Schweser QBank 2017 portfolio management and wealth planning 10 trading, monitoring, and rebalancing

Which of the following statements regarding rebalancing strategies is least accurate?Using futures contracts can significantly enhance the benefits of tactical asset allocation.. Specifi

Test ID: 7427799Trading, Monitoring, and Rebalancing

Which of the following statements regarding econometric models is CORRECT? Econometric models:

are only useful for forecasting trading costs

are not useful for forecasting trading costs or assessing trading effectiveness

are used to forecast trading costs and assess trading effectiveness

Explanation

They can be used to forecast trading costs and assist portfolio managers in determining the size of the trade They can also

be used to assess trading effectiveness by comparing actual trading costs to forecasted trading costs from the models

In a flat but oscillating market, which asset allocation strategy outperforms?

Constant proportion portfolio insurance (CPPI)

Which of the following asset allocation strategies passively assumes that risk tolerance is directly related to wealth levels?

Buy and hold

Constant proportion portfolio insurance (CPPI)

Which of the following statements regarding disciplined rebalancing is CORRECT? Disciplined rebalancing (e.g., maintaining

an asset mix at 60% stocks and 40% bonds):

eliminates periodic departures from the policy mix

allows for the possibility of a drifting mix

prevents substantial gains from market timing

Explanation

Disciplined rebalancing prevents drifting of the asset mix with market variability Evidence suggests that market timing fails toadd value

A simple logical participation strategy trades:

early in the day and attempts to minimize market impact

with market flow and attempts to minimize market impact

with market flow and attempts to minimize opportunity costs

Explanation

Simple logical participation strategies seek to trade with market flow to minimize market impact

Which of the following statements regarding the implementation shortfall components is least accurate?

Missed trade opportunity cost is weighted by the portion of the order that is

filled

Missed trade opportunity cost represents the difference between the price at which

the order is cancelled and the original price

Realized profit and loss represents the difference between the execution price and the

previous day's closing price

Explanation

Missed trade opportunity cost is weighted by the portion of the order that is not filled It is calculated using the differencebetween the price at which the order is cancelled and the original price Realized profit and loss uses the difference betweenthe execution price and the previous day's closing price This is divided by the original price and weighted by the portion of theorder filled

Which of the following is least accurate regarding best execution?

Best execution can be measured for a single trade

Each party to a trade determines what best execution is

Best execution cannot be judged separately of the investment decision

Explanation

Although best execution can be measured ex post over time, it cannot be measured for a single trade Best execution cannot

be judged independently of the investment decision Best execution cannot be known with certainty ex ante, it depends on theparticular circumstances of the trade Each party to a trade determines what best execution is

The cost of not rebalancing the portfolio includes all of the following EXCEPT:

holding assets that no longer fit the needs of the client

the costs of desirable trades that never happen

holding an overpriced asset

Explanation

This is a cost of trading due to rebalancing

All of the following are costs associated with rebalancing a portfolio EXCEPT:

brokerage commissions

tax costs

deferral costs

Explanation

Question #11 of 158 Question ID: 465631

Tax costs are the key costs associated with rebalancing a portfolio and are often underestimated Investors focus on

brokerage commissions and forget trading costs such as market impact, trade execution inefficiencies and opportunity costs

Which of the following client portfolios is most likely to generate the highest trading costs?

RebalancingDiscipline Employed

A 40% Corporate Bonds; 30% Mortgage-Backed

Bonds; 30% Government Bonds

Rebalanced on the last day ofeach calendar quarter

B 25% Domestic Equity; 25% Real Estate; 25%

International Equity; 25% Corporate Bonds

Rebalanced within an allowablerange of 5% for each asset class

C 40% Domestic Equity; 30% International Equity; 30%

Government Bonds

Rebalanced to precise targetweights if allocation strays fromtarget

to changes in allocation before any trades would take place

Which of the following statements best characterizes a limit order? A limit order has:

price uncertainty and execution uncertainty

reduced price uncertainty but retains execution uncertainty

price uncertainty but not execution uncertainty

Explanation

A limit order is an order to trade at the best possible price, subject to the price satisfying the limit price A limit order

emphasizes the price of execution (the reduction of price uncertainty) It however, may not be filled immediately and may even

go unfilled or partially unfilled A limit order thus has execution uncertainty

Which of the following statements regarding rebalancing strategies is least accurate?

