Core Satellite, Return-Based Style

CFA Level III
#1

Placing half of the portfolio’s 40% US large Cap Equity Allocation with a Russell 1000 index manager; remaining half is to be divided equally between two additional managers.The committee hopes the two non-indexers will generate positive active returns

Answer states this is a core-satellite approach because half of the portfolio is being indexed and the remaining half is being divided equally between two additional manager… It also mentioned that “had specifically referenced using the Russell 1000 for beta and then the other managers for value added, then alpha and beta separation would be the best choice.”

My questions:

  1. Does this mean we need to see the wording beta and alpha to pick the beta-alpha strategy? If we don’t see the wording, we just pick core-satellite?

  2. For the return style exposure charts, if we see certain assets with higher exposures, does it mean they have higher weights or just higher potential return?

I just saw an answer stating “the regression of return data does not consider the actual holdings in the portfolio and cannot determine if the portfolio actually held cash equivalents or the actual weights on average.”

Thank you!

#2

That’s how I resume this problematic:

  1. We need to see short-long strategy to conclude whether is particular strategy alpha and beta separation. If not alpha & beta separation still does not mean that is core satellite. IMO, it is core satellite if highest weight of portfolio is indexed and remainder is allocated to active manager(s).

  2. IMO, higher exposures is crucial for style determining. But, for example if 51% in Return analysis is coming from large cap growth stocks, I would simply conclude that manager was 51 % exposed to large cap growth stocks returns during recorded period.

  3. Return based analysis is based on historical trending data (eg. past 36 months) while Holding based analysis is based on current snapshot.

#3

Thanks, Flashback!

  1. In the Kaplan, i know they mentioned specifically about using the long-short strategy to achieve the alpha. However, they also mention "any strategy that seeks to provide index-like return (beta risk) from one set of decisions and positive value added from their decisions is alpha and beta separation. So do we still need to see the long-short strategy for the alpha and beta approach?

  2. I know we cannot say the current holding is 51%. But I feel like if we can say they were exposed 51% with large cap in the past, that is equivalent to saying 51% holdings on average in the past, right? What is wrong with my logic?

Thank you!

#4

  1. Maybe I am not correct, but how one be exposed to alpha only without beta exposure if long only strategy is used.

  2. I think whatever makes it better to understand is OK tactic for exam. Later we will continue our education more in detail under less stressful conditions:)

#5

Thanks for your help!

  1. Do you mean a beta exposre with long SP500 ETF and long a IBM stock? I think no matter if we use long only or long-short for the alpha piece, the beta exposure is always there with something like long SP500 ETF. I am not very clear with this concept, I will send a Kaplan this and see what they will say.

  2. I think you are right, Flashback! We will continue that after the exam :slight_smile: At first, I was just trying to find a way to remember this.

#6

core satellite is generally referencing 1 asset class like US Equities or even more specifically i.e. Large Cap.

beta-alpha can mean different markets

#7

I am quite sure that core satellite may also refer to more than one satellite asset classes and not only on domestic market.

Beta and alpha mean not only different markets (or only different asset classes within same market) than long and short strategies use.