Reading 25 Equity Portfolio Management FinQuiz.com FinQuiz.com CFA Level III Item-set - Solution Study Session 12 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 © 2018 - All rights reserved Reading 25 Equity Portfolio Management FinQuiz.com FinQuiz Level III 2018 – Item-sets Solution Reading 25: Equity Portfolio Management Question ID: 17100 Correct Answer: A Passive investing is characterized by zero active returns and zero active risks Manager A’s investment strategy generates an active return of 4% (22% ─ 18%) as well as active risk Manager B’s investment strategy generates an active return of – 1% (35% – 36%) as well as active risk Question ID: 17101 Correct Answer: C A stratified sampling approach uses a matrix to replicate factor exposures of the benchmark index without holding all the stocks in the benchmark This strategy is less costly Question ID: 17102 Correct Answer: A Strategy reflects a long-short equity strategy A long-short strategy provides exposure to two alphas; one on the long and one on the short position Such a strategy will increase the active risk and possibly active return of TC’s investment portfolio; i.e is inappropriate Strategy reflects investment in an exchange-traded fund (ETF) This approach reflects a passive investment approach and is appropriate given TC’s investment mandate Question ID: 17103 Correct Answer: C Comment is incorrect One of the drawbacks to value investing is that investors tend to misapprehend the cheapness of stocks and not appreciate the economic reasoning behind the currently undervaluation of value stocks Value investors justify their investment approach by stating that earnings multiples will expand as earnings revert to their mean (historical average) Question ID: 17104 Correct Answer: C True active return is the return attributed to security selection True active return = Manager’s portfolio return – Normal benchmark return = 34% – 25% = 9% Misfit active return is the return attributed to manager style Misfit active return = Normal benchmark return – Investor benchmark = 25% – 20% = 5% FinQuiz.com © 2018 - All rights reserved Reading 25 Equity Portfolio Management FinQuiz.com Total active return = True active return + Misfit active return = 9% + 5% = 14% 64% (9%/14%) of the total active return is attributed to security selection and 36% (5%/14%) is attributed to manager style Question ID: 17105 Correct Answer: C Given that West’s expertise lies in developed market corporate bonds, the correct approach would be to invest in an ETF tracking a developed corporate bond index This investment will provide beta exposure to NLEF’s portfolio Given that NLEF’s requirements with respect to emerging market corporate bonds, the correct approach would be to sell futures on an emerging corporate bond index This will help eliminate systematic risk exposures associated with its emerging market bond investments; requires no cash; and helps generate alpha FinQuiz.com © 2018 - All rights reserved .. .Reading 25 Equity Portfolio Management FinQuiz. com FinQuiz Level III 2018 – Item- sets Solution Reading 25: Equity Portfolio Management Question ID:... and zero active risks Manager A’s investment strategy generates an active return of 4% (22% ─ 18%) as well as active risk Manager B’s investment strategy generates an active return of – 1% (35 %... approach reflects a passive investment approach and is appropriate given TC’s investment mandate Question ID: 171 03 Correct Answer: C Comment is incorrect One of the drawbacks to value investing is that