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

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 Question #2 of 27 bo ok c fundamental active equity approach en tre C) Manager A follows a quantitative active equity approach and manager B follows a Competitive positioning and environmental, social and governance (ESG) characteristics of a m company are most likely to be used as information sources for: o A) Neither quantitative nor fundamental active equity managers w w B) Both quantitative and fundamental active equity managers w C) Fundamental active managers only Question #3 of 27 https://www.kaplanlearn.com/education/dashboard/index/66a9ea0d62bb71ab495925615029a3fd/practice/qbank/24038518/quiz/83447396/print 1/13 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 relative value en tre approach? A) Stock S B) Stock T m Question #4 of 27 bo ok c C) Stock U A fundamental active equity investment manager screens the stocks in their universe in order o to create an equally weighted portfolio of securities that have a price-to-book ratio of less than w w one Which of the following pitfalls of fundamental active investing is this manager most likely to be subject to? w A) The value trap B) Behavioural biases C) The growth trap Question #5 of 27 https://www.kaplanlearn.com/education/dashboard/index/66a9ea0d62bb71ab495925615029a3fd/practice/qbank/24038518/quiz/83447396/print 2/13 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 en tre in C) -$1 Question #6 of 27 investment manager should: bo ok c An analyst who wishes to capture the most accurate and up-to-date style exposure of an A) Prefer to use returns-based analysis B) Prefer to use holdings-based analysis w w o m C) Be indi erent between using holdings based and returns based analyses w Question #7 of 27 https://www.kaplanlearn.com/education/dashboard/index/66a9ea0d62bb71ab495925615029a3fd/practice/qbank/24038518/quiz/83447396/print 3/13 10/12/2018 Learning Management System 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 Where: rt = the fund return in period t LC = large cap style index SC = small cap style index in εt = residual return not explained by style factors en tre The value added by the fund manager is closest to: A) 0.5% plus the residual return, εt B) The residual return, εt m Question #8 of 27 bo ok c C) 0.5% A quantitative active equity investment manager gathers the following data regarding o information coe cients (ICs) when backtesting the value, growth and size factors in their w w investment universe: Factor insigni cant w Value Pearson IC Spearman Rank IC 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 conclude that the factors with strong predictive powers for subsequent returns are: A) Value and Growth B) Growth and Size C) Value, Growth and Size https://www.kaplanlearn.com/education/dashboard/index/66a9ea0d62bb71ab495925615029a3fd/practice/qbank/24038518/quiz/83447396/print 4/13 10/12/2018 Learning Management System 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 en tre in global nancial crisis of 2008/2009 and have since failed to recover to pre-crisis levels Question #10 of 27 Company A announces a cash-only purchase of Company B In order to pro t from this event, a bo ok c merger-arbitrage hedge fund manager would most likely: 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 m is announced w w o C) Purchase the shares of Company B after the deal is announced w 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 B) Factor mimicking portfolios are commonly used in factor-tilting portfolios C) Factor mimicking portfolios are relatively expensive to construct Question #12 of 27 https://www.kaplanlearn.com/education/dashboard/index/66a9ea0d62bb71ab495925615029a3fd/practice/qbank/24038518/quiz/83447396/print 5/13 10/12/2018 Learning Management System 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 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 mispricing opportunities in Question #13 of 27 en tre 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 ($) P/E EPS Forecast 0.25 20% T 95 4.75 U 15 5.5 m S 0.00 Pharmaceuticals 20 3% 0.08 Defence 25 -5% 0.03 Utilities 12 w w approach? o Which stock is most likely to be the best opportunity for investors that use a deep value A) Stock U w B) Stock S C) Stock T Question #14 of 27 With regards to the potential pitfalls in investment strategies, which of the following statements is likely to be most accurate? https://www.kaplanlearn.com/education/dashboard/index/66a9ea0d62bb71ab495925615029a3fd/practice/qbank/24038518/quiz/83447396/print 6/13 10/12/2018 Learning Management System A) A fundamental active equity investor who seeks information that agrees with their existing beliefs is exhibiting availability bias B) Over tting is more likely to be a pitfall for a fundamental manager than a quantitative active equity manager C) The behavioural bias of overcon dence is more likely to be a pitfall for a fundamental manager than a quantitative active equity manager in Question #15 of 27 The table below provides information on three stocks being considered for investment by a en tre bottom-up equity manager bo ok c 123-Year Sector Price Month EPS Dividend Company Industry Sector Average ($) Forward Growth ($) P/E EPS Forecast 0.25 20% 0.00 Pharmaceuticals 20 T 95 4.75 3% 0.08 Defence 25 U 15 5.5 -5% 0.03 Utilities 12 m S w w A) Stock T o Which stock is most likely to be the best opportunity for investors that use GARP? B) Stock U w C) Stock S Question #16 of 27 