2019 CFA level 3 qbank reading 28 active equity investing strategy answers

10/12/2018 Learning Management System Question #1 of 27 Consider two equity portfolios with the same benchmark index composed of 943 constituents Active equity manager A has constructed a portfolio of 45 high conviction ideas which are continuously monitored to assess whether their weights in the portfolio remain appropriate Active equity manager B has active bets on 550 stocks with automatic rebalancing conducted on regular monthly intervals It is most likely that: A) Both manager A and manager B are following quantitative active equity approaches following a quantitative active equity approach in B) Manager A is following a fundamental active equity approach and manager B is fundamental active equity approach Explanation en tre C) Manager A follows a quantitative active equity approach and manager B follows a o m bo ok c A fundamental manager will likely have fewer holdings than a quantitative active equity manager due to the intensive research conducted on individual companies carried out to generate high conviction investment ideas This is in contrast to the quantitative manager who will likely construct a broad portfolio of hundreds of securities in order to generate the desired exposure to risk factors expected to generate returns based on historical data The rebalancing process of a fundamental manager is likely to involve continuous monitoring of positions for changes in the weights of the portfolio, in contrast to the quantitative manager who will have a more formal, regular automatic rebalancing strategy based on systematic rules w w (Study Session 14, Module 28.1, LOS 28.a) Related Material w SchweserNotes - Book Question #2 of 27 Competitive positioning and environmental, social and governance (ESG) characteristics of a company are most likely to be used as information sources for: A) Neither quantitative nor fundamental active equity managers B) Both quantitative and fundamental active equity managers C) Fundamental active managers only https://www.kaplanlearn.com/education/dashboard/index/66a9ea0d62bb71ab495925615029a3fd/practice/qbank/24038518/quiz/83447396/print 1/19 10/12/2018 Learning Management System Explanation Competitive positioning and environmental, social and governance (ESG) characteristics of a company are data that are unlikely to be expressed numerically, and as such are unlikely to be information used in a quantitative active equity approach Fundamental active equity approaches focusing on bottom-up investing could consider such information as part of their approach (Study Session 14, Module 28.1, LOS 28.a) Related Material in SchweserNotes - Book en tre Question #3 of 27 The table below provides information on three stocks being considered for investment by a bottom-up equity manager bo ok c 123-Year Sector Price Month EPS Dividend Company Industry Sector Average ($) Forward Growth ($) P/E EPS Forecast 0.25 20% T 95 4.75 U 15 5.5 o m S 0.00 Pharmaceuticals 20 3% 0.08 Defence 25 -5% 0.03 Utilities 12 w w Which stock is most likely to be the best opportunity for investors that use a relative value approach? w A) Stock S B) Stock T C) Stock U Explanation https://www.kaplanlearn.com/education/dashboard/index/66a9ea0d62bb71ab495925615029a3fd/practice/qbank/24038518/quiz/83447396/print 2/19 10/12/2018 Learning Management System Relative value investors look for low price multiples relative to the industry sector Stock S has a PE of 5/0.25 = 20x which is equal to the industry average hence stock S is not a relative value investment Stock T has a PE of 95/4.75 = 20x which is below the industry average of 25x hence making it potentially a relative value investment Stock U has a PE of 15/5.5 = 2.7x which is considerably lower than the industry average of 12 This would suggest the Stock U would be more appropriate for a deep value or distressed investing strategy than a relative value strategy (Study Session 14, Module 28.1, LOS 28.b) Related Material in SchweserNotes - Book en tre Question #4 of 27 A fundamental active equity investment manager screens the stocks in their universe in order to create an equally weighted portfolio of securities that have a price-to-book ratio of less than one Which of the following pitfalls of fundamental active investing is this manager most likely bo ok c to be subject to? A) The value trap B) Behavioural biases m C) The growth trap o Explanation w w By screening the universe and allocating naively for stocks with a low price-to-book ratio the manager will likely be investing in many securities that appear attractively valued, but are correctly priced