Chapter 7

Question 1

Fondamental investing uses?

Answer 1

Top 1000 stocks, ABCD, Annual sales, Book value, Cash flow, Dividend. A: not for service industry, B not for accounting firm, C not for cyclical, D not for growth stock

Question 2

When a PF has lower risk?

Answer 2

When the assets held are less than perfectly correlated

Question 3

Selection dimension

Answer 3

Identifies securities that are mispriced by the market (L or S)

Question 4

Superficial loss (avoid)

Answer 4

Selling investment 30 days before or after the sale

Question 5

Closet indexing is manage?

Answer 5

Passively

Question 6

Information ratio =

Answer 6

Alpha /tracking error

Question 7

In a taxable environment we use

Answer 7

Passively managed growth fund

Question 8

Market neutral strategy use

Answer 8

Short position

Question 9

Long short strategy uses :

Answer 9

Information more efficiently

Question 10

Fundamental indexing was developed for

Answer 10

To solve the structural return drag

Question 11

Alpha engine

Answer 11

Low embedded betas to generate positive return, should be consistant and sustainable, meet the investor’s objectives

Question 12

Risk budgeting prevent and what’s doing ?

Answer 12

Being surprised by negative returns and process to maximize returns while keeping the total portfolio risk to a minimum

Question 13

Full replication is ideal

Answer 13

With large cap stocks

Question 14

Portable alpha can divorce, separate

Answer 14

The security selection decision from the asset allocation decision

Question 15

Portable alpha cannot be issued with

Answer 15

Real estate/private equity

Question 16

Fees for a 120-20 portfolio

Answer 16

,10%

Question 17

Timing dimension is?

Answer 17

The general movement of the market

Question 18

3 ways to create a index fund

Answer 18

Replicating, tracking(mimic, the overall index with subsets, ) fondamental indexing

Question 19

Closet indexing

Answer 19

Alpha close to zero

Question 20

SMA do not permit short position. How can a manager can hedge.

Answer 20

Inverse ETF

Question 21

With a short futures contract strategy, what’s the initial margin .

Answer 21

5% of the value of the underlying stocks

Question 22

10 basic analytical tenets of WBuffett

Answer 22

Equities outperform other investments
Soundness and potential of a security is the true measure of value
Concentrated PF of well performing stocks
Investors are not always rational and process information correctly
Risk is not based on price but on economic value
Focus on 10 to 12 stocks
Most important measure weighted average cost and intrinsic value
Minimize transaction cost
Measure return after tax basis
Power of componding returns

Question 23

4 steps of enhanced indexing process

Answer 23

Select benchmark portfolio
Establish the maximum acceptable tracking error
Identify and take advantage of active mgt opportunities
Build portfolio that does not exceed the tracking limit

Question 24

What’s the primary method for weighting a security with fundamental indexing

Answer 24

Market capitalization

Question 25

What is the price based for an ETF ?

Answer 25

Underlying portfolio’s weighted average bid-ask spread

Question 26

NAPVU=

Answer 26

Fund asset-fund liabilities/shares

Question 27

What’s a synthetic equity swap?

Answer 27

Mgr pay 3 months T-Bill yield and receive the S&Ptsx 60 index return for the same 3 month

Question 28

Two ways an index can be tracked

Answer 28

Sampling and math models

Question 29

SMAs are used for

Answer 29

Small accounts
Accounts accumulating assets
Specialized strategies

Question 30

ABC inc received a 3% weight in sales metric, 5% cash,9% div and 4% book value, what’s the overall weighting

Answer 30

3+5+9+4=21/4
5,25%

Question 31

Modern portfolio theory proposes ?

Answer 31

A clear quantitative picture of its expected performance

Question 32

How the tracking error calculated ?

Answer 32

Standard deviation of the return difference between the PF and the index