S11+12

Question 1

tracking ratio =

Answer 1

active return / tracking risk

Question 2

return based analysis

Answer 2

regressing returns on a managers portfolio AGAINST the returns of various security indices

Question 3

holdings based analysis

Answer 3

evaluating characteristics of securities from the portfolio

value =

• low PE,
• low PB,
• high div,
• small EPS growth,
• high earnings volatility (cyclicals),
• utility and financials (not tech and health)

Question 4

return based analysis - advantages

Answer 4

characterizes entire portfoli
enables comparison of entire portfolios
summarizes the result of the investment process
methodology backed by theory
low information requirements
different models resutls in same conclusions
low cost
fast speed

Question 5

return based analysis - disadvantages

Answer 5

may be innacuratge due to style drift

misspecified indices can lead to misleading conclusions

Question 6

holdings based analysis - advantages

Answer 6

characterizes each security
enables comparison of securities
quick in detection of style drift

Question 7

holdings based analysis - disadvantages

Answer 7

is not consistent with methods used by managers to select securities
requires subjective judgement to clasify securities
requires more data

Question 8

style drift

Answer 8

when PM stRAYs from his original/STATED style objective

Question 9

pricing inefficiencies on the short side

Answer 9

barriers exist to short sales
firm management is more likely to promote stock via accounting manipulation
analysis on the sellside are more likely to issue buy recommendation
analysts face pressure from management against issuing sell recommendations

Question 10

instruments for equitizing market neutral strategies

Answer 10

futures

ETFs

Question 11

short extension strategies

Answer 11

120/20

Question 12

advantages of short extension strategies

Answer 12

perceived as an equity strategy
can exploit short ideas
can be implemented without derivatives

Question 13

disadvantages of short extension strategy

Answer 13

higher transaction costs
return is generated just via finding long/short ideas (no futures, interest as present in equitized market-neutral long-short portfolio)

Question 14

selling discipline - 6 types

Answer 14

price target SD
deteriorating fundamentals SD
opportunity cost SD
valuation level SD
down from cost SD
up from cost SD

Question 15

fundamental law of active management =

Answer 15

InfoR = InfoC * Sq Root (Investor Breadth)

Question 16

true active return =

Answer 16

total return - normal return

Question 17

misfit active return =

Answer 17

normal - benchmark

Question 18

total active risk =

Answer 18

SqRoot (True active risk ^2 + Misfit active risk^2)

Question 19

true information ratio

Answer 19

True active return / true active risk

Question 20

equities are a good

Answer 20

inflation hedge especially when firm can pass inflation on the consumer

Question 21

passive equity strategy recommended to investors which are

Answer 21

taxable
have informational disadvantage
in informationally efficient large cap market
avoiding high transaction costs of small cap market

Question 22

tax efficiency ETF vs Mutual funds

Answer 22

ETFs are more efficient

Question 23

cost of holding ETF vs mutual funds

Answer 23

ETF are less expesnve

Question 24

ETF better than futures due to

Answer 24

infinite life

easier to manage

Question 25

forms of passive investment

Answer 25

full replication stratified sampling optimisation using a factor model

Question 26

socially responsible investing

Answer 26

ethical investing biased to GROWTH and small caps

Question 27

why one would weight stocks in an index based on PEs

Answer 27

to prevent overweighting the overvalued stocks in that index

Question 28

optimisation less convenient vs stratified sampling due to

Answer 28

more frequent rebalancing

Question 29

investors more risk averse when facing total OR active risk?

Answer 29

active

Question 30

price weighted indexes

Answer 30

Dow Jones Ind / Nikkei

Question 31

float weighted indexes

Answer 31

CAC DAX FTSE RUSSEL S&P MSCI

Question 32

3 goals of corporate governance | and for resolving principal-agent problem

Answer 32

affecting behaiviour of agents reducing asymmetry of information removing agents who misbehave or violate ethics

Question 33

examples of unethical behaviour

Answer 33

self dealing - converting corporate funds to personal use info manipulation - to hide health of firm anti-competitive behavior opportunistic exploitation of suppliers substandard working conditions environmental degradation corruption - using bribery to gain illegal advantage

Question 34

origins of unethical behavior

Answer 34

``` flawed personal ethics failure to realize profit/growth culture flawed business culture with unrealistic goals unethical leadership ```

Question 35

purpose of stakeholder impact analysis

Answer 35

force the company to make choices among stakeholders and identify which groups are most critical to the company

Question 36

principal-agent problem

Answer 36

agents of the company (mgmt) not acting in a way that achieved the goals of the principals of the company (shareholders)

Question 37

friedman dorctrine

Answer 37

increasing profits within the rules of the game | flaw: too vague and broad

Question 38

utilitarianism

Answer 38

businesses must weight consequences to the society and seek to produce highest good for the largest number of people flaw: many costs and benefits are difficult to measure, can lead to exploitation of a small group of people

Question 39

kantian ethics

Answer 39

people are different from other production factors, so they deserve dignity and respect flaw: not sufficient to be a complete philosophy

Question 40

rights theories

Answer 40

all individuals have rights and privileges | flaw: greatest good of utilitarianism cannot come at the expense of violation of the rights of others

Question 41

justice theory

Answer 41

focus just on distribution of economic input | justice met if all participants agree on fair rules

Question 42

4 tradeoffs for tracking international indices

Answer 42

- breadth vs cost (liquidity) - liquidity vs cost of altering portfolio tracking a popular index at each reconstitution - making precise float adjustment vs cost of reconstituting a portfolio - investing in popular index vs cost of lack of objectivity in construction of the index

Question 43

proprietary index models are ___ to reconsitute

Answer 43

more expensive

Question 44

causes of contagion

Answer 44

currency may be devalued to keep exports competitive in line with other country which devalued drop in exports to a contracting country initial devaluation serving as a wake up call for investors crisis in one country can lead to credit crunch in another initial crisis cause investors to liquidate their investors in other countries.

Question 45

negative attributes of corporate governance in emerging countries

Answer 45

- mgmt has larger voting power - infrequent takeovers do not discipline mgmt - firm shares can be owned by another which is concentrating control - gov capital controls to benefit favored firms - strong creditor rights = greater frequency of bankrupcy filings - weaker governance firms may suffer more inmarket crises - lower CEO turnover can leave poor management in place

Question 46

what is driving the pricing of newly liberalized market vs unliberalized

Answer 46

smaller covariance risk instead of higher variance risk

Question 47

style of a quan OR qual itative factor in researching investors

Answer 47

quantitative

Question 48

why performance based compensation is bad for staff

Answer 48

volatility in compensations creates problem in retaining staff

Question 49

investors total return in equitizing long short portfolio =

Answer 49

= + pl from LongShort position + PL from Futures + Interest earned on cash from short sale