Free CFA-Level-III Exam Braindumps (page: 42)

Lucy Sakata, CFA and Gary Lowenstein, CFA are portfolio managers for the Murray Funds, a provider of investment funds to institutional and wealthy individual investors. Murray frequently indexes in developed markets, but uses full blown active management in less efficient markets and when they think their analysts have a particular expertise. The vast majority of Murray's clients attempt to minimize tracking error.
One of the Murray's funds invests in a Hong Kong index and is marketed as a way for investors to participate in the growth of the Asian economies. The index represents the best known Hong Kong stocks and Murray uses a full replication strategy for the fund. The index is a market cap-weighted index and ten firms represent over 70% of the index's total market cap._Sakata would like to market the Hong Kong fund to institutions with a required minimum investment of $50 million. Many potential clients are institutions who outsource their foreign equity management and are subject to maximum holdings on individual stocks.
Murray also has a Canada fund that invests in an index which represents the 25 largest cap stocks in Canada. It is marketed as a way for investors to exploit the growth in demand for commodities. The index adjusts for stock splits and repurchases as necessary. Most of the index's return has come from capital gains, rather than dividends, due to the tremendous increase in global demand for commodities. To encourage long-term holding, Murray places a back-end load of 3% on fund redemptions that are made within two years of initial investment. Sakata and Lowenstein discuss the fundamental law of active management and how it applies to three hypothetical managers who invest against the broad large-cap U.S. market, as represented by the S&P 500 index.
• Manager A under-weights and over-weights the 500 individual stocks of the S&P 500 index as she sees appropriate, keeping industry exposures similar to those of the index. She has an information coefficient of 0.05 and is restricted to long-only positions.
• Manager B holds cash and long S&P 500 futures. He tries to generate excess returns by altering the duration of the cash position and has an information coefficient of 0.05.
• Manager C has an information coefficient of 0.07, and she uses a long-short strategy for the 500 stocks in the S&P 500 index.
Sakata is consulting with the trustees of the Powell Foundation. The foundation has a position in the three Murray funds described in Exhibit 1 below.
Exhibit 1: Powell Foundation Holdings


Murray has a value fund that invests in stocks in the U.S. Lowenstein is considering several equity style index providers as a benchmark for the fund. The characteristics of the index providers and the methodologies they use to construct equity style indices are described in Exhibit 2 below.

Exhibit 2: Comparison of Index Providers

In regard to the index providers, Lowenstein makes the following statements:
Statement 1: "I would like to use the indices from either provider in a returns-based style analysis. Based on the information in the table, I believe that if I regress a value manager's returns against Provider B's indices, the manager's selection return will appear artificially large."
Statement 2: "If an index provider uses buffering rules, a fund tracking that index will experience lower transactions costs."

Of the following strategies, determine which strategy is most likely pursued by Fund 1.

Lucy Sakata, CFA and Gary Lowenstein, CFA are portfolio managers for the Murray Funds, a provider of investment funds to institutional and wealthy individual investors. Murray frequently indexes in developed markets, but uses full blown active management in less efficient markets and when they think their analysts have a particular expertise. The vast majority of Murray's clients attempt to minimize tracking error.
One of the Murray's funds invests in a Hong Kong index and is marketed as a way for investors to participate in the growth of the Asian economies. The index represents the best known Hong Kong stocks and Murray uses a full replication strategy for the fund. The index is a market cap-weighted index and ten firms represent over 70% of the index's total market cap._Sakata would like to market the Hong Kong fund to institutions with a required minimum investment of $50 million. Many potential clients are institutions who outsource their foreign equity management and are subject to maximum holdings on individual stocks.
Murray also has a Canada fund that invests in an index which represents the 25 largest cap stocks in Canada. It is marketed as a way for investors to exploit the growth in demand for commodities. The index adjusts for stock splits and repurchases as necessary. Most of the index's return has come from capital gains, rather than dividends, due to the tremendous increase in global demand for commodities. To encourage long-term holding, Murray places a back-end load of 3% on fund redemptions that are made within two years of initial investment. Sakata and Lowenstein discuss the fundamental law of active management and how it applies to three hypothetical managers who invest against the broad large-cap U.S. market, as represented by the S&P 500 index.
• Manager A under-weights and over-weights the 500 individual stocks of the S&P 500 index as she sees appropriate, keeping industry exposures similar to those of the index. She has an information coefficient of 0.05 and is restricted to long-only positions.
• Manager B holds cash and long S&P 500 futures. He tries to generate excess returns by altering the duration of the cash position and has an information coefficient of 0.05.
• Manager C has an information coefficient of 0.07, and she uses a long-short strategy for the 500 stocks in the S&P 500 index.
Sakata is consulting with the trustees of the Powell Foundation. The foundation has a position in the three Murray funds described in Exhibit 1 below.
Exhibit 1: Powell Foundation Holdings


Murray has a value fund that invests in stocks in the U.S. Lowenstein is considering several equity style index providers as a benchmark for the fund. The characteristics of the index providers and the methodologies they use to construct equity style indices are described in Exhibit 2 below.

Exhibit 2: Comparison of Index Providers

In regard to the index providers, Lowenstein makes the following statements:
Statement 1: "I would like to use the indices from either provider in a returns-based style analysis. Based on the information in the table, I believe that if I regress a value manager's returns against Provider B's indices, the manager's selection return will appear artificially large."
Statement 2: "If an index provider uses buffering rules, a fund tracking that index will experience lower transactions costs."

Assuming that the correlations between the equity managers' active returns are zero, determine which of the following is closest to the information ratio for the Powell Foundation.

Lucy Sakata, CFA and Gary Lowenstein, CFA are portfolio managers for the Murray Funds, a provider of investment funds to institutional and wealthy individual investors. Murray frequently indexes in developed markets, but uses full blown active management in less efficient markets and when they think their analysts have a particular expertise. The vast majority of Murray's clients attempt to minimize tracking error.
One of the Murray's funds invests in a Hong Kong index and is marketed as a way for investors to participate in the growth of the Asian economies. The index represents the best known Hong Kong stocks and Murray uses a full replication strategy for the fund. The index is a market cap-weighted index and ten firms represent over 70% of the index's total market cap._Sakata would like to market the Hong Kong fund to institutions with a required minimum investment of $50 million. Many potential clients are institutions who outsource their foreign equity management and are subject to maximum holdings on individual stocks.
Murray also has a Canada fund that invests in an index which represents the 25 largest cap stocks in Canada. It is marketed as a way for investors to exploit the growth in demand for commodities. The index adjusts for stock splits and repurchases as necessary. Most of the index's return has come from capital gains, rather than dividends, due to the tremendous increase in global demand for commodities. To encourage long-term holding, Murray places a back-end load of 3% on fund redemptions that are made within two years of initial investment. Sakata and Lowenstein discuss the fundamental law of active management and how it applies to three hypothetical managers who invest against the broad large-cap U.S. market, as represented by the S&P 500 index.
• Manager A under-weights and over-weights the 500 individual stocks of the S&P 500 index as she sees appropriate, keeping industry exposures similar to those of the index. She has an information coefficient of 0.05 and is restricted to long-only positions.
• Manager B holds cash and long S&P 500 futures. He tries to generate excess returns by altering the duration of the cash position and has an information coefficient of 0.05.
• Manager C has an information coefficient of 0.07, and she uses a long-short strategy for the 500 stocks in the S&P 500 index.
Sakata is consulting with the trustees of the Powell Foundation. The foundation has a position in the three Murray funds described in Exhibit 1 below.
Exhibit 1: Powell Foundation Holdings


Murray has a value fund that invests in stocks in the U.S. Lowenstein is considering several equity style index providers as a benchmark for the fund. The characteristics of the index providers and the methodologies they use to construct equity style indices are described in Exhibit 2 below.

Exhibit 2: Comparison of Index Providers

In regard to the index providers, Lowenstein makes the following statements:
Statement 1: "I would like to use the indices from either provider in a returns-based style analysis. Based on the information in the table, I believe that if I regress a value manager's returns against Provider B's indices, the manager's selection return will appear artificially large."
Statement 2: "If an index provider uses buffering rules, a fund tracking that index will experience lower transactions costs."

Determine whether the statements made by Lowenstein on the construction of equity style indices are correct or incorrect.

Albert Wulf, CFA, is a portfolio manager with Upsala Asset Management, a regional financial services firm that handles investments for small businesses in Northern Germany. For the most part, Wulf has been handling locally concentrated investments in European securities. Due to a lack of expertise in currency management he works closely with James Bauer, a foreign exchange expert who manages international exposure in some of Upsala's portfolios. Both individuals are committed to managing portfolio assets within the guidelines of client investment policy statements.
To achieve global diversification, Wulf's portfolio invests in securities from developed nations including the United States, Japan, and Great Britain. Due to recent currency market turmoil, translation risk has become a huge concern for Upsala's managers. The U.S. dollar has recently plummeted relative to the euro, while the Japanese yen and British pound have appreciated slightly relative to the euro. Wulf and Bauer meet to discuss hedging strategies that will hopefully mitigate some of the concerns regarding future currency fluctuations.
Wulf currently has a $1,000,000 investment in a U.S. oil and gas corporation. This position was taken with the expectation that demand for oil in the U.S. would increase sharply over the short-run. Wulf plans to exit this position 125 days from today. In order to hedge the currency exposure to the U.S. dollar, Bauer enters into a 90-day U.S. dollar futures contract, expiring in September. Bauer comments to Wulf that this futures contract guarantees that the portfolio will not take any unjustified risk in the volatile dollar.
Wulf recently started investing in securities from Japan. He has been particularly interested in the growth of technology firms in that country. Wulf decides to make an investment of ¥25,000,000 in a small technology enterprise that is in need of start-up capital. The spot exchange rate for the Japanese yen at the time of the investment is ¥135/€. The expected spot rate in 90 days is ¥132/€. Given the expected appreciation of the yen, Bauer purchases put options that provide insurance against any deprecation of the euro. While delta-hedging this position, Bauer discovers that current at-the-money yen put options sell for €1 with a delta of -0.85. He mentions to Wulf that, in general, put options will provide a cheaper alternative to hedging than with futures since put options are only exercised if the local currency depreciates.
The exposure of Wulf’s portfolio to the British pound results from a 180-day pound-denominated investment of £5,000,000. The spot exchange rate for the British pound is £0.78/€. The value of the investment is expected to increase to £5,100,000 at the end of the 180 day period. Bauer informs Wulf that due to the minimal expected exchange rate movement, it would be in the best interest of their clients, from a cost-benefit standpoint, to hedge only the principal of this investment.

Before entering into currency futures and options contracts, Wulf and Bauer discuss the possibility of also hedging market risk due to changes in the value of the assets. Bauer suggests that in order to hedge against a possible loss in the value of an asset Wulf should short a given foreign market index. Wulf is interested in executing index hedging strategies that are perfectly correlated with foreign investments. Bauer, however, cautions Wulf regarding the increase in trading costs that would result from these additional hedging activities. Of the following cash management approaches, the one that best reflects Wulf and Bauer's currency management strategy is: