2. Surplus-at-risk is most accurately
might underperform the plan’s
Incorrect
interpreted as being the likelihood
strategic asset allocation by a
that BC Plc might need to contribute
specified percentage within the
a specified amount to the plan within
next year.”
the next year.
Correct
“Two fixed income portfolios
could have identical durations and
substantially different levels of
Value at Risk (VAR).”
The individual manager’s risk can be
“If we reduce the tracking error of
offset by other individual managers’
Correct
the manager with the highest
portfolio risk. Forcing an individual
active risk, this is very likely to
manager to minimize tracking error or
Incorrect
reduce the plan-wide active risk of
mimic the benchmark could in fact
the overall portfolio.”
raise plan-wide active risk.
Part B
Determine
whether each of
the three
If incorrect, give one reason why the
statements by
Statement
statement is incorrect
Fiertz is correct
or incorrect
(circle one)
Standard deviation typically requires several
“Standard deviation is
years before the manager’s return history is
more useful than VAR in
available, which limits its use in determining
evaluating new managers
the effectiveness of new managers and
and new portfolio
strategies.
strategies.”
“Beta does not measure the
potential underperformance
of our equity portfolio
compared with the FTSE
All Share Index.” Incorrect
“For a fixed income
portfolio, duration
Correct Duration is a measure of the price sensitivity of
a fixed income portfolio to a small change in
measures the probability
interest rates. Duration is not a probability
associated with price
measure.
changes for specific
securities in the portfolio in
response to changes in
market interest rates.”
LEVEL III, QUESTION 3
Topic: Portfolio Management -Institutional Investor
Minutes: 9
Reading References:
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