ENVIRONMENT‐RELATED NEGATIVE SCREENING IS MOST LIKELY TO LEAD T...
42. Environment‐related negative screening is most likely to lead to funds being overweight which of
the following styles?
A. Value and small‐cap.
B. Value and large‐cap.
C. Growth and small‐cap.
Portfolio Management—Alternative Investments
Question 8
Use the following information to answer the next six questions.
The Baracas Foundation is considering adding alternative assets to what has historically been a portfolio
invested entirely in traditional publicly listed equities and bonds.
The investment committee is meeting to decide which of the major types of alternative asset is most likely
to meet their requirements.
During the meeting, committee members make the following comments:
Comment 1: “We look to real estate primarily to provide diversification and lower the downside risk of
the portfolio. It is not a major objective that any allocation to real estate–related products should boost
returns of the portfolio.”
Comment 2: “Due to the size of the foundation, any allocation to private equity is likely to not be
large enough to meet the minimum commitment levels of more than two or three private equity limited
partnerships. On this basis the foundation should consider allocating to a private equity fund of funds
since the diversification benefits achieved in doing so are likely to outweigh any extra layer of fees in the
fund‐of‐funds structure.”
The committee has also concluded that an allocation to commodities would be appropriate for the
foundation, given the principal roles commodities are expected to play in an investment portfolio with
respect to diversification and inflation hedging. They are looking at adding a position in three potential
commodity investments displayed in Exhibit 1:
Exhibit 1
Three Potential Commodity Investment Positions Considered by the Baracas Foundation
Investment
Commodity
Commodity
Type
Price
Spot Price
Gold
Spot
$1,300
$1,300
Gold
Futures
$1,250
$1,300
Crude Oil Services Company
Equity
$12.31
$61.55
The committee is also considering the performance data of several hedge fund indices, and the
performance data of several large hedge funds of various strategies. One of the committee members who
has previous experience working in a hedge fund environment cautions the committee about nạve use of
this data. Specifically, they state that biases such as survivorship bias, stale price bias, and inclusion bias
can significantly inflate hedge fund index returns. They also state the following issues with the Sharpe
ratio when applied to hedge fund returns: