CFAI Reading 23, Example 7, page 195

[Sunshine4ever]

"EXAMPLE 7

Returns-Based Style Analysis (2)

Frank Harvey is analyzing a U.S. equity mutual fund that states the investment objective of investing for growth and income, with an orientation to mid-cap stocks within the universe of U.S.-domiciled companies. Harvey may select from the following indices for use in a returns-based style analysis:

■ the S&P/Citigroup 500 Growth and Value indices, which have a large-cap orientation;

■ the Russell 2000 Growth and Value indices, which have a small-cap orientation; ■ the Russell 1000 Growth and Value indices, which include large-cap and

mid-cap shares;

■ the Russell Top 200 Growth and Value indices, which together represent the 200 largest market-cap securities in the Russell 1000 Index; and

■ the Russell Midcap Growth and Value indices, which together represent the 800 smallest market-cap issues in the Russell 1000 Index (the Russell Top 200 Index and the Russell Midcap Index together constitute the Russell 1000 Index).

Harvey selects the S&P/Citigroup 500 Growth and Value indices and the Russell 2000 Growth and Value indices for the style analysis.

2. Recommend a more appropriate selection of indices.

Solution to 2:

The following selection of indices would be best:

■ Russell Top 200 Growth ■ Russell Top 200 Value ■ Russell Midcap Growth ■ Russell Midcap Value

■ Russell 2000 Growth ■ Russell 2000 Value"

Harvey is only interested in mid-cap growth and value. My answer is Russell Midcap Growth & Value. What’s the point of including Top 200 or Russell 2000?

[cpk123]

As stated - the Russell Midcap Growth and Value indices, which together represent the 800 smallest market-cap issues in the Russell 1000 Index – what if the index had some of the larger mid cap securities represented - which might be adequately represented in the Top 200 indices.

If you did not include the Top 200 - you incur a higher tracking error on your portfolio.

[ov25]

@Sunshine4ever

■ the Russell 2000 Growth and Value indices, which have a small-cap orientation; ■ the Russell 1000 Growth and Value indices, which include large-cap and

mid-cap shares;

■ the Russell Top 200 Growth and Value indices, which together represent the 200 largest market-cap securities in the Russell 1000 Index; and

The following selection of indices would be best:

■ Russell Top 200 Growth ■ Russell Top 200 Value ■ Russell Midcap Growth ■ Russell Midcap Value

■ Russell 2000 Growth ■ Russell 2000 Value"

Harvey is only interested in mid-cap growth and value. My answer is Russell Midcap Growth & Value. What’s the point of including Top 200 or Russell 2000?

CP:

Top200 of the large cap -> appears to me that they are far larger than the mid-cap

R2000 - would have “small-cap orientation”

I prolly still dont understand how the above indeces contibute to “mid-cap growth or value”