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
Based on Exhibit 1, the expected active return in answer to Lund's first question is closest to:
Solution
A is correct. The full fundamental law of active management states
Lund asks for expected value added at the maximum active risk the IPS allows, so is the 3.0% ceiling rather than the 4.0% of current positioning. From Exhibit 1, , , and .
First, the constrained information ratio:
Then the expected active return:
The transfer coefficient belongs in the calculation because, as Sinclair notes, it already captures the degradation caused by the long-only restriction, the 8% issuer limit, and the active risk ceiling in translating the analysts' insights into portfolio weights.
Lund asks for expected value added at the maximum active risk the IPS allows, so is the 3.0% ceiling rather than the 4.0% of current positioning. From Exhibit 1, , , and .
First, the constrained information ratio:
Then the expected active return:
The transfer coefficient belongs in the calculation because, as Sinclair notes, it already captures the degradation caused by the long-only restriction, the 8% issuer limit, and the active risk ceiling in translating the analysts' insights into portfolio weights.
