2009 Schweser Practice Exam V2 Exam 3 Q17.3

Can anyone explain why manager B will have less IB ? Sorry I am using 2009 version.

B is doing an enhanced indexing strategy using futures. He is not picking stock (or bonds) but seeks enhanced cash return by altering the duration (using gov issued notes and bills). His universe (limited breadth: 90 days bills, 3 years notes,…) is smaller than mgr C’s (500 stocks) AND his IC < mgr C’s.

elcfa, Seeking enhanced cash return by altering the duration (using gov issued notes and bills) is not making decision ? The solution stated : The derivatives-based enhanced indexing strategy of Manager B will have less breadth than the (stock-based) enhanced strategies of Managers A and C. I don’t understand what this means. Can you kindly advise ? TKVM !

Breadth of C: 500, i.e., C potentially makes up to 500 decisions independently. Breadth of B: a few since B is not picking stocks nor bonds (says long IBM 5 yr, short GS 5 yr,…). He is only trying to tilt the duration toward the yield curve he thinks will give more return in the short term (using short term gov papers: T notes or short term bills) so he is only making a few decisions (e.g., to take the example in CFAI text: 30% 30 days, 70% 3 years T notes vs. 80% 30 days, 20% 3 years T notes).

elcfa, TKVM ! I got so much benefit from you. You are very much appreciated !