“STRUCTURING THE GLOBAL INVESTMENT PROCESS” (STUDY SESSION 18) A) D...

1. “Structuring the Global Investment Process” (Study Session 18)

a) discuss the functions of and relationships among the major participants in the global

investment industry;

b) evaluate the appropriateness, in terms of implementing the investment policy

statement and strategic or tactical asset allocation, of fund/manager choices available

to a global investor;

c) compare and contrast the major choices (i.e., active/passive, top-down/bottom-up,

style, global/specialized, currency, and quantitative/subjective) available to a global

investor in structuring the global investment decision-making process;

d) discuss the components of a formal investment policy statement;

e) discuss the role of capital market expectations in strategic and tactical asset

allocation;

f) evaluate the appropriateness of an investment policy statement for a global investor;

g) interpret capital market data and capital market expectations in the context of

strategic asset allocation for a global investor;

h) discuss the important issues (i.e., scope, weights, and currency allocation) in choosing

a global benchmark for strategic asset allocation;

i) compare and contrast alternative approaches to hedging currency risk in strategic

asset allocation;

j) discuss the determinants of effective global tactical asset allocation;

k) compare and contrast global strategic and tactical asset allocation;

l) describe and evaluate the components of the global asset allocation process;

m) determine an appropriate strategic asset allocation for a global investor;

Guideline Answer:

Part A

Determine, for a synthetic

replication index strategy,

whether each of the

Support each of your

Advantage

advantages cited in

responses with one reason

Langford’s statement is

accurate or inaccurate

(circle one)

The synthetic portfolio is

The synthetic portfolio will

closely track the chosen index

created using cash and a

at relatively low cost. Accurate

futures contract on the index.

Inaccurate

Fair pricing of the futures

results in the index being

closely tracked, with low

transactions costs. Despite the

fact that derivatives are

prohibited, Langford’s first

statement is accurate.

There are essentially no

Because the synthetic

constraints on NE’s

Accurate

portfolio is created using

implementation of such a

derivative products, the

strategy.

investment mandate

prohibiting the use of

derivatives will constrain

strategy for NE. Also, futures

contracts tend to be written on

indexes based on subsets of

the broad market (especially

regionally based), which

constrains implementation of a

strategy that intends to

replicate broadly based

indexes.

Part B

The simplest and most common approach is to use a published global market index. The weights

are proportional to the relative market capitalizations (caps).* The second approach involves

using GDP country weights; this strategy gives each country a weight proportional to its

economic output. Custom approach: allocations based on institutional expertise justifies a

customized approach.

*Market cap weights are often float-adjusted to reflect shares actually available for investment.

Part C

Determine whether each

If incorrect, give one

of the statements by Lee is

Statement

reason why the statement

correct or incorrect

is incorrect

There are three strong

If we are concerned about

reasons to consider other

the short-term volatility of

than a full hedging

the global portion of our

Correct

approach:

portfolio, there is no strong

Incorrect

reason to undertake