CFA 2018 level 3 schweser practice exam CFA 2018 level 3 question bank 08 equity answers

EQUITY Answers Question Part A Semi-active management—(1) Rhodes has stated a preference for active management, but (2) does not wish to underperform the benchmark Semi-active management combines an active approach while minimizing tracking error with the benchmark Sample Scoring Key: point for semi-active management points for the explanation Part B The manager’s equal weighting under weights larger cap stocks relative to the index market cap weighting; larger cap stocks could have outperformed Maintaining equal weighting will require more frequent rebalancing and will increase transaction costs Sample Scoring Key: points each for the two reasons Part C Full replication: 75 is a relatively small number of stocks, and, with larger sales, they are probably larger and more liquid, so transaction costs will be manageable Sample Scoring Key: point for full replication points for the explanation Candidate discussion: Stating full replication lowers tracking error is a generic comment not related to this situation and is not accepted as a reason Part D Western Utility: Because it has the largest free float percentage, the other two will have greater relative reductions in weight Sample Scoring Key: point for Western Utility points for the explanation Question Part A 17.2 – 18.3 = –1.1% Peters has consistently underperformed his benchmark over the past five years and should not be hired Sample Scoring Key: point for calculating the true active return points for the interpretation Candidate discussion: True active return = manager’s total return – manager’s normal benchmark return Part B A separate account is best because the other methods are likely unavailable: Futures are available on only a limited number of widely used indexes Without available hedging instruments, a dealer is unlikely to offer a swap at any reasonable cost Sample Scoring Key: points for identifying separate account point each for explaining why the other two are unlikely to be appropriate Part C Stratified sampling can best deal with the unusual features of this index: The large size of the index makes full replication more expensive The data and criteria for index inclusion are not clearly defined, making full replication or even equal weighting difficult Tracking error can be reduced using stratified sampling, whereas equal weighting the index will not track its return as well Sample Scoring Key: point for stratified sampling point each for two reasons Question Part A 5%: This is directly reported in the quarter-end holdings report, the most recent data provided Sample Scoring Key: Two points for 5% and one for citing where the number comes from Candidate discussion: The only relevant number to show is 5%, and only the recent holdings report shows that number The betas from the returns-based regression report are also “weights,” but they are allocation weights that over the last 60 months would have produced a return path most closely matching the actual return path of the manager They not reflect direct allocation to assets and only provide an indication of weighting on average over the full analysis period, not as of the most recent allocation Part B Style drift is evident The weights in the current holdings-based report are very different from the regression exposures over the last 60 months For example:   Market cap allocations are different; large cap went from 66% (11 + 55) to 38% (21 + 17) Growth went from a 79% to 38% allocation Sample Scoring Key: One point for there is style drift and one if it is clear the candidate understands how the different nature of the two reports leads to that conclusion One point each for providing two relevant data comparisons between the two reports Candidate discussion: If you understand what the two reports do, there is clear evidence of style drift These reports distinguish market cap and value/growth exposures Look for the large weighting differences in those two dimensions For example, if you cite the cash weight shifted from to 5%, it is trivial No points will be given if you ignored the obvious larger differences in the reports Note that the reports not prove style drift because the regression report does not directly measure how the fund invested However, the large quantity of differences in the reports strongly suggests style drift Part C   The client will not have the style and risk exposures that were desired, resulting in too much or too little risk exposure The manager may be shifting into areas where he lacks expertise, resulting in lower returns Sample Scoring Key: Two points each for two items Candidate discussion: This is straightforward reciting what the reading covered Variation in phrasing is acceptable, but the issues you discuss must tie directly to the reading Part D 100 million to the long-only manager  Long manager buys 130 million  Short manager shorts 30 million Sample Scoring Key: One point each for: 100 million of DE capital is used, the long manager gets 100 million but buys 130 million, and the short manager takes a short position of 30 million Part E The SE approach is more efficient because one single manager can identify and short over valued securities while taking long positions in undervalued securities, avoiding any situations of being both long and short the same security Or The SE approach is more efficient because combination approach is suboptimal The long-only manager may buy securities he thinks are undervalued, while the short specialist believes they are overvalued and shorts them Their actions exactly offset, creating valueless trading and unnecessary transaction expenses SE with one manager avoids this Sample Scoring Key: One point for selecting the SE approach and two if it is clear the candidate understands why uncoordinated long/short positions in the combination approach are less efficient than coordinated decision making in short extension Note that the second of the two answers provided works because it includes an explanation of why “combination” is suboptimal If it had only said, “the SE approach is optimal because combination is suboptimal,” it would earn no credit ... exposures over the last 60 months For example:   Market cap allocations are different; large cap went from 66% (11 + 55) to 38 % (21 + 17) Growth went from a 79% to 38 % allocation Sample Scoring Key:... manager buys 130 million  Short manager shorts 30 million Sample Scoring Key: One point each for: 100 million of DE capital is used, the long manager gets 100 million but buys 130 million, and.. .Question Part A 17.2 – 18 .3 = –1.1% Peters has consistently underperformed his benchmark over the past five years