2019 CFA level 3 qbank reading 29 active equity investing portfolio construction questions

If the manager signi cantly lowers the allocation to cash in the portfolio by buying benchmark securities, this is most likely to: A decrease active risk and increase absolute risk B inc

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Question #1 of 24

An active equity portfolio manager is benchmarked by their domestic large-cap equity index If

the manager signi cantly lowers the allocation to cash in the portfolio by buying benchmark

securities, this is most likely to:

A) decrease active risk and increase absolute risk

B) increase active risk and decrease absolute risk

C) increase active risk and increase absolute risk

Exposure to rewarded factors can be achieved through

A) Systematic active management approaches only

B) Discretionary active management approaches only

C) Both systematic and discretionary active management approaches

An analyst estimates the following data for two active equity fund managers:

Manager Breadth Active Risk Transfer Coe cient

A 50 8% 0.55

B 100 8% 0.55

If manager B has the same excess return as manager A, then the Information coe cient of

manager A is closest to:

A) 2 times the information coe cient of manager B

B) 1.4 times the information coe cient of manager B

C) 0.7 times the information coe cient of manager B

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A security has an active weight of 10% and the covariance of the security's active returns and

portfolio active returns is 0.005 The contribution of the security to portfolio active variance is

closest to:

A) 0.0005

B) 0.05

C) 0.005

Manager A generates excess return by maintaining a consistent positive active exposure to the

size factor Manager B has the same benchmark and generates excess return by varying their

exposure to the size factor according to their view on when the factor will outperform Both

managers are highly diversi ed According to the building blocks of active management, which

manager is most likely to be generating return from alpha skills?

A) Manager B only

B) Both Manager A and Manager B

C) Manager A only

An active equity investment manager has a target active risk of 8%, a maximum sector

deviation of 12% and maximum risk contribution from a single security of 2% This manager is

best described as a:

A) Closet Indexer

B) Sector Rotator

C) Concentrated stock picker

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James Greco, CFA, is an investment analyst working as a consultant to institutional clients One

of his clients has asked him about recent innovations in factor-based equity investing In

response to his client's questions, Greco makes the following two statements:

Statement 1: 'Managers that have the ability to short sell in their portfolios are more likely to generate higher information ratios when pursuing diversi ed factor

exposure strategies than long only managers' Statement 2: 'Due to the ability to short sell and the inherent hedging that entails, the long term returns of long/short managers is always expected to be lower than those of long-only managers'

Which of Greco's statements is correct?

A) Both Statement 1 and Statement 2

B) Statement 2 only

C) Statement 1 only

When a benchmark security held in an active portfolio is replaced with a similar security that is

not held in the benchmark, the most likely outcome is:

A) Active Share increases by more than active risk

B) Active Share decreases and active risk increases

C) Active Share and active risk both increase by similar proportions

Factor timing is a technique most likely employed by a strategy that is:

A) Top down and systematic

B) Bottom up and systematic

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C) Top down and discretionary

All of the following characteristics are features of the 'well-constructed portfolio' except:

A) The portfolio delivers results consistent with investor expectations in a cost-e cient

way

B) The portfolio delivers results consistent with investor expectations in a risk-e cient way

C) The portfolio guarantees excess returns relative to the benchmark

An active equity investment manager follows a strategy which has the following investment

constraints:

Maximum position size is the lesser of 5x the index weight or the index weight plus 2%

No position size is allowed that represents more than 10% of the security's average daily volume (ADV)

No investment is allowed in any security whose index weight is less than 0.1% of the index

Details of the fund and benchmark index are as follows:

Fund size: $500 million Approximate number of positions: 350 Approximate total market capitalisation of benchmark index: $10 trillion Approximate daily trading volume of smaller securities in the benchmark: 0.5% of shares outstanding

The level of assets under management at which the manager's strategy is likely to be a ected

by liquidity and concentration constraints is closest to:

A) $10 billion.

B) $1 billion.

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C) $2 billion.

An active equity investment manager has the following four risk constraints:

Liquidity constraint: It should always be possible to liquidate 85% of the portfolio in 10 trading days or less without su ering signi cant market impact costs

Leverage: Explicit leverage is not allowed Leverage using derivates is allowed but restricted to a portfolio assets/equity ratio of 1.5

Maximum tracking error of 5% per annum The 1 % Conditional VaR should not exceed 3%

How many of these constraints are heuristic in nature?

A) Two

B) Three

C) One

Which of the following active equity managers is likely to generate most of their active return

from idiosyncratic risk?

A) A manager following an enhanced indexing factor-tilt approach

B) A manager following a quantitative factor-based approach

C) A stock-picking manager following a fundamental approach

Which of the following statements regarding risk constraints is most accurate?

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A) Formal risk constraints are appropriate for fundamental managers, heuristic risk

constraints are appropriate for quantitative managers

B) Both Heuristic constraints and formal constraints are equally likely to be appropriate

for both fundamental and quantitative managers

C) Heuristic risk constraints are appropriate for fundamental managers, formal risk

constraints are appropriate for quantitative managers

All else equal, the well-constructed portfolio for an active equity investment strategy will most

likely have

A) A greater number of positions and lower active share

B) Fewer positions and higher active share

C) A greater number of positions and higher active share

Forward looking risk estimates are required for:

A) Formal risk constraints only

B) Heuristic risk constraints only

C) Both formal risk constraints and heuristic risk constraints

Two active equity investment managers have similar sized investment funds and the same

investment universe Active equity manager A follows a concentrated stock-picking strategy

with a high turnover of portfolio positions Active equity manager B follows a diversi ed factor

exposure strategy with a low turnover of portfolio positions Which manager is most likely to be

able to sustain a higher level of Assets Under Management (AUM)?

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A) Manager B

B) Manager A

C) Both managers are likely to sustain a similar level of AUM

An investor is most likely to consider introducing short selling into a long-only portfolio when

their primary concern is:

A) Hedging

B) Earning long-term risk premiums

C) Capacity

Which of the following factor-based strategies is least likely to su er signi cant scaling issues

due to increased slippage costs caused by higher levels of assets under management (AUM)?

A) Short-Term Reversal

B) Size

C) Value

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The chief investment o cer of a large endowment is considering allocating to a new core active

equity portfolio manager The endowment requires core active equity managers to have a

large-cap value bias and has a benchmark equal to the NCSI World Equity Index The risk factor

exposures of the benchmark and the custom portfolio of a potential new manager are

displayed below:

Factor Exposures NCSI World Index Custom Portfolio

Which of the factor exposures is least likely to be consistent with a well-constructed portfolio?

A) Market

B) Size

C) Value

An analyst collects the following data regarding a portfolio of three securities:

Covariance

Asset A 10% 0.040000 0.012000 0.002400

Asset B 35% 0.012000 0.014400 0.001440

Asset C 55% 0.002400 0.001440 0.003600

Portfolio 100% 0.009520 0.007032 0.002724

The contribution of Asset C to total portfolio variance is closest to:

A) 0.000952

B) 0.002461

C) 0.001498

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Relative to discretionary active equity managers, systematic active equity managers will likely

have

A) Higher exposure to idiosyncratic risk

B) Lower exposure to idiosyncratic risk

C) Similar exposure to idiosyncratic risk

Long extension strategies are best de ned as strategies that have:

A) net exposure equal to zero

B) gross exposure equal to 100%

C) net exposure equal to 100%

An active equity investment manager who holds no benchmark holdings in her portfolio will

have an active share equal to:

A) 1

B) 0

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