hi all – reading 27 q 19 from CFA – i have no idea what they mean here! the question is, which of these equity benchmark characteristics would a fund manager favor if they have large, uncertain cashflows in and out of their fund?
a) investability over breadth
b) float bands over judgment-based construction
c) fewer reconstitution effects over fewer crossing opportunities.
waaaaaaht. any ideas? thanks v much everyone
breadth vs. investability
breadth = larger # of stocks to invest in.
investability = more liquid stocks available.
So they would prefer investability over breadth definitely - so they can take advantage of stock liquidity in order to meet / use the uncertain cashflows coming in and out of the portfolio.
float bands vs. judgment based construction
float bands - are bands of say 15-25%, 26-50%, 50-75% where the % represents the percentage of company’s full capitalization available for trading.
judgment based construction: do not know the index contents properly.
Both of these lead to uncertainty in the index contents - and hence a manager would not choose this option.
fewer reconstituion effects vs. fewer crossing opportunities
reconstitution effect - when the benchmark is modified due to items moving in / out (inclusion/deletion effects). a more popular index would have more reconstitution effects. A more popular index would also by the same token be more liquid, and hence have more crossing opportunities. So fewer reconstitution effects = less popular index = fewer crossing opportunities. --> this makes this choice not right.
hence A) investability over breadth is the choice.