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.

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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.

hinsafdar

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.

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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.

hinsafdar

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.

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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.

hinsafdar

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.

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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.

hinsafdar

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%.

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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.

hinsafdar

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.

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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.

hinsafdar

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.

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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.

hinsafdar

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.

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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).

hinsafdar

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.

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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.

hinsafdar

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.

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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.