文稿年汇总-207cfa三级

LEVEL Institutional Reading#13–“ManagingInstitutionalInvestorPortfolios,”byR.CharlesTschampion,CFA,LaurenceB.Siegel,DeanJ.Takahashi,andJohnL.Maginn,CFAThecandidateshouldbeablecontrastadefined-benefitplantoadefined-contributionplananddiscusstheadvantagesanddisadvantagesofeachfromthesoftheemployeeandtheemployer;discussinvestmentobjectivesandconstraintsfordefined-benefitevaluatepensionfundrisktolerancewhenriskisconsideredfromtheofthe1)plansurplus,2)sponsorfinancialstatusandprofitability,3)sponsorandpensionfundcommonriskexposures,4)planfeatures,and5)workforcecharacteristics;prepareaninvestmentpolicystatementforadefined-benefitevaluatetheriskmanagementconsiderationsininvestingpensionplanprepareaninvestmentpolicystatementforaparticipantdirecteddefined-contributiondiscusshybridpensionplans(e.g.,cashbalanceplans)andemployeestockownershipdistinguishamongvarioustypesoffoundations,withrespecttotheirdescription,purpose,andsourceoffunds;comparetheinvestmentobjectivesandconstraintsoffoundations,endowments,insurancecompanies,andbanks;discussthefactorsthatdetermineinvestmentpolicyforpensionfunds,foundationendowments,lifeandnon-lifeinsurancecompanies,andbanks;prepareaninvestmentpolicystatementforafoundation,anendowment,aninsurancecompany,andabank;contrastinvestmentcompanies,commoditypools,andhedgefundstoothertypesofinstitutionalcomparetheasset/liabilitymanagementneedsofpensionfunds,foundations,endowments,insurancecompanies,andbanks;comparetheinvestmentobjectivesandconstraintsofinstitutionalinvestorsgivenrelevantdata,suchasdescriptionsoftheirfinancialcircumstancesandattitudestowardrisk.Level

Answer onThis1-A.Calculatethereturnrequirementtofullyfundeachsubscriptionoption.Determinewhichsubscriptionoptionismostappropriatefor owment,givenitsobjectiveandriskmanagementpractices.Justifyyourresponse.Note:Usearithmeticreturns,ratherthangeometricreturns,forthereturnrequirementTheinvestablebaseafterpaymentoftheone-timeimmediateinitiationfeeis:InvestablebaseBasic=USD21,000,000–USD500,000=USD20,500,000Thereturnrequirementiscalculatedusingthesumoftheannualsubscriptionexpenseasapercentageoftheinvestablebase,themanagementfees,andtotalpriceinflation.USD800,000/USD20,500,000=.0390=ReturnrequirementBasic=3.9%+0.5%+2%+1%=Theinvestablebaseafterpaymentoftheone-timeimmediateinitiationfeeis:InvestablebasePremium=USD21,000,000–USD1,000,000=USD20,000,000Thereturnrequirementiscalculatedusingthesumoftheannualsubscriptionexpenseasapercentageoftheinvestablebase,themanagementfees,andtotalpriceinflation.USD1,000,000/USD20,000,000=.0500=ReturnrequirementPremium=5.0%+0.5%+2%+1%=TheBasicoptionismostappropriatebecauseitsreturnrequirementisbelow owment’sreturnexpectation.Theexpectedportfoliosurpluscanthenbeusedasacushiontomaintainpurchasingpowerifinvestmentperformancedeterioratesintheshortterm.ThePremiumoptionisnotappropriatebecauseitsreturnrequirementexactlyequals owment’stotalreturnexpectation.Thiswouldmostlikelyimpairtheportfolio’sabilitytomaintainpurchasingpowerduetothevolatilityoftheendowment’sexpectedreturns.MonteCarlosimulationsshowthatthereturnrequirementcanbesafelysetequaltothereturnexpectationonlyifexpectedreturnshavenovolatility.LevelAnswer onThis Discuss,otherthantheportfolioreturnrequirement,onefactorthat:(seei.andii.below)Note:Restatingcasefactswithoutadditionalsupportwillnotreceivecredit. owment’sabilitytotakeThefactors(unrelatedtothereturnrequirement)thatdecrease owment’sabilitytotakeriskareasfollows: owment’ssupporttotheuniversityisessentialinkee theuniversitycompetitive.Therefore,disruptioninthesubscriptionserviceduetopoorreturnswouldhaveseriousconsequences. owmentisnotexpectedtoreceiveanydonationsintheforeseeablefuture.Lackofadditionalcontributionslimitsthesizeoftheinvestablebaseandreducestheportfolio’sabilitytoabsorblosses. owment’sabilitytotakeThefactors(unrelatedtothereturnrequirement)thatincrease owment’sabilitytotakeriskareasfollows:Theinvestmenthorizonisperpetual,allowingtimetomakeupforpoorshort-terminvestmentreturns.Thefundreinvestsanysurplus,resultinginanincreasedabilitytomaintainpurchasingpower.Level

