) BASED ON EXHIBIT 1 AND STATEMENT 1, SMITHERS'S INVESTMENT STRATEGY IS BEST DESCRIBED AS

1.) Based on Exhibit 1 and Statement 1, Smithers's investment strategy is best described as:

A.

active management.

B.

enhanced indexing.

C.

pure bond indexing.

Answer = B

In Exhibit 1, the contributions to spread duration for the credit sector (1.6) and for the

mortgage sector (1.6) are slightly higher than the corresponding contributions to spread

duration in the benchmark—that is, there are minor risk factor mismatches. But note,

however that the portfolio duration of the benchmark and the Smithers portfolio is 4.7.

Thus, the strategy followed by Smithers is best described as an enhanced indexed

strategy with minor risk factor mismatches. Also, in Statement 1, Spong states "Smithers

has minor risk factor mismatches with the benchmark."

“Fixed-Income Portfolio Management–Part I,” by H. Gifford Fong and Larry D. Guin