CFA LEVEL III, PRACTICE QUESTIONS Reading # 23 (Equity Portfolio Management) | Questions Question - #91666 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 Question - #92657 Which of the following provides the correct range of annual turnover in a value investor’s portfolio? A) 20% to 80% B) 0% to 20% C) 80% to 150% Question - #92961 Which of the following is least accurate regarding using equities as an inflation hedge? A) The effectiveness of an individual stock as a hedge depends on its product market B) The historical record is impressive as to their effectiveness C) Their ability to hedge is unaffected by taxes Question - #91937 Using the following information, what is the investor’s “true” information ratio? Manager Return 14.0% Investor's Benchmark 11.0% Normal Portfolio Return 16.0% Total Active Risk 5.0% Misfit Active Risk 3.2% A) –0.63 B) –0.52 C) 0.60 Question - #91686 Which of the following best characterizes the historical record of active management? Compared to passive management, active manager returns: A) outperform passive management before expenses and equal passive management after expenses B) equal passive management before expenses and underperform after expenses underperform passive management before expenses and underperform passive management after C) expenses Question - #92058 What are the two main benefits to monitoring the potential style bias resulting from socially responsible investing? The benefits are the: investor can change his or her social screen and the manager can determine the appropriate A) benchmark portfolio manager can take steps to minimize the bias and the manager can determine the B) appropriate benchmark portfolio manager can take steps to minimize the bias and the manager can suggest alternative C) socially responsible portfolios to the investor Question - #92355 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? Portfolio Manager A is expected to outperform the broad market and Portfolio Manager B is A) expected to outperform the broad market Portfolio Manager A is expected to underperform the broad market while Portfolio Manager B is B) expected to outperform the broad market Portfolio Manager A is expected to outperform the broad market while Portfolio Manager B is C) expected to underperform the broad market Question - #91923 In which of the following portfolios would misfit risk be largest? A portfolio: A) generated using a completeness fund approach B) generated using a core-satellite approach C) that is indexed to a broad market Question - #92420 A manager wishes to use a passive strategy to mimic the returns of a price-weighted stock index that consists of 50 stocks Which of the following would be the best method to use in composing this portfolio? To compose a portfolio that consists of an equal number of shares of a sample of the stocks in the A) index B) To compose a portfolio that is equally weighted using a sample of stocks in the index C) Using the full replication method Question 10 - #98498 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) The market return and alpha for the short extension strategy are generated from the same source A short extension strategy can short a small cap stock that may have a minimal weight in a C) market capitalized benchmark Question 11 - #98499 Which of the following statements regarding the beta of a short extension strategy versus a market neutral strategy is most accurate? The beta of a short extension strategy is generally designed to be around whereas the beta of a A) market neutral strategy is The beta of a short extension strategy is generally designed to be around whereas the beta of a B) market neutral strategy is The beta of both a short extension strategy and a market neutral strategy can vary depending upon C) the percentage of equity exposure employed in the strategy Question 12 - #92398 An investor would like to track an index Comparing optimization, stratified sampling, and replication; in which of the following indexes would the investor be least likely to use replication? A) A value-weighted index B) A free float-adjusted market capitalization index C) An equal-weighted index Question 13 - #92594 Which of the following is least likely to be a limitation of an alpha and beta separation approach? A) It may be difficult to implement in markets B) The investor may be exposed to systematic risk C) Some long-short strategies may have a degree of systematic risk Question 14 - #91685 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 returnsbased style analysis and holdings-based style analysis, it is most likely that: Bowers is performing holdings-based style analysis and Hoffman is performing returns-based A) style analysis B) Bowers and Hoffman are both using variations of holdings-based style analysis Bowers is performing returns-based style analysis and Hoffman is performing holdings-based C) style analysis Question 15 - #98496 A short extension strategy can be described as: shorting part of the portfolio to reduce exposure to over-valued stocks and gaining market A) exposure through the use of derivatives going short in part of the portfolio and purchasing an equal amount of equities resulting in a B) position that is more than 100% long C) a long position in equities with a relaxed constraint on short sales Question 16 - #92010 A socially responsible portfolio tends to be more heavily weighted in: A) value and small-cap stocks B) growth and