Answer onThiswhethertheabilitytotakeriskislowerthan,thethanthatoftheSophoCollege(circleone)JustifyyourresponsewithtwolowerthesamehigherThePrairieFoundation’sabilitytotakeriskishigherthanthatoftheSophoCollegeendowmentforthefollowingreasons:TheSophoCollegeendowmentdoesnotexpectanyfuturedonations,whereasthePrairiefoundationrecentlyreceivedasubstantialcommitmentrelativetoitsmarketvalue.ThePrairieFoundationdoesnothaveacommitmenttofundspecificgrants,whereastheSophoCollegeendowment’sonlypurposeistofullyfundthelibrary’sannualonlinesubscriptionexpensesPrairie’sreturnrequirement(4.3%spendingrate+0.2%managementfees+2.0%inflation=6.5%)islowerthanthatofSopho(7.4%).Answer onThis

LevelDeterminewhetherthefoundation’sspendingforbelower,thesame,orhigherusingthenewspendingruleinsteadoftheoldspendingrate.(circleone)JustifyyourtheThefoundation’stotalspendingforthecomingyearwillbehigherusingthenewspendingrulebecausehigherportfoliovaluesintheearlieryearsmaketherollingthree-yearaveragehigherthanthelowerrecentportfoliovalue.Whilethe4.3%spendingrateremainsthesame,thespendingwillbehigherusingthenewrule.LEVEL Reading#22–“ ePortfolioManagement—PartII,”byH.GiffordFongandLarryD.Guin,DBA,Thecandidateshouldbeableevaluatetheeffectofleverageonportfoliodurationandinvestmentdiscusstheuseofrepurchaseagreements(repos)tofinancebondpurchasesandthefactorsthataffectthereporate;critiquetheuseofstandarddeviation,semivariance,shortfallrisk,andvalueatriskasmeasuresof eportfoliorisk;demonstratetheadvantagesofusingfuturesinsteadofcashmarketinstrumentstoalterportfoliorisk;formulateandevaluateanimmunizationstrategybasedoninterestrateexplaintheuseofinterestrateswapsandoptionstoalterportfoliocashflowsandexposuretointerestraterisk;comparedefaultrisk,creditspreadrisk,anddowngraderiskanddemonstratetheuseofcreditderivativeinstrumentstoaddresseachriskinthecontextofa explainthepotentialsourcesofexcessreturnforaninternationalbondevaluate1)thechangeinvalueforaforeignbondwhendomesticinterestrateschange2)thebond’scontributiontodurationinadomesticportfolio,giventhedurationoftheforeignbondandthecountrybeta; mendandjustifywhethertohedgeornothedgecurrencyriskinaninternationalbondinvestment;describehowbreakevenspreadysiscanbeusedtoevaluatetheriskinseekingyieldadvantagesacrossinternationalbondmarkets;discusstheadvantagesandrisksofinvestinginemergingmarketdebt;discussthecriteriaforselectinga emanager.Answer onThis

Level2-A.CalculatethepercentageofMacDougal’s ernmentportfoliothatshouldbeallocated10-year ernmentbondstodecreasetheportfolio’sdurationto6.00.ShowyourThedurationattributedtoaforeignbondinthedomesticportfolioisfoundbymultiplyingthebond’scountrybeta(0.50)bythebond’sdurationinlocalterms(8.00).ThedurationoftheTauraviabondsheldbyinvestorsinScorponia=0.50x8.00=4.00.Becausethedurationoftheportfolio(wp)istheweightedaverageofthedurationsofitsfixed einvestments,wp=(weightofScorponia×Scorponiaduration)+(weightofTauravia×Tauraviaduration).Withonlytwoinvestments,theweightofScorponia=1–weightofTauravia=(1–wT).Given durationof6.00,theweightofTauraviabonds =(1–wT)×DJ+wT× =((1–wT)×7.50)+(wT× =7.50–7.50wT+–1.50= =TheweightofTauraviabondsintheportfolioneededtoachieveaportfoliodurationof6.00isLevel

Answer onThis2-B.Calculatetheminimumchange(inbps)intheyieldfortheTauraviabondthatwouldeliminatequarterlyyieldadvantagerelativetotheScorponiabond.Showyourcalculations.Note:Ignoretheimpactofcurrencymovements.Thebreakevenspreadwidening ysisisbasedonthehigherofthetwobonds’durations.BecauseTauraviabonds’durationishigherthantheScorponiabonds’duration,the ysisisbasedonchangesintheyieldforTauraviabonds.TheyieldspreadbetweentheTauraviaandScorponiabondsis320basispoints(7.50%–4.30%),sothequarterlyyielddifferentialis0.80%or80basispoints(320/4).Thechangeinpricewillneedtoeliminatethatadvantage.LetWdenotethespreadwidening.Changeinprice=Duration×Changeinyield:80bps=8.0×W.Thespreadwidening(W)thatwouldeliminatethequarterlydifferentialbetweenthebondsis10bps0.10%.IftheyieldinTauraviabondsincreasesby10basispoints,thequarterlyyieldadvantagefromTauraviabondswillbeeliminatedforScorponiainvestors.Answer onThis

Level2-C.DeterminewhethertheTauraviabondswouldhaveahigherexpectedreturnoverthecomingyearifthecurrencyexposureisfullyhedgedorunhedged.Justifyyourresponse.Showyourcalculations.Note:AssumeMacDougal’sspotexchangerateforecastiscorrectandtherearenochangesintheyieldTheTauraviabondshaveahigherexpectedreturnifunhedged.Theunhedgedreturnisapproxima equaltotheforeignbondreturninlocalcurrencyterms,rl,plusthecurrencyreturn,e,whichistheexpectedpercentagechangeinthespotexchangeratestatedintermsofthehomecurrencyperunitofforeigncurrency.Theunhedgedreturn≈rl+e.TheexpectedchangeinthespotrateoftheTRFe=(St+1–St)/=(1.97–2.00)/=–0.015orTheunhedgedreturn≈7.50%+(–1.50%)=IfMacDougalhedgesthecurrencyriskusingaforwardcontract,thehedgedreturnwillbe yequaltothelocalriskpremium,plusthedomesticinterestrate.Alternatively,thehedgedreturnisapproxima yequaltothelocalreturnplustheforwardpremium(thedifferencebetweenthedomesticandforeignrisk-freeinterestrates).Thisistruebecause,byenteringintotheforwardcontract,MacDougalwouldbeeffectivelypayingtheforeigninterestrateandearningthedomesticinterestrate.Therefore,thefullyhedgedreturnis:HedgedReturn≈𝑟𝑟𝑙𝑙+(𝑖𝑖𝑑𝑑−if)=𝑖𝑖𝑑𝑑+(𝑟𝑟𝑙𝑙−Thefullyhedgedreturn≈1.80%+(7.50%–4.00%)=1.80%+3.50%=Alternatively,theexpectedcurrencychangeof–1.50%isgreaterthantheTRFforwardpremiumof–2.20%(=1.80%–4.00%)underIRP.Therefore,theexpectedcurrencylossislessifthebondisunhedgedthanifitishedged,andtheTauraviabondshaveahigherexpectedreturnifunhedged.AlternativeThesameconclusioncanbereachedbycomparingtheIRPforwardratewiththefutureforecastspotexchangerate.Futureforecastexchangerate=1.97TheIRPforwardratecanbecalculatedas:2.00spotrate×(1.018/1.04)=1.9577SCF/TRFSincetheIRPforwardrateislowerthanthefutureforecastspotexchangerate,thecurrencyriskshouldbeleftunhedged.Level

Answer onThisSelect,foreachofthefollowing,themostappropriatehedgingstrategy(buylongorsellshort)thatwouldaddressMacDougal’sconcernusingacreditspread:(circleDeterminewhethereachstrategyhasanegative,zero,orpositivepayofftoEtherealifthecreditspreadis150bpsatexpiration.(circleone)buysellii.callbuysellThefollowingexplanationsareprovidedforinformationalForwardGivenMacDougal’sconcernsaboutacreditspreadincrease,heshouldbuythecreditspreadforwardcontract(long).Ifthecreditspreadwidensto150bps,thestrategywouldhaveapositivepayoff.Payofffromthecreditspreadforward=(Creditspreadatforwardcontractmaturity–Contractedcreditspread)×Notionalamount×Riskfactor.Payoff=(150bps–100bps)×Notionalamount×Riskfactor,whichisCalloptionGivenMacDougal’sconcerns,heshouldbuyacreditspreadcalloption(long).Ifthecreditspreadwidensto150bps,thestrategywouldhaveapositivepayoff.Payoff=Max[(Spreadattheoptionmaturity–creditstrikespread)×Notionalamount×Riskfactor,=Max[(150bps–100bps)×NotionalAmount×Riskfactor,0],whichisAnswer onThis

Levelbuyorsellinterestratefuturestoachievehisdurationobjective.(circleone)CalculatethenumberofcontractsMacDougalshouldtrade.ShowyourBecauseMacDougalhasadurationgreaterthanthecurrentduration,heshouldpurchasefuturescontractstoachievethatobjective.Tolengthentheportfolio’sdurationtotheobjectiveof10.00,thenumberofcontractsthatneedtobepurchasedcanbeestimatedby:(DT−DI)×NumberofContracts= ×ConversionFactorofCTDbondDCTD×PCTDDT=thedurationoftheDI=theinitialdurationofthePI=theinitialmarketvalueoftheDCTD=thedurationofthecheapest-to-deliverPCTD=thepriceofthecheapest-to-deliver(10.00−8.00)×NumberofContracts= ×0.85=432.247.6×MacDougalshouldbuy432contractstoachievehisLEVEL Reading#23–“EquityPortfolioManagement,”byGaryL.Gastineau,AndrewR.Olma,CFA,andRobertG.Zielinski,CFAThecandidateshouldbeablediscusstheroleofequitiesintheoveralldiscusstherationalesforpassive,active,andsemiactive(enhancedindex)equityinvestmentapproachesanddistinguishamongthoseapproacheswithrespecttoexpectedactivereturnandtrackingrisk; mendanequityinvestmentapproachwhengivenaninvestor’sinvestmentpolicystatementandbeliefsconcerningmarketefficiency;distinguishamongthepredominantweightingschemesusedintheconstructionofmajorequitymarketindicesandevaluatethebiasesofeach;comparealternativemethodsforestablishingpassiveexposuretoanequitymarket,includingindexedseparateorpooledaccounts,indexmutualfunds,exchange-tradedfunds,equityindexfutures,andequitytotalreturnswaps;comparefullreplication,stratifiedsampling,andoptimizationasapproachestoconstructinganindexedportfolioand