Using futures contracts can significantly enhance the benefits of tactical asset

allocation

Market timing strategies will tend to outperform constant mix strategies

Drifting mix strategies tend to perform poorly compared to disciplined rebalancing strategies

Explanation

Market timing strategies have been shown to perform poorly relative to constant mix strategies The other statements are true

Carl Allen, CFA, has been assigned the task of documenting some of his company's asset allocation techniques After the firmreceives accolades in a recent trade magazine article highlighting firms with innovative trading strategies, Allen's supervisordecides it is time the firm began formally documenting how properly timed allocation shifts can add value to assets undermanagement Allen decides he will not only document the firm's specific allocation adjustment strategies, but will also compile

a document listing various allocation techniques Allen decides to begin with input factors such as investor risk tolerance andmarket conditions and work his way to specific techniques designed to take advantage of various opportunities His overallplan is to work from theoretical concepts to specific applications

One of the first concepts Allen has to explain is the idea of holding an "optimal" portfolio In his mind, Allen decides he has toadequately explain the two main factors that will allow an investor the ability to hold an optimal portfolio Which of the followingwill dictate the selection of an investor's optimal portfolio?

The tangential intersection between an investor's indifference curve and the

efficient frontier

The global minimum variance portfolio

Any intersection between an investor's indifference curve and the investment

opportunity set

Explanation

Question #16 of 158 Question ID: 465663

intersection of indifference curves with the efficient frontier dictates an investor's optimal portfolio

Allen has determined there are differential postures an asset manager can take, depending upon whether market conditionsare trending up, trending down, or staying relatively level with significant volatility Which rebalancing strategy provides thegreatest benefit when markets are trending up or down with little oscillation?

Constant mix strategy

Buy and hold strategy

Constant proportion portfolio insurance strategy

While conducting his research, Allen determines that some dynamic strategies can use a mathematical formula that can easilydetermine the amount of assets one invests in equities Specifically, one formula Allen discovers is:

$ Invested in stock = m x (assets - floor)

where:

m = stock investment multiplier

assets = total assets held in the portfolio (TA)

floor = the minimum allowable portfolio value (F) (zero risk level)

assets - floor = cushion or funds that can be put at risk

Realizing that his firm's trading strategies were highlighted in the recent edition of a trade magazine due in part to some timelyexposure increases in trending markets, Allen begins to document how his firm applies this particular mathematical formula.Since Allen's firm's performance seems exemplary in a trending market, which value of "m" was probably chosen?

Question #18 of 158 Question ID: 465629

equities, and high yield bonds Since the asset classes in his portfolio are relatively volatile, I am also setting wide tolerancecorridors, or else I would be rebalancing his portfolio practically all the time."

With regard to their statements about the effects of factors on the width of the tolerance corridors:

Riley's statement is correct; Gray's statement is correct

Riley's statement is incorrect; Gray's statement is incorrect

Riley's statement is incorrect; Gray's statement is correct

Explanation

Both Riley's statement and Gray's statement are incorrect Based on the criteria they have stated - they should be setting tighttolerance corridors for rebalancing purposes Riley said that her client has a low risk tolerance With a low risk tolerance,tolerance corridors should be smaller in order to detect corridor violations and take action to avoid an even worse violation Ifthe portfolio is allowed to drift, riskier assets in the portfolio will tend to take over With volatile asset classes, Gray's clientshould also have small tolerance corridors When an asset class is volatile and/or the rest of the assets are volatile, thetolerance corridor should be small to give the portfolio manager the ability to detect any violation in the allocation and reactquickly to avoid an even worse violation

Which of the following statements about asset allocation strategies is CORRECT? Constant mix:

outperforms buy and hold when stock market reversals do not occur

outperforms buy and hold when stock market reversals occur

is a convex strategy

Explanation

Constant mix is a concave strategy

Which of the following trading costs results when an order is not filled?

Price impact costs

Delay costs

When an order is not filled, delay or slippage costs result These costs can be substantial if information regarding the security

is released while the order sits unfilled

Which of the following statements about convex and concave strategies is least accurate?

The constant mix payoff curve is concave

For constant proportion portfolio insurance (CPPI) strategies, the payoff curve is concave

No downside protection exists for constant mix strategies

Explanation

For CPPI strategies, the payoff curve is convex The other statements are true

Which of the following statements about asset allocation strategies is least accurate?

The constant proportion portfolio insurance (CPPI) strategy is a convex strategy

The constant proportion portfolio insurance (CPPI) strategy has a payoff diagram similar to

that of a protective put

Strategies for which the slope of the exposure diagram is greater than one give rise to

concave payoff diagrams

Explanation

An exposure diagram for an asset allocation strategy plots the desired stock position (y-axis) against the value of the portfolio (x-axis).Strategies with concave payoff diagrams (y-axis = portfolio value, x-axis = stock market value), such as the constant mix strategy, haveexposure diagrams with slopes between zero and one

Which of the following statements about constant proportion rebalancing strategies is least accurate?

It is a concave strategy

The strategy does well in a bull market

The strategy is protected on the downside

Explanation

Constant proportion is a convex strategy

Question #24 of 158 Question ID: 465560

be gamed A trader can trade at favorable bid and asks by waiting for orders to be brought to them

Which of the following statements regarding a buy-side trader's priority is CORRECT?

