hinsafdar

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.

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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.

hinsafdar

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.

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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.

hinsafdar

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.

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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.

hinsafdar

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.

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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.

hinsafdar

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.

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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.

hinsafdar

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.

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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.

Gypsy

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.

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A socially responsible portfolio tends to be more heavily weighted in growth stocks and small-cap stocks.

Gypsy

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.

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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.

Gypsy

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.

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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.

Gypsy

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.

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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.