3:
as a Russell 2000 index fund, for our small-cap stock portfolio. The market for
small-cap stocks tends to be more efficient than the market for large-cap stocks
and would provide more opportunities for us to benefit from active
management."
Identify whether or not you agree or disagree with each of Stone's statements. Support each
decision with one reason.
Grading Guide
Answer for Question 4
Comment Circle
one Supporting statement
More public information
"Large-cap stocks are the most appropriate place for
available on large caps
active management because managers can take big
Incorrect
makes efficient pricing
enough positions to capitalize on pockets of
more likely and generating
inefficiency."
excess return less likely.
S&P is market-value
"Because the S&P 500 Index is price-weighted, out-
weighted.
performing stocks tend to have more and more
influence on its value."
"The Shailor College endowment should employ a
Small cap stocks tend to
passive index vehicle, such as a Russell 2000 index
receive less research and
be less efficient, making it
fund, for our small-cap stock portfolio. The market for
small-cap stocks tends to be more efficient than the
easier to generate alpha
market for large-cap stocks and would provide more
with small caps.
opportunities for us to benefit from active
Candidate discussion: Maximum 9 points. 1 point for each correct/incorrect decision that is
correct. 2 points for each supporting statement as long as the correct/incorrect decision is
correct.
(Study Session 12, LOS 25.b, d, i)
QUESTION 5 HAS ONE PART FOR A TOTAL OF 12 MINUTES
Amy Morgan manages a $4 billion global equity fund and has discretion to invest in the stocks of
firms located in both developed and emerging markets as long as she maintains guideline
weights in each. Partly due to a disagreement over her most recent performance appraisal, she
has suggested changes to her benchmark. She makes the following statements:
"For a benchmark to be considered valid, it must be investable. To be investable, I should be
able to recreate and hold the benchmark as a portfolio."
"Although I agree with you that market value-weighted benchmarks are generally considered the
most valid, the benchmark you have applied in my performance appraisal is not truly market
value-weighted because you have not included the total market capitalization of all the
benchmark firms."
"Perhaps as an alternative we could use a multi-factor model-based benchmark. Factor model-
based benchmarks are considered valid benchmarks and, since they are based on sound
statistical methods, their results are irrefutable."
"If you do not like the idea of multi-factor-based benchmarks, we can always go back to
comparing my performance to the average equity manager. At least that way I know exactly who
I'm up against."
Select whether you agree or disagree with each of Morgan's statements. If you
disagree, support your decision with one reason related to the characteristics of valid
benchmarks.
Answer for Question 5
Agree
If you disagree, support your
or
decision with one reason
Comment
disagree
related to the characteristics of
(circle
valid benchmarks
one)
"For a benchmark to be considered valid, it
must be investable. To be investable, I should
be able to recreate and hold the benchmark as a
portfolio."
"Although I agree with you that market value-
weighted benchmarks are generally considered
It is typical and appropriate to
the most valid, the benchmark you have applied
float-adjust the benchmark by
Disagree
in my performance appraisal is not truly market
removing shares that do not trade
value-weighted because you have not included
and cannot be purchased.
the total market capitalization of all the
"Perhaps as an alternative we could use a multi-
Multifactor models can be
factor model-based benchmark. Factor model-
appropriate but they are not
based benchmarks are considered valid
unambiguous. There are different
models based on different factors
benchmarks and, since they are based on sound
that lead to different results.
Comparing to the average
"If you do not like the idea of multi-factor-
manager is common but not a
based benchmarks, we can always go back to
valid benchmark. It cannot be
comparing my performance to the average
specified in advance and is not an
equity manager. At least that way I know
investable alternative to active
exactly who I'm up against."
management.
Candidate discussion: Maximum 12 points. 3 points for agreeing with first statement. 1 point
each for disagreeing with remaining three statements. 2 points for each correct explanation only
ifagree/disagree decision is correct.
(Study Session 17, LOS 33.f)
QUESTION 6 HAS THREE PARTS (A, B, C) FOR A TOTAL OF 11 MINUTES
Sid Mulder, CFA, manages a $250 million fixed-income portfolio. The portfolio duration is
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