Their relationship with sell-side trader must come first

Their relationships with their broker, the client, and sell-side traders are of equal

priority

Their relationship with the client must come first

Explanation

The buy-side trader should always be acting in the best interests of their clients Buy-side traders and portfolio managers have

a fiduciary duty to maximize the value of their client's portfolio The buy-side trader's relationships with sell-side traders mustnever come before the interests of their clients

Which of the following is least accurate regarding best execution, the CFA Institute's Trade Management Guidelines, andethics in trading?

The buy-side trader's relationship with clients must come before their

relationship with sell-side traders

Record keeping is a key component of the CFA Institute's Trade Management

Question #27 of 158 Question ID: 465608

Jim Cantore is a 45 year old client with a $1.5 million portfolio that is heavily weighted toward equities Cantore will continue working forthe next 20 years and has a substantial retirement portfolio through his current employer

Cantore's three children are now nearing college age and will all attend premiere universities in the U.S which each cost $50,000 per year

to attend All college expense will be paid out of Cantore's portfolio Cantore should:

Rebalance his portfolio toward high quality, intermediate-term debt instruments to

service the expected liquidity needs of his portfolio

Rebalance his portfolio toward large-cap common stocks and international securities because

education costs are highly correlated with the returns to these securities

Not rebalance his portfolio because his children should all pay their own way through school

Explanation

The liquidity needs of sending his children to school should take precedence over his retirement needs, which are already well funded

Which of the following is least accurate regarding best execution?

Best execution can be measured after the fact for a series of trades

Best execution can determine a trader's effectiveness over time

Best execution prevents high cost trades from taking place

Explanation

Some strategies might have high trading costs but that does not mean they should not be pursued if in net they enhanceportfolio value Best execution can be measured after the fact for a series of trades

Which of the following relationships is adversarial?

Trader and broker

Trader and dealer

Broker and dealer

Explanation

The relationship between a trader and a dealer is adversarial The dealer would like to maximize the trade spread and thetrader would like to minimize it Also, when a trader has information that the dealer does not, the trader profits at the dealer'sexpense

Which of the following trade motivations would most likely use a low-cost-whatever-the-liquidity trading focus?

Liquidity and value-motivated

Liquidity and information-motivated

Passive and value-motivated

Explanation

In a low-cost-whatever-the-liquidity trading focus, the trader places a limit order outside of the current bid-ask quotes in order

to minimize trading costs The strength of this strategy is that commissions, spreads, and market impact costs tend to be low.Passive and value-motivated traders will often purse this patient strategy Information and liquidity motivated trades need moreimmediate execution and thus would not use this strategy

Consider two identical $10,000 portfolios, each with a 75% allocation to stock and a 25% cash allocation One portfolio is being managed

to a buy and hold strategy with an initial stock/total value ratio of 0.75 The other is being managed to a constant mix strategy with adesired stock/total value ratio of 0.75 Beta for the stock component of both portfolios is equal to one Now, assume that the stock marketinstantly decreased from an index value of 1,000 to 900 and, a short while later, jumped back to the 1,000 level The difference betweenthe final value of the two portfolios is closest to which of the following?

The constant mix portfolio will be worth $187.50 more than the buy-and-hold portfolio

The constant mix portfolio will be worth $20.83 more than the buy-and-hold portfolio

There is no difference between the final value of the buy-and-hold portfolio and the constant

mix portfolio

Explanation

Buy and hold portfolio: After the 10% decrease in the market, the value of the stock in the buy-and-hold portfolio is 0.9 x $7,500 = $6,750.Combined with the cash value of $2,500, the total value of the portfolio is $2,500 + $6,750 = $9,250 When the market returns to 1,000, anincrease of 11.11% (100/900), the stock value is 1.111($6,750) = $7,500, and the total portfolio value returns to $10,000 = $2,500 +

$7,500

Constant mix portfolio: After the 10% decrease in the market, the portfolio consists of $2,500 in cash and 0.9 x $7,500 = $6,750 in stock,for a total value of $9,250 This represents a stock/total asset ratio of 6,750/9,250 = 0.7297 To maintain the desired 0.75 stock/totalasset mix, additional stock must be purchased The amount of stock that must be repurchased is determined as follows:

($6,750 + X)/$9,250 = 0.75, or X = $187.50

After the purchase of $187.50 in additional stock, the portfolio consists of stock valued at $6,937.50 = $6,750 + $187.50 and cash in theamount of $2,500 - $187.50 = $2,312.50 Following the 11.11% increase in the stock market, the constant mix portfolio value is equal to: $2,312.50 + 1.1111($6,937.50) = $10,020.83

Thus, the ending value of the constant mix portfolio is $20.83 greater than that of the buy-and-hold portfolio This demonstrates that aconstant mix strategy outperforms a buy-and-hold strategy in a flat, oscillating market

Question #32 of 158 Question ID: 465670

Which of the following strategies is most appropriate for an investor whose risk tolerance drops to zero when the value of the portfoliodrops below a floor value?

Both of these responses are correct

Buy and hold

Constant proportion portfolio insurance

A security market should be judged on the basis of its liquidity and assurity of completion

Mimi Smith, a client of Osborne Capital, Inc., believes that her portfolio should be rebalanced She supports her claim by stating that shejust won the lottery and wants to retire 10 years earlier than before Does she have a valid claim?

Yes Her wealth and time horizon have changed

Yes Her time horizon has changed

No Not enough information is given to determine

Explanation

Changes in wealth, time horizon, and liquidity requirements all dictate the need to rebalance Taxes, laws, and regulations, as well asunique circumstances, also play into this decision.font>

Use the following information to determine how the trades should be placed for the following shares

Stock Ticker Trade Size Average Daily Volume Spread Urgency

ABCD should be traded using a shortfall implementation strategy, LMNO should be

traded using a simple logical participation strategy, and WXYZ should be placed with a

broker

ABCD should be traded using a simple logical participation strategy, LMNO should be traded

using a shortfall implementation strategy, and WXYZ should be placed with a broker

ABCD should be traded using a shortfall implementation strategy, LMNO should be placed

with a broker, and WXYZ should be traded using a simple logical participation strategy

Explanation

The trade for stock WXYZ is large relative to average daily trading volume (75,000/150,000 = 50%) and has a large spread Because ofthese characteristics, it should be traded through a skilled broker or through a crossing system to minimize the spread The trade forstock ABCD is relatively small (20,000/400,000 = 5%) and the spread is low The ABCD trade is of low urgency and can be traded overtime It is thus suitable for a simple participation strategy based on VWAP or other benchmark The LMNO trade is of small relative size(60,000/1,000,000 = 6%), has small spreads, and high urgency It should be traded more quickly using an implementation shortfallstrategy

Which of the following statements about constant mix rebalancing is least accurate?

As stock prices rise, the stock to total assets ratio increases, so stocks should be sold

As stock prices fall, the stock to total assets ratio decreases, so stocks must be purchased

As stock prices rise, the stock to total assets ratio increases, so stocks should be

purchased

Explanation

To maintain the constant mix, when stock prices rise, stocks must be sold

The model portfolio for Yazbeck Capital Management consists of the following allocation:

Asset Class AllocationIntermediate U.S Government bonds 45%

Intermediate U.S Corporate bonds 45%

Large Cap U.S equities 10%

One of the primary tenets of Yazbeck's Investment Process is to rebalance portfolios based on a percentage-of-portfolio approach withtolerance corridors for each asset class Two of Yazbeck's portfolio managers, Justin Croniser and Kevin Hopkins are discussing the size

of the corridor width for each asset class Croniser states, "The high correlation between U.S Government bonds and U.S Corporate

The founder of Yazbeck Capital Management, Shadya Yazbeck is listening to their conversation Yazbeck should:

agree with Croniser's statement, but disagree with Hopkins' statement

disagree with Croniser's statement and disagree with Hopkins' statement

agree with Croniser's statement and agree with Hopkins' statement

Explanation

Yazbeck should agree with Croniser's statement A high degree of correlation between asset classes means that the assets will tend tomove together For example, if interest rates rise, the prices of U.S Government and corporate bonds are likely to fall by similar amountsand thus are likely to stay within acceptable ranges High correlations between asset classes mean that they are likely to stay in rangetogether even if corridors are small Conversely, assets that have zero or negative correlation will tend to move opposite one another, andthus are more likely to exceed corridor limits Yazbeck should disagree with Hopkins' statement The more liquid an asset class is, thelower the transaction costs for trading that asset Since transaction costs are minimal for government bonds, a small corridor would not domuch to increase aggregate trading costs In contrast, an illiquid asset class (i.e private equity) would have high trading costs and shouldhave a wider corridor to compensate

Tyrone Wilkins and Deborah Ortiz are portfolio managers for Meabon Asset Management Both Wilkins and Ortiz believe that rebalancing

is an important part of portfolio management, but are unsure which rebalancing method would be best for their respective clients Wilkinswants to maintain his client's exposure to systematic risk factors, but does not want to spend his time constantly monitoring his client'sportfolio Ortiz is most concerned that two or more asset classes in the portfolio could stray too far from the portfolio's target allocation.Given their concerns, which rebalancing method would be best for Wilkins and Ortiz respectively?