or even overpriced due to seriously deteriorating business conditions This is referred to as the value trap w (Study Session 14, Module 28.3, LOS 28.g) Related Material SchweserNotes - Book Question #5 of 27 https://www.kaplanlearn.com/education/dashboard/index/66a9ea0d62bb71ab495925615029a3fd/practice/qbank/24038518/quiz/83447396/print 3/19 10/12/2018 Learning Management System An analyst is backtesting a quantitative investment process which investigates the relationship between EPS announcements and subsequent month stock returns The analyst notes that one speci c company in the universe frequently revises earnings – for example 2017 EPS was initially announced in March 2018 as $2 when the market expected earnings of $2.10 These 2017 earnings were subsequently revised down to a loss of $1 per share in June 2018 due to accounting fraud coming to light In order to avoid look ahead bias, when backtesting the performance of the stock in April 2018, the manager should use an EPS value of: A) $2 B) $2.10 in C) -$1 en tre Explanation Look ahead bias occurs when using information that was unknown at the time to explain stock returns In this case the market did not know in April of the earnings revision that was to come later in the year, hence stock returns for April should be regressed against the EPS that was known at the time, that being the $2 initially reported in March bo ok c (Study Session 14, Module 28.3, LOS 28.h) Related Material m SchweserNotes - Book o Question #6 of 27 w w An analyst who wishes to capture the most accurate and up-to-date style exposure of an investment manager should: w A) Prefer to use returns-based analysis B) Prefer to use holdings-based analysis C) Be indi erent between using holdings based and returns based analyses Explanation An advantage of holdings-based analysis over returns-based analysis is that by looking at current individual holdings of the fund, an analyst can get the most accurate and current analysis of the manager's style exposure In comparison, returns-based analysis uses historical regression hence will be more of a backward-looking view of the manager's historic style exposures (Study Session 14, Module 28.4, LOS 28.i) https://www.kaplanlearn.com/education/dashboard/index/66a9ea0d62bb71ab495925615029a3fd/practice/qbank/24038518/quiz/83447396/print 4/19 10/12/2018 Learning Management System Related Material SchweserNotes - Book Question #7 of 27 An analyst conducting a returns-based style analysis on an active equity fund constructs the following monthly multivariate regression: rt = 0.005 + 0.7LC + 0.3SC + ϵt in Where: LC = large cap style index SC = small cap style index bo ok c εt = residual return not explained by style factors en tre rt = the fund return in period t The value added by the fund manager is closest to: A) 0.5% plus the residual return, εt C) 0.5% w w Explanation o m B) The residual return, εt w In a returns-based regression the slope coe cients are interpreted as the exposure to the styles during the period, and the intercept term (0.005 or 0.5%) is generally interpreted as the value added by the manager The residual term is random and unexplained and hence not due to manager skill or the style factor exposures (Study Session 14, Module 28.4, LOS 28.i) Related Material SchweserNotes - Book Question #8 of 27 https://www.kaplanlearn.com/education/dashboard/index/66a9ea0d62bb71ab495925615029a3fd/practice/qbank/24038518/quiz/83447396/print 5/19 10/12/2018 Learning Management System A quantitative active equity investment manager gathers the following data regarding information coe cients (ICs) when backtesting the value, growth and size factors in their investment universe: Factor Value Pearson IC Spearman Rank IC insigni cant signi cantly positive Growth signi cantly positive signi cantly positive Size signi cantly positive insigni cant If the manager is concerned about biases caused by outliers in the data, they should most likely in conclude that the factors with strong predictive powers for subsequent returns are: en tre A) Value and Growth B) Growth and Size C) Value, Growth and Size bo ok c Explanation m The IC measures the correlation between factor scores and subsequent market returns The Pearson IC measures the correlation of values which can be biased by the existence of outliers in the data In order to avoid this bias, the Spearman Rank IC should be used which looks at the correlation between the rank of factor scores and the rank of subsequent returns The Spearman Rank IC suggests that there is predictive power for the factor when it is signi cantly positive, i.e for the value and growth factors Related