small-cap stocks C) growth and large-cap stocks Question 17 - #91514 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) High tracking risk and low information ratio B) Low tracking risk and high information ratio C) Low tracking risk and low information ratio Question 18 - #92580 An investor would like to use tactical asset allocation to take advantage of short-term mispricing Which of the following statements is most accurate regarding the use of either ETFs or equity index futures combined with basket trades? If she uses ETFs, she will be able to invest longer-term but will not be able to establish short A) positions as easily B) If she uses ETFs, she will be able to invest longer-term and establish short positions more easily If she uses futures, she will be able to invest longer-term and establish short positions more C) easily Question 19 - #91838 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 A manager shifting from high earnings volatility stocks to high P/E stocks is not exhibiting style B) drift C) A manager shifting from technology stocks to health care stocks is not exhibiting style drift Question 20 - #92462 Michelle St Jacques analyzes industrial stocks and manages portfolios for Candid Capital, a full-service brokerage in Rhode Island St Jacques is given charge of the assets of clients interested in a growth-oriented strategy using large-cap stocks Barnard Walters also manages portfolios for Candid Capital, focusing on a midcap value strategy Lance Johnson, Candid’s investment director, is happy with the performance of client portfolios but concerned about the returns-based analysis performed about six months ago on both the St Jacques and Walters portfolios Here are the results of the analysis: Style St Jacques Portfolios Walters Portfolios Large-Cap 0.77 0.15 Midcap 0.12 0.57 Small-Cap 0.02 0.18 Fixed-Income 0.09 0.10 Johnson decides to the analysis again, being far more thorough This time, he regresses the returns of portfolios managed by St Jacques and Walters against a variety of style categories Here are the results of the regression: Style St Jacques Portfolios Walters Portfolios Large-Cap Value 0.14 0.09 Large-Cap Growth 0.44 0.0 Midcap Value 0.02 0.56 Midcap Growth 0.12 0.03 Small-Cap Value 0.0 0.06 Small-Cap Growth 0.0 0.0 Foreign Large-Cap 0.20 0.02 Foreign Small-Cap 0.0 0.0 Long-Term Treasuries 0.03 0.0 Intermediate-Term 0.02 0.0 Treasuries Money Markets 0.0 0.22 Corporate Bonds 0.03 0.0 Real Estate 0.0 0.02 While Johnson is working on his regression analysis, St Jacques faces a problem of her own Shares of Wellman Industries look appealing at current levels, but the analyst is concerned about the behavior of company management A half-dozen former executives looted the company and fled to Argentina, leaving Wellman Industries with an attractive product portfolio, a solid market position, and a leadership vacuum Company founder Josephine Wellman has come out of retirement to take over the firm on an interim basis Her mandate is to increase both investor confidence and management accountability, and St Jacques is trying to assess whether her efforts will have the desired effect So far, Josephine Wellman has done the following: Abolished cash bonuses Tied executives’ stock-option compensation to the amount of profit their division generates over the next year Changed the composition of the board, adding four new independent directors and giving the audit committee more power Altered the stock-option program to issue options at higher strike prices than the current price in order to stave off criticisms about excessive compensation Required all board members to agree to be legally responsible for their actions while serving on the board Required all executives to invest 2% of their base pay in company stock every year and not sell any company stock they already own Required all board members to own a sizable stake in Wellman Industries and changed the compensation policy so that they receive stock and not cash Part 1) In the wake of the second regression analysis, what changes should be made in the analysts’ stated investment styles? A) Walters’ stated style should change, but St Jacques’ should not B) St Jacques’ stated style should change, but Walters’ should not C) Neither St Jacques’ nor Walters’ stated style should be changed Part 2) Which statement about regression analysis is least accurate? A) Correlation probably skews the data B) St Jacques’ portfolio composition changed little between the two tests C) Regression works better for growth and value strategies than for blend strategies Part 3) Which of the following is least likely to improve the effectiveness of Wellman Industries’ board? A) Requiring directors to own shares in the company B) Paying directors with stock C) Holding directors legally responsible for their actions Part 4) The change in regression-analysis data for Walters’ portfolios can be best explained by: A) increased appeal of value stocks relative to growth stocks B) a rise in Walters’ bearishness C) style drift Part 5) Josephine Wellman’s actions are least likely to spur: A) company managers to use equity swaps B) company managers to take more risks C) company managers to become whistleblowers Part 6) The first returns-based analysis probably has Johnson least concerned about: A) misfit active risk B) a low style fit C) inaccurate risk measurement Question 21 - #92287 Which of the following statements regarding a free float-adjusted market capitalization index is least accurate? A) The major value-weighted indices in the world have not been adjusted for free float The float adjusted index is considered the best index type by many investors, because it is B) representative and can be mimicked with minimal tracking risk A free float-adjusted market capitalization index assumes the investor has bought all the publicly C) available shares of each company in the index Question 22 - #92554 Which of the following would least likely be a component of an alpha and beta separation approach for an investor who is restricted from explicit long-short investing strategies? A) A long position in a large-cap equity futures contract B) A market neutral hedge fund C) A short position in a small-cap equity futures contract Question 23 - #91697 An investor uses a core-satellite approach to allocate funds amongst equity managers in the table below How much does the investor have allocated to the core and how much is allocated to the satellites? Expected Active Return Expected Active Risk Allocations Manager W 0% 0% 10% Manager X 1.80% 2.90% 20% Manager Y 3.20% 5.60% 15% Manager Z 3.90% 7.30% 10% Enhanced 1.60% 2.40% 45% Indexing A) B) C) 10% is allocated to the core and 90% is allocated to the satellites 55% is allocated to the core and 45% is allocated to the satellites 45% is allocated to the core and 55% is allocated to the satellites Question 24 - #91638 Which of the following equity strategies would provide the highest expected active return? A) Enhanced indexing B) Risk-controlled active management C) Active Question 25 - #92136 If an investor is concerned that his or her equity manager might undertake too much risk, which of the following provisions in the equity manager’s compensation plan should be included? A) Stock options B) A fee cap C) A high water mark provision Question 26 - #91709 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 holdings-based style analysis is more data intensive and returns-based style analysis may be B) ineffective in characterizing current style returns-based style analysis is more data intensive and holdings-based style analysis may be C) ineffective in characterizing current style Question 27 - #91631 An investor uses a core-satellite approach to allocate funds amongst equity managers in the table below What is the investor’s information ratio? Expected Active Return Expected Active Risk Allocations Manager W 0% 0% 10% Manager X 1.80% 2.90% 20% Manager Y 3.20% 5.60% 15% Manager Z 3.90% 7.30% 10% Enhanced 1.60% 2.40% 45% Indexing A) 1.17 B) 0.97 C) 1.04 Question 28 - #92270 Which of the following provisions in an equity manager’s compensation plan would create symmetry in the compensation? A) A high water mark provision B) A fee cap C) Stock options Question 29 - #92619 Which of the following is the correct benchmark for a market neutral long-short strategy equitized with S&P 500 futures contracts? A) The risk-free rate B) The S&P 500 index C) The S&P 500 index plus the risk-free rate Question 30 - #92092 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 Question 31 - #93022 Bob Hageman is the Chief Investment Officer for the pension fund of Wapitechnology Industries Wapitechnology is a producer of a variety of customized software solutions for service and distribution industries, currently entering its second decade in business Wapitechnology offers a generous defined benefit pension plan, but because of the firm’s comparatively recent founding and the industry in which it operates, Wapitechnology has a very young and mobile workforce Few employees have vested in its pension plan, and no employee has acquired sufficiently long service to retire The demographics of the defined benefit plan’s beneficiaries give Wapitechnology an extremely long time horizon for the management of its pension fund Bob Hageman has suggested to Yvette Vargas, Wapitechnology’s Chairman and Chief Executive, that they should change the investment policy statement for the pension fund to accommodate a higher risk level Specifically, Hageman thinks that Wapitechnology should increase its asset allocation to equities because the exceptionally long time horizon of the pension fund enables it to take on an unusually high degree of risk in its investment strategy Vargas wonders about the suitability of passive management for the Wapitechnology pension fund She points out, “Asset allocation is more likely to favor passive management for taxable investors than for nontaxable investors because of reduced portfolio turnover in a passive management approach.” Vargas cites the statistics, saying, “On average after expenses, historical data shows that active management does not outperform passive management.” Hageman reminds Vargas, “International equity markets are less informationally efficient than the U.S market, so a U.S based investor would be wise to pursue an active strategy abroad to exploit the informational inefficiencies, rather than a passive strategy.” Since Vargas is interested in passive investing, Hageman presents the following indexes as possible benchmarks for a passive portfolio: Region Type Index Standard & Poor’s 500 Composite (S&P 500) US capitalization-weighted Value Line Composite Average UK equally weighted Nikkei Stock Average Japan value-weighted CAC 40 France capitalization-weighted Dow Jones Industrial Average (DJIA) US price-weighted He also details the