Chapter 11 – Equity Portfolio Management Strategies
1. A way to distinguish between these strategies is to decompose the total actual return that the portfolio manager attempts
to produce.
a.
True
b.
False
2. Active portfolio managers just try to capture the expected return consistent with the risk level of their portfolios.
a.
True
b.
False
3. Passive portfolio managers attempt to “beat the market” by forming portfolios capable of producing actual returns that
exceed risk-adjusted expected returns.
a.
True
b.
False
4. The difference between the actual and expected return is often called the portfolio’s alpha,
Chapter 11 – Equity Portfolio Management Strategies
a.
True
b.
False
5. An attempt on the manager’s part to generate alpha is generally referred to as indexing.
a.
True
b.
False
6. The goal of a passive portfolio is to track the index as closely as possible.
a.
True
b.
False
7. Active equity portfolio management is a long-term buy-and-hold strategy.
a.
True
b.
False
8. A benchmark portfolio is defined as a passive portfolio whose average characteristics match the client’s risk-return
objectives.
a.
True
b.
False
9. The three basic techniques for constructing a passive index are: full replication, sampling, and linear programming.
a.
True
b.
False
10. An advantage of sampling is that portfolio returns will not track the index as closely as with full replication.
a.
True
b.
False
11. An advantage of quadratic programming is that it relies on historical correlations.
a.
True
b.
False
12. Tracking error is defined as the degree to which the portfolio’s returns deviate from those of the actual index.
a.
True
b.
False
13. There is a direct relationship between a passive portfolio’s tracking error relative to its index and the time and expense
necessary to create and maintain the portfolio.
a.
True
b.
False
14. Completeness funds are portfolios designed to complement active portfolios that do not cover the entire market.
a.
True
b.
False
15. Exchange-Traded Funds (ETF) are depository receipts that give investors a pro rata claim on the capital gains and
cash flows of securities held by financial institutions.
a.
True
b.
False
16. Following an earnings momentum strategy, an investor acquires stocks that have enjoyed above-market stock price
increases.
a.
True
b.
False
17. The goal of active equity management is to earn a return that exceeds the return of a passive benchmark portfolio, net
of transaction costs, on a risk-adjusted basis.
a.
True
b.
False
18. Growth stocks consistently outperform value stocks.
a.
True
b.
False
19. A growth investor focuses on the current and future economic “story” of a company, with less regard for share
valuation.
a.
True
b.
False
20. The value investor focuses on share price in anticipation of a market correction and, possibly, improving company
fundamentals.
a.
True
b.
False
21. Growth oriented investors focus on the price component of the Price/Earnings ratio.
a.
True
b.
False
22. Style investing involves constructing portfolios in such a way as to capture one or more of the characteristics of equity
securities.
a.
True
b.
False
23. It does not make economic sense for portfolio managers to try to “time” between different investment styles.
a.
True
b.
False
24. Style identification allows an investor to select investment managers that allow his overall portfolio to be properly
diversified.
a.
True
b.
False
25. Style investing allows control of the total portfolio to be shared between investment managers and pension fund
managers.
a.
True
b.
False
26. Insured asset allocation is a strategy to limit investment losses by shifting funds between an existing equity portfolio
and a risk-free security.
a.
True
b.
False
27. A portfolio manager who uses tactical asset allocation is attempting to create alpha.
a.
True
b.
False
28. The integrated asset allocation strategy separately examines capital market conditions and the investor’s objectives
and constraints.
a.
True
b.
False
29. Tactical asset allocation is used to determine the long-term policy asset weights in a portfolio.
a.
True
b.
False
30. Strategic asset allocation frequently adjusts the asset class mix in the portfolio to take advantage of changing market
conditions.
a.
True
b.
False
31. The difference between the actual and expected return is often called
a.
alpha.
b.
beta.
c.
risk premium.
d.
the risk-free rate.
e.
the benchmark.
32. Which of the following statements concerning active equity portfolio management strategies is true?
a.
b.
c.
d.
e.
33. Which of the following is considered a passive management strategy?
a.
sector rotation
b.
use of factor models
c.
quantitative screens
d.
sampling
e.
linear programming
34. Which of the following is NOT a technique for constructing a passive index portfolio?
a.
full replication
b.
sampling
c.
quadratic programming
d.
linear programming
e.
indexing
35. The goal of the passive portfolio manager is to minimize
a.
alpha.
b.
beta.
c.
standard error.
d.
tracking error.
e.
portfolio risk.
36. All of the following are advantages of ETFs over mutual funds EXCEPT
a.
The ability for continuous trading while markets are open.
b.
the ability to time capital gain tax realizations.
c.
a smaller management fee.
d.
ETFs can be bought and sold like common stock.
e.
smaller brokerage commission.
37. In equity portfolio management, tracking error occurs when
a.