2009 Mock Exam PM - Question 33

Is there anyone else who interprets the strategy of the portfolio presented in Exhibits 2 & 3 differently than the answer guide? Answer choice: A) A enhanced indexing by minor risk factor mismatches B) active management by larger risk factor mismatches C) enhanced indexing by matching primary risk factors I put down (A) and I can maybe see that it’s ©… but no way it’s (B), which is what the answer guide says. What constitutes minor risk factor mismatches? When I look at the portfolio returns compared to the benchmark returns in Exhibit 2, the excess returns are all less than 70 bps every year from 2004 to 2008. That definitely looks like enhanced indexing and not active management to me. Also, if you look at the contribution to spread duration, it may lean more towards answer choice ©. Can anyone please shed some light on how (B) can be the answer and why not (A) nor ©? Thanks!

Well, if it were A, duration should be the almost same… Maybe it’s an issue of degree, since the anual returns are dfferent. though they are awful close… I thinkI put C.

B for sure, look at the spread durations

So I looked it up. enhanced indexing by matching primary risk factors is supposed to only create small deviation from the index- enough to “cover the difference in administrative costs”. i learned something new a day before the test.

Ah…damn the subtleties… Thanks, guys! Now I won’t have to make the same mistake on the real exam. Good luck to you both!