2015 Mock Exam CFAI Question #27

CFA Level III Equities
#1

“Tan has not found any manager capable of generating positive alpha in US midcap stocks. She has, however, identified a long-only portfolio manager of Canadian equities whom she believes will produce positive alpha. This manager uses the S&P/TSX (Toronto Stock Exchange) Index as a benchmark. Tan wants to create a portable alpha strategy that will earn the alpha of the Canadian equity portfolio and meet the new benchmark allocation to US midcap stocks.”

Which of the following combinations of futures positions would most likely be included in Dodson’s advice to Tan regarding her intended portable alpha strategy?

A. Short position in S&P/TSX futures and long position in S&P 400 futures

B. Long position in S&P/TSX futures and short position in S&P 400 futures

C. Long position in S&P/TSX futures and long position in S&P 400 futures

Explain your reasoning, because CFA doesn’t.

#2

A. Alpha is protable, they just need to switch the beta.

#3

Thanks June, the answer is A. Can you kindly explain? The answer by CFAI is vague and garbage. I did this mock today and this question still confuses me. Tan wants to ‘earn the alpha of the Canadian dollar portfolio’ …wouldn’t you earn alpha buy going long futures on the Canadian portfolio? Thanks again.

#4

To have Alpha Strategy, need to do both long and other side as short to have no beta but alpha.

He is a long strategy Canadian Equity investor, to be portable, he need short side. so short Canadian index

For US–Want to meet the US bechmark-buy US equity futures

#5

You want alpha exposure to Canadian equities but beta exposure to US mid-cap. You’ve invested $ with the Canadian manager that will provide you alpha and beta exposure to Canada. Now you just want to switch the beta exposure from Canada to US mid-cap, so you short TSX futures and long S&P 400