34 Free CFA Level 3 Practice Exams Questions and Answers on Equity Portfolio Management

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Returns of the fund are regressed vs. various indicesthe regression coefficients (b scores) should some to 1. use the b-scores to determine exposure and then construct a custom benchmark. - Indices used should be mutually exclusive and exhaustive of asset classes.-Benefits - Tests if reported style and actual style match. Mult regressions can be used to see style shifts over time (Wave Chart)

• Enhanced Indexing - Stock Based
• Style Analysis - Holdings Based
• Style Analysis - Returns Based
• Equity Total Return Swap

Either by Quantity (80% gr/20% value) or Category (one or the other)Most indices are constructed w/ no style overlap.

• Style Fit
• Equity Total Return Swap
• Equity Style Indices
• Equity Futures -

Big Companies dominate the impactmature firms biasmay be less diversified if over represented by large firms.Some investors may not be able to mimic value weighted if they are subject to Max % holdings

• Index Weighting Schemes - Price Weight
• Biases of Weighting Schemes - Value Weight
• Biases of Weighting Schemes - Equal Weight
• Biases of Weighting Schemes - Price Weight

Tend to Tilt toward growth companies and small cap. Used returns based analysis to monitor.

• Style Analysis - Holdings Based
• Long Short Investing
• Social Responsible Investing - Biases
• Style Analysis - Returns Based

A stock is not immediately reclassified w/ a slight characteristic change. Creates less turnover

• Buffering
• Style Fit
• Buy Side
• Sell Side

All stocks are bought per their weights. Typically only used w/ large $. Pros: Low Tracking Risk, Low TurnoverCons: will underperform when assets are illiquid. Return - Index Return - Admin - Cash Drag - transactions

• Indexing a portfolio - Stratified Sampling
• Indexing a portfolio - Full replication
• Indexing a portfolio - Optimization
• Information Ratio

Equal $ in each stock. Periodic Rebalancing needed.

• Biases of Weighting Schemes - Equal Weight
• Index Weighting Schemes - Price Weight
• Index Weighting Schemes - Equal Weight
• Index Weighting Schemes - Mkt Cap Weight

Ex. Active Return / Tracking Risk - Oddly the highest in semi-active

• Information Ratio
• Style Fit
• Buffering
• Core -Satellite

1. Allocate % to Equities2. Divide Active/Semi/Passive: Active Risk/ReturnUtilActive = ExpActRetun - (Risk Aversion x Variance of Active Return)3. Use the Eff Frontier, but w/ Active Return/Active Risk plottedInvestors are more risk adverse w/ Active Risk then Total RiskHave to believe active risk is possible, and they can find it.Performance is judged w/ a passive benchmark.

• Selecting Equity Managers
• Equity Total Return Swap
• Allocating to Managers (3 Steps)
• Famous Indexes by Schemes

Inv. Banking Use research to promote stocks. Also done by indv. firms that paid for research.

• Buffering
• Style Fit
• Buy Side
• Sell Side

Is the R Square from the Returns based regression. Lets you know - amount of the inv return explained by style indices - called style fit. 1-sytle fit = Security Selection (Active bets away from that style)

• Buy Side
• Buffering
• Style Fit
• Sell Side

Manager's Questionnaire1. Staff Quality, Quantitiy & Vision2. Inv. Philosophy and Procedures - How do you plan to find alpha? Risk manage? Stock Selection Techniques?3. Resources - Turnover, models, trading functions4. Performance - BM, Exp. Alpha, Exp Risk, Holdings5. Fees.

• Equity Futures -
• Selecting Equity Managers
• Allocating to Managers (3 Steps)
• Equity Style Indices

Separating stocks in the index by size, p/e, industry into cells. Each cell is then weighted. w/in the cells manager picks representative stocks. can be used for large indices, or when restricted due to concentrated positions.

• Long Short Investing
• Indexing a portfolio - Stratified Sampling
• Indexing a portfolio - Optimization
• Indexing a portfolio - Full replication

1. Index Mutual Funds are less frequently traded (1 time/day)2. ETFs do not have to maintain record keeping for Shareholders - less cost3. Index MFS pay lower license fees to S&P vs. ETFs4. ETF is generally more tax eff. ETF can redeem by giving a basket of stocks to avoid taxable event. Funds have to sell shares. 5. ETFs tend to cost less.

• Famous Indexes by Schemes
• Index Funds vs. Index ETFs (5)
• Equity Style Indices
• Long Short Investing

Index institutional Portfolios may use Pooled accounts, its advantageous for smaller funds. Pros: Share a manager = lower fees vs. funds. You can also send your securities to offset costs.

• Separate or Pooled Accounts
• Information Ratio
• Equity Style Indices
• Style Fit

If you want to add systematic risk to a MKT neutral strategy go long equities futures w/ notional principal = cash from shorts. Net profit = L/S Profit + Futures P/L + Int earning on short sale. Or ETFs can be shorted.

• Long Short Investing
• Information Ratio
• Equitizing a long/short portfolio
• Equity Total Return Swap

Paper Card

• Equity Futures -
• Equity Style Indices
• The Completeness Fund Approach
• Core -Satellite

Provides faster analysis then Returns based, cause holdings are updated often. Requires more data ,subjective judgment in classifying securities (Morningstar)

• Enhanced Indexing - Stock Based
• Sell Side
• Style Analysis - Holdings Based
• Style Analysis - Returns Based

Typically Swap MKT for Fixed. Creates Synthetic diversification, low cost!. Could be great for avoiding withholding tax on int'l investments.

• Equity Futures -
• Equity Total Return Swap
• Style Fit
• Equity Style Indices

-If IPS states investor is taxable - Use Passive-If investor believes the markets are efficient - Use PassiveOn average Active-Expenses underperforms passiveActive underperforms by expenses.-In taxable accounts it's prudent to use Passive in LC, INTL, Even Small Cap in Taxable.

• Core -Satellite
• When to use Active/Passive/Semi
• Equity Style Indices
• Information Ratio

Analyst works for and builds a portfolio for investment firm. usual analysts presents their data to a committee

• Style Fit
• Buffering
• Sell Side
• Buy Side