Since blue boxes seem to come up on every exam each year, I wanted to understand question 2 of example 6.
My confusion lies with the Y-Axis of exhibit 13 and how it relates to question 2 of Example 6. How I see the Y-axis is that it is the Style Fit. With Style fit, all I’m looking at is Selection = 1 - Style (which measures the active security selection ability).
From the graph, I would have noted that only the R1000G is Actively managed since the style for the other three (R100V, R2000G and R200V) are near 0 --> Style = 100 so Selection = 0.
I’m obviously interpreting this graph completely wrong because it’s not even mentioning active management and that’s all i’m getting from the Y-Axis. It says the graph is representing the Factor weights of each benchmarks.
Can somebody explain.
Much appreciated.
I’m not really sure what you are asking regarding Example 6 because you are reference #2 but keep saying part c? but also reference style fit.
If you are just asking about Exhibit 13. and wondering why the y-axis isn’t style fit. I think the answer is they labeled it allocation not style fit. But also #2 isn’t asking anything about active management.
I corrected it above. What I meant is Question 2 of Example 6. Sorry.
I understand question 2 is not asking anything about style fit but I’m trying to understand their solution. How do you get that from the exhibit. My point is, if I was answering question 2 of example 6 I would’ve said the R1000G is being actively managed because the style is around 50% and therefor the Selection is near 50% as well and therefore is being actively managed.
The question asks --> Characterize the historical style? Being actively managed is how I would have characterized it. Their solution talks about factors weights and I dont get it. The Y-Axis is referring to Style allocation and I dont know how that Style Allocation translates to Factor Weights.
Thanks
So just looking at Exhibit 13, you can’t determine if the strategy is being actively managed or not. The only thing exhibit 13 is telling you is your portfolio has roughly 50% large cap growth stocks. The chart doesn’t tell you anything about the benchmark or index, the Russell Indices in exhibit 13 are just for representation purposes.
So without knowing anything about the benchmark in exhibit 13 alone, it would be impossible to mention anything about active management. Style characteristics are growth, value, neutral. So characterizing the historical style means tell me the composition of the portfolio using growth, value, neutral. Toss in capitalization (large or small) to be more specific. Style Allocation = Style Weights = Factor Weights.
hope that helps.
Thats great. Much appreciated.
I got stuck on seeing the word STYLE.
With style I jumped to Selection = 1 - Style and was using the perentages from the graph with Selection representing active management.
Thanks again