Question 1

Active equity portfolio management is a long-term buy-and-hold strategy.

Accepted Answer

Active equity portfolio management involves constantly analyzing and adjusting the portfolio based on market conditions, industry trends, and individual stock performance. It is an active approach to investing and does not necessarily involve a long-term buy-and-hold strategy.

Question 2

Tracking error is defined as the degree to which the portfolio's returns deviate from those of the actual index.

Accepted Answer

This is the correct definition of tracking error.

Question 3

A way to distinguish between these strategies is to decompose the total actual return that the portfolio manager attempts to produce.

Accepted Answer

By decomposing the total actual return, the portfolio manager can evaluate how much of it was generated by the particular investment strategy employed. This allows for a better understanding of the effectiveness of the strategy and can aid in making future investment decisions.

Question 4

The goal of active equity management is to earn a return that exceeds the return of a passive benchmark portfolio, net of transaction costs, on a risk-adjusted basis.

Accepted Answer

The statement accurately describes the goal of active equity management.

Question 5

A benchmark portfolio is defined as a passive portfolio whose average characteristics match the client's risk-return objectives.

Accepted Answer

This is the correct definition of a benchmark portfolio. It is designed to closely match a client's desired risk and return preferences, and is passively managed to track a particular market index or sector.

Question 6

Exchange-Traded Funds (ETF) are depository receipts that give investors a pro rata claim on the capital gains and cash flows of securities held by financial institutions.

Accepted Answer

ETFs are indeed depository receipts that allow investors to have a claim on the underlying securities held by financial institutions, giving them exposure to a diversified portfolio of stocks, bonds, or other assets.

Question 7

An advantage of quadratic programming is that it relies on historical correlations.

Accepted Answer

Quadratic programming is a mathematical optimization method that does not inherently rely on historical correlations; it focuses on optimizing a quadratic objective function subject to linear constraints.

Question 8

Active portfolio managers just try to capture the expected return consistent with the risk level of their portfolios.

Accepted Answer

Active portfolio managers aim to outperform the market or a specific benchmark by making strategic investment decisions, not just to capture the expected return consistent with the risk level of their portfolios.

Question 9

There is a direct relationship between a passive portfolio's tracking error relative to its index and the time and expense necessary to create and maintain the portfolio.

Accepted Answer

A passive portfolio aims to replicate the performance of its index, minimizing tracking error and associated costs. Increased time and expense do not necessarily lead to a lower tracking error, as the goal is efficient replication, not active management or frequent adjustments.

Question 10

Following an earnings momentum strategy, an investor acquires stocks that have enjoyed above-market stock price increases.

Accepted Answer

An earnings momentum strategy involves buying stocks that have recently reported strong earnings growth, not necessarily those with above-market price increases.

Question 11

Completeness funds are portfolios designed to complement active portfolios that do not cover the entire market.

Accepted Answer

Completeness funds are indeed designed to fill in any gaps left by active portfolios that may not cover the entire market.

Question 12

Growth stocks consistently outperform value stocks.

Accepted Answer

Growth stocks and value stocks perform differently under various market conditions, and neither consistently outperforms the other over all time periods. Performance can depend on factors like economic cycles, interest rates, and market sentiment.

Question 13

A growth investor focuses on the current and future economic "story" of a company, with less regard for share valuation.

Accepted Answer

A growth investor is focused on investing in companies that have the potential for rapid earnings growth in the future, and they prioritize the company's economic story (such as market trends, innovation, and competitive advantage) over the current share valuation.

Question 14

Passive portfolio managers attempt to "beat the market" by forming portfolios capable of producing actual returns that exceed risk-adjusted expected returns.

Accepted Answer

Passive portfolio managers do not attempt to beat the market, but instead aim to replicate the performance of a specific market index or benchmark. They do not actively trade securities, but instead hold a diversified portfolio that mimics the selected index or benchmark. Therefore, their returns are expected to align with the market returns, rather than exceed them.

Question 15

The goal of a passive portfolio is to track the index as closely as possible.

Accepted Answer

This is because passive portfolios are designed to replicate the performance of a specific market index, such as the S&P 500, rather than trying to outperform it. The main advantage of this approach is that it typically involves lower fees and expenses than actively managed portfolios, which can make it a cost-effective way to invest in a broad range of stocks or other assets. However, passive portfolios also tend to be more susceptible to market fluctuations and may not be ideal for investors who are looking for higher returns or greater diversification.

Question 16

The difference between the actual and expected return is often called the portfolio's alpha,

Accepted Answer

This statement is true. The portfolio's alpha is the difference between the actual return and the expected return, and it measures the portfolio's performance compared to its expected performance.

Question 17

An advantage of sampling is that portfolio returns will not track the index as closely as with full replication.

Accepted Answer

Sampling aims to mimic the performance of the index with fewer securities, but it still strives for close tracking. Full replication more precisely tracks the index by holding all its components.

Question 18

An attempt on the manager's part to generate alpha is generally referred to as indexing.

Accepted Answer

The answer of An attempt on the manager's part to...

Question 19

The value investor focuses on share price in anticipation of a market correction and, possibly, improving company fundamentals.

Accepted Answer

The statement accurately describes the core investment philosophy of a value investor. They seek to purchase stocks that are undervalued by the market in the expectation that the market will eventually recognize the company's true worth and share price will increase. Additionally, value investors often investigate company fundamentals such as earnings, assets, and debt to further confirm whether the company is a good investment opportunity.

Question 20

The three basic techniques for constructing a passive index are: full replication, sampling, and linear programming.

Accepted Answer

The three basic techniques for constructing a passive index are full replication, sampling, and optimization, not linear programming.

Quiz 11: Equity Portfolio Management Strategies