Material o (Study Session 14, Module 28.3, LOS 28.h) w w w SchweserNotes - Book Question #9 of 27 Which of the following statements regarding activist equity investing is most accurate? A) Activist investors tend to target companies that have lower than average revenue growth with negative price momentum B) Activist investors tend to target companies that have multi-class share structures C) The assets under management of activist hedge funds decreased sharply during the global nancial crisis of 2008/2009 and have since failed to recover to pre-crisis l l https://www.kaplanlearn.com/education/dashboard/index/66a9ea0d62bb71ab495925615029a3fd/practice/qbank/24038518/quiz/83447396/print 6/19 10/12/2018 Learning Management System Explanation Activist investors will target companies that are not being run e ciently These tend to be companies that have slower than average revenue growth and negative price momentum A multi-class share structure may hinder activist investors since this usually means that the founder's shares have multiple votes per share The comment regarding the assets under management of activist hedge funds is correct (Study Session 14, Module 28.2, LOS 28.e) Related Material in SchweserNotes - Book en tre Question #10 of 27 Company A announces a cash-only purchase of Company B In order to pro t from this event, a merger-arbitrage hedge fund manager would most likely: bo ok c A) Purchase the shares of Company B prior to the deal being announced B) Purchase the share of Company B and short sell the shares of Company A after the deal is announced C) Purchase the shares of Company B after the deal is announced m Explanation w w w o In a cash-only merger, the merger-arbitrage manager would purchase the shares of the target company and earn a risk premium when the deal is closed This is done after the deal is announced, since the price of the target company typically remains below the o ered price until the transaction is completed and the manager can earn a pro t if and when the deal closes There is no requirement to short sell the shares of the acquiring company in a cashonly deal – this would be required if the transaction were a stock-for-stock acquisition (Study Session 14, Module 28.3, LOS 28.f) Related Material SchweserNotes - Book Question #11 of 27 Which of the following statements is most accurate with respect to factor-mimicking portfolios? A) Factor mimicking portfolios are usually constructed using long only portfolios https://www.kaplanlearn.com/education/dashboard/index/66a9ea0d62bb71ab495925615029a3fd/practice/qbank/24038518/quiz/83447396/print 7/19 10/12/2018 Learning Management System B) Factor mimicking portfolios are commonly used in factor-tilting portfolios C) Factor mimicking portfolios are relatively expensive to construct Explanation Factor mimicking portfolios are dollar neutral long/short portfolios that aim to generate a unit exposure to a single factor As such they invest in very many positions without regard to short selling constraints and transaction costs This can make them very expensive to construct Factor tilting portfolios are not constructed using factor mimicking portfolios – they are portfolios designed to track a benchmark with small tilts towards factors that the manager expects to outperform (Study Session 14, Module 28.2, LOS 28.d) in Related Material en tre SchweserNotes - Book bo ok c Question #12 of 27 Which of the following statements regarding market-microstructure arbitrage strategies is least accurate? A) The typical time horizon of a trade is a few minutes m B) High-frequency trading techniques are a fundamental part of the strategy C) The strategy analyses limit order books of exchanges to identify very short-term w w Explanation o mispricing opportunities w Market microstructure arbitrage strategies involve extensive analysis of the limit order books of trading venues to identify very short-term trading opportunities The time horizon of the opportunities is usually a few milliseconds (Study Session 14, Module 28.3, LOS 28.f) Related Material SchweserNotes - Book Question #13 of 27 https://www.kaplanlearn.com/education/dashboard/index/66a9ea0d62bb71ab495925615029a3fd/practice/qbank/24038518/quiz/83447396/print 8/19 10/12/2018 Learning Management System The table below provides information on three stocks being considered for investment by a bottom-up equity manager 123-Year Sector Price Month EPS Dividend Company Industry Sector Average ($) Forward Growth ($) P/E EPS Forecast S 0.25 20% 0.00 Pharmaceuticals 20 T 95 4.75 3% 0.08 Defence 25 U 15 5.5 -5% 0.03 Utilities 12 in Which stock is most likely to be the best opportunity