2019 CFA level 3 qbank r 26 27 intro to equity port managem passive equity invest questions

10/12/2018

Learning Management System

Question #1 of 26
Which portfolio construction method is most likely to be used when tracking an index with a
large number of constituent stocks for relatively small clients?

A) Full replication.
B) Strati ed sampling.

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C) Optimization.

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Question #2 of 26

An investment analyst is addressing environmental, social, and governance (ESG) concerns for
clients. Her goal is to recommend suitable investments by excluding companies from the equity

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investment universe that fail to meet client ESG standards. Which of the following screening
techniques should be applied by the investment analyst?

A) Negative screening.

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C) Positive screening.

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B) Thematic investing.

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Question #3 of 26

Which of the following statements regarding using equities as an in ation hedge is most
accurate? They have been a good in ation hedge:

A) in many countries over a short time span.
B) but only in the U.S for a short time span.
C) in many countries over a long time span.

Question #4 of 26
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10/12/2018

Learning Management System

An investment analyst is evaluating portfolio costs related to buying and selling equity
securities. Which of the following costs is an example of an implicit trading cost?

A) Stock exchange fees.
B) Broker commissions.
C) Price impact from trading.

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Question #5 of 26
The strategy of using derivatives to shift a portfolio back to the risk exposure that matches the

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index as a result of short-term deviations is best referred to as:

A) a rebalancing overlay.

C) a risk overlay.

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Question #6 of 26

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B) a completion overlay.

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Management fees and trading commissions are most likely to be lowest for:

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A) passive factor-based investing.
B) active investing.

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C) market-cap weighted passive investing.

Question #7 of 26
Which of the following is least accurate regarding using equities as an in ation hedge?

A) The historical record is impressive as to their e ectiveness.
B) Their ability to hedge is una ected by taxes.
C) The e ectiveness of an individual stock as a hedge depends on its product market.

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10/12/2018

Learning Management System

Question #8 of 26
Which of the predominant weighting schemes used in the construction of equity share indices
assumes that the investor holds each company in the index according to its relative weight in
the index?

A) The market capitalization-weighted index.
B) The free oat-adjusted market capitalization index.

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C) The price-weighted index.

Question #9 of 26

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Passive factor-based investing is also referred to in the industry as:

A) strati ed investing.
B) smart beta.

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C) attribution trading.

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Question #10 of 26

Which of the following is least accurate regarding equities in a portfolio?

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A) Equities have been shown to be an in ation hedge worldwide.
B) European institutions hold more equity than U.S. institutions in their portfolio.
C) U.S. equity typically constitutes about half of world equity.

Question #11 of 26

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10/12/2018

Learning Management System

If an optimization approach to portfolio construction yields a portfolio that is not meanvariance e cient relative to the benchmark, the most appropriate solution to this problem is
to:

A) re-estimate the key inputs to the model: returns, variances, and covariances.
B) add a constraint that portfolio volatility is equal to benchmark volatility.
C) switch to full replication.

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Question #12 of 26

positive e ect on which characteristic of indexes?

A) Transparent.

C) Investable.

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Question #13 of 26

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B) Rules-based.

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The use of free- oat weighting for a market-cap weighted portfolio most likely has the largest

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Which of the following statements is most accurate?

A) Corporate governance issues are important to passive investors.
B) Passive investors typically have little or no access to corporate boards and

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management.

C) The cost of voting proxies for passive investors typically outweighs the bene ts, so
portfolio managers of passive funds don’t usually exercise the right to vote those
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Question #14 of 26
Which of the following equity investment portfolios would most likely be passively managed?

A) USA consumer defensive sector portfolio.
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10/12/2018

Learning Management System

B) Emerging markets small-cap value portfolio.

C) World large-cap growth portfolio.

Question #15 of 26
Three market-cap weighted indexes have the following Her ndahl-Hirschman indexes (HHI):
HHI for Index XX = 0.01.
HHI for Index YY = 0.05.

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HHI for Index ZZ = 0.10.

weighted portfolio of 100 stocks?

B) Index XX.
C) Index ZZ.

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Question #16 of 26

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A) Index YY.

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Which of these market-cap weighted portfolios has the same concentration risk as an equally

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Which type of analysis is most useful in identifying sources of tracking error?

A) Attribution analysis.

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B) Optimization.

C) Strati ed sampling.

Question #17 of 26
Which fund most likely has the lowest tracking error relative to its benchmark?
Fund Alpha: Fees = 0.11%; cash allocation = 4.2%
Fund Beta: Fees = 0.02%; cash allocation = 1.6%
Fund Gamma: Fees = 0.06%; cash allocation = 2.1%
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A) Fund Alpha.

B) Fund Beta.
C) Fund Gamma.

Question #18 of 26
Which of the following indices would be biased towards small cap stocks?

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A) An equal-weighted index.
B) A price-weighted index.

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Question #19 of 26

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C) A value-weighted index.

An investor who seeks to actively in uence speci c companies is least likely to:

B) lend securities.

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C) start a proxy voting.

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A) be an activist investor.

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Question #20 of 26

An investment advisor is considering the addition of equity securities to one of his client's
portfolios. According to the client's investment policy statement, the client exhibits a low
tolerance for risk and prefers stable portfolio income. Which type of equity security would be

most appropriate given this client's investment considerations?

A) Mid-cap oil-producing company.
B) Large-cap consumer staples company.
C) Small-cap technology company.

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10/12/2018

Learning Management System

Question #21 of 26

Which of the following statements regarding a free oat-adjusted market capitalization index is

least accurate?

A) A free oat-adjusted market capitalization index assumes the investor has bought all
the publicly available shares of each company in the index.
B) The major value-weighted indices in the world have not been adjusted for free oat.
C) The oat adjusted index is considered the best index type by many investors, because it

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is representative and can be mimicked with minimal tracking risk.

Question #22 of 26

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The fact that rms with greater market capitalization have a greater impact on the index than
rms with lower market capitalization creates a primary bias in what type of index?

A) Equal-weighted index.
B) Price-weighted index.

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C) Value-weighted index.

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Question #23 of 26

A portfolio manager is planning to invest in an emerging market's small-cap index. Which of the
following equity universe segmentation approaches does this market index combine?

A) Size/style and geographic segmentation.
B) Geographic and economic activity segmentation.
C) Size/style and economic activity segmentation.

Question #24 of 26
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A portfolio manager is considering investing in a startup rm with a price-to-earnings (P/E) ratio
of 42. The manager notes that the market P/E ratio is currently 25. Which of the following
equity investment style boxes would best categorize this company?

A) Small-cap value.
B) Large-cap growth.
C) Small-cap growth.

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Question #25 of 26

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A wealth manager is researching the potential sources of income from owning and managing
an equity portfolio. Which of the following actions are required if the manager wishes to
generate income from a dividend capture strategy? The manager should:

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A) sell put options on equities.
B) transfer equities to another investor.

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C) buy-and-hold equities for a short period of time.

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Question #26 of 26

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Active management may demand or provide liquidity to equity markets. Which of the following
active investment strategies would most likely demand liquidity from the market?

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A) Momentum strategies.
B) Deep value strategies.

C) Buy-and-hold strategies.

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