Rebalancing Method for Wilkins Rebalancing Method for Ortiz

Percentage-of-Portfolio Monte Carlo Portfolio

Percentage-of-Portfolio Calendar

Calendar Percentage-of-Portfolio

Explanation

The two primary methods of rebalancing are calendar rebalancing and percentage-of-portfolio rebalancing - Monte Carlo is not a

rebalancing method With calendar rebalancing, the portfolio is rebalancing on a predetermined date Since calendar rebalancing providesdiscipline without the need for constant monitoring, calendar rebalancing would be appropriate for Wilkins Percentage-of-portfolio

rebalancing is triggered by changes in value rather than calendar dates Since Ortiz is most concerned about asset classes straying from

a target allocation, Ortiz could use percentage of portfolio rebalancing to set a target corridor for each asset class and rebalance theportfolio when the portfolio's asset allocation moves outside of the corridor

Question #39 of 158 Question ID: 465530

Where would an illiquid security in a developing country most likely trade?

Electronic crossing networks

Kim and Darren Jones are both 55 years old and want to retire within the next 12 - 18 months They currently have the following portfolio:

Small cap growth 35

Large cap value 30

High yield bonds 30

Which sector should be increased?

Small cap growth stocks

Corporate bonds

Large cap value stocks

Question #42 of 158 Question ID: 465605

Two years have passed and the Jones are in retirement They now realize the asset allocation problems with their portfolio They enlistthe aid of Snipes & Son, an investment advisory firm Snipes proposes the following four portfolios:

Small cap

growth

Large cap value 5% 0% 25% 10%

High yield bonds 5% 0% 20% 10%

Portfolio A is underweighted in equities, portfolio B has too much invested in bonds, portfolio C is overweighted in equities at 60% if highyield bonds are viewed more as an equity than a bond Portfolio C is also underweighted in bonds at only 30% in corporate bonds with T-bills equaling the cash component

Which of the portfolios would yield the lowest expected return?

Question #44 of 158 Question ID: 465572

Which of the following trading tactics would most likely be used by an information-motivated trader?

time-A market order has:

price uncertainty but not execution uncertainty

execution uncertainty but not price uncertainty

both price uncertainty and execution uncertainty

Explanation

A market order is an order to execute the trade immediately at the best possible price The emphasis in a market order is the speed ofexecution (the reduction of execution uncertainty) The disadvantage of a market order is that the price it will be executed at is not knownahead of time, it thus has price uncertainty

Which of the following is least accurate regarding the CFA Institute's Trade Management Guidelines? They state that investment

management firms:

must disclose their conflicts of interest related to trading

should strive for best execution

must not disclose documentation concerning policies and procedures to outside parties

Explanation

Documentation concerning policies and procedures to outside parties should be disclosed to outside regulators, not held within the firm.The CFA Institute's Trade Management Guidelines state that in regard to record keeping, investment management firms should maintainthe documentation supporting: 1) the firm's compliance with its policies and procedures; and 2) disclosures made to its clients In doing

so, the firm provides evidence to regulators as to how the firm pursues best execution for its clients

Information-motivated traders emphasize:

time in their trading and use market orders

price in their trading and use market orders

price in their trading and use limit orders

Explanation

Information-motivated traders have information that is time sensitive, and if they do not trade quickly, the value of their information willexpire They, therefore, emphasize time in their trades They use market orders to execute quickly and because these orders are lessnoticeable

Allen and Hanes joined Tacticon five years ago, fresh out of college They are now both convinced that properly timed allocation shiftscan add value to the investment process The equity market trended upward for the first three years of their tenure, but has been slowlydeclining ever since In spite of the lackluster performance of the markets in general, the firm has produced exceptional annual and 5-yeartrailing returns Both analysts are certain that Tacticon's ability to generate positive alpha is the result of a superior investment system.Ridley wants Allen and Hanes to record the specifics of Tacticon's investment process for internal use He also wants them to compile adocument explaining a variety of allocation techniques to be used by the marketing staff and portfolio managers when working withprospects and clients

While conducting his research, Allen notes that certain dynamic strategies can use a mathematical formula to determine the amount ofequities that should be held Specifically, one formula Allen finds is:

Allen decides to organize his thoughts about asset allocation by constructing a matrix that compares some of the different strategies Hisfirst draft is detailed in Exhibit A below

Exhibit A - Dynamic Asset Allocation Strategies

Strategy Shape of Payoff Diagram Performs Well In

Constant Proportion Portfolio Insurance (CPPI)

Hanes is having difficulty completing Exhibit A as he is unsure of the shape of the payoff diagram for CPPI The correct shape for theCPPI payoff diagram is:

convex

Which strategy in Exhibit A provides the greatest benefit when markets are trending up or down with little oscillation?

Constant proportion portfolio insurance

Buy and hold strategy

Constant mix strategy

Explanation

When a market is either trending up or down (with low volatility), a CPPI strategy will outperform other strategies A CPPI strategy willprovide increasing exposure to risky assets when asset values are increasing An investor will essentially hold an increasing amount ofrisky assets when their value is increasing On the other hand, investors following a CPPI strategy will be selling risky assets faster thanothers as markets decline

Allen realizes that his firm's trading success might have been due to use of the mathematical formula he found Since Tacticon's

performance was exemplary over the past five years, which value of "m" was probably chosen?