https://www.kaplanlearn.com/education/dashboard/index/66a9ea0d62bb71ab495925615029a3fd/practice/qbank/24038518/quiz/83447396/print 7/13 10/12/2018 Learning Management System Consider the following three companies: Company Listing Return on Assets Asset Turnover Cash Balance SBD Nasdaq Low Low High JBC Amex High Average Average LLB Unlisted Low Low Low Which of the above companies is most likely to o er an opportunity for activist investing? A) LLB in B) JBC en tre C) SBD bo ok c 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 m implemented o Statement 2: When constructed properly, hedged portfolios represent pure exposure to the w w factors they are designed to represent It is most likely that: w A) Both statements are false B) Both statements are true C) Statement is true and statement is false Question #18 of 27 Data for US companies show that in the years after activist investing, companies on average have: https://www.kaplanlearn.com/education/dashboard/index/66a9ea0d62bb71ab495925615029a3fd/practice/qbank/24038518/quiz/83447396/print 8/13 10/12/2018 Learning Management System 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 Question #19 of 27 A factor-based quantitative active equity investment manager is investigating the relationship between treasury yields and factor returns They regress both contemporaneous and in subsequent month factor returns against the 10-year treasury bond yield The factors used are w w w o m bo ok c coe cients are displayed in the chart below: en tre systematic risk (beta), size (market capitalisation) and value (book-to-market) The regression 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 C) Long high beta securities and short value securities in months subsequent to treasury yields being high https://www.kaplanlearn.com/education/dashboard/index/66a9ea0d62bb71ab495925615029a3fd/practice/qbank/24038518/quiz/83447396/print 9/13 10/12/2018 Learning Management System Question #20 of 27 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 B) Market volatility levels fall C) Realised market volatility is lower than implied volatility en tre in Question #21 of 27 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 bo ok c investment process B) Adding active returns that are not correlated with the underlying portfolio strategy m C) Identifying overvalued/undervalued securities for stock selection w w o Question #22 of 27 The Information coe cient is best de ned as: w A) The correlation of the performance of a hedged portfolio representing returns to a 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 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 Question #23 of 27 https://www.kaplanlearn.com/education/dashboard/index/66a9ea0d62bb71ab495925615029a3fd/practice/qbank/24038518/quiz/83447396/print 10/13 10/12/2018 Learning Management System 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 Question #24 of 27 When comparing fundamental and quantitative approaches to active equity investing, which of en tre the following statements is most accurate? A) Manager judgement plays a large role in fundamental active equity approaches, but plays no role in quantitative active equity approaches bo ok c 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 o m fundamental approaches to active management w w w Question #25 of 27 https://www.kaplanlearn.com/education/dashboard/index/66a9ea0d62bb71ab495925615029a3fd/practice/qbank/24038518/quiz/83447396/print 11/13 10/12/2018 Learning Management System An analyst is investigating potential pairs trades for a statistical arbitrage fund She gathers the 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 historical correlation of the two companies has been low Pair consists of two mature advertising agencies that have comparable future earnings prospects Both typically trade on similar valuations and the historical standard deviations below its moving average in correlation of share prices has been high The ratio of share prices is currently 1.5 en tre 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 bo ok c 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 w w o m C) Pair w Question #26 of 27 Which of the following investment strategies is least likely to be a top-down investment strategy? A) Volatility based strategies B) Special situations strategies C) Thematic investment strategies Question #27 of 27 https://www.kaplanlearn.com/education/dashboard/index/66a9ea0d62bb71ab495925615029a3fd/practice/qbank/24038518/quiz/83447396/print 12/13 10/12/2018 Learning Management System 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? 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 w w w o m bo ok c en tre in price target https://www.kaplanlearn.com/education/dashboard/index/66a9ea0d62bb71ab495925615029a3fd/practice/qbank/24038518/quiz/83447396/print 13/13 ... https://www.kaplanlearn.com/education/dashboard/index/66a9ea0d62bb71ab495925615029a3fd/practice /qbank/ 24 038 518/quiz/ 834 4 739 6/print 12/ 13 10/12/2018 Learning Management System When creating a fundamental active investment strategy an active equity manager should... https://www.kaplanlearn.com/education/dashboard/index/66a9ea0d62bb71ab495925615029a3fd/practice /qbank/ 24 038 518/quiz/ 834 4 739 6/print 3/ 13 10/12/2018 Learning Management System An analyst conducting a returns-based style analysis on an active equity fund constructs... https://www.kaplanlearn.com/education/dashboard/index/66a9ea0d62bb71ab495925615029a3fd/practice /qbank/ 24 038 518/quiz/ 834 4 739 6/print 6/ 13 10/12/2018 Learning Management System A) A fundamental active equity investor who seeks information