I’m pretty sure all the info you need is in this paragraph. Expanding on the discussion of multifactor models, Henshaw discusses the existence of factor and tracking portfolios. Henshaw states that a manager who has no view of future interest rates and wants to hedge away the interest rate risk in his portfolio could create a tracking portfolio that is not exposed to the interest rate factor. Ponder adds that if a manager believes that she can beat the index with superior stock selection she can use a factor portfolio with the same factor exposures as the S&P 500 but with a different set of securities than the S&P 500. Regarding their statements concerning tracking and factor portfolios: are henshaw and ponder correct? to say time, i didn’t lay it out with the 4 choices but obviously there are 4 possibilities. i’m curious about more q’s in the set, but if i figure out why i don’t have this one right it might help with the others. BTW, how big is the schweser erratum? i’ll have to check tomorrow.
I think both statements are backwards. To hedge away interest rate risk you want a 0 exposure to that factor Ponder can use a tracking portfolio but change her active specific risk (weightings) for superior stock selection.
Westbruin: is what I said correct?
yeah, it is… i’m frustrated as i feel like i understand the concept but maybe i don’t understand the terminology or exact construction… i definitely thought the second guy is talking about factors all the same as the S&P 500 but then active risk beyond it… and the first guy i take NO exposure to mean ZERO exposure. a couple of other things in the other questions: does the CML become the new efficient frontier? is that the right terminology? i don’t remember them referring to it as such… and then a few more things confuse me… anyhow i’ve used schweser alot, so this worries me some. altough still time for me to read it again (the PM that is) … of course without schweser i’d probably be hugely deficient on a bunch of subjects.
The CML transforms the efficient frontier into a straight line with the intercept being rf and the tangent point on the efficient frontier is the market portfolio. Anyone else correct me if I am wrong.
Niblita75 Wrote: ------------------------------------------------------- > The CML transforms the efficient frontier into a > straight line with the intercept being rf and the > tangent point on the efficient frontier is the > market portfolio. > > Anyone else correct me if I am wrong. ok, thanks… i read it that they consider it the new efficient frontier. which is a reasonable description but i don’t remember anyone describing/naming it that way… i’ll post the exact wording.
ponder states that the EF is the set of portfolios on the portion of the minimum variance portfolio frontier of risky assets above the global minimum variance portfolio. is he correct? no, the EF when a RF asset is avail and risk is measured as std is the capital market line (CML)… paraphrasing: basically CML dominates the minimum variance efficient frontier… all that’s ok, but i don’t remember the CML being considered a new efficient frontier.
I would have said he was correct. They threw that rf stuff in the answer not the question.
also, they seem to have std on the x axis of their CAPM graph… and, they say multifactor returns explain returns in terms of factor surprises. i say macroeconomic yes, fundamental P/E type models = NO… anyhow, pulling my hair out.
Niblita75 Wrote: ------------------------------------------------------- > I would have said he was correct. They threw that > rf stuff in the answer not the question. sorry, the rf was earlier in the paragraph… but i’m still unsure on the wording…