advantages and disadvantages of different types of indexes: Statement 1: Price-weighted indexes are biased in that higher priced stocks have a greater impact on the index’s value than lower priced stocks, but the price of a stock is somewhat arbitrary and dependent on splits, stock dividends, and repurchases Statement 2: The free float-adjusted index is considered the best type by many investors because it removes the float from the index calculation Statement 3: A market capitalization-weighted index automatically adjusts for stock splits of individual firms Statement 4: A price-weighted index must be periodically rebalanced Hageman explains to Vargas that equity investment approaches can be described by tracking risk and information ratio Hageman explains, “Tracking risk is the excess of fund return relative to the appropriate benchmark.” He suggests to Vargas that the Wapitechnology pension fund’s long time horizon enables them to take on significant tracking risk Vargas suggests that she thinks they should pay close attention to the information ratio of any equity strategy or manager they consider for the pension fund She explains, “Historically, the information ratio has been highest for active management and lowest for passive management, with semi-active management falling in the middle.” Hageman tells Vargas that he has interviewed a wide range of equity managers for potential addition to Wapitechnology’s stable of managers He adds that Cytologic Fund Management has shown an information ratio of 0.082, but says that their tracking risk recently has been lower than the historical average “If their tracking risk remains low, that would lower their information ratio.” Part 1) The best description of the accuracy of Hageman’s statements regarding the advantages and disadvantages of different types of equity indexes is: A) Statements and are incorrect, Statements and are correct B) Statement is incorrect, Statement 1, and are correct C) Statements and are incorrect, Statements and are correct Part 2) Is Hageman correct with regard to his definition of tracking risk and the impact of tracking risk on the information ratio? Definition Impact A) Incorrect Correct B) Incorrect Incorrect C) Correct Incorrect Part 3) The primary advantage of a price-weighted index is that it: A) is easiest to mimic with minimal tracking risk B) is computationally simple C) implicitly assumes that each investor holds one share of each stock in the index Part 4) Is Vargas correct in her statements about the information ratio and the advantage of passive management for taxable investors? Information Passive management ratio A) Incorrect Correct B) Correct Correct C) Incorrect Incorrect Part 5) Which of the following best describes of the accuracy of the index data in the table? A) The Value Line and CAC 40 are incorrect, the others are correct B) The Nikkei and Value Line are incorrect, and the others are correct C) The CAC 40 and the Nikkei are incorrect, the others are correct Part 6) Are Vargas and Hageman correct in their descriptions of active versus passive strategies with respect to the historical data and international investors? Vargas Hageman A) Incorrect Incorrect B) Correct Correct C) Correct Incorrect Question 32 - #92044 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 Question 33 - #92259 Which of the following is least likely to be a reason pricing inefficiencies exist on the short-side? A) There are more potential buyers than sellers of stock B) The securities exchanges in the developed world prohibit short sales C) Management has options in firm’s stock Question 34 - #91963 How is risk controlled in a stock-based enhanced indexing strategy? A) Buying puts on equity indices B) Through monitoring factor risk and industry exposures C) Selling equity futures contracts Question 35 - #92119 Caroline Corbin has recently come into a large inheritance, and is consulting with her wealth advisor, Kathy Berg, about investing the allocation to equities Corbin is in her 40s and thus has a very long time horizon for the investment of the funds Berg has suggested a fairly substantial equity allocation in view of the risk that can be accommodated by this long time horizon Berg describes aspects of the investor utility function and allocation process for active risk: Statement 1: If an investor wants higher active return positions, he must be willing to give up some diversification across managers Statement 2: An efficient frontier analysis is not useful to assess active return because the efficient frontier plots expected total return and expected total risk, not active return and active risk Statement 3: Utility of active return decreases as active return increases and as active risk decreases Statement 4: Investors are usually less risk averse when facing active risk than they are when dealing with total risk Corbin asks about the possibility of employing a core-satellite approach, which uses a core stable of active managers and a rotating stable of satellite active managers Corbin points out, “In a core-satellite approach, the core is benchmarked to the asset class benchmark, and the satellites are benchmarked to a more specific benchmark.” Berg provides the following table of active managers for Corbin’s consideration, along with a potential allocation approach: Manager Expected Active Return Expected Active Risk Allocation Hardley Management 1.50% 2.20% 20% Noskia Investment Advisors 