mendanapproachwhengivenadescriptionoftheinvestmentvehicleandtheindextobetracked;explainandjustifytheuseofequityinvestment–styleclassificationsanddiscussthedifficultiesinapplyingstyledefinitionsconsistently;explaintherationalesandprimaryconcernsofvalueinvestorsandgrowthinvestorsanddiscussthekeyrisksofeachinvestmentstyle;comparetechniquesforidentifyinginvestmentstylesandcharacterizethestyleofaninvestorwhengivenadescriptionoftheinvestor’ssecurityselectionmethod,detailsontheinvestor’ssecurityholdings,ortheresultsofareturns-basedstyleysis;comparethemethodologiesusedtoconstructequitystyleinterprettheresultsofanequitystyle ysisanddiscusstheconsequencesofstyledistinguishbetweenpositiveandnegativescreensinvolvingsociallyresponsibleinvestingcriteriaanddiscusstheirpotentialeffectsonaportfolio’sstylecharacteristics;comparelong–shortandlong-onlyinvestmentstrategies,includingtheirrisksandpotentialalphas,andexplainwhygreaterpricinginefficiencymayexistontheshortsideofthemarket;explainhowamarket-neutralportfoliocanbe“equitized”togainequitymarketexposureandcompareequitizedmarket-neutralandshort-extensionportfolios;comparetheselldisciplinesofactivecontrastderivatives-basedandstock-basedenhancedindexingstrategiesandjustifyenhancedindexingonthebasisofriskcontrolandtheinformationratio; mendandjustify,inarisk-returnframework,theoptimalportfolioallocationstoagroupofinvestmentmanagers;explainthecore-saliteapproachtoportfolioconstructionanddiscusstheadvantagesanddisadvantagesofaddingacompletenessfundtocontroloverallriskexposures;distinguishamongthecomponentsoftotalactivereturn(“true”activereturnand“misfit”activereturn)andtheirassociatedriskmeasuresandexplaintheirrelevanceforevaluatingaportfolioofexplainalphaandbetaseparationasanapproachtoactivemanagementanddemonstratetheuseofportablealpha;describetheprocessofidentifying,selecting,andcontractingwithequitycontrastthetop-downandbottom-upapproachestoequityAnswer onThis

Level3-A.Calculatetheinformationratioforthetotalequityallocation,assumingNielsen’sproposalisShowyourTheinformationratioiscalculatedasportfolioactivereturndividedbyportfolioactiverisk.Expectedactivereturnforthetotalequityallocationiscalculatedas:Portfolioactivereturn= ℎ𝐴𝐴𝐴𝐴=theweightassignedtotheithIfNielsen’sproposalisadopted,the55%weightallocatedtoUSlarge-capgrowthwouldbereplacedbyapureindexingstrategywith phaofzero.Therefore,theportfolio’sactivereturnwouldbe:=(0.55*0)+(0.20*2.3)+=Giventheassumptionthatexpectedactivereturnsareuncorrelated,theexpectedtotalportfolioactiveriskforthetotalequityallocationiscalculatedas:nPortfolioactiverisk=��h2Ai ℎ𝐴𝐴𝐴𝐴=theweightassignedtotheith𝜎𝜎𝐴𝐴𝐴𝐴=theactiveriskoftheithBecausethepureindexingstrategyhasatrackingriskofzero,theportfolio’sactiveriskwould=�(0.55)2(0)2+(0.20)2(4)2+=2.154%or215.4Therefore,theinformationratio=1.335%/=Level

