Sorry I am using 2009 version of Schweser Practice Exam. Refering to V2 Exam 1 Q5C, I don’t understand what are stated in it’s solution at all. Can anyone explain ? TKVM !
Can anyone explain ?
Found no Q5C in 2009 Schweser Practice Exam V2 Exam 1, only 5a and 5b
I am very sorry, it shall be Q6C.
Schweser answer: “Positively correlated with positive stock returns and negatively correlated with negative stock returns.” This refers to the footnote pg 98v5 CFAI. Actually, Schweser misquotes/misunderstands slightly what CFAI says. The research shows positively correlated with SIGNIFICANT positive stock returns and negatively correlated with SIGNIFICANT negative stock returns It means that when the stock returns is VERY positive, mgned fut return is also positive --> not dampen portfolio return a lot in good time, while at market crashes, mgned fut returns tend to be positive thus soften the negative return. Schweser: Very liquid and provide leverage. Managed Fut provide Tokay Endow the oppo to swiftly respond to major price movements either upward or downward… The transaction does not require liquidation of other investment holdings or adding to overall portfolio risk, but the investment is highly leveraged. The statement is true only if Tokay is the one managing the futures portfolio (normally it is the CTAs whom Tokay invests in, otherwise what is the point of having CTA). In this case, Tokay can modify its exposure to futures with little (relatively) additional cash (as collateral/margin account), thus little need to liquidate. Futures market is very liquid. Not sure I agree with the statement “not require…adding to overall portfolio risk”. It seems obvious to me that you add to your portfolio risk when you increase your leverage especially in connection with futures exposure.
elcfa, Can I summary as follow ? Adding Managed Futures will result in 1. Risk reduction (as you said : when the stock returns is VERY positive, mgned fut return is also positive --> not dampen portfolio return a lot in good time, while at market crashes, mgned fut returns tend to be positive thus soften the negative return) 2. Return enhancement (because of “highly leveraged” ? this will higher risk ?) 3. Increased liquidity ? Your comment is appreciated !
AMC Wrote: ------------------------------------------------------- > elcfa, > > Can I summary as follow ? Adding Managed Futures > will result in > > 1. Risk reduction (as you said : when the stock > returns is VERY positive, mgned fut return > is also positive --> not dampen portfolio > return a lot in good time, while at market > crashes, mgned fut returns tend to be positive > thus soften the negative return) Yes, as seen in higher Sharpe ratio and higher min monthly return in portfolios incorporating CTA using historical returns shown in CFAI texts. > 2. Return enhancement (because of “highly > leveraged” ? this will higher risk ?) Yes, but for a different reason: as seen in higher returns in portfolios incorporating CTA using historical returns shown in CFAI texts. > 3. Increased liquidity ? > > Your comment is appreciated ! No. Increased leverage (if desired). One note of previous posting: >“I agree with the statement “not require…adding to overall portfolio risk”. It seems >obvious to me that you add to your portfolio risk when you increase your leverage >especially in connection with futures exposure” Schweser may have meant, ON AVERAGE, the portfolio risk does not increase when adding mgned fut in your portfolio. In that case, I agree, as measured by lower Sharpe ratio using historical returns mentioned earlier. If Schweser means no increased risk when “swiftly respond to major price movements either upward or downward” then I disagree.
elcfa, TKVM again !
One last thing, just to make the whole thing 100% clear. I wrote: “normally it is the CTAs whom Tokay invests in, otherwise what is the point of having CTA” I actually meant: “normally it is the CTAs whom Tokay uses/hires to manage/do the actual investment (of the mgned fut account), otherwise what is the point of having CTA”
elcfa, TKVM for your kindness !