Returns based analysis

CFA Level III
#1

In a returns based analysis, if these are the indices chosen, is the choice appropriate? Manager pursues a actively managed domestic equity growth strategy.

  • UK large cap growth
  • UK large cap value
  • UK mid and small cap growth
  • UK mid and small cap value

I thought no, because the last two do not represent distinct sources of risk (mid cap vs. small cap). What is your view?

#2

Are they mutually exclusive?

Yes.

Are they (nearly) collectively exhaustive?

Yes.

So they’re OK.

#3

I agree with your points, Magician; but i can’t say that the indices are appropriate since the third condition isn’t satisfied, isn’t it? The solution says they represent distinct sources of risk - not sure if that’s correct?

#4

For the exam, you’re not going to have to determine on your own what the sources of risk are. Unless they tell you that there are specific risk drivers common to these asset classes, treat them as different.

#5

Got it, thank you!

#6

My pleasure.