) RAMIREZ MOST LIKELY CRITICIZES THE RELATIVE-VALUE METHODOLOGY THAT ALPHA USES TO ADD VALUE BECAUSE

6.) Ramirez most likely criticizes the relative-value methodology that Alpha uses to add

value because:

A.

it better reflects a top-down approach to portfolio management.

B.

it better reflects a structure trade.

C.

a total return approach is a far superior framework.

Answer = C

Yield measures have limitations as an indicator of potential performance. The total

return framework is a superior framework for assessing potential performance for a

trade.

“Relative-Value Methodologies for Global Credit Bond Portfolio Management,” by Jack

Malvey

Section

Sarkar

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 University Endowment is willing to accept a certain degree of tracking risk, provided

that it is compensated with incremental returns. In particular, Hayes wants 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 by 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 expected to outperform the index. If the manager has no

opinion on a stock, or if the stock is expected to underperform, 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 it earns alpha associated with small-cap stocks but

without the associated small-cap market beta exposure.

Daniels Corporation Pension Plan

Daniels Corporation pension trustees want to allocate a portion of the equity 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 in Exhibit 1.

Exhibit 1

Investment Manager Data

31 December 2012

Manager Manager Manager

A

B

C

Assets under management ($ millions)

2,876

3,752

4,619

Price-to-earnings ratio (P/E)

8.7

17.5

23.1

Dividend yield

3.50%

1.70%

1.00%

Earnings per share 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%