CFA CFA level 3 CFA level 3 CFA level 3 CFA level 3 CFA level 3 CFA level 3 finquiz item set questions, study session 7, reading 20

His performance is compared to the top performing manager in the assigned manager universe benchmark.. The performance of Walsh Ruben, the fund’s equity manager, is being benchmarked to

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CFA Level III Item-set - Question

Study Session 9 June 2018

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FinQuiz Item-set ID: 21875

Questions 1(21876) through 6( 21881) relate to Reading 20

Greendale Associates Case Scenario

Greendale Associates is an asset management firm offering its clients three funds, Alpha, Beta, and Gamma

The Alpha Fund is a hedge fund executing a long-only equity strategy managed by Lance

Malkovich His performance is compared to the top performing manager in the assigned manager universe benchmark

The Beta Fund has an active management mandate seeking exposure to the stocks of companies with strong sustainability profiles and avoiding stocks of companies with negative social or environmental impact All companies operate in the emerging market The performance of Walsh Ruben, the fund’s equity manager, is being benchmarked to the MSCI Emerging Market Social Responsibility Investment (SRI) index

The index is reconstituted annually and its contents are defined by existing constituents Only the top-performing, most liquid SRI company stocks qualify for inclusion The index limits

excessive concentration in any company by concentrating maximum corporate exposure to 5% The index is float-adjusted and cap-weighted

The Gamma Fund invests in an exchange-traded fund which tracks the S&P 500 The fund is managed by Rachel Cummings Cummings is subject to a maximum 10% investment restriction

in any index stock

The current year’s performance of all three managers relative to their respective benchmark is summarized in the Exhibit

Exhibit:

Performance of Fund Managers Relative to Respective Benchmarks

Manager Annual Fund Return (%) Annual Benchmark Return (%)

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During an informal meeting between Cummings and Ruben, the managers discuss the

shortcomings of index weighting schemes:

Statement 1: “The weighting scheme of cap-weighted indexes is not without flaws As a stock’s

market-cap falls, the index will own less of the company; this will decrease the company’s representation in the index.”

Statement 2: “With a fixed security count, indexers tracking the S&P 500 should experience

lower turnover and a reduced need for rebalancing in comparison to an index with

a broad equity exposure.”

FinQuiz Question ID: 21876

1 Using the information in the Exhibit and on the designated manager universe benchmark, determine which manager should be awarded a bonus for his or her performance relative to the benchmark?

A Malkovich

B Ruben

C Cummings

2 A limitation of using the MSCI Emerging market index as benchmark for the Beta Fund is that it may serve as a poor:

A asset allocation proxy

B basis for investment vehicles

C investment manager mandate

3 Which of the following index construction trade-offs most likely poses a limitation when

using a MSCI Global SRI Index?

A Completeness vs investibility

B Rebalancing and reconstitution vs turnover

C Objective and transparent rules vs subjective judgment

4 If Cummings investment objective is to obtain small-cap equity exposure, a limitation of

using the S&P 500 as performance benchmark least likely excludes:

A she may not be able to track the index

B the index will require frequent rebalancing

C a property of a valid benchmark will be violated

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5 Statement 1 is most likely:

A correct

B incorrect; changes in market-cap do not influence a company’s representation

C incorrect; this ensures that tracking portfolios will be efficient from a risk-return

perspective

6 Statement 2 is most likely:

A correct

B incorrect; the index will need to be rebalanced frequently

C incorrect; an index with a fixed number of securities will have higher turnover

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