Reading 31: Equity Portfolio Management－LOS c equity, investor, investment, efficiency, concerning

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CFA Institute Area 8-11, 13: Asset Valuation
Session 10: Equity Portfolio Management
Reading 31: Equity Portfolio Management
LOS c: Recommend an equity investment approach when given an investor's investment policy statement and beliefs concerning market efficiency.

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An investor believes markets are efficient and pursues an equity investment strategy consistent with their beliefs. Which of the following best characterizes their portfolio, relative to other possible equity strategies?

A) Low tracking risk and high information ratio.

B) High tracking risk and low information ratio.

C) Low tracking risk and low information ratio.

D) High tracking risk and high information ratio.

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Answer and Explanation

If an investor believes markets are efficient, the investor will pursue a passive strategy. Relative to active and semiactive strategies, passive strategies are characterized by low expected active return, low tracking risk, and low information ratio.

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Which of the following best characterizes the historical record of active management? Compared to passive management, active manager returns:

A) underperform passive management before expenses and underperform passive management after expenses.

B) outperform passive management before expenses and equal passive management after expenses.

C) equal passive management before expenses and underperform after expenses.

D) outperform passive management before expenses and outperform passive management after expenses.

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Answer and Explanation

Compared to passive management, active managers have average returns similar to passive management before expenses. After expenses, they underperform passive management on average.

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Which of the following investors would be more likely to pursue passive equity management strategies?

A) A taxable investor who believes markets are efficient.

B) A taxable investor who believes markets are inefficient.

C) A nontaxable investor who believes markets are efficient.

D) A nontaxable investor who believes markets are inefficient.

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Answer and Explanation

Passive strategies have low turnover, fewer realized capital gains, and hence lower associated taxes. If an investor believes markets are efficient, he or she would be more likely to pursue a passive strategy because the investor would not believe that beating the market was possible through an active strategy.