3.80% 7.10% 25% Floode Funds 3.20% 6.50% 25% Triumphant Returns Partners 2.75% 4.25% 15% Goodright Wynnes Partnership 2.20% 3.20% 15% Corbin complains about the proposed asset allocation and selection of managers, saying, “The information ratio of that portfolio would be approximately 1.1.” She suggests to Berg that they should calculate the true information ratio: True information ratio = True active return / Misfit active return Berg completes her description of the equity allocation process to Corbin by explaining, “Once the investor has made a decision to invest in equity, the tradeoff between risk and return focuses on active risk and active return.” Corbin rephrases the comment back to Berg, saying, “The investor needs to decide how to maximize active risk relative to a passive management baseline.” Part 1) Expected active return and expected active risk for the allocation shown in the table are closest to: Return Risk A) 2.8% 0.07% B) 0.7% 2.6% C) 2.8% 2.6% Part 2) Are Corbin and Berg correct in their description of active risk and the equity allocation process? Corbin Berg A) Incorrect Correct B) Correct Incorrect C) Incorrect Incorrect Part 3) Which of the following least accurately describes a completeness fund? A) Increases misfit risk Complements the active portfolio so that the combined portfolios have a risk exposure similar to B) the benchmark C) Active return can be maintained while active risk is minimized Part 4) Is Corbin correct in her description of how a core-satellite approach is implemented and how it is benchmarked? Implemented Benchmarked A) Correct Correct B) Incorrect Correct C) Incorrect Incorrect Part 5) Which of the following is the best description of the accuracy of Berg’s statements regarding the investor utility function and allocation process for active risk? A) Statement is correct, Statements 2, and are incorrect B) Statements 1, and are incorrect, Statement is correct C) Statements and are correct, Statements and are incorrect Part 6) Which is the most accurate description of Corbin’s statements regarding the information ratio and true information ratio? A) Both statements are correct The value of 1.1 for the information ratio is correct, but the formula for the true information ratio B) is incorrect C) Both statement are incorrect Question 36 - #92414 An investor would like to track an index Compared to stratified sampling and optimization, when would replication be favored? When the index has: A) more than 1,000 stocks and liquid stocks B) less than 1,000 stocks and liquid stocks C) less than 1,000 stocks and illiquid stocks Question 37 - #92441 An investor would like to track an index and is considering using optimization Optimization is characterized by: A) the use of a factor model and frequent rebalancing B) the use of a factor model and infrequent rebalancing C) the use of a matrix model and frequent rebalancing Question 38 - #91717 Which of the following assumptions is typically used to calculate the portfolio active risk from a group of equity managers? The correlation between equity managers’ active returns are: A) zero B) positive, ranging from 0.3 to 0.8 C) a function of the amount allocated to each manager Question 39 - #92236 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) two alphas and eliminate systematic risk C) one alpha and eliminate systematic risk Question 40 - #92294 Which of the following would least likely be a characteristic of a growth portfolio using holdings-based style analysis? A) Representation in the financial industry B) Low earnings volatility C) Low dividend yield Question 41 - #147260 The fact that firms with greater market capitalization have a greater impact on the index than firms with lower market capitalization creates a primary bias in what type of index? A) Price-weighted index B) Equal-weighted index C) Value-weighted index Question 42 - #92375 Which of the following is least accurate regarding an alpha and beta separation approach? A) The alpha position is more costly than the beta position A portable alpha strategy means that an investor can easily pick up systematic risk through a B) variety of positions C) This approach may obscure investment risks Question 43 - #92445 Which of the following is least likely to be an advantage of returns-based style analysis? A) It will detect style changes quickly B) The use of different models provides similar results C) Low cost Question 44 - #92221 Which of the following equity manager compensation plans would create the greatest incentive for performance? A) A base compensation plus bonus and stock options B) A symmetric compensation plan C) A base compensation plus stock options Question 45 - #92920 Which of the following is least accurate regarding equities in a portfolio? A) U.S equity typically constitutes about half of world equity B) Equities have been shown to be an inflation hedge worldwide C) European institutions hold more equity than U.S institutions in their portfolio Question 46 - #147259 Which of the predominant weighting schemes used in the construction of major equity share indices assumes that the investor holds each company in the index according to its relative weight in the index? A) The price-weighted index B) The free float-adjusted market capitalization index C) The market capitalization-weighted index Question 47 - #91680 Which of the following is least likely to be an objective of optimization after decomposing total