CISI International Certificate in Wealth & Investment Management ICWIM Question # 45 Topic 5 Discussion
ICWIM Exam Topic 5 Question 45 Discussion:
Question #: 45
Topic #: 5
An active portfolio manager is deliberately holding securities in a portfolio in differing proportions from that in which they are weighted within the benchmark. Why are they doing this?
A.
To increase the liquidity of the fund
B.
In an attempt to outperform the benchmark
C.
Because some securities are cheaper to deal in than others
D.
Because they are anticipating a re-weighting of the benchmark
Active management involves taking positions that differ from the benchmark to try to generate excess return, often referred to as alpha. If a portfolio held securities in exactly the same weights as the benchmark, before fees it would deliver benchmark-like performance and would be classified as passive or index tracking. By overweighting securities expected to outperform and underweighting or excluding those expected to underperform, the manager is expressing investment views and accepting active risk, commonly measured by tracking error. This deliberate deviation is the defining feature of active management and is undertaken to outperform after costs. Liquidity considerations and dealing costs can influence how active bets are implemented, but they are not the primary reason for deviating from benchmark weights. Anticipating a benchmark re-weighting is possible, but that is just one specific type of active view and is not the broad objective being tested. The examinable principle is that active managers differ from the benchmark in order to outperform it.
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