【优质】solution manual for investment analysis and portfolio management ch17.docVIP

CHAPTER 17 EQUITY PORTFOLIO MANAGEMENT STRATEGIES Answers to Questions 1. Passive portfolio management strategies have grown in popularity because investors are recognizing that the stock market is fairly efficient and that the costs of an actively managed portfolio are substantial. 2. Numerous studies have shown that the majority of portfolio managers have been unable to match the risk-return performance of stock or bond indexes. Following an indexing portfolio strategy, the portfolio manager builds a portfolio that matches the performance of an index, thereby reducing the costs of research and trading. In an indexing strategy, the portfolio manager’s evaluation is based upon how closely the portfolio tracks the index or “tracking error,” rather than a risk-return performance evaluation. 3. There are a number of active management strategies discussed in the chapter including sector rotation, the use of factor models, quantitative screens, and linear programming methods. Following a sector rotation strategy, the manager over-weights certain economic sectors, industries or other stock attributes in anticipation of an upcoming economic period or the recognition that the shares are undervalued. Using a factor model, portfolio managers examine the sensitivity of stocks to various economic variables. The managers then “tilt” the portfolios by trading those shares most sensitive to the analyst’s economic forecast. Through the use of computer databases and quantitative screens, portfolio managers are able to identify groups of stocks based upon a set of characteristics. Using linear programming techniques, portfolio managers are able to develop portfolios that maximize objectives while satisfying linear constraints. 4. Three basic techniques exist for constructing a passive portfolio: (1) full replication of an index, in which all securities in the index are purchased proportionally to their weight in the index; (2) sampling, in which a portfolio manager purchases on