active return into true and misfit components? A) Generate a positive “true” information ratio B) Eliminate misfit risk C) Maximize total active return Question 48 - #92189 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 Question 49 - #91778 Which of the following is most accurate regarding equity style index methodology? If style is viewed as a quantity then: A) stocks will be placed in either value or growth indices with no overlap B) there will be a neutral style index category C) the market cap of some stocks will be split between value and growth indices Question 50 - #91754 The risk for growth investors is that the expected earnings growth does not occur How will this low growth affect the price-multiple and stock prices, respectively? A) Increase; decrease B) Decrease; increase C) Decrease; decrease Question 51 - #91721 Which of the following statements is least accurate? An investor’s utility of the active return: A) increases as the investor’s risk aversion to active risk decreases B) increases as the investor’s risk tolerance for active risk decreases C) increases as active risk decreases Question 52 - #92833 Which of the following would least likely be included in bottom-up equity research? A) Price-multiple B) Currency forecasts C) Dividend yield Question 53 - #91718 Which of the following is a justification of a value investing strategy? A) The value of stock is volatile so a cheaply priced stock will see an increase in value in the future B) The investor can add value using proper analysis of the risky firm C) Current depressed earnings will rise in the future as they revert to the mean Question 54 - #93173 Which of the following equity strategies would provide the lowest expected tracking risk? A) Passive B) Enhanced indexing C) Risk-controlled active management Question 55 - #92748 Which of the following best describes the buy-side equity research approach? Investment recommendations are presented to a committee and the research is not available to the A) public Investment recommendations are used to promote stocks and the research is available to the B) public Investment recommendations are presented to a committee and the research is available to the C) public Question 56 - #91891 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: the same for each analyst and the characterization of the fund’s style will likely be different for A) each analyst different for each analyst and the characterization of the fund’s style will likely be different for B) each analyst the same for each analyst and the characterization of the fund’s style will likely be the same for C) each analyst Question 57 - #92856 An investor would like to diversify internationally Compared to trading in the underlying, an equity total return swap usually has: A) higher trading costs and lower taxes B) lower trading costs and higher taxes C) lower trading costs and lower taxes Question 58 - #92984 Compared to ETFs, index mutual funds have: A) lower license fees and are more tax efficient B) lower license fees and are less tax efficient C) higher license fees and are less tax efficient Question 59 - #92955 Which of the following is the primary risk of a market-oriented equity investing approach? A) The tilt to growth is too strong The portfolio must outperform broad market averages or investors will switch to low cost B) indexing strategies C) The tilt to value is too strong Question 60 - #91659 Which of the following investors would be more likely to pursue passive equity management strategies? A) A nontaxable investor who believes markets are efficient B) A taxable investor who believes markets are inefficient C) A taxable investor who believes markets are efficient Question 61 - #92805 Jane Andrews has investigated the economic conditions in the country of Semeria and is forecasting an economic expansion She then investigates the valuations for cyclical stocks in this country What equity research approach is she using? A) A combination of top-down and bottom-up B) Bottom-up C) Top-down Question 62 - #91976 A socially responsible portfolio tends to shun: A) basic industries and technology stocks B) financial and energy stocks C) basic industries and energy stocks Question 63 - #93062 Which of the following statements regarding using equities as an inflation hedge is most accurate? They have been a good inflation hedge: A) in many countries over a long time span B) in many countries over a short time span C) but only in the U.S for a short time span Question 64 - #91880 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) drifting and this is a problem for the investor B) stagnant and this is not a problem for the investor C) drifting and this is not a problem for the investor Question 65 - #92292 In comparing returns-based style analysis with holdings-based style analysis it is most accurate to say that: holdings-based style analysis aggregates the effect of the investment process, and returns-based A) style analysis is more forward looking returns-based style analysis can capture changes in style more quickly, but holdings-based style B) analysis is more quickly executed holdings-based style analysis can capture changes in style more quickly, but returns-based style C) analysis is more quickly executed Question 66 - #93080 Which of the following indices would be biased towards small cap stocks? A) A price-weighted index B) An equal-weighted index C) A value-weighted index