Answer onThisSupport,withbothareturns-basedreasonandaholdings-basedreasonforeachofthefollowing,Nielsen’sbeliefregardingthemandate’sstyle.Returns-basedHoldings-basedThestyleweightofthefundforlarge-capgrowthdecreased(from85%to58%),whilethestyleweightforsmall-capgrowthincreasedfrom(5%to32%).Thus,thefundnolongerisconsistentwithlarge-capstyle.Thefundhasanunderweighttothetopquartileversusthebenark(33%fundweightversus45%ben arkweight)andanoverweightpositiontothebottomthreequartilesofissuersbymarketcap.Thefundexhibitshighstyleweightstobothlarge-capgrowth(58%)andsmall-capgrowth(32%),withonlyaverylowstyleweighttolarge-andsmall-capvalue(10%total).ThefundshowshigherP/EandP/Bratiosandalowerdividendyieldthanthebenark,allofwhichareconsistentwithagrowthbias.Answer onThis

LevelSelectthemanagerfromExhibit4thatismostappropriateasacomponentofNielsen’soverallstrategy.(circleone) ExplainhowastrategyfollowingNielsen’sguidelinesi.maintainthebetaexposureoftheNielsenwouldmaintainthebetaexposuretotheemergingmarketequityallocationbypurchasingindexfutures.betaexposure.Octanswouldavoidadditionalbetaexposureasthemarket-neutralportfoliobearsnosystematicriskandshouldofferonlytherisk-freerateplusanyalphagenerated.ToavoidadditionalBetaexposurewithCarinaandAra,Nielsenwouldneedtoshortsmall-capequityfutures,whichisnotallowedbytheguidelines.LEVEL Asset Reading#17–“AssetAllocation,”byWilliamF.Sharpe,PengChen,PhD,CFA,JeraldE.Pinto,PhD,CFA,andDennisW.McLeavey,CFAThecandidateshouldbeableexplainthefunctionofstrategicassetallocationinportfoliomanagementanddiscussitsroleinrelationtospecifyingandcontrollingtheinvestor’sexposurestosystematicrisk;comparestrategicandtacticalassetdiscusstheimportanceofassetallocationforportfoliocontrasttheasset-onlyandasset/liabilitymanagement(ALM)approachestoassetallocationanddiscusstheinvestorcircumstancesinwhichtheyarecommonlyused;explaintheadvantageofdynamicoverstaticassetallocationanddiscussthetrade-offsofcomplexityandcost;explainhowlossaversion,mentalaccounting,andfearofregretmayinfluenceassetallocationevaluatereturnandriskobjectivesinrelationtostrategicassetevaluatewhetheranassetclassorsetofassetclasseshasbeen yselectandjustifyanappropriatesetofassetclassesforanevaluatethetheoreticalandpracticaleffectsofincludingadditionalassetclassesinanassetdemonstratetheapplicationofmean–variance ysistodecidewhethertoincludeanadditionalassetclassinanexistingportfolio;describerisk,cost,andopportunitiesassociatedwithnondomesticequitiesandexplaintheimportanceofconditionalreturncorrelationsinevaluatingthediversificationbenefitsofnondomesticinvestments;explainexpectedeffectsonshareprices,expectedreturns,andreturnvolatilityasasegmented esintegratedwithglobalmarkets;explainthemajorstepsinvolvedinestablishinganappropriateassetdiscussthestrengthsandlimitationsofthefollowingapproachestoassetallocation:mean–variance,resampledefficientfrontier,Black–Litterman,MonteCarlosimulation,ALM,andexperiencebased;discussthestructureoftheminimum-variancefrontierwithaconstraintagainstshortformulateandjustifyastrategicassetallocation,givenaninvestmentpolicystatementandcapitalmarketexpectations;comparetheconsiderationsthataffe setallocationforindividualinvestorsversusinstitutionalinvestorsandcritiqueaproposedassetallocationinlightofthoseconsiderations;formulateandjustifytacticalassetallocation(TAA)adjustmentstostrategicassetclassweights,givenaTAAstrategyandexpectationaldata.Level

