) RAMIREZ MOST LIKELY CRITICIZES THE RELATIVE-VALUE METHODOLOGY THAT...

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. 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%