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:
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