How to know in this language - to long or to short?

CFA Level III
#1

This is CFA 2015 MC exam! Question 27?

This manager uses the S&P/TSX 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.

The answer is to long the US midcap and short the TSX? LOL.

Any one? I speak english but I dont read it apparently. lol.

#2

This one bugged me out too… its poorly worded, but makes sense if you make an assumption

#3

He wants the alpha of the Canadian market, not the beta, hence the short.

#4

MrSMART do you know this question?

Why is it a long and a long though? what the heck in the question do you know when to short?

#5

I don’t have the question, he said he wanted an alpha in the Canadian market, then he shorted the index and went long on canadian stocks with an aggregate beta of 1.

Look at it this way. He wants exposure to the US market, and he wants alpha from the CAD market.

  1. Long US market -> US Beta

  2. Short CAD market -> Remove CAD Beta (-1)

  3. Long CAD stocks / enchaned index -> Make alpha less the movement in the general CAD market -> (+Alpha + (Beta - (Beta from bullet 2))

#6

what does alpha from the CAD market mean? LOL.

It sounded like from the question he wanted to invest in US and in CAD!

#7

its a portable alpha strategy!

I think that gives it away that you will need a strategy witha correlation of 0 and alpha/beta works long and short!

#8

It means he wants returns over the market, without the market return included.

So you short the market, and any long positions then using the proceeds would be an alpha, whether positive or negative.

#9

OK… you have to ASSUME that he makes an investment with the “long only portfolio manager” since its a portable alpha strategy (by definition you need to be LONG the underlying… the question and answer makes sense but is clearly poorly worded… even by CFA standards they should have added a sentence explaining that the he made the investment with teh manager that is expected to earn positive alpha…

by shorting TSX futures he removes the beta and maintains the alpha from the long only manager…

the answer should state (long underlying/ long midcap/ short tsx)

#10

I haven’t read the question and I understood what was asked from the answer.

What do you mean by underlying?