Shown below are the investment weights for the securities held in four different

Question

Shown below are the investment weights for the securities held in four different portfolios three mutual funds and the benchmark index that each of those funds uses 8. % Security Investment Weight: Fund Y 40% 0 Fund Z Fund X 12% 13 Benchmark Index 10% 10 10 10 10 10 10 10 10 10 Security 11% 15 4 0 10 30 14 10 a. Calculate the active share (AS) measure for Fund X, Fund Y, and Fund Z relative to the b. Using these active share calculations, indicate which fund is the most likely to be consid- managed concentrated stock-picking fund. Explain the reason for your classification 25 10 benchmark ind ex. ered: (i) a passive index fund, (ii) a closet (or enhanced) index fund, and (iii) an actively

Explanation / Answer

a) Calculation of Active share measure

Activity share measure for Fund X = 28/2 = 14

Activity share measure for Fund Y = 130/2 = 65

Activity share measure for Fund Z = 11/2 = 5.5

b)

(i) Passive Index Fund is Fund Z, because it has the lowest Activity share measure compared to benchmark

(ii) Closet Index Fund is Fund X, because it has medium Activity share measure.

(iii) An actively managed concentrated stock-picking fund is Fund Y, because it has the highest Activity share measure.

Security Benchmark Index Activity (fund X) Activity (fund Y) Activity (fund Z) 1 10 |10-12| = 2 |10-40| = 30 |10-11| = 1 2 10 |10-13| = 3 |10-0| = 10 |10-9| = 1 3 10 |10-8|= 2 |10-5| = 5 |10-9| = 1 4 10 |10-15| = 5 |10-0| = 10 |10-9| = 1 5 10 3 10 1 6 10 0 10 1 7 10 5 20 1 8 10 4 10 1 9 10 4 10 1 10 10 0 15 1

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