) ARE SARKAR’S STATEMENTS ON THE METHODS THAT CAN BE USED TO IMPLEMENT THE INVESTMENT APPROACH FOR HAYES ENDOWMENT CORRECT

2.) Are Sarkar’s statements on the methods that can be used to implement the investment

approach for Hayes Endowment correct?

A.

No, Method 2 is incorrect.

B.

No, Method 1 is incorrect.

C.

Yes.

Answer = A

Method 2 is incorrect. Semiactive strategies are appropriate for the Hayes Endowment.

They come in two forms: a derivatives-based strategy (Method 1) and a stock-based

strategy (Method 2). The derivatives-based strategy is described accurately by Sarkar.

But the description of Method 2, the stock-based strategy, is incorrect. In a stock-based

strategy, all decisions regarding stock holdings are made relative to the benchmark

weight. That is, if the manager has no opinion on the stock, then he will hold it in his

portfolio at the benchmark weight. If he has a negative opinion, then he will

underweight it relative to the benchmark weight. The manager will overweight the stock

in his portfolio if he has a positive expectation for the stock. Sarkar is incorrect when he

states: “Here 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,

then the stock will not be included in the investment portfolio.”

“Equity Portfolio Management,” by Gary L. Gastineau, Andrew R. Olma, and Robert G.

Zielinski