Reading 20 Market Indexes and Benchmarks FinQuiz.com FinQuiz.com CFA Level III Item-set - Question Study Session June 2018 Copyright © 2010-2018 FinQuiz.com All rights reserved Copying, reproduction or redistribution of this material is strictly prohibited info@finquiz.com FinQuiz.com © 2017 - All rights reserved Reading 20 Market Indexes and Benchmarks FinQuiz.com FinQuiz Item-set ID: 21875 Questions 1(21876) through 6( 21881) relate to Reading 20 Greendale Associates Case Scenario Greendale Associates is an asset management firm offering its clients three funds, Alpha, Beta, and Gamma The Alpha Fund is a hedge fund executing a long-only equity strategy managed by Lance Malkovich His performance is compared to the top performing manager in the assigned manager universe benchmark The Beta Fund has an active management mandate seeking exposure to the stocks of companies with strong sustainability profiles and avoiding stocks of companies with negative social or environmental impact All companies operate in the emerging market The performance of Walsh Ruben, the fund’s equity manager, is being benchmarked to the MSCI Emerging Market Social Responsibility Investment (SRI) index The index is reconstituted annually and its contents are defined by existing constituents Only the top-performing, most liquid SRI company stocks qualify for inclusion The index limits excessive concentration in any company by concentrating maximum corporate exposure to 5% The index is float-adjusted and cap-weighted The Gamma Fund invests in an exchange-traded fund which tracks the S&P 500 The fund is managed by Rachel Cummings Cummings is subject to a maximum 10% investment restriction in any index stock The current year’s performance of all three managers relative to their respective benchmark is summarized in the Exhibit Exhibit: Performance of Fund Managers Relative to Respective Benchmarks Annual Fund Return Annual Benchmark Manager (%) Return (%) Malkovich 22 20 Ruben 16 18 Cummings 12 12 FinQuiz.com © 2017 - All rights reserved Reading 20 Market Indexes and Benchmarks FinQuiz.com During an informal meeting between Cummings and Ruben, the managers discuss the shortcomings of index weighting schemes: Statement 1: “The weighting scheme of cap-weighted indexes is not without flaws As a stock’s market-cap falls, the index will own less of the company; this will decrease the company’s representation in the index.” Statement 2: “With a fixed security count, indexers tracking the S&P 500 should experience lower turnover and a reduced need for rebalancing in comparison to an index with a broad equity exposure.” FinQuiz Question ID: 21876 Using the information in the Exhibit and on the designated manager universe benchmark, determine which manager should be awarded a bonus for his or her performance relative to the benchmark? A Malkovich B Ruben C Cummings FinQuiz Question ID: 21877 A limitation of using the MSCI Emerging market index as benchmark for the Beta Fund is that it may serve as a poor: A asset allocation proxy B basis for investment vehicles C investment manager mandate FinQuiz Question ID: 21878 Which of the following index construction trade-offs most likely poses a limitation when using a MSCI Global SRI Index? A Completeness vs investibility B Rebalancing and reconstitution vs turnover C Objective and transparent rules vs subjective judgment FinQuiz Question ID: 21879 If Cummings investment objective is to obtain small-cap equity exposure, a limitation of using the S&P 500 as performance benchmark least likely excludes: A she may not be able to track the index B the index will require frequent rebalancing C a property of a valid benchmark will be violated FinQuiz.com © 2017 - All rights reserved Reading 20 Market Indexes and Benchmarks FinQuiz.com FinQuiz Question ID: 21880 Statement is most likely: A correct B incorrect; changes in market-cap not influence a company’s representation C incorrect; this ensures that tracking portfolios will be efficient from a risk-return perspective FinQuiz Question ID: 21881 Statement is most likely: A correct B incorrect; the index will need to be rebalanced frequently C incorrect; an index with a fixed number of securities will have higher turnover FinQuiz.com © 2017 - All rights reserved .. .Reading 20 Market Indexes and Benchmarks FinQuiz. com FinQuiz Item- set ID: 21875 Questions 1(21876) through 6( 21881) relate to Reading 20 Greendale Associates Case... Benchmark Manager (%) Return (%) Malkovich 22 20 Ruben 16 18 Cummings 12 12 FinQuiz. com © 201 7 - All rights reserved Reading 20 Market Indexes and Benchmarks FinQuiz. com During an informal meeting... property of a valid benchmark will be violated FinQuiz. com © 201 7 - All rights reserved Reading 20 Market Indexes and Benchmarks FinQuiz. com FinQuiz Question ID: 21880 Statement is most