Question 67 - #92360 In which of the following situations should an equity investor generally consider a passive management strategy? A) When investing in global markets B) The manager should consider a passive strategy in both of these cases C) When investing in large cap markets Question 68 - #91888 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) Deteriorating Fundamentals C) Opportunity cost Question 69 - #92412 An investor would like to track an index Compared to optimization, stratified sampling: A) models the covariances and leads to lower tracking risk B) assumes the covariances are zero and leads to higher tracking risk C) models the covariances and leads to higher tracking risk Question 70 - #92627 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 cash from the short sale C) The value of the long position Question 71 - #91703 Which of the following is most accurate regarding growth stocks? Growth stocks are likely to: A) outperform during an economic contraction and underperform during an economic expansion B) outperform during an economic contraction and outperform during an economic expansion C) underperform during an economic contraction and outperform during an economic expansion Question 72 - #92166 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 more accurate forecasts B) Manager Y because he has greater breadth C) Manager X because she has greater breadth Question 73 - #91807 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 Question 74 - #91439 Which of the following is least accurate regarding the completeness fund approach? A) It can be managed passively or semiactively B) It will increase the misfit return Combining a completeness fund with an active fund will result in risk exposure similar to the C) benchmark Question 75 - #93117 Which of the following equity strategies would provide the highest information ratio? A) Active B) Enhanced indexing C) Passive Question 76 - #98497 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? Combining a 100/0 strategy with a 20/20 strategy would result in a 120/20 short extension A) strategy The 120/20 strategy is managed as a single portfolio whereas the combination of the other B) strategies represents two separately managed portfolios C) Both strategies are essentially equivalent Question 77 - #92702 Which of the following is least likely to be a rationale for investing in small cap stocks? A) Smaller firms are more likely to be underpriced than larger cap stocks with greater coverage B) Higher returns are more likely when starting from a smaller stock price base C) The higher betas for small cap stocks indicate that their future returns should be higher Question 78 - #92706 An investment management firm is preparing to hire an independent analyst to recommend security selections for the firm’s portfolio The firm would like to keep the manager’s compensation straightforward and predictable Which of the following best describes the firm’s situation? The investment management firm wants to hire a: A) buy-side analyst and pay them on ad valorem basis B) buy-side analyst and pay them on ad valorem basis C) sell-side analyst and pay them performance-based fees Question 79 - #93126 Mavis Borchard, principal of Borchard Investments, is discussing portfolio strategy with Wilford Tupper, a potential client who walked into her office in the hopes of finding a shrewd way to invest an $800,000 IRA roll-over Tupper is an experienced investor with other stock holdings, but he does not have the time to manage his own account After listening to Tupper's investment goals, Borchard suggests a policy of active management, listing several of its benefits "The potential returns of this strategy are higher than those of passive-management strategies, yet the riskreward trade-off is appealing The information ratio for active management is higher than the ratio for passive management." "My optimization approach limits risk by using a factor model that takes into account the covariance of different risk factors." "To ensure that my portfolios deliver the best performance and that I don't deviate from my original investment style, I regress my returns against three indexes, a large-cap, a mid-cap, and small-cap." "I use a bottom-up approach to select stocks, focusing most on industry conditions." Tupper is not satisfied with Borchard's strategies and asks about other types of investments Historically, Tupper has not been successful at beating the market with his large-cap stock choices, but he is a firm believer in reversion to the mean Borchard then recommends an enhanced indexing strategy She suggests that Tupper start with 60 percent of his money in a market index fund, then divide the remainder between two portfolio managers, one who manages accounts in a large-cap blend style, and one who buys small-cap stocks with a value slant Borchard expects the risk-free return to remain at 4.3 percent for the rest of the year and projects a market return of 12.7 percent and market risk of 18.6 percent for the year The following is some data on expectations for both investment managers Assume the correlation between the equity manager's active returns are zero Expected Return Expected Risk Manager Large-cap blend manager 13.8% 27.5% Small-cap value manager 17.5% 30.1% This plan appeals to Tupper, but he is still not sure in what index he should invest He is picky about his indexes and would like any selections to meet a