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
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