Gypsy

If two analysts are classifying a portfolio by style using a style box which of the following statements is most accurate? The characterization of the fund’s size will likely be:

A) the same for each analyst and the characterization of the fund’s style will likely be different for each analyst.

B) different for each analyst and the characterization of the fund’s style will likely be different for each analyst.

C) the same for each analyst and the characterization of the fund’s style will likely be the same for each analyst.

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Categorizing portfolios by size is fairly standard in that market cap is the usual metric for evaluating size. However, different analysts may use different categorizations of value and growth attributes. For this reason, the categorization of portfolios can differ a great deal depending on the analyst.

Gypsy

Which of the following is most accurate regarding equity style index methodology? If style is viewed as a quantity then:

A) the market cap of some stocks will be split between value and growth indices.

B) stocks will be placed in either value or growth indices with no overlap.

C) there will be a neutral style index category.

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If style is viewed as a quantity, then there will be overlap when the style index is constructed. Some of a stock’s market cap may be assigned to value and another part could be assigned to growth. This would occur when a stock is not clearly value or growth. Whether style is viewed as a quality or a quantity does not affect whether there will be a neutral category.

Gypsy

If an equity style index has buffering rules, the index will have:

A) less turnover and there will be lower transactions costs from rebalancing for managers tracking the index.

B) more turnover and there will be higher transactions costs from rebalancing for managers tracking the index.

C) more turnover and there will be lower transactions costs from rebalancing for managers tracking the index.

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If an index has buffering rules, a stock is not immediately moved to a different style category when its style characteristics have slightly changed. The presence of buffering means that there will be less turnover in the style indices and hence lower transactions costs from rebalancing for managers tracking the index.

Gypsy

Which of the following is most accurate regarding equity style index methodology? The justification for having just two categories of style (i.e., there is only value and growth and no neutral category) is that:

A) many investment managers have a clear value or growth mandate they must follow.

B) having overlap in categories precludes a neutral category.

C) neutral categories are hard to define.

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Most indices have just two categories, value and growth (i.e., there is no neutral style index). The justification for just two categories is that many investment managers have a clear value or growth mandate and they need a benchmark that is structured similar to their mandate.

Gypsy

Which of the following is most accurate regarding equity style index methodology? Most equity style indices are constructed using:

A) holdings-based style analysis which would make buffering more necessary compared to using returns-based style analysis.

B) returns-based style analysis which would make buffering more necessary compared to using holdings-based style analysis.

C) holdings-based style analysis which would make buffering less necessary compared to using returns-based style analysis.

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Most indices use holdings-based style analysis to characterize securities. Holding-based style analysis detects style changes more quickly than returns-based style analysis. If an index has buffering rules, a stock is not immediately moved to a different style category when its style characteristics have slightly changed. Because holdings-based style analysis detects style changes more quickly, buffering would become more necessary so that there is not excessive turnover within the index.

Gypsy

Which of the following would least likely be a characteristic of a value portfolio using holdings-based style analysis?

A) Representation in the utility industry.

B) Low earnings volatility.

C) Below average earnings growth.

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A value manager would have high earnings volatility because they are willing to take positions in cyclical firms. Low earnings growth and representation in the utility industry would characterize a value manager.

Gypsy

Harold Bowers, CFA, and Bill Hoffman, CFA, are analyzing the returns of several portfolios. Bowers is performing an analysis based upon the characteristics of the investments in each of the portfolios, and Hoffman is performing a regression analysis using historical data. Based upon this, with respect to returns-based style analysis and holdings-based style analysis, it is most likely that:

A) Bowers and Hoffman are both using variations of holdings-based style analysis.

B) Bowers is performing returns-based style analysis and Hoffman is performing holdings-based style analysis.

C) Bowers is performing holdings-based style analysis and Hoffman is performing returns-based style analysis.

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Bowers is clearly performing holdings-based style analysis. Of the two approaches, regression is used in the return’s-based style analysis by regressing historical returns on factors.

Gypsy

In comparing returns-based style analysis with holdings-based style analysis, it is most accurate to say that:

A) holdings-based style analysis is as equally data intensive as returns-based style analysis.

B) returns-based style analysis is more data intensive and holdings-based style analysis may be ineffective in characterizing current style.

C) holdings-based style analysis is more data intensive and returns-based style analysis may be ineffective in characterizing current style.

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Holdings-based style analysis is very data intensive because the characteristics of each position must be analyzed. However, it does give a better indication of the current style because the returns-based analysis is based upon historical data.

Gypsy

In comparing returns-based style analysis with holdings-based style analysis it is most accurate to say that:

A) holdings-based style analysis aggregates the effect of the investment process, and returns-based style analysis is more forward looking.

B) returns-based style analysis can capture changes in style more quickly, but holdings-based style analysis is more quickly executed.

C) holdings-based style analysis can capture changes in style more quickly, but returns-based style analysis is more quickly executed.

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Holdings-based style analysis captures changes more quickly because returns-based style analysis uses historical data, and holdings-based analysis is based upon current holdings in the portfolio. Holdings-based style analysis requires more time and work because it requires analyzing each position, and returns-based style analysis uses historical data in a regression. Returns-based style analysis aggregates the effect of the investment process and requires more theory in the process.

Gypsy

Which of the following would least likely be a characteristic of a growth portfolio using holdings-based style analysis?

A) Low earnings volatility.

B) Low dividend yield.

C) Representation in the financial industry.

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A growth manager would have representation in the technology and health care industries. A value manager would have representation in the utility and financial industries. A growth manager would have a low dividend yield and low earnings volatility.