2019 CFA level 3 qbank reading 29 active equity investing portfolio construction questions

10/12/2018

Learning Management System

Question #1 of 24
An active equity portfolio manager is benchmarked by their domestic large-cap equity index. If
the manager signi cantly lowers the allocation to cash in the portfolio by buying benchmark
securities, this is most likely to:

A) decrease active risk and increase absolute risk
B) increase active risk and decrease absolute risk

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C) increase active risk and increase absolute risk

Question #2 of 24

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Exposure to rewarded factors can be achieved through

A) Systematic active management approaches only

B) Discretionary active management approaches only

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C) Both systematic and discretionary active management approaches

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Question #3 of 24

An analyst estimates the following data for two active equity fund managers:

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Manager Breadth Active Risk Transfer Coe
A

50

8%

0.55

B

100

8%

0.55

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If manager B has the same excess return as manager A, then the Information coe cient of
manager A is closest to:

A) 2 times the information coe cient of manager B
B) 1.4 times the information coe cient of manager B
C) 0.7 times the information coe cient of manager B
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10/12/2018

Learning Management System

Question #4 of 24
A security has an active weight of 10% and the covariance of the security's active returns and
portfolio active returns is 0.005. The contribution of the security to portfolio active variance is
closest to:

A) 0.0005
B) 0.05

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C) 0.005

Question #5 of 24

Manager A generates excess return by maintaining a consistent positive active exposure to the

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size factor. Manager B has the same benchmark and generates excess return by varying their
exposure to the size factor according to their view on when the factor will outperform. Both
managers are highly diversi ed. According to the building blocks of active management, which
manager is most likely to be generating return from alpha skills?

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A) Manager B only

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C) Manager A only

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B) Both Manager A and Manager B

Question #6 of 24
An active equity investment manager has a target active risk of 8%, a maximum sector
deviation of 12% and maximum risk contribution from a single security of 2%. This manager is
best described as a:

A) Closet Indexer
B) Sector Rotator
C) Concentrated stock picker

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Question #7 of 24
James Greco, CFA, is an investment analyst working as a consultant to institutional clients. One
of his clients has asked him about recent innovations in factor-based equity investing. In
response to his client's questions, Greco makes the following two statements:
Statement 1: 'Managers that have the ability to short sell in their portfolios are more
likely to generate higher information ratios when pursuing diversi ed factor
exposure strategies than long only managers'
Statement 2: 'Due to the ability to short sell and the inherent hedging that entails,
the long term returns of long/short managers is always expected to be lower than

A) Both Statement 1 and Statement 2

C) Statement 1 only

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Question #8 of 24

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B) Statement 2 only

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Which of Greco's statements is correct?

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those of long-only managers'

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When a benchmark security held in an active portfolio is replaced with a similar security that is

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not held in the benchmark, the most likely outcome is:

A) Active Share increases by more than active risk

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B) Active Share decreases and active risk increases
C) Active Share and active risk both increase by similar proportions

Question #9 of 24
Factor timing is a technique most likely employed by a strategy that is:

A) Top down and systematic
B) Bottom up and systematic

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C) Top down and discretionary

Question #10 of 24
All of the following characteristics are features of the 'well-constructed portfolio' except:

A) The portfolio delivers results consistent with investor expectations in a cost-e cient
way

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B) The portfolio delivers results consistent with investor expectations in a risk-e cient way

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C) The portfolio guarantees excess returns relative to the benchmark

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Question #11 of 24

An active equity investment manager follows a strategy which has the following investment
constraints:

Maximum position size is the lesser of 5x the index weight or the index weight plus 2%

volume (ADV)

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No position size is allowed that represents more than 10% of the security's average daily

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index

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No investment is allowed in any security whose index weight is less than 0.1% of the

Details of the fund and benchmark index are as follows:

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Fund size: $500 million
Approximate number of positions: 350
Approximate total market capitalisation of benchmark index: $10 trillion
Approximate daily trading volume of smaller securities in the benchmark: 0.5% of shares
outstanding

The level of assets under management at which the manager's strategy is likely to be a ected
by liquidity and concentration constraints is closest to:

A) $10 billion.
B) $1 billion.