Constant mix rebalancing involves:

holding either all cash or all equities

buying the asset whose price falls; selling the asset whose price rises

buying the asset whose price rises; selling the asset whose price falls

Explanation

Rebalancing under a constant mix strategy requires buying the asset whose price falls and selling the asset whose price rises This

Question #52 of 158 Question ID: 465522

produces a concave payoff diagram

Suppose a trader is quoted a market bid price of $40.40 and an ask of $40.49 The execution price of a buy order is $40.47 What is theeffective spread?

$0.05, which is 4 cents better than the quoted spread of $0.09 ($40.40 - $40.49)

Jack Steele has just determined using analysis that the prospects for Titan Steel are favorable He would like to trade before otherinvestors realize Titan's prospects What type of trade should he use?

limit

participate

market

Explanation

Steele is an information-motivated trader These traders have information that is time sensitive, and if they do not trade quickly, the value

of their information will expire They use market orders to execute quickly and because these orders are less noticeable

Stuart Steinberg, a portfolio manager for Weber Capital Advisors, uses a percentage-of-portfolio rebalancing approach when rebalancinghis client portfolios, but is unsure how to set the optimal corridor width for each asset class Steinberg is evaluating the following factorsfor a particular asset class

Factor 1: The asset class has a tendency to be extremely volatile

Factor 2: The asset class has a low trading volume and a high bid-ask spread

Factor 3: When comparing the asset class to the rest of the portfolio, the volatility for the rest of the portfolio is high

Which of the factors would lead Steinberg to set a large corridor for the asset class?

Factor 2 only

Factors 1 and 2 only

Factors 2 and 3 only.

Explanation

When an asset class is volatile and/or the rest of the assets are volatile, the tolerance corridor should be small to give the portfoliomanager the ability to detect any violation in the allocation in the asset class and react quickly enough to avoid an even worse violation.However, in this example the low trading volume and high bid-ask spread implies a large corridor When an asset class is illiquid andtransactions costs are high, the corridor should be wider to try to avoid frequent trading

Which of the following statements about trading strategies is CORRECT?

A buy and hold strategy is best with respect to asset allocation because it has the

lowest trading costs

A disciplined rebalancing strategy typically underperforms a buy and hold strategy

A buy and hold strategy may not satisfy the current asset allocation needs of a client

Explanation

Buy and hold strategies "drift" over time Because of this, initial asset allocation decisions may not be evident in the resulting portfolio.Disciplined rebalancing performs better than buy and hold strategies in a flat but oscillating market

In which of the following relationships does the adverse selection risk problem pertain?

Trader and investor

Trader and dealer

Trader and broker

Item 1: Watch for changes in client objectives that may necessitate changes to the portfolio

Item 2: Construct the investor's portfolio to meet the needs of the client as specified in the IPS

Item 3: Identify changes in capital market conditions and asset class risks

Item 4: Look for changes in client constraints that could cause changes in the client's allocation

ᅞ A)

ᅚ B)

ᅞ C)

Questions #58-63 of 158

Item 5: Avoid trying to make tactical timing changes to a client portfolio because evidence shows that market timing

increases risk without increasing return

Which of the following most accurately describes Burke's statements?

Only Item 3 addresses Beekley's question, while Items 1 and 4 would be part of a

client's investment policy statement

Only Items 1, 3, and 4 address Beekley's question, while Item 2 is a fiduciary duty not related

Michelle Nack has a problem She just took over for a portfolio manager who bolted unceremoniously from money manager Masters andIckes, leaving his accounts in disarray Nack has been tasked with sorting out the mess

She has connected most of the investment policy statements with the appropriate accounts, but three accounts, each valued at

$100,000, are not named The accounts contain the following assets:

Portfolio A Portfolio B Portfolio C

Long-Term Corporate Bonds $20,000 $25,000

Short-Term Corporate Bonds $10,000 $5,000 $5,000

Nack is trying to match the accounts with clients for whom no other accounts have been found

Johnson is a 55-year-old executive who was recently promoted to a senior-management position at a pharmaceutical company.Kent is a 26-year-old assistant manager of a restaurant

Lerner is a 70-year-old owner of a copper mine who retired from the business 20 years ago

After Nack has been on the job for six months, she is still not sure who owns Portfolio A However, substantial moves of the market

Question #58 of 158 Question ID: 485136

ᅞ A)

ᅚ B)

ᅞ C)

suggest that it is time to rebalance the portfolio The portfolio notes infer that a CPPI strategy should be used, with a coefficient of 2 and

a $70,000 floor Here are the portfolio weights after six months:

Long-Term Corporate Bonds $20,500

Short-Term Corporate Bonds $10,150

Another six months has passed since Nack rebalanced Portfolio A The market has been quite volatile, and Nack wants to rebalanceagain Because she still does not know to whom the portfolio belongs, she decides to reconsider the rebalancing strategy in an effort tomaximize portfolio return The current allocation is as follows:

Long-Term Corporate Bonds $18,400

Short-Term Corporate Bonds $10,050

Nack decides to rebalance using a constant-mix strategy this time, reasoning that the original asset mix was what the first portfoliomanager considered best for the unnamed client Going forward, Nack isn't sure about the market's direction The research department atMasters and Ickes has produced divergent forecasts, with some analysts projecting a flat market with lots of volatility and some

projecting a sustained upward trend

When Nack submits her trades to the Masters and Ickes trading desk, they are handled by Wilbur Wallace, a 30-year veteran trader.Wallace handles most of the company's rebalancing trades, and he is almost always more concerned about the price of trades than thetiming For that reason, he generally uses limit orders

Which investors appear to be the best fit for:

Question #59 of 158 Question ID: 485137

After Nack rebalances Portfolio A the first time, its bond holdings should:

The new stock holdings = 2 × ($93,000 − $70,000) = $46,000

Current stock holdings are $57,350, so we must sell $11,350 in stocks to hit the target, which means that the bond holdings will rise by

$11,350 (Study Session 16, LOS 31.h)

The owner of Portfolio B appears least concerned about:

Question #62 of 158 Question ID: 485140

is not concerned about liquidity (Study Session 16, LOS 31.c, f)

After rebalancing Portfolio A the second time, if Nack's goal is to maximize return potential while limiting potential loss of principal, herbest rebalancing strategy is:

or bonds, while it performs well in an upward-trending market and is roughly flat in an oscillating market If Nack doesn't have any insight

on where the market is going and wants to limit loss of principal, buy and hold is the best option of those offered, especially consideringthat her analysts are projecting either a flat or upward market, but not a downward market (Study Session 16, LOS 31.h)

When Nack rebalances Portfolio A the second time, the portfolio's stock allocation is most likely to fall by:

3.11%

6.45%

3.33%

Explanation

At the time of the second rebalancing, the portfolio's stock weighting is 68.11% Constant-mix rebalancing assumes the purchase or sale

of stock sufficient to return the portfolio to its original weighting, in this case 65%

68.11% − 65% = 3.11%

(Study Session 16, LOS 31.h, j)

A constant mix strategy:

exhibits good upside potential

performs poorly in flat, oscillating markets

performs much like a covered call position

Explanation

Constant mix performs best in flat, oscillating markets, much like a covered call strategy Constant mix has weak upside potential in thatthe strategy reduces exposure to risky assets in an increasing market

Question #65 of 158 Question ID: 465584

A simple logical participation percent-of-volume strategy

Placing the trade with a broker

A simple logical participation strategy based on VWAP

of security prices during a day, where the weight applied is the proportion of the day's trading volume She states further that the weighted average price is preferred to the trading cost benchmark alternative of the opening day's stock price because the opening pricecan be gamed to a greater extent by traders, relative to the volume-weighted average price She also mentions that the effective spread isanother useful alternative to the opening price because the effective spread cannot be gamed

volume-Discussing the types of trading cost benchmarks further, Walker states that the implementation shortfall, which is the difference betweenthe actual portfolio's return and a paper portfolio's return, is probably the most accurate measure of trading costs She states that thepaper portfolio's return is based on the security price when the decision to trade is originally made She mentions that it is not subject togaming, and incorporates both explicit and implicit trading costs

Hohlman asks Walker to evaluate a trade made last week for the Calvert Pension Fund, using the implementation shortfall measure Thetrade was a buy order for the stock of Brucker Industries Brucker Industries is a small cap stock, which Hohlman thinks is a timely buygiven recent announcement about the firm's prospects On Wednesday, Brucker Industries stock price closed at $20.00 a share OnThursday morning before the market opened, the portfolio manager for the Calvert Pension Fund decided to buy Brucker Industries andtransferred a limit order for $19.97 a share for 1000 shares to the trader The order expired unfilled The Brucker Industries stock closed at

$20.03 on Thursday On Friday, the order was revised to a limit of $20.07 The order was partially filled that day as 800 shares werebought at $20.07 The commission was $14 The stock closed at $20.09 on Friday and the order was cancelled

Regarding Hohlman's statement concerning trading cost benchmarks:

Hohlman is incorrect because the effective spread can be gamed

Hohlman is incorrect because the opening price cannot be gamed more than the

volume-weighted average price

Hohlman is correct

Explanation

Question #67 of 158 Question ID: 485116

Hohlman is incorrect because the effective spread can be gamed A trader may wait for other traders to come to them, i.e when anothertrader is seeking liquidity By doing so, the trader can trade at favorable bid and ask prices However, the trader's delay may cost theinvestor foregone profits She is correct though that the volume-weighted average price is preferred to the opening day's stock pricebecause the opening price can be gamed to a greater extent by traders, relative to the volume-weighted average price This is becausethe opening price is known with more certainty than the VWAP (Study Session 16, LOS 30.f)

