Deck 15: Equity Portfolio Management Strategies

Question 1

Growth oriented investors focus on the price component of the Price/Earnings ratio.

Answer 1

False

Question 2

With dollar-cost averaging a manager purchases fewer shares when stock prices are low and more shares when stock prices are high.

Answer 2

False

Question 3

Active equity portfolio management is a long-term buy-and-hold strategy.

Answer 3

False

Question 4

Completeness funds are portfolios designed to complement active portfolios that do not cover the entire market.

Question 5

A benchmark portfolio is defined as a passive portfolio whose average characteristics match the client's risk-return objectives.

Question 6

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.

Question 7

Style investing allows control of the total portfolio to be shared between investment managers and pension fund managers.

Question 8

The goal of a passive portfolio is to track the index as closely as possible.

Question 9

Tracking error is defined as the degree to which the portfolio's returns deviate from those of the actual index.

Question 10

In backtesting, computers are used to examine the composition and returns of portfolios based on historical data in order to determine if the investment strategy would have worked in the past.

Question 11

The three basic techniques for constructing a passive index are: full replication, sampling and linear programming.

Question 12

Following an earnings momentum strategy, an investor acquires stocks that have enjoyed above-market stock price increases.

Question 13

Style identification allows an investor to select investment managers that allow his overall portfolio to be properly diversified.

Question 14

Sharpe (1991) study reveals that active managers typically outperform passive managers even after transaction costs and fees.

Question 15

It does not make economic sense for portfolio managers to try to "time" between different investment styles.

Question 16

Style investing involves constructing portfolios in such a way to capture one or more of the characteristics of equity securities.

Question 17

An advantage of sampling is that portfolio returns will not track the index as closely as with full replication.

Question 18

Growth stocks consistently outperform value stocks.

Question 19

An advantage of quadratic programming is that it relies on historical correlations.

Question 20

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.

Question 21

The following are ways to implement index portfolio investing

A) Buying shares in index mutual funds
B) Buying hedge funds.
C) Buying exchange traded funds
D) Choices a and b.
E) Choices a and c.

Question 22

Growth stocks would have the following characteristics

A) Low price/book, high price/earnings.
B) Low price/book, low price/earnings.
C) High EPS growth, high profitability.
D) Low EPS growth, high profitability.
E) None of the above.

Question 23

In equity portfolio management, tracking error occurs when

A) The managed portfolio outperforms the benchmark portfolio.
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.

Question 24

Which of the following statements concerning active equity portfolio management strategies is true?

A) The goal of active equity portfolio management is to earn a portfolio return that exceeds the return of a passive benchmark portfolio (net of transaction costs) on a risk-adjusted basis.
B) An actively managed equity portfolio has lower total transaction costs.
C) An actively managed equity portfolio has lower risk than the passive benchmark.
D) A key to success for an actively managed equity portfolio is to maximize trading activity.
E) All of the above.

Question 25

The asset allocation 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.

Question 26

Which of the following is not considered a mainstream investment style?

A) Value
B) Growth
C) Market-oriented
D) Benchmark
E) Small-cap

Question 27

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.
C) Value stock investing is superior to growth stock investing.
D) Growth stock investing is superior to value stock investing.
E) None of the above.

Question 28

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.

Question 29

The following are examples 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.

Question 30

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

Question 31

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.

Question 32

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) None of the above.

Question 33

____ 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) All of the above.
E) None of the above.

Question 34

Exchange traded funds

A) Are exactly the same as index mutual funds
B) Can be bought and sold like common stocks
C) Can be sold short.
D) Choices a and b.
E) Choices b and c.

Question 35

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) None of the above (that is, all are techniques for constructing a passive index portfolio)

Question 36

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) None of the above (that is, all are asset allocation strategies)

Question 37

Value stocks would have the following characteristics

A) Low price/book, high price/earnings.
B) Low price/book, low price/earnings.
C) High EPS growth, high profitability.
D) Low EPS growth, high profitability.
E) None of the above.

Question 38

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) None of the above (all are true statements)

Question 39

Which of the following is considered a strategy for timing the market and adding value to actively managed portfolios?

A) Time the markets by shifting between different types of securities based on market forecasts and estimated risk premiums.
B) Shift funds between the various equity sectors, industries, investment styles, etc., in order to take advantage of the "hot" concept before the remainder of the market does.
C) Individual stockpicking in order to buy low and sell high.
D) Choices a and b only
E) All of the above

Question 40

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) None of the above

Question 41

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

A) 2.36%
B) 4.08%
C) 2.89%
D) 3.33%
E) 1.18%

Question 42

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

A) 7.20%
B) 9.60%
C) 9.70%
D) 10.08%
E) 14.29%

Question 43

Exhibit 15-1
USE THE FOLLOWING INFORMATION TO ANSWER THE NEXT QUESTION(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. $$\begin{array}{c}\underline {\text { Asset Mix }}\quad\quad\quad\quad\quad\quad\\\begin{array} { c c c c c } \text { Partfalia } & \text { Stack } & \text { Bond } & \begin{array} { c } \text { Exgected } \\\text { Retun }\end{array} & \text { Variance } \\\hline \text { A } & 0.75 & 0.25 & 0.12 & 0.45 \\\text { B } & 0.4 & 0.6 & 0.08 & 0.16 \\\text { C } & 0.3 & 0.7 & 0.05 & 0.06\end{array}\end{array}$$

-Refer to Exhibit 15-1. The recommended portfolio for Bob Bowman is

A) Portfolio A because it has expected utility of 9.95
B) Portfolio A because it has expected utility of 4.5
C) Portfolio B because it has expected utility of 5.33
D) Portfolio B because it has expected utility of 7.27
E) Portfolio C because it has expected utility of 6.75

Question 44

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

A) The portfolio manager outperformed 95% of his peers.
B) The portfolio manager was outperformed by 95% of his peers.
C) 95% of the portfolio return variability could be attributed to portfolio style.
D) 95% of the portfolio return variability could be attributed to stock selection skills.
E) 5% of the portfolio return variability could be attributed to portfolio style.