for investors that use a deep value en tre approach? A) Stock U B) Stock S bo ok c C) Stock T Explanation o m Deep value investors look for price multiples that are considerably lower than the industry sector Stock S has a PE of 5/0.25 = 20x which is equal to the industry average hence stock S is not a deep value investment Stock T has a PE of 95/4.75 = 20x which is below the industry average of 25x hence making it potentially a relative value investment Stock U has a PE of 15/5.5 = 2.7x which is considerably lower than the industry average of 12 This would suggest the Stock U would be more appropriate for a deep value or distressed investing strategy than a relative value strategy w w (Study Session 14, Module 28.1, LOS 28.b) Related Material w SchweserNotes - Book Question #14 of 27 With regards to the potential pitfalls in investment strategies, which of the following statements is likely to be most accurate? A) A fundamental active equity investor who seeks information that agrees with their existing beliefs is exhibiting availability bias https://www.kaplanlearn.com/education/dashboard/index/66a9ea0d62bb71ab495925615029a3fd/practice/qbank/24038518/quiz/83447396/print 9/19 10/12/2018 Learning Management System B) Over tting is more likely to be a pitfall for a fundamental manager than a quantitative active equity manager C) The behavioural bias of overcon dence is more likely to be a pitfall for a fundamental manager than a quantitative active equity manager Explanation in Fundamental active equity managers use more subjective judgement than quantitative managers, and hence are more likely to be subject to behavioural psychological biases that can distort opinion Overcon dence, where a manager believes they have abilities beyond those they actually possess, is an example of a behavioural bias Over tting is the process of testing data until a pre-determined model is justi ed which is a pitfall of quantitative approaches, not fundamental approaches A manager who seeks information that rms their existing beliefs is exhibiting rmation bias, not availability bias en tre (Study Session 14, Module 28.3, LOS 28.g) Related Material Question #15 of 27 bo ok c SchweserNotes - Book The table below provides information on three stocks being considered for investment by a m bottom-up equity manager T w S w w o 123-Year Sector Price Month EPS Dividend Company Industry Sector Average ($) Forward Growth ($) P/E EPS Forecast U 0.25 20% 0.00 Pharmaceuticals 20 95 4.75 3% 0.08 Defence 25 15 5.5 -5% 0.03 Utilities 12 Which stock is most likely to be the best opportunity for investors that use GARP? A) Stock T B) Stock U C) Stock S Explanation https://www.kaplanlearn.com/education/dashboard/index/66a9ea0d62bb71ab495925615029a3fd/practice/qbank/24038518/quiz/83447396/print 10/19 10/12/2018 Learning Management System Investors that use GARP will consider will invest in securities with low PE-to-growth (PEG) ratios Stock S has a PE of 5/0.25 = 20x which is average for the industry, but growth is expected to be signi cantly higher than the other stocks giving a PEG ratio of 20/20 = The PE ratio of stock T is 95/4.75 = 20x giving a PEG ratio of 20/3 = 6.6 which is much higher than for Stock S, making the security less desirable to a GARP investor Stock U has negative growth hence would not be appropriate for a growth investor (Study Session 14, Module 28.1, LOS 28.b) Related Material in SchweserNotes - Book Consider the following three companies: en tre Question #16 of 27 Company Listing Return on Assets Asset Turnover Cash Balance Nasdaq Low JBC Amex High LLB Unlisted Low Low bo ok c SBD High Average Average Low Low m Which of the above companies is most likely to o er an opportunity for activist investing? A) LLB w w C) SBD o B) JBC Explanation w Activist investors take stakes in publicly listed companies since they often use public proxy battles and open letters to other investors to push for their value enhancing changes This rules out company LLB as a potential activist investment since it is unlisted An activist will look for companies that are currently underperforming from a return on assets and assets turnover perspective and seek to make changes to improve this performance and unlock value Company SBD has low return on assets and asset turnover, with high cash balances this suggests the company could bene t from returning cash to shareholders and repositioning the company to focus on higher productivity xed asset investments This makes SBD A good candidate for activist investing Conversely, company JBC shows no evidence of ine ciency since return on assets is high and other metrics are at average