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TitleCH 16
TagsValuation (Finance) Investor Active Management Asset Allocation Stock Market Index
File Size183.8 KB
Total Pages9
Document Text Contents
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market; other risk factors explain the difference in risk-adjusted returns between value
and growth portfolios.

9. A price momentum strategy is based on the assumption that a stock’s recent price
  behavior will continue to hold. Thus an investor would buy a stock whose price has
recently been rising, and sell (or short) a stock whose price has been falling.

An earnings momentum strategy rests on the idea that a firm’s stock price will ultimately
follow its earnings. The measurement of earnings momentum is usually based on a
comparison to expected earnings. Thus an investor would buy a stock that has
accelerating earnings relative to expectations and sell (or short) a stock whose earnings
fall below expectations.

These two approaches may product similar portfolios if company’s P/E ratios remain
stable as their earnings (or price) exhibits momentum characteristics.

10. There are tradeoffs between using the full replication and the sampling method. Fully
replicating an index is more difficult to manage and has higher trading commission costs,
when compared to the sampling method. However, tracking error occurs from sampling,
which should not be the case in the full replication of the index.

11. The portfolio manager could emphasize or overweight, relative to the benchmark,
investments in natural resource stocks. The portfolio manager could also purchase
options on natural resource stocks.

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