Question 1

A portfolio manager who is trying to generate alpha could use

Accepted Answer

Hedge funds are known for their ability to generate alpha by actively managing investments and taking advantage of market inefficiencies. They often use a variety of investment strategies such as leverage, derivatives, and short selling to generate returns that are uncorrelated with the broader market. While there are risks associated with investing in hedge funds, they can be a useful tool for portfolio managers who are trying to generate alpha. Mutual funds, insured asset allocation, and ETFs tend to be more passive investment vehicles that may not be as effective at generating alpha.

Question 2

Exhibit 16.1
USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S)
A portfolio manager is trying to establish a strategic asset allocation for two different clients, Bob Bowman and Tom Luck. Bob Bowman has a risk tolerance factor of 22 and Tom Luck has a risk tolerance factor of 6. The characteristics of the three model portfolios under consideration are provided in the table below. $\begin{array}{ccccc}
&\text { Asset Mix}&&\text { Expected}\
\text { Portfolio } & \text { Stock } & \text { Bond } & \text { Return } & \text { Variance } \
\hline \text { A } & 0.75 & 0.25 & 0.12 & 0.45 \
\text { B } & 0.4 & 0.6 & 0.08 & 0.16 \
\text { C } & 0.3 & 0.7 & 0.05 & 0.06
\end{array}$
-Refer to Exhibit 16.1. The expected utilities of Portfolios A, B and C for Tom Luck are

Accepted Answer

The answer of Exhibit 16.1
USE THE INFORMATION BELOW FOR THE...

Question 3

An active portfolio manager sold $90 million of stocks in a year. If the portfolio had an average value of $110 million in assets under management what is the portfolio turnover ratio?

Accepted Answer

Portfolio turnover ratio = (Total sales of securities) / (Average assets under management)
Portfolio turnover ratio = ($90 million) / ($110 million)
Portfolio turnover ratio = 0.818 or 81.8%

Question 4

The goal of the passive portfolio manager is to minimize

Accepted Answer

The goal of a passive portfolio manager is to closely track (i.e., minimize tracking error) a market index while minimizing portfolio risk. Alpha, beta, and standard error are all measures of portfolio performance and do not reflect the goal of a passive portfolio manager.

Question 5

All of the following are advantages of ETFs over mutual funds except

Accepted Answer

The answer of All of the following are advantages of...

Question 6

In returns-based style analysis a coefficient of determination of 95% would suggest that

Accepted Answer

A coefficient of determination of 95% suggests that 95% of the portfolio return variability can be attributed to portfolio style, which means that the portfolio's return is largely explained by the style of the securities in the portfolio, rather than the individual stock selection skills of the portfolio manager.

Question 7

Exhibit 16.1
USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S)
A portfolio manager is trying to establish a strategic asset allocation for two different clients, Bob Bowman and Tom Luck. Bob Bowman has a risk tolerance factor of 22 and Tom Luck has a risk tolerance factor of 6. The characteristics of the three model portfolios under consideration are provided in the table below. $\begin{array}{ccccc}
&\text { Asset Mix}&&\text { Expected}\
\text { Portfolio } & \text { Stock } & \text { Bond } & \text { Return } & \text { Variance } \
\hline \text { A } & 0.75 & 0.25 & 0.12 & 0.45 \
\text { B } & 0.4 & 0.6 & 0.08 & 0.16 \
\text { C } & 0.3 & 0.7 & 0.05 & 0.06
\end{array}$
-Refer to Exhibit 16.1. The expected utilities of Portfolios A, B and C for Bob Bowman are

Accepted Answer

The expected utility is calculated using the formula: Expected Utility = Expected Return - 0.5 * Risk Tolerance * Variance. For Bob Bowman with a risk tolerance of 22, the calculations are: Portfolio A: 0.12 - 0.5 * 22 * 0.45 = 9.95, Portfolio B: 0.08 - 0.5 * 22 * 0.16 = 7.27, Portfolio C: 0.05 - 0.5 * 22 * 0.06 = 4.73.

Question 8

A contrarian investment strategy is based on the belief that

Accepted Answer

A contrarian investment strategy is based on the belief that stock returns are mean reverting. This means that when a stock price moves too far in one direction, it is likely to move back towards its average over time. By taking positions opposite to the prevailing market sentiment, contrarian investors aim to profit from these price reversals.

Question 9

Fund XYZ had a pretax return of 10.2% and a tax-adjusted return of 9.5%. Calculate Fund XYZ's tax cost ratio.

Accepted Answer

Tax Cost Ratio = [1 - {(1 + 0.095)/(1 + 0.102)}](100)= [1 - 0.99365](100)= 0.635

Question 10

An investor focusing on a growth strategy does all of the following except

Accepted Answer

The answer of An investor focusing on a growth strategy...

Question 11

Which of the following statements regarding momentum strategies is true?

Accepted Answer

The statement that is true is D. The earnings momentum investor will most likely acquire stocks for companies that have positive earnings surprises. The other statements are false. Price momentum is a technical strategy, earnings momentum is a fundamental strategy, and price momentum and earnings momentum strategies can result in different portfolio strategies and holdings.