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C) $2 billion.

Question #12 of 24
An active equity investment manager has the following four risk constraints:
Liquidity constraint: It should always be possible to liquidate 85% of the portfolio in 10
trading days or less without su ering signi cant market impact costs

restricted to a portfolio assets/equity ratio of 1.5
Maximum tracking error of 5% per annum

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The 1 % Conditional VaR should not exceed 3%

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Leverage: Explicit leverage is not allowed. Leverage using derivates is allowed but

How many of these constraints are heuristic in nature?

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A) Two
B) Three

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C) One

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Question #13 of 24

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Which of the following active equity managers is likely to generate most of their active return
from idiosyncratic risk?

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A) A manager following an enhanced indexing factor-tilt approach
B) A manager following a quantitative factor-based approach
C) A stock-picking manager following a fundamental approach

Question #14 of 24
Which of the following statements regarding risk constraints is most accurate?

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A) Formal risk constraints are appropriate for fundamental managers, heuristic risk
constraints are appropriate for quantitative managers
B) Both Heuristic constraints and formal constraints are equally likely to be appropriate

for both fundamental and quantitative managers
C) Heuristic risk constraints are appropriate for fundamental managers, formal risk
constraints are appropriate for quantitative managers

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Question #15 of 24

likely have

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All else equal, the well-constructed portfolio for an active equity investment strategy will most

A) A greater number of positions and lower active share
B) Fewer positions and higher active share

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Question #16 of 24

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C) A greater number of positions and higher active share

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Forward looking risk estimates are required for:

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A) Formal risk constraints only

B) Heuristic risk constraints only

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C) Both formal risk constraints and heuristic risk constraints

Question #17 of 24
Two active equity investment managers have similar sized investment funds and the same
investment universe. Active equity manager A follows a concentrated stock-picking strategy
with a high turnover of portfolio positions. Active equity manager B follows a diversi ed factor
exposure strategy with a low turnover of portfolio positions. Which manager is most likely to be
able to sustain a higher level of Assets Under Management (AUM)?
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A) Manager B
B) Manager A
C) Both managers are likely to sustain a similar level of AUM

Question #18 of 24
An investor is most likely to consider introducing short selling into a long-only portfolio when

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their primary concern is:

B) Earning long-term risk premiums

Question #19 of 24

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C) Capacity

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A) Hedging

Which of the following factor-based strategies is least likely to su er signi cant scaling issues

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A) Short-Term Reversal

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B) Size
C) Value

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due to increased slippage costs caused by higher levels of assets under management (AUM)?

Question #20 of 24

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The chief investment o cer of a large endowment is considering allocating to a new core active
equity portfolio manager. The endowment requires core active equity managers to have a
large-cap value bias and has a benchmark equal to the NCSI World Equity Index. The risk factor
exposures of the benchmark and the custom portfolio of a potential new manager are
displayed below:

Factor Exposures

Market

Size

1.00

0.92

-0.21

0.15

0.05

0.25

Value

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NCSI World Index Custom Portfolio

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Which of the factor exposures is least likely to be consistent with a well-constructed portfolio?

A) Market

C) Value

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Question #21 of 24

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B) Size

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An analyst collects the following data regarding a portfolio of three securities:

Covariance

10% 0.040000 0.012000 0.002400

Asset B

35% 0.012000 0.014400 0.001440

Asset C

55% 0.002400 0.001440 0.003600

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Asset A

Portfolio 100% 0.009520 0.007032 0.002724
The contribution of Asset C to total portfolio variance is closest to:

A) 0.000952
B) 0.002461
C) 0.001498

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Question #22 of 24
Relative to discretionary active equity managers, systematic active equity managers will likely
have

A) Higher exposure to idiosyncratic risk
B) Lower exposure to idiosyncratic risk
C) Similar exposure to idiosyncratic risk

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Question #23 of 24
Long extension strategies are best de ned as strategies that have:

A) net exposure equal to zero

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B) gross exposure equal to 100%
C) net exposure equal to 100%

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Question #24 of 24

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An active equity investment manager who holds no benchmark holdings in her portfolio will

A) 1

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B) 0

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have an active share equal to:

C) 0.5

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