levels (Study Session 14, Module 28.2, LOS 28.e) Related Material SchweserNotes - Book https://www.kaplanlearn.com/education/dashboard/index/66a9ea0d62bb71ab495925615029a3fd/practice/qbank/24038518/quiz/83447396/print 11/19 10/12/2018 Learning Management System Question #17 of 27 Consider the following two statements regarding the hedged portfolio approach to implementing factor-based active equity investing strategies: Statement 1: Restrictions on short selling securities will likely prevent the strategy being implemented Statement 2: When constructed properly, hedged portfolios represent pure exposure to the in factors they are designed to represent A) Both statements are false B) Both statements are true C) Statement is true and statement is false bo ok c Explanation en tre It is most likely that: m The hedged portfolio approach constructs portfolio that represent factors through ranking securities by the factor and buying top quantile securities whilst shorting bottom quantile securities Statement is therefore true Statement is false: a major drawback of the hedged portfolio approach is that the portfolios created are not pure factor portfolios since they will have signi cant exposure to other risk factors outside the factor being modelled Related Material o (Study Session 14, Module 28.2, LOS 28.d) w w w SchweserNotes - Book Question #18 of 27 Data for US companies show that in the years after activist investing, companies on average have: A) Higher return on equity and leverage levels B) Lower return on equity and lower leverage levels C) Higher return on equity and lower leverage levels Explanation https://www.kaplanlearn.com/education/dashboard/index/66a9ea0d62bb71ab495925615029a3fd/practice/qbank/24038518/quiz/83447396/print 12/19 10/12/2018 Learning Management System Data for US companies subject to activist investing show that on average fundamentals of a company such as revenue growth, EPS growth, return on equity and corporate governance indicators improve in the years after activist investing Price momentum also signi cantly improves The data also show that on average these improvements come at the cost of higher debt/equity ratios (Study Session 14, Module 28.2, LOS 28.e) Related Material SchweserNotes - Book in Question #19 of 27 en tre A factor-based quantitative active equity investment manager is investigating the relationship between treasury yields and factor returns They regress both contemporaneous and subsequent month factor returns against the 10-year treasury bond yield The factors used are systematic risk (beta), size (market capitalisation) and value (book-to-market) The regression w w w o m bo ok c coe cients are displayed in the chart below: Based on the regression coe cients above, which of the following strategies is most likely to be pro table: A) Short high beta securities and long value securities in months subsequent to treasury yields being high B) Long high beta securities and short value securities in months where treasury yields are high https://www.kaplanlearn.com/education/dashboard/index/66a9ea0d62bb71ab495925615029a3fd/practice/qbank/24038518/quiz/83447396/print 13/19 10/12/2018 Learning Management System C) Long high beta securities and short value securities in months subsequent to treasury yields being high Explanation The regression coe cients indicate there is a positive relationship between bond yields and returns to high beta securities in the subsequent month Hence high beta securities should be bought the month after high treasury yields have been observed There is a negative relationship between bond yields and returns to value securities in the subsequent month, hence value securities should be sold in the month after high treasury yields have been observed (Study Session 14, Module 28.2, LOS 28.d) Related Material en tre in SchweserNotes - Book Question #20 of 27 bo ok c A top down portfolio manager using a short straddle position to express their view on market volatility will most likely earn excess returns when: A) Implied volatility is lower than realized market volatility m B) Market volatility levels fall Explanation o C) Realised market volatility is lower than implied volatility w w w A manager using a short straddle position is selling calls and puts with the same strike price and expiry in the expectation that realised market volatility will be lower that implied volatility currently factored into option prices Market volatility levels falling on its own does not guarantee that the manager will earn excess returns since this fall in volatility may already be priced into the implied volatility of options (Study Session 14, Module 28.1, LOS 28.c) Related Material SchweserNotes - Book Question #21 of 27 https://www.kaplanlearn.com/education/dashboard/index/66a9ea0d62bb71ab495925615029a3fd/practice/qbank/24038518/quiz/83447396/print 14/19 10/12/2018 Learning Management System A portfolio overlay derivatives strategy can be employed by a portfolio manager for all the following purposes, except: A) Removal of unintended macro exposures created by a bottom-up fundamental investment process B) Adding active returns that are not correlated with the underlying portfolio strategy C) Identifying overvalued/undervalued securities for stock selection Explanation (Study Session 14, Module 28.1, LOS 28.c) Related Material Question #22 of 27 bo ok c SchweserNotes - Book en tre in A portfolio overlay strategy uses derivatives positions to remove unintended macro exposures generated by the portfolio management process It can also be used to attempt to generate excess return from areas that are uncorrelated with the underlying portfolio strategy Being a top-down strategy, a portfolio overlay will focus on macro sectors rather than individual stock selection m The Information coe cient is best de ned as: o A) The correlation of the performance of a hedged portfolio representing returns to a w w factor and a fundamental driver of factor performance such as interest rates across i B) The cross-sectional correlation of factor scores verses subsequent stock returns w across an investment universe C) The correlation of the performance of a hedged portfolio representing returns to a factor and the returns of the manager’s portfolio Explanation The information coe cient is calculated as the correlation between the factor score of a security and the subsequent return of the security If the information coe cient is high this implies the factor has predictive power (Study Session 14, Module 28.3, LOS 28.h) Related Material SchweserNotes - Book https://www.kaplanlearn.com/education/dashboard/index/66a9ea0d62bb71ab495925615029a3fd/practice/qbank/24038518/quiz/83447396/print 15/19 10/12/2018 Learning Management System Question #23 of 27 According to Morningstar's classi cation criteria for Value/Growth stocks, a security with a net style score of close to zero is classi ed as A) Growth B) Value C) Core in Explanation Related Material SchweserNotes - Book o m Question #24 of 27 bo ok c (Study Session 14, Module 28.4, LOS 28.i) en tre The Morningstar Value and Growth Scoring scheme allocates a score out of 100 to a stock for growth attributes and for value attributes The net style score is the growth score minus the value score If the net style score is strongly negative the stock is classi ed as value If the net style score is close to zero then the stock is classi ed as core If the stock has a net style score that is strongly positive then it is classi ed as a growth stock When comparing fundamental and quantitative approaches to active equity investing, which of w w the following statements is most accurate? A) Manager judgement plays a large role in fundamental active equity approaches, but w plays no role in quantitative active equity approaches B) Company nancial statements would likely be a source of information for fundamental approaches but not for quantitative active equity approaches C) Factor based modelling is likely to play a greater role in quantitative approaches than fundamental approaches to active management Explanation https://www.kaplanlearn.com/education/dashboard/index/66a9ea0d62bb71ab495925615029a3fd/practice/qbank/24038518/quiz/83447396/print 16/19 10/12/2018 Learning Management System Factor based modelling is a key ingredient of quantitative active equity approaches, since their focus is on identifying relationships between rewarded factors and stock returns Company nancial statements are likely to be a source of information for both fundamental and quantitative approaches, since accounts can be used to generate a fundamental opinion or to establish exposure to a quantitative factor such as valuation Manager judgement plays a role in both fundamental and quantitative approaches – the fundamental manager will use judgement in making investment decisions, whilst the quantitative manager will use judgement in building models, particularly in deciding which factors and signals are relevant (Study Session 14, Module 28.1, LOS 28.a) Related Material Question #25 of 27 en tre in SchweserNotes - Book An analyst is investigating potential pairs trades for a statistical arbitrage fund She gathers the bo ok c following information about three potential pairs: Pair consists of two car manufacturers One of the