24 RELATE TO GENEVA MANAGEMENT. GENEVA MANAGEMENT (GENM)...

Questions 19-24 relate to Geneva Management.

Geneva Management (GenM) selects long-only and long-short portfolio managers to develop

asset allocation recommendations for their institutional clients.

GenM Advisor Marcus Reinhart recently examined the holdings of one of GenM's long-only

portfolios actively managed by Jamison Kiley. Reinhart compiled the holdings for two

consecutive non-overlapping 5-year periods. The Morningstar Style Boxes for the two periods for

Kiley's portfolio are provided in Exhibits 1 and 2.

Exhibit 1: Morningstar Style Box: Long-Only Manager for 5-Year Period 1

Value Blend Growth

Large-cap 20 30 40

Mid-cap 2 3 5

Small-cap 0 0 0

Exhibit 2: Morningstar Style Box: Long-Only Manager for 5-Year Period 2

Large-cap 45 30 20

Mid-cap 1 2 2

Reinhart contends that the holdings-based analysis might be flawed because Kiley's portfolio

holdings are known only at the end of each quarter. Portfolio holdings at the end of the reporting

period might misrepresent the portfolio's average composition. To compliment his holdings-

based analysis, Reinhart also conducts a returns-based style analysis on Kiley's portfolio.

Reinhart selects four benchmarks:

1. SCV: a small-cap value index.

2. SCG: a small-cap growth index.

3. LCV: a large-cap value index.

4. LCG: a large-cap growth index.

Using the benchmarks, Reinhart obtains the following regression results:

Period 1: R

= 0.02 + 0.01(SCV) + 0.02(SCG) + 0.36(LCV) + 0.61(LCG)

Period 2: R

= 0.02 + 0.01(SCV) + 0.02(SCG) + 0.60(LCV) + 0.38(LCG)

Kiley's long-only portfolio is benchmarked against the S&P 500 Index. The Index's current sector

allocations are shown in Exhibit 3.

Exhibit 3: S&P 500 Index Sector Allocations

Sector Percentage

Allocation

Energy 12

Materials 3

Industrials 11

Consumer Discretionary 9

Consumer Staples 10

Health Care 12

Financials 19

Information Technology 17

Telecommunications 4

Utilities 3

GenM strives to select managers whose correlation between forecast alphas and realized alphas

has been fairly high, and to allocate funds across managers in order to achieve alpha and beta

separation. GenM gives Reinhart a mandate to pursue a core-satellite strategy with a small

number of satellites each focusing on a relatively few number of securities.

In response to the core-satellite mandate, Reinhart explains that a Completeness Fund approach

offers two advantages:

Advantage 1: The Completeness Fund approach is designed to capture the stock selecting

ability of the active manager, while matching the overall portfolio's risk to its

benchmark.

Advantage 2: The Completeness Fund approach allows the Fund to fully capture the value

added from active managers by eliminating misfit risk.

...

Which one of the following statements about Kiley's long-only portfolio is most correct? Kiley's

portfolio:

A) is only exposed to systematic risk.

B) is only exposed to unsystematic risk.

C) attempts to earn a positive alpha through security selection.

Question #20 of 60

Reinhart is concerned that the portfolio managed by Kiley has style drift. Is Reinhart's concern

supported by either holdings-based style analysis or returns-based style analysis?

A) Only the holdings-based style analysis supports style drift.

B) Only the returns-based style analysis supports style drift.

C) Both approaches support style drift.

Question #21 of 60

Assuming Kiley feels that the Utilities Sector is overvalued now, the largest active weight that

Kiley can apply to the Utilities sector is:

A) −3%

B) 0%

C) 3%.

Question #22 of 60

Reinhart is more likely to satisfy the GenM alpha and beta separation objective by:

A) allocating funds to his long-only active managers and to his passive market index fund manager.

B) allocating funds to his market-neutral long-short managers and to his passive market index fund

manager.

C) allocating funds solely to his market-neutral long-short managers.

Question #23 of 60

Assuming no material change in the forecasting ability of GenM's managers and considering the

core-satellite mandate faced by Reinhart, which of the following statements is correct?

A) The GenM information coefficient will be relatively low.

B) The GenM investor breadth will be relatively low.

C) The GenM information ratio will be relatively low.

Question #24 of 60

State whether the two advantages to the Completeness Fund approach explained by Reinhart

are correct.

A) Only advantage 1 is correct.

B) Only advantage 2 is correct.

C) Both advantages 1 and 2 are correct.

Question #25 of 60