- In the context of multi-factor models, investors with lower-than-average exposure to recession risk (e.g. those without labor income) can earn a risk premium for holding dimensions of risk unrelated to market movements by creating equity portfolios with: A) greater-than-average exposure to the recession risk factor. B) less-than-average exposure to the recession risk factor. C) greater-than-average market risk exposure. D) less-than-average market risk exposure. 2) Analysts attempting to compensate for instability in the minimum-variance frontier will find which of the following strategies least effective? A) Gathering more accurate historical data. B) Eliminating short sales. C) Reducing the frequency of portfolio rebalancing. D) Improving the accuracy of their forecasting models. 3)Which factors, taken in combination, would create the best multifactor model for utility stocks? A) Projected winter low temperature, interest rate term structure, housing starts, price/earnings factor. B) Projected change in energy prices, interest rate term structure, estimated GDP growth, projected market return. C) Projected winter low temperature, projected change in energy prices, projected change in inflation, projected market return. D) Interest rate term structure, projected change in inflation, price/earnings factor, estimated GDP growth.
PM is my weak section right now. I’ll give it a shot… 1. D - not sure about it though. 2. No idea, going to guess C 3. B?
C A C
C B C
C C? C
A A A did I mention PM is my weakest section??
even i thought that these were very straight forward…but guess not. I got only one correct when I attempted. will wait for others to respond…
C A B
Just read PM once, a month ago… have no idea what’s all this. My guesses… A1. C? High Risk, high return. If loss - they don’t care A2. A? accurate historical data?? I mean, what we have is what we have. (no Shorting, and less frequent rebalance should provide stability) A3. B?? A. interest rate term structure, housing starts – looks dep vars C - projected change in energy prices, projected change in inflation - looks dep vars D -Interest rate term structure, projected change in inflation -loods dep var
I am going with 1. A 2. A 3. C I hate PM.
A A C?
I got only the #2 correct…(A) The correct answers to all of them is (A). nicolargol, did you really mean that?? Here’s the explanation which may not be too satisfying… 1) The correct answer was A. Multifactor models allow us to capture other dimensions of risk besides overall market risk. Investors with unique circumstances different than the average investor may want to hold portfolios tilted away from the market portfolio in order to hedge or speculate on factors like recession risk, interest rate risk or inflation risk. An investor with lower-than-average exposure to recession risk can earn a premium by creating greater-than-average exposure to the recession risk factor. In effect, he earns a risk premium determined by the average investor by taking on a risk he doesn’t care about as much as the average investor does. 2) The correct answer was A. A key problem with the minimum-variance frontier is the difficulty of forecasting statistical inputs. As such, improving the forecasting model is useful. Constraining portfolio weights through the elimination of short sales and avoiding rebalancing until significant changes occur in the efficient frontier can be effective strategies for limiting instability. However, even the best historical data is often of limited use in forecasting future values. Gathering more accurate historical data would help, compensate for instability, but not as much as the other three options. 3) The correct answer was A. Without knowing the accuracy of the factor sensitivities or actually looking at the numbers generated by the equation, we can only assess the value of a multifactor model by considering whether the individual factors are relevant. Winter low temperatures and energy prices are particularly relevant to utilities, the first on the revenue side, and the second on the cost side. Because utilities tend to be heavily leveraged, interest rates affect them. Inflation rates are relevant for most companies, as are price/earnings ratios. Housing starts are relevant for utilities, as houses are larger than apartments and more expensive to heat and cool. However, utilities are considered diversifiers, and their returns are less correlated to those of the broader market than are the returns of stocks in other sectors. The sector is also less correlated to economic growth than most. As such, models that consider GDP growth or market returns are probably of less value than the one model that considers neither.
1/3 is not good. Banni you rock!!!
LOL, 2/3 isn’t exactly knocking it out of the park. 3rd one was one of those questions that just pisses you off and you flick the bird at the computer screen for getting the general idea but then having schweser tell you that a P/E ratio is more important than the mkt return. i’d maybe argue mr/mrs schweser on that, but whatever, i get what their answer says and will move on.
0/3. I AM THE SMARTEST MAN ALIVE
Cool nicolargol! I don’t feel bad, since I am yet to do the PM readings thoroughly.
Well I was pretty confident with the first 2 A, the third one I remembered having read that for utilities, market return was not relevant… My pb with PM is that I always feel like I have “guessed” the answer, instead of being sure like I can be with econs or fixed income for example
Hi, moregreat , just wondering where you get these questions? they are pretty high qarlity…
ack these were tough – 1 of 3. #3 was a killer. simple concept, annoying to weigh the different factors in your head
these are straight out of Schweser Q-bank.