Sample Questions
Question 1
Easy
Factor timing refers to the practice of:
Solution
A is correct.
Factor timing involves dynamically adjusting portfolio factor exposures based on predictions about which factors will perform well in different market regimes or economic environments. For example, a manager might increase value exposure when value spreads are wide (predicting mean reversion) and decrease it when spreads narrow.
Factor timing involves dynamically adjusting portfolio factor exposures based on predictions about which factors will perform well in different market regimes or economic environments. For example, a manager might increase value exposure when value spreads are wide (predicting mean reversion) and decrease it when spreads narrow.
Question 2
Medium
Smart beta strategies differ from traditional passive indexing in that they:
Solution
A is correct.
Smart beta strategies use rules-based, transparent methodologies that weight stocks by factor characteristics (value, momentum, quality, low volatility, size) rather than market capitalization. They sit between fully passive cap-weighted indexing and fully active management.
Smart beta strategies use rules-based, transparent methodologies that weight stocks by factor characteristics (value, momentum, quality, low volatility, size) rather than market capitalization. They sit between fully passive cap-weighted indexing and fully active management.
Question 3
Hard
A portfolio manager wants to increase the portfolio's active return potential without increasing tracking error. The most appropriate approach is to:
Solution
A is correct.
The Fundamental Law of Active Management shows that IR = IC x sqrt(BR). To increase active return (IR x tracking error) without increasing tracking error, the manager must increase the information ratio. This can be achieved by improving the information coefficient (forecasting skill) through better research, data, or analytical methods.
The Fundamental Law of Active Management shows that IR = IC x sqrt(BR). To increase active return (IR x tracking error) without increasing tracking error, the manager must increase the information ratio. This can be achieved by improving the information coefficient (forecasting skill) through better research, data, or analytical methods.