Answer onThis mendwhichtwocornerportfoliosDarzishouldusefortheoptimalassetallocationtoachievetheendowment’sreturnrequirement.Determinetheweightsforeachofthesetwocornerportfolios.Showyourcalculations.ThetwocornerportfoliosDarzishouldusefortheoptimalassetallocationtoachieveWellcareEndowment’sreturnrequirementarePortfolio#3andPortfolio#4.ThestatedreturnrequirementfortheWellcareEndowmentis8.0%.Hence,themostappropriateallocationisacombinationCornerPortfolios#3and#4,whichhaveexpectedreturnsjustaboveandbelowthereturnTheweightsofthecornerportfoliosfortheoptimalstrategicassetallocationare36.8%ofPortfolio#3and63.2%ofPortfolio#4.WeightsofCornerPortfolios#3and#4arecalculatedasReturnRequirement=(w)×ReturnPortfolio#3+(1–w)xReturnPortfolio#4 =(w)×8.60%+(1–w)x7.65% =8.60w+7.65– = ==36.8%ofCornerPortfolio1- =(1–==63.2%ofCornerPortfolioLevelAnswer onThis4-B.Calculatetheoptimallevelofleveragetoachieve owment’sreturnobjective.ShowyourWiththeabilitytouseleverage,theWellcareEndowmentcancombinethecornerportfolioclosesttothetangencyportfoliowithborrowingattherisk-freeratetoselectaportfolioonthecapitalallocationline.ThecornerportfolioclosesttothetangencyportfolioistheonewiththehighestSharpe-ratio.ThisisCornerPortfolio4,whichhasanexpectedreturnof7.65%.Borrowingisdoneatarateof0.5%.Thestatedreturnrequirementis8.0%.Theoptimallevelofleveragerequiredtoachievetherequiredreturnisdeterminedas=(w)x7.65%+(1-w)x=7.65w+0.5-=w=Hence,theoptimallevelofleverageis4.9%or1.049Level

