) 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