Question 12

If the annual geometric mean for the equity risk premium is 8.4 percent, what percentage of the equity risk premium is consumed by trading costs of 1.2 percent?

Accepted Answer

Trading costs of 1.2 percent is equal to 14.29% (1.2/8.4)of the equity risk premium.

Question 13

Exhibit 16.1
USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S)
A portfolio manager is trying to establish a strategic asset allocation for two different clients, Bob Bowman and Tom Luck. Bob Bowman has a risk tolerance factor of 22 and Tom Luck has a risk tolerance factor of 6. The characteristics of the three model portfolios under consideration are provided in the table below. $\begin{array}{ccccc}
&\text { Asset Mix}&&\text { Expected}\
\text { Portfolio } & \text { Stock } & \text { Bond } & \text { Return } & \text { Variance } \
\hline \text { A } & 0.75 & 0.25 & 0.12 & 0.45 \
\text { B } & 0.4 & 0.6 & 0.08 & 0.16 \
\text { C } & 0.3 & 0.7 & 0.05 & 0.06
\end{array}$
-Refer to Exhibit 16.1. The recommended portfolio for Bob Bowman is

Accepted Answer

The expected utility for Bob Bowman is calculated using the formula: Expected Utility = Expected Return - 0.5 * Risk Tolerance * Variance. For Portfolio A, it is 0.12 - 0.5 * 22 * 0.45 = 9.95, which is the highest among the options.

Question 14

If you have a portfolio with a market value of $100 million and a beta (measured against the S&P 500) of 1.5, then if the market rises by 10 percent, what value would you expect your portfolio to have?

Accepted Answer

The expected return of the portfolio is equal to the risk-free rate plus the beta of the portfolio times the market risk premium.
Assuming the risk-free rate is 0 (for simplicity purposes), the expected return of the portfolio is:
Expected return = 0 + 1.5 * 10% = 15%
Therefore, the expected market value of the portfolio after the market rises by 10% is:
$100 million * (1 + 15%) = $115 million
Therefore, the best choice is D, as it is the closest option to the expected market value of the portfolio.

Question 15

Exhibit 16.1
USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S)
A portfolio manager is trying to establish a strategic asset allocation for two different clients, Bob Bowman and Tom Luck. Bob Bowman has a risk tolerance factor of 22 and Tom Luck has a risk tolerance factor of 6. The characteristics of the three model portfolios under consideration are provided in the table below. $\begin{array}{ccccc}
&\text { Asset Mix}&&\text { Expected}\
\text { Portfolio } & \text { Stock } & \text { Bond } & \text { Return } & \text { Variance } \
\hline \text { A } & 0.75 & 0.25 & 0.12 & 0.45 \
\text { B } & 0.4 & 0.6 & 0.08 & 0.16 \
\text { C } & 0.3 & 0.7 & 0.05 & 0.06
\end{array}$
-Refer to Exhibit 16.1. The recommended portfolio for Tom Luck is

Accepted Answer

The answer of Exhibit 16.1
USE THE INFORMATION BELOW FOR THE...

Question 16

A Long futures positions in the S&P500 has the effect of ____ portfolio exposure to equities, while short futures positions in the S&P500 has the effect of ____ portfolio exposure to equities.

Accepted Answer

Long futures positions in the S&P500 increase the portfolio exposure to equities as they provide a synthetic long position in the index. On the other hand, short futures positions in the S&P500 decrease the portfolio exposure to equities as they provide a synthetic short position in the index.

Question 17

Which of the following statements regarding 130/30 strategies is false?

Accepted Answer

This statement is false as 130/30 strategies have gained popularity over the years and are widely used by institutional investors. The increased risk of hedging is a potential drawback, but it does not make the strategy unpopular.

Question 18

The table below provides returns on a portfolio along with returns for the corresponding benchmark index for the past eight quarters. The table also provides the difference between portfolio returns and the benchmark index, the average of these differences over the past eight quarters and the standard deviation of these differences. $\begin{array}{cccc}
\text { Period } & \text { Portfolio } & \text { Index } & \text { Difference } \
\hline 1 & 0.05 & 0.027 & 0.023 \
2 & -0.036 & -0.046 & 0.010 \
3 & 0.022 & 0.019 & 0.003 \
4 & 0.012 & 0.022 & -0.010 \
5 & -0.003 & -0.001 & -0.002 \
6 & -0.023 & -0.03 & 0.007 \
7 & 0.089 & 0.081 & 0.008 \
8 & -0.008 & 0.006 & -0.014\\
\text { Average } &&& 0.003 \
\mathrm{SD} &&& 0.011789
\end{array}$ The annualized tracking error for this period is

Accepted Answer

The tracking error is calculated as the standard deviation of the differences between the portfolio and the benchmark returns. To annualize it, multiply by the square root of the number of periods in a year (√4 for quarterly data). Thus, 0.011789 * √4 = 0.023578, or 2.36%.

Quiz 16: Equity Portfolio Management Strategies