I remember one of the schweser practice exam questions mention the core should be at least 50%. any new thought on how to deal with such question in real CFA exam?
Even I was confused with this. But there was a similar question in 2012 PM CFAI mock - question 19
19 The approach to portfolio construction used by the Magnolia Foundation is best described as: A. a core–satellite structure.
B. a portable alpha strategy. C. using a completeness fund.
Answer = A
A is correct because a large portion of the portfolio is invested in a manager who is expected to match the portfolio’s benchmark (zero alpha, zero tracking error), forming the core of the portfolio.
This one bothered me alot, the example on pg 235 of book 4 does reference “more than half” as the core as if it has some relevance. The other example has more than 50% of the core which is why I think many are anchored to this number. But there is nothing in the definition that says how much of the portfolio must be active or semiactive. It is really misleading the way it is presented but this begs the question: if 20% can be the core, how about 10%, 5%? Where is the cutoff?
I also got this one wrong, however the text does repeat the exam’s explanation that a small core could be indicative of higher risk tolerance. I guess we all just need to know that a core doesn’t have to be big neccessarily.