) IN STATEMENT 2, ARE VERTEX'S OBJECTIVES WITH REGARD TO TRACKING RISK AND PORTFOLIO RETURN CONSISTENT WITH ITS STRATEGY
3.) In Statement 2, are Vertex's objectives with regard to tracking risk and portfolio return
consistent with its strategy?
A.
No, the objective regarding portfolio return is inconsistent with its strategy.
B.
No, the objective regarding tracking risk is inconsistent with its strategy.
C.
Yes.
Answer = B
The objective regarding tracking risk is inconsistent with their strategy. In Statement 2,
Spong states that Vertex's strategy is to construct a portfolio with significant risk factor
mismatches with the benchmark and that it relies on proprietary interest rate forecast
models to generate returns. Exhibit 1 indicates that for Vertex the contributions to
spread duration are significantly different from the benchmark in the credit and CMBS
sectors. Note also that portfolio duration is different from the benchmark duration. All
this suggests that Vertex is an active manager. As an active manager, Vertex would be
willing to accept a large tracking error with the objective of generating portfolio returns
that exceed the benchmark.
“Fixed-Income Portfolio Management–Part I,” by H. Gifford Fong and Larry D. Guin
Sections 3.1, 3.2.4