Question 45

Exhibit 15-1
USE THE FOLLOWING INFORMATION TO ANSWER THE NEXT QUESTION(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. $$\begin{array}{c}\underline {\text { Asset Mix }}\quad\quad\quad\quad\quad\quad\\\begin{array} { c c c c c } \text { Partfalia } & \text { Stack } & \text { Bond } & \begin{array} { c } \text { Exgected } \\\text { Retun }\end{array} & \text { Variance } \\\hline \text { A } & 0.75 & 0.25 & 0.12 & 0.45 \\\text { B } & 0.4 & 0.6 & 0.08 & 0.16 \\\text { C } & 0.3 & 0.7 & 0.05 & 0.06\end{array}\end{array}$$

-Refer to Exhibit 15-1. The expected utilities of Portfolios A, B and C for Bob Bowman are

A) Portfolio A = 9.95, Portfolio B = 7.27, Portfolio C = 4.73
B) Portfolio A = 4.5, Portfolio B = 5.33, Portfolio C = 4.0
C) Portfolio A = 7.95, Portfolio B = 5.33, Portfolio C = 4.73
D) Portfolio A = 3.5, Portfolio B = 7.27, Portfolio C = 4.73
E) Portfolio A = 5.33, Portfolio B = 7.27, Portfolio C = 4.73

Question 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%, what value would you expect your portfolio to have?

A) $100 million
B) $110 million
C) $150 million
D) $165 million
E) $1.65 billion

Question 47

Exhibit 15-1
USE THE FOLLOWING INFORMATION TO ANSWER THE NEXT QUESTION(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. $$\begin{array}{c}\underline {\text { Asset Mix }}\quad\quad\quad\quad\quad\quad\\\begin{array} { c c c c c } \text { Partfalia } & \text { Stack } & \text { Bond } & \begin{array} { c } \text { Exgected } \\\text { Retun }\end{array} & \text { Variance } \\\hline \text { A } & 0.75 & 0.25 & 0.12 & 0.45 \\\text { B } & 0.4 & 0.6 & 0.08 & 0.16 \\\text { C } & 0.3 & 0.7 & 0.05 & 0.06\end{array}\end{array}$$

-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%
B) 81.8%
C) 90.0%
D) 110.0%
E) 122.2%

Question 48

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 the above statements are true

Question 49

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

A) Focuses 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) Focuses on the current and future economic "story" of a company.
E) All of the above statements are true.

Question 50

Exhibit 15-1
USE THE FOLLOWING INFORMATION TO ANSWER THE NEXT QUESTION(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. $$\begin{array}{c}\underline {\text { Asset Mix }}\quad\quad\quad\quad\quad\quad\\\begin{array} { c c c c c } \text { Partfalia } & \text { Stack } & \text { Bond } & \begin{array} { c } \text { Exgected } \\\text { Retun }\end{array} & \text { Variance } \\\hline \text { A } & 0.75 & 0.25 & 0.12 & 0.45 \\\text { B } & 0.4 & 0.6 & 0.08 & 0.16 \\\text { C } & 0.3 & 0.7 & 0.05 & 0.06\end{array}\end{array}$$

-Refer to Exhibit 15-1. The recommended portfolio for Tom Luck is

A) Portfolio A because it has expected utility of 9.95
B) Portfolio A because it has expected utility of 4.5
C) Portfolio B because it has expected utility of 5.33
D) Portfolio B because it has expected utility of 7.27
E) Portfolio C because it has expected utility of 6.75

Question 51

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

A) Analyst can make full use of their knowledge of undervalued and overvalued stocks.
B) Long positions up to 130% of the value of the portfolio cab be made.
C) Short positions up to 30% 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.

Question 52

Exhibit 15-1
USE THE FOLLOWING INFORMATION TO ANSWER THE NEXT QUESTION(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. $$\begin{array}{c}\underline {\text { Asset Mix }}\quad\quad\quad\quad\quad\quad\\\begin{array} { c c c c c } \text { Partfalia } & \text { Stack } & \text { Bond } & \begin{array} { c } \text { Exgected } \\\text { Retun }\end{array} & \text { Variance } \\\hline \text { A } & 0.75 & 0.25 & 0.12 & 0.45 \\\text { B } & 0.4 & 0.6 & 0.08 & 0.16 \\\text { C } & 0.3 & 0.7 & 0.05 & 0.06\end{array}\end{array}$$

-Refer to Exhibit 15-1. The expected utilities of Portfolios A, B and C for Tom Luck are

A) Portfolio A = 9.95, Portfolio B = 7.27, Portfolio C = 4.73
B) Portfolio A = 4.5, Portfolio B = 5.33, Portfolio C = 4.0
C) Portfolio A = 7.95, Portfolio B = 5.33, Portfolio C = 4.73
D) Portfolio A = 3.5, Portfolio B = 7.27, Portfolio C = 4.73
E) Portfolio A = 5.33, Portfolio B = 7.27, Portfolio C = 6.75

Question 53

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.

A) Increasing, decreasing.
B) Decreasing, increasing,
C) Increasing, increasing.
D) Decreasing, decreasing.
E) None of the above.

Question 54

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.