Chapter 11 – Equity Portfolio Management Strategies
b.
the managed portfolio under performs the benchmark portfolio.
c.
the return volatility of the managed portfolio is positively correlated with the return volatility of the
benchmark portfolio.
d.
the return volatility of the managed portfolio is negatively correlated with the return volatility of the
benchmark portfolio.
e.
the return volatility of the managed portfolio is not correlated with the return volatility of the benchmark
portfolio.
38. 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.
Period
Difference
1
0.023
2
0.010
3
0.003
4
−0.010
5
−0.002
6
0.007
7
0.008
8
−0.014
Average
0.003
SD
0.011789
The annualized tracking error for this period is
a.
2.36 percent.
b.
4.08 percent
c.
2.89 percent.
d.
3.33 percent.
e.
1.18 percent.
39. In ____ strategy, certain economic sectors or industries are overweighted relative to the benchmark in anticipation of
the next phase of the business cycle.
a.
sector rotation
b.
price momentum
c.
earnings momentum
d.
return rotation
e.
passive momentum
40. Which of the following is NOT considered an active management strategy?
a.
sector rotation
b.
use of factor models
c.
quantitative screens
d.
full replication
e.
linear programming
41. Which of the following is considered a strategy for timing the market and adding value to actively managed
portfolios?
a.
timing the markets by shifting between different types of securities based on market forecasts and estimated
risk premiums.
b.
shifting funds between the various equity sectors, industries, investment styles, etc., in order to take advantage
Chapter 11 – Equity Portfolio Management Strategies
of the “hot” concept before the remainder of the market does.
c.
individual stock picking in order to buy low and sell high.
d.
using tactical asset allocation strategies.
e.
All of these are correct.
42. A portfolio management strategy that overweights a particular industry, relative to the benchmark portfolio, based on
the next expected phase of the business cycle is called
a.
tactical asset allocation.
b.
indexing.
c.
sector rotation.
d.
contrarian investing.
e.
Bottom-up investing.
43. ____ is a strategy used because the market seems to reward companies that have steady, above average earnings
growth, or whose prices are rising because of market optimism.
a.
Relative strength
b.
Asset momentum
c.
Rotational attribution
d.
Sector rotation
e.
Earnings momentum
44. The following is an example of a fundamental active equity portfolio management strategy.
a.
contrarian investing
b.
earnings momentum investing
c.
low P/E and low P/BV investing
d.
bottom up investing
e.
investing on the basis of calendar effects
45. Which of the following statements regarding 130/30 strategies is FALSE?
a.
Analysts can make full use of their knowledge of undervalued and overvalued stocks.
b.
Long positions up to 130 percent of the value of the portfolio can be made.
c.
Short positions up to 30 percent of the value of the portfolio can be made.
d.
130/30 strategies are not very popular due to the increased risk of hedging.
e.
The use of short positions creates leverage.
46. 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?
a.
$100 million
b.
$110 million
Chapter 11 – Equity Portfolio Management Strategies
c.
$150 million
d.
$165 million
e.
$1.65 billion
47. Which of the following statements regarding momentum strategies is TRUE?
a.
Price momentum is a fundamental strategy.
b.
Earnings momentum is a technical strategy.
c.
Price momentum and earnings momentum strategies will often result in identical portfolio strategies and
holdings.
d.
The earnings momentum investor will most likely acquire stocks for companies that have positive earnings
surprises.
e.
All of these are correct.
48. 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?
a.
22.2 percent
b.
81.8 percent
c.
90.0 percent
d.
110.0 percent
e.
122.2 percent
49. 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?
a.
7.20 percent
b.
9.60 percent
c.
9.70 percent
d.
10.08 percent
e.
14.29 percent
50. Fund XYZ had a pretax return of 10.2 percent and a tax-adjusted return of 9.5 percent. Calculate Fund XYZ’s tax cost
ratio.
a.
0.006
b.
0.106
c.
0.116
d.
0.342
e.
0.635
51. A fundamental tenet of the contrarian investment strategy is the notion that
a.
all stock returns are mean reverting.
b.
certain stocks outperform others during different stages of the business cycle.
Chapter 11 – Equity Portfolio Management Strategies
c.
value stock investing is superior to growth stock investing.
d.
growth stock investing is superior to value stock investing.
e.
None of these are correct.
52. Value stocks would have the following characteristics:
a.
low price/book and high price/earnings.
b.
low price/book and low price/earnings.
c.
high EPS growth and high profitability.
d.
low EPS growth and high profitability.
e.
None of these are correct.
53. Growth stocks would have the following characteristics:
a.
low price/book and high price/earnings.
b.
low price/book and low price/earnings.
c.
high EPS growth and high profitability.
d.
low EPS growth and high profitability.
e.
None of these are correct.
54. An investor focusing on a growth strategy does all of the following EXCEPT
a.
focus on the earnings per share (EPS) component on the P/E ratio.
b.
seek out investments with higher expected growth in earnings.
c.
implicitly assume that the P/E ratio will grow over the near term.
d.
focus on the current and future economic “story” of a company.
e.
All of these are correct.
55. Which of the following statements about investment style is FALSE?
a.
Growth stocks generally have smaller capitalizations than value stocks.
b.
Value stocks have P/E and P/B ratios significantly lower than those of growth stocks.
c.
Value stocks dividend yields are much higher than those of growth stocks.
d.
Growth and levels of earnings is higher in growth stocks.
e.
Value stocks have a higher risk premium.
56. Which of the following is NOT considered an investment style?
a.
value
b.
growth
c.
market-oriented
d.
benchmark
e.
small-cap
Chapter 11 – Equity Portfolio Management Strategies
57. Which of the following statements is FALSE?
a.
A manager’s choice to align with an investment style communicates information to clients about the investor’s
focus, area of expertise, and stock evaluation methods.
b.
An investment manager’s style cannot be used as a basis for measuring the manager’s performance relative to a
benchmark.
c.
Style identification allows an investor to select investment managers that allow his overall portfolio to be
properly diversified.
d.
Style investing allows control of the total portfolio to be shared between the investment managers and a
knowledgeable sponsor.
e.
An investor needs to be cautious about a manager whose portfolio exhibits unintentional style drift.
58. In returns-based style analysis, a coefficient of determination of 95 percent would suggest that
a.
the portfolio manager outperformed 95 percent of his peers.
b.
the portfolio manager was outperformed by 95 percent of his peers.
c.
95 percent of the portfolio return variability could be attributed to portfolio style.
d.
95 percent of the portfolio return variability could be attributed to stock selection skills.
e.
5 percent of the portfolio return variability could be attributed to portfolio style.
59. Which of the following is NOT considered an asset allocation strategy?
a.
integrated asset allocation
b.
strategic asset allocation
c.
tactical asset allocation
d.
insured asset allocation
e.
full replication
60. In ____ asset allocation, the investor’s risk tolerance and constraints are assumed to be constant over time. However,
changes in capital market conditions result in changes in the portfolio’s stock-bond mix.
a.
integrated
b.
strategic
c.
tactical
d.
insured
e.
replication
61. The strategy that is used to determine the long-term policy asset weights in a portfolio is called
a.
integrated asset allocation.
b.
tactical asset allocation.
c.
sector rotation.
d.
strategic asset allocation.
e.
insured asset allocation.
Chapter 11 – Equity Portfolio Management Strategies
62. The strategy that separately examines capital market conditions and the investor’s objectives and constraints is called
a.
integrated asset allocation.
b.
tactical asset allocation.
c.
sector rotation.
d.
strategic asset allocation.
e.
insured asset allocation.
63. The strategy that frequently adjusts the asset class mix in the portfolio to take advantage of changing market
conditions while assuming that the investor’s risk tolerance and investment constraints to be constant over time is called
a.
integrated asset allocation.
b.
tactical asset allocation.
c.
sector rotation.
d.
strategic asset allocation.
e.
insured asset allocation.
64. A contrarian investment strategy is based on the belief that
a.
stock returns are mean reverting.
b.
the best time to buy is when other investors are bullish.
c.
rising stocks will continue to rise.
d.
passive management is preferred to active management.
e.
a long/short portfolio will outperform a long only portfolio.
65. A portfolio manager who is trying to generate alpha could use
a.
hedge funds.
b.
mutual funds.
c.
insured asset allocation.
d.
ETFs.
e.
indexing.