companies is a small new manufacturer of electric self-drive vehicles, the other companies is one of the largest car manufacturers in the world established over 100 years ago The mature company has recently made signi cant investment in new electric vehicles The m historical correlation of the two companies has been low .o Pair consists of two mature advertising agencies that have comparable future w w earnings prospects Both typically trade on similar valuations and the historical correlation of share prices has been high The ratio of share prices is currently 1.5 w standard deviations below its moving average Pair consists of two mature companies: one is a cement manufacturer and the other is a thermal coal company Although the companies operate in di erent markets and have di erent business models the stock prices have historically shown high correlation A recent news announcement has caused the ratio of share prices to deviate from the long-term average The pairs trade the analyst should most likely recommend is: A) Pair B) Pair C) Pair Explanation https://www.kaplanlearn.com/education/dashboard/index/66a9ea0d62bb71ab495925615029a3fd/practice/qbank/24038518/quiz/83447396/print 17/19 10/12/2018 Learning Management System Pair is the most suitable for pairs trading strategy since the companies are similar businesses and share prices have shown strong correlation in the past Pair is inappropriate because the business model of the companies and market valuations are likely to be very di erent Pair is inappropriate since the companies operate in di erent sectors and hence any correlation between share price is likely to be spurious and not persistent into the future (Study Session 14, Module 28.3, LOS 28.f) Related Material in SchweserNotes - Book en tre Question #26 of 27 Which of the following investment strategies is least likely to be a top-down investment strategy? A) Volatility based strategies bo ok c B) Special situations strategies C) Thematic investment strategies Explanation w w o m The special situations investment style focusses on mispricings occurring due to corporate events such as mergers, acquisitions, spin-o s and divestures These corporate events relate to individual company information and hence this is a bottom-up strategy Both volatility based and thematic investment strategies look at markets as a whole and hence are more likely to be top down strategies (Study Session 14, Module 28.1, LOS 28.c) Related Material w SchweserNotes - Book Question #27 of 27 When creating a fundamental active investment strategy an active equity manager should assign a price target that they believe to be the fair value of the security Which of the following statements regarding this price target is most accurate? https://www.kaplanlearn.com/education/dashboard/index/66a9ea0d62bb71ab495925615029a3fd/practice/qbank/24038518/quiz/83447396/print 18/19 10/12/2018 Learning Management System A) The price target should not be adjusted after it is set at the outset in order to avoid su ering from behavioural biases such as loss aversion B) Adjusting the price target down in response to negative news ow until it is lower then the current market price would trigger a sale or reduction in the position size C) The stock position should always be fully liquidated as soon as the security reaches the price target Explanation Related Material w w w o m bo ok c SchweserNotes - Book en tre (Study Session 14, Module 28.3, LOS 28.g) in The price target speci ed in a fundamental investing strategy need not be xed but can be updated to re ect changing market conditions since the position was established The manager should recognise that the fair value of the security is an estimate and therefore would not necessarily liquidate the full position as soon as the stock reaches the price target, instead choosing to reduce the position https://www.kaplanlearn.com/education/dashboard/index/66a9ea0d62bb71ab495925615029a3fd/practice/qbank/24038518/quiz/83447396/print 19/19 ... 28 .3, LOS 28. f) Related Material SchweserNotes - Book Question # 13 of 27 https://www.kaplanlearn.com/education/dashboard/index/66a9ea0d62bb71ab495925615029a3fd/practice /qbank/ 24 038 518/quiz/ 834 4 739 6/print... 14, Module 28 .3, LOS 28. h) Related Material SchweserNotes - Book https://www.kaplanlearn.com/education/dashboard/index/66a9ea0d62bb71ab495925615029a3fd/practice /qbank/ 24 038 518/quiz/ 834 4 739 6/print... Module 28 .3, LOS 28. g) Related Material SchweserNotes - Book Question #5 of 27 https://www.kaplanlearn.com/education/dashboard/index/66a9ea0d62bb71ab495925615029a3fd/practice /qbank/ 24 038 518/quiz/ 834 4 739 6/print