Answer onThis4-C.Determinewhethertheunleveragedorleveragedstrategicassetallocationofferslowerexpectedvolatilitytoachieve owment’sreturnobjective.Justifyyourresponse.Note:NocalculationsareTheleveragedstrategicassetallocationofferslowerexpectedvolatilitythantheunleveragedallocationtoachievetherequiredreturn.Ifnoleverageisused,toachievetherequiredreturnyouwoulduseacombinationofCornerPortfolios#3and#4.TheSharperatioofthatcombinationisbetweentheindividualSharperatiosoftheCornerPortfolios.Ifleverageisused,CornerPortfolio#4canbecombinedwithborrowingtoachieveraterequiredreturn.TheresultingSharperatiowouldbethatofCornerPortfolio#4,whichishigherthancombinedportfolios.Thismeansthevolatilityislowerfortheleveragedportfolio.Thiscanbeillustratedasfollows:LEVEL Trading,Monitoring, Reading#29–“ExecutionofPortfolioDecisions,”byAnanthMadhavan,JackL.Treynor,andWayne#30–“MonitoringandRebalancing,”byRobertD.Arnott,TerenceE.Burns,CFA,LisaPlaxco,CFA,andPhilipMooreReading#29Thecandidateshouldbeablecomparemarketorderswithlimitorders,includingthepriceandexecutionuncertaintyofcalculateandinterprettheeffectivespreadofamarketorderandcontrastittothequotedbid–askspreadasameasureoftradingcost;comparealternativemarketstructuresandtheirrelativecomparetherolesofbrokersandexplainthecriteriaofmarketqualityandevaluatethequalityofamarketwhengivenadescriptionofitscharacteristics;explainthecomponentsofexecutioncosts,includingexplicitandimplicitcosts,andevaluateatradeintermsofthesecosts;calculateanddiscussimplementationshortfallasameasureoftransactioncontrastvolumeweightedaverageprice(VWAP)andimplementationshortfallasmeasuresoftransactioncosts;explaintheuseofeconometricmethodsinpretrade ysistoestimateimplicittransactiondiscussthemajortypesoftraders,basedontheirmotivationtotrade,timeversuspricepreferences,andpreferredordertypes;describethesuitableusesofmajortradingtactics,evaluatetheirrelativecosts,advantages,andweaknesses,and mendatradingtacticwhengivenadescriptionoftheinvestor’smotivationtotrade,thesizeofthetrade,andkeymarketcharacteristics;explainthemotivationforalgorithmictradinganddiscussthebasicclassesofalgorithmictradingstrategies;discussthefactorsthattypicallydeterminetheselectionofaspecificalgorithmictradingstrategy,includingordersize,averagedailytradingvolume,bid–askspread,andtheurgencyoftheorder;explainthemeaningandcriteriaofbestevaluateafirm’sinvestmentandtradingprocedures,includingprocesses,disclosures,andrecordkee,withrespecttobestexecution;discusstheroleofethicsinReading#30Thecandidateshouldbeablediscussafiduciary’sresponsibilitiesinmonitoringaninvestmentdiscussthemonitoringofinvestorcircumstances,market/economicconditions,andportfolioholdingsandexplaintheeffectsthatchangesineachoftheseareascanhaveontheinvestor’s mendandjustifyrevisionstoaninvestor’sinvestmentpolicystatementandstrategicassetallocation,givenachangeininvestorcircumstances;discussthebenefitsandcostsofrebalancingaportfoliototheinvestor’sstrategicassetcontrastcalendarrebalancingtopercentage-of-portfoliodiscussthekeydeterminantsoftheoptimalcorridorwidthofanassetclassinapercentage-of-portfoliorebalancingprogram;comparethebenefitsofrebalancinganassetclasstoitsportfolioweightversusrebalancingtheassetclasstostaywithinitsallowedrange;explaintheperformanceconsequencesinup,down,andflatmarketsof1)rebalancingtoaconstantmixofequitiesandbills,2)buyingandholdingequities,and3)constantproportionportfolioinsurance(CPPI);distinguishamonglinear,concave,andconvexrebalancingjudgetheappropriatenessofconstantmix,buy-and-hold,andCPPIrebalancingstrategieswhengivenaninvestor’srisktoleranceandassetreturnexpectations.Level

Answer onThis5-A.ExplaintwodisadvantagesofCole’sproposedtechniquefortheBLUEtradeAdvertise-to-draw-liquidityisanexplicitliquidity-enhancingtechniqueusedwithinitialpublicofferings,secondaryofferings,andsunshinetrades,whichpubliclydisplaysthetradinginterestinadvanceoftheactualorder.Ifpublicityattrac oughtraderstakingtheoppositeside,thetrademightexecutewithlittleornomarketimpact.Thedisadvantagesoftheadvertise-to-drawliquiditytechniquefortheBLUEexecutionareasColeisaninformation-motivatedtrader,andwantstoestablishalargeposition(relativetoaveragedailyvolume)quicklybecausehisproprietaryresearchledhimtobelievethatthesharepriceofBLUEwillincreasesubstantially.Advertisingcoulddrawouttheothersideofthetrade,butdoesn’tguaranteeimmediateexecution.Theadvertise-to-draw-liquiditytechniquec sobeartheriskofotherstradinginfrontoftheorder.Itcouldcauseinformationleakagetofrontrunners,increasingthesharepriceaheadofCole’sexecution.Answer onThis

Level5-B.Calculatetheshare-volume-weightedeffectivespreadfortheLIVStransaction.ShowyourTheeffectivespreadistwotimesthedeviationoftheactualexecutionpricefromthemidpointofthemarketquoteatthetimeanorderisentered.BecausetheLIVSorderexecutedattwodifferentprices,theshare-volumeweightedspreadisusedincomputingthedeviationfromthemidpoint.Forthe trade,themidpointofthemarketatthetimetheorderisenteredis:(EUR21.07+EUR21.13)/2=EUR21.10sotheeffectivespread=2×(EUR21.13–EUR21.10)=EURForthesec