POINT DISCUSSION, IT MUST BE CLEAR THE BENCHMARK MUST HAVE THE SAME...

2-point discussion, it must be clear the benchmark must have the same vintage year.

(Study Session 13, LOS 26.b, d, g, i, k, l, m, n)

G. State whether zinc or wheat futures are more likely to have positive correlation with changes

in future inflation and explain why.

Grading Guide

Answer for Question 5-G

Commodities that are storable and affected by the level of economic activity, such as industrial

metals which includes zinc, are positively related to unexpected changes in inflation and found to

be a good hedge against inflation.

Candidate discussion: 1 point for zinc and 3 points for the explanation.

QUESTION 6 HAS FOUR PARTS (A, B, C, D) FOR A TOTAL OF 17 MINUTES

Jens Gustave is a senior portfolio manager with BAM Asset Management. He is reviewing the

manager asset allocation for the High Grove Foundation, one of BAM's larger accounts. The

foundation has carved out a 10% allocation, which employs aggressive techniques to enhance

returns. Gustave has gathered data on three equity sub-managers to be employed and collected

the following data.

Manager A Manager B Manager C Market Index

P/E 15.2 18.4 22.8 18.5

Beta 0.86 1.0 1.15 1.0

Dividend Yield 4.7% 3.1% 1.5% 3.2%

Active Return 0.9% 0.0% 1.5% 0

Active Risk 1.3% 0.1% 2.7% 0

Fees 0.40% 0.05% 0.60% n.a.

Carl Johnson is a new board member for High Grove and also a money manager. Johnson has

contacted Gustave and proposed an allocation between manager A and C of 100% and 100%

with a 100% short position in B to fund the allocation. Manager B allows short positions in their

fund.

Johnson says that the alpha of the equity sub-managers in this strategy can (1) be transported to

other asset classes and (2) transporting alpha would be desirable during periods of poor relative

equity performance. Gustave has promised to consider the idea and get back to Johnson before

the next board meeting.

...

A. Calculate the true information ratio for the allocation proposal. Show your work.

Answer for Question 6-A

Active return is the weighted average for the managers: