THROUGH 24 RELATE TO EQUITY PORTFOLIO MANAGEMENT. BOBBY S...

Questions 19 through 24 relate to Equity Portfolio Management. Bobby Sarkar Case Scenario Bobby Sarkar is a senior consultant with Experian Financial Consultants (EFC), an investment advisory firm based in Cambridge, Massachusetts. EFC provides a range of consulting services including advice on investment strategy and selection of money managers. Currently, Sarkar is working with three clients: 1) Hayes University Endowment, 2) Bayside Foundation, and 3) Daniels Corporation Pension Plan. Hayes University Endowment The Hayes Endowment is willing to accept a certain degree of tracking risk provided it is compensated with incremental returns. In particular, Hayes wishes to implement an investment approach that maximizes the information ratio. Sarkar indicates that there are two alternate methods to implement the investment approach favored by Hayes: Method 1 Under this method cash in the portfolio is equitized using a long futures position. The cash is invested in short to medium term fixed income securities. Method 2 The manager will only invest in stocks that are expected to outperform the index. If the manager has no opinion on a stock, or if the stock is expected to underperform, then the stock will not be included in the investment portfolio. Bayside Foundation The investment policy committee for Bayside Foundation follows a fairly conservative investment strategy and pays particular attention to the minimization of tracking error. Bayside seeks to achieve two specific objectives: Objective 1 Invest a portion of the portfolio in an index with a large cap bias. In addition to minimizing tracking error, Bayside would also like to ensure that the index strategy involves minimal rebalancing costs. Objective 2 Allocate another portion of the portfolio so that it earns alpha associated with small cap stocks but without the associated small cap market beta exposure. By accessing this mock exam, you agree to the following terms of use: This mock exam is provided to currently-registered CFA candidates. Candidates may view and print the exam for personal exam preparation only. The following activities are strictly prohibited and may result in disciplinary and/or legal action: accessing or permitting access by anyone other than currently-registered CFA candidates; copying, posting to any website, emailing, distributing and/or reprinting the mock exam for any purpose. Daniels Corporation Pension Plan Daniels Corporation wishes to allocate a portion of its pension portfolio to an active money manager with a value investment style. Sarkar has collected information on three active portfolio managers and will recommend one of them to Daniels. Selected information for the three managers is presented below in Exhibit 1. Exhibit 1 Investment Manager Data December 31, 2009 Manager Manager Manager A B C Assets under management ($ millions) 2,876 3,752 4,619 P/E 8.7 17.5 23.1 Dividend yield 3.50% 1.70% 1.00% EPS growth (5-year projected) 6.75% 5.25% 14.50% Portfolio active return 3.50% 3.00% 4.30% Portfolio tracking risk 5.00% 1.50% 6.00% Style fit 87.00% 95.00% 85.00% 19. In order to meet the objectives of Hayes University Endowment, the most appropriate investment approach is an: A. enhanced index approach. B. active market oriented approach. C. index approach using stratified sampling. 20. Are Sarkar’s statements on the methods that can be used to implement the investment approach for Hayes Endowment correct? A. Yes. B. No, Method 1 is incorrect. C. No, Method 2 is incorrect. 21. The type of index that would most likely help Bayside Foundation achieve Objective 1 is a: A. price-weighted index. B. value-weighted index. C. equal-weighted index. 22. The most appropriate manner for Bayside to achieve Objective 2 is to invest in small cap stocks using a: A. long-only strategy. B. short extension strategy. C. market-neutral long-short strategy. 23. Based on the information presented in Exhibit 1, Sarkar should recommend to the Daniels Corporation Pension Fund that the most appropriate manager to meet its investment objective is: A. Manager A. B. Manager B. C. Manager C. 24. Based on Exhibit 1, which of the following sub styles is most consistent with Manager C’s investment style? A. Low P/E B. High yield C. Earnings momentum