Regarding Walker's statement concerning the implementation shortfall:

$20.03)/$20.00 = 0.16% The positive value means that there is a loss (a cost) here (Study Session 16, LOS 30.g)

What is the delay costs component of the implementation shortfall measure Walker should calculate for the Brucker Industries trade?0.12%

Use the following information to calculate the implementation shortfall components:

On Wednesday, the stock price closes at $40 a share

On Thursday morning before market open, the portfolio manager decides to buy Megawidgets and transfers a limit order for $39.95 ashare, for 1,000 shares The price never falls to $39.95 during the day and the order expires unfilled The stock closes at $40.04

On Friday, the order is revised to a limit of $40.05 The order is partially filled that day as 700 shares are bought at $40.05 Thecommission is $17 The stock closes at $40.08 and the order is cancelled

The opportunity costs are 0.06% and the total implementation shortfall is 0.15%

The opportunity costs are 0.07% and the total implementation shortfall is 0.19%

The opportunity costs are 0.06% and the total implementation shortfall is 0.19%

Explanation

To decompose the implementation shortfall, we calculate the following:

Explicit costs - the commission as a percent of the paper portfolio investment is $17/$40,000 = 0.04%

Realized profit and loss is calculated using the execution price minus the decision price, which is usually measured as the previousday's closing price This is divided by the original price and weighted by proportion of the order filled It is (700/1000) × ($40.05 -

Question #73 of 158 Question ID: 465654

The sum of the components is the total implementation cost: 0.04% + 0.02% + 0.07% + 0.06% = 0.19%

Which of the following statements regarding asset allocation decisions is least accurate?

Insured asset allocation is similar to a constant mix-type asset allocation strategy

A strategic asset allocation needs to be rebalanced periodically to maintain the constant asset

proportions

A contrarian investment strategy is one where expected returns tend to fall when prices rise

Explanation

An insured asset allocation is similar to a constant proportion portfolio insurance strategy

Which of the following strategies is also referred to as insured asset allocation?

A shortfall implementation strategy trades:

early in the day and attempts to maximize trading cost volatility

with market flow and attempts to minimize opportunity costs

early in the day and attempts to minimize opportunity costs

Explanation

Implementation shortfall strategies trade heavier early in the day to ensure order completion, reduce opportunity costs, and minimize thevolatility of trading costs

Question #76 of 158 Question ID: 465590

Which of the following is least accurate regarding the CFA Institute's Trade Management Guidelines? They state that investment

management firms should:

hire independent outside consultants to ensure best execution

provide general information on their trading techniques, markets, and brokers

have policies and procedures that assist in best execution

Explanation

The CFA Institute's Trade Management Guidelines do not require that investment management firms hire independent outside consultants

to ensure best execution

Annabelle Sellier, CFA, manages the income portfolio of a large research endowment fund Sellier's 2002 allocation among income assets, the returns she realized from these investments, and benchmark returns for each of the asset classes are presented inthe table below

fixed-Fixed-income allocation and returns Asset Class Allocation Realized Returns

manager's return in excess of the exposure-weighted return on a portfolio of fully diversified asset class benchmarks

Sellier's portfolio return is:

Question #78 of 158 Question ID: 465587

Thus, Sellier's alpha (ε ) is 9.9385 - 9.3210 = 0.6175% This implies that Sellier's security selection ability earned her portfolio an extra0.6175%

Which of the following is least accurate regarding best execution? Best execution:

depends on relationships and practices

is similar to the prudence concept

should be judged independently of the investment decision

Explanation

Best execution cannot be judged independently of the investment decision Prudence and best execution both attempt to improve portfolioperformance and meet fiduciary responsibilities Relationships and practices are integral to best execution

Passive traders emphasize:

price in their trading and use limit orders

price in their trading and use market orders

time in their trading and use market orders

Explanation

Passive traders can afford to be very patient and price, not time is their emphasis They favor limit orders

In a market that can be characterized by up-down or down-up movements, rather than a sustained up or down trend, which of the followingstatements is least accurate with regard to the benefits of rebalancing the asset mix of a portfolio?

Under a buy and hold strategy, asset allocation changes occur solely in response to

changes in relative market values

Disciplined rebalancing strategies are superior to a buy and hold strategy

Momentum-based rebalancing strategies outperform disciplined rebalancing strategies

Explanation

Disciplined rebalancing (e.g., maintaining a 60% stock / 40% bond mix) is superior to a momentum-based rebalancing strategy when themarket is not following a sustained trend

i