number of criteria: The index must be investable Transaction costs must be low The index value must be easy to track Index construction must allow investors to mimic the index with minimal tracking risk The index must reflect the broader market as closely as possible While Tupper likes the mix of index funds and active management proposed by Borchard, he is also concerned that the active managers stick to their knitting Borchard generally uses a large-cap index like the Dow Jones Industrial Average as a benchmark, but Tupper wants a benchmark customized to each manager's investment style Borchard reluctantly agrees to provide a customized benchmark She generally uses returns-based analysis to track whether money managers stay on target, but Tupper prefers a holdingsbased approach Part 1) To best meet Tupper's index requirements, Borchard should select: A) a price-weighted index B) an index reconstituted by committee, rather than by rule C) a capitalization-weighted index Part 2) Which of Borchard's statements is likely to be most effective at convincing Tupper to let her actively manage his account? "My optimization approach limits risk by using a factor model that takes into account the A) covariance of different risk factors." "To ensure that my portfolios deliver the best performance and that I don't deviate from my B) original investment style, I regress my returns against three indexes, a large-cap, a mid-cap, and small-cap." "The potential returns of this strategy are higher than those of passive-management strategies, yet C) the risk-reward trade-off is appealing The information ratio for active management is higher than the ratio for passive management." Part 3) Assuming a 30 percent weighting in large-cap stocks, Borchard's enhanced indexing strategy for Tupper should generate an active return closest to: A) 0.81% B) 13.51% C) 5.11% Part 4) Based on his belief in mean reversion, Tupper should pursue a strategy of: A) momentum investing B) optimization C) value investing Part 5) Which of the following statements about holdings-based analysis is least accurate? It: A) can pick up style drift faster than returns-based analysis B) requires the use of less data than returns-based analysis C) can yield different results depending on the method used Part 6) Assuming a 25 percent weighting in small-cap stocks, Borchard's enhanced indexing strategy for Tupper should generate active risk closest to: A) 14.08% B) 3.17% C) 5.12% Question 80 - #91823 In which of the following situations would an investor be most risk averse? A) When allocating funds to active equity managers B) When allocating assets to stocks, bonds, and other assets C) When allocating funds to a passive index Question 81 - #92673 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 can be more convenient B) ETFs can be more cost effective C) ETFs are subject to less regulation Question 82 - #91850 Which of the following statements about value and growth investors is least accurate? Growth investors seek industries where low expected earnings growth will drive the stock price A) down Value investors focus on the numerator of the P/E ratio while growth investors focus on the B) denominator C) Growth investors may better during an economic contraction than during an expansion Question 83 - #91648 Using the following information, what is the investor’s “true” information ratio? Manager Return 11.0% Investor's Benchmark 12.0% Normal Portfolio Return 7.0% Total Active Risk 4.8% Misfit Active Risk 2.8% A) 1.43 B) -0.21 C) 1.03 Question 84 - #91816 Which of the following is most accurate regarding equity style index methodology? Most equity style indices are constructed using: holdings-based style analysis which would make buffering more necessary compared to using A) returns-based style analysis returns-based style analysis which would make buffering more necessary compared to using B) holdings-based style analysis holdings-based style analysis which would make buffering less necessary compared to using C) returns-based style analysis Question 85 - #91800 If an equity style index has buffering rules, the index will have: more turnover and there will be higher transactions costs from rebalancing for managers tracking A) the index less turnover and there will be lower transactions costs from rebalancing for managers tracking B) the index more turnover and there will be lower transactions costs from rebalancing for managers tracking C) the index Question 86 - #92169 Which of the following concerning investment strategies is least accurate? If a manager does not have an opinion about an index stock in stock-based enhanced indexing A) strategy, they will not hold the stock Stock-based enhanced indexing strategy can produce higher information ratios because investors B) 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  ... decreases Question 52 - #92 833 Which of the following would least likely be included in bottom-up equity research? A) Price-multiple B) Currency forecasts C) Dividend yield Question 53 - #91718... satellites Question 24 - #91 638 Which of the following equity strategies would provide the highest expected active return? A) Enhanced indexing B) Risk-controlled active management C) Active Question 25. .. mean Question 54 - # 931 73 Which of the following equity strategies would provide the lowest expected tracking risk? A) Passive B) Enhanced indexing C) Risk-controlled active management Question