Questions 19 through 24 relate to Equity Portfolio Management.
William Pugh Case Scenario
William Pugh is a portfolio manager for the pension plan of the FMJ Corporation. Pugh
is evaluating portfolio managers for the pension plan.
PMA Asset Management follows a passive investment strategy that is implemented using
ETF’s rather than conventional mutual funds. PMA proposes to offer a new index
portfolio that reflects the Russell 2000 small-cap value index. PMA indicates that the
technique used to construct the new index portfolio assumes that the factors used to
explain stock returns are uncorrelated.
ASM Partners is an active manager. A common strategy that ASM implements is a pairs
trade where they take equal long and short positions in two common stocks in a single
industry. These positions are constructed so that they have no correlation with equity
market returns.
CKI Financial Advisors also follows an active portfolio strategy. A portfolio analysis for
CKI is provided below in Exhibit 1.
Exhibit 1
Portfolio Analysis for CKI
Portfolio Benchmark
Number of Stocks 25 700
Weighted Average Market Cap $25 billion $50 billion
Dividend Yield 3.7% 1.8%
P/E 12 22
P/B 1.2 2.5
Projected EPS growth 8% 13%
Pugh is also evaluating another active manager, the DCM Group. Selected information
for all three active managers as well as their normal and investor benchmarks are
presented in Exhibit 2
Exhibit 2
Active Portfolio Managers’ Characteristics
and Benchmark Information
Normal Investor Total Misfit
Portfolio Manager Benchmark Benchmark Active Active
Manager Return Return Return Risk Risk
ASM 15.00% 11.25% 8.50% 6.05% 4.40%
CKI 13.20% 14.25% 7.50% 4.68% 3.40%
DCM 12.75% 15.00% 10.00% 5.50% 4.00%
Pugh proposes to construct a core-satellite portfolio with the following allocations: 45
percent in PMA, 15 percent in ASM, 20 percent in CKI and 20 percent in DCM. The
investment management committee for the pension plan has stated that it expects the
core-satellite portfolio to achieve a total active return of at least 2.1 percent and have total
active risk of no more than 1.8 percent. Pugh assumes that the managers’ active returns
are uncorrelated. Furthermore, since PMA follows a passive strategy, he assumes that
active return and active risk for PMA are 0 percent.
19. A characteristic of PMA Asset Management’s investment strategy is that it:
A. is more tax efficient.
B. has lower license fees.
C. has higher expenses due to fund level accounting.
20. The most appropriate technique for constructing PMA’s new portfolio is:
A. optimization.
B. full-replication.
C. stratified sampling.
21. Relative to a long-only strategy, the expected alpha of ASM Partners’ investment
strategy is most likely:
A. half.
B. twice.
C. similar.
22. Based on the information presented in Exhibit 1, CKI Financial Advisors most
likely follows a:
A. value strategy.
B. growth strategy.
C. market-oriented strategy.
By accessing this mock exam, you agree to the following terms of use: This mock exam is provided to
23. Based on the information in Exhibit 2, does the portfolio proposed by Pugh meet
the investment management committee’s stated thresholds of risk and return?
A. Yes.
B. No, portfolio active risk is above the threshold.
C. No, portfolio active return is below the threshold.
24. Based on the information presented in Exhibit 2, the “true” active risk for ASM
Partners is closest to:
A. 1.65%.
B. 4.15%.
C. 6.05%.
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