Pm L2

Question 1

What is the main objective of an active equity strategy?

Answer 1

To generate alpha (excess return) by deviating from benchmark exposures.

Question 2

Differentiate between fundamental and quantitative active investing.

Answer 2

Fundamental relies on analyst judgment and qualitative data; quantitative uses systematic models based on historical factors.

Question 3

Define top-down investing.

Answer 3

Approach that starts with macroeconomic or thematic trends

Question 4

Define bottom-up investing.

Answer 4

Approach focusing on company-specific fundamentals and valuation

Question 5

Name four common equity style factors.

Answer 5

Value

Question 6

What distinguishes thematic investing from traditional style investing?

Answer 6

Thematic strategies focus on broad trends (e.g.

Question 7

Explain the goal of activist investing.

Answer 7

Seek to unlock shareholder value through engagement or governance changes.

Question 8

What is alpha decay?

Answer 8

Erosion of short-term alpha after discovery or implementation delay.

Question 9

Describe a long-short equity strategy.

Answer 9

Combines long positions in undervalued securities with shorts in overvalued to exploit relative mispricing.

Question 10

What is market neutrality?

Answer 10

Constructing long and short exposures to offset market beta; portfolio return driven by alpha differences.

Question 11

State the Fundamental Law of Active Management.

Answer 11

IR = IC × √Breadth.

Question 12

Define information coefficient (IC).

Answer 12

Correlation between forecasted and realized active returns; measure of manager skill.

Question 13

Define breadth (BR).

Answer 13

Number of truly independent investment decisions per period.

Question 14

Explain how breadth affects the information ratio.

Answer 14

Higher breadth increases IR for a given level of skill (IC).

Question 15

If IC = 0.05 and BR = 100

Answer 15

what is expected IR?

Question 16

List three potential biases in quantitative models.

Answer 16

Look-ahead bias

Question 17

How can overfitting occur in factor models?

Answer 17

Model fits noise in historical data rather than true predictive relationships.

Question 18

Explain survivorship bias.

Answer 18

Excluding failed or delisted firms from historical dataset

Question 19

Describe the difference between style drift and style purity.

Answer 19

Style drift occurs when manager exposures deviate from stated style benchmark; purity maintains consistent exposures.

Question 20

What is factor timing?

Answer 20

Altering factor exposures (e.g.

Question 21

Explain why transaction costs are critical in active equity management.

Answer 21

High turnover can erode alpha; costs must be included in expected IR calculations.

Question 22

Calculate realized IR given active return = 0.6% and tracking error = 2%.

Answer 22

IR = 0.006 / 0.02 = 0.3.

Question 23

What is a factor momentum strategy?

Answer 23

Investing in factors (e.g.

Question 24

Define active share.

Answer 24

½ Σ|w_p − w_b|; measures deviation of portfolio holdings from benchmark.

Question 25

Interpret an active share of 0.8 and tracking error of 0.3%.

Answer 25

High conviction stock-picking with tight benchmark-relative volatility.

Question 26

What does low active share with high TE indicate?

Answer 26

Portfolio closely mirrors benchmark holdings but uses derivatives or factor tilts to generate active risk.

Question 27

Why might fundamental managers have lower breadth than quantitative managers?

Answer 27

They make fewer independent decisions due to resource and time constraints.

Question 28

What is closet indexing?

Answer 28

Manager claims to be active but replicates benchmark exposures

Question 29

Describe an event-driven strategy.

Answer 29

Invests around corporate events (M&A

Question 30

What is the difference between absolute and relative return objectives?

Answer 30

Absolute aims for positive total return; relative seeks to outperform a benchmark.

Question 31

Explain alpha transfer.

Answer 31

Using derivatives or overlays to separate alpha generation from beta exposure.

Question 32

What is behavioral alpha?

Answer 32

Return generated by exploiting investor biases (e.g.

Question 33

When is a multifactor model preferred?

Answer 33

When managers want diversified sources of alpha and lower specific risk.

Question 34

What is the risk of multicollinearity in factor models?

Answer 34

Highly correlated factors reduce explanatory power and stability of coefficients.

Question 35

Describe capacity constraints in active strategies.

Answer 35

Large AUM limits ability to execute ideas efficiently; alpha declines with scale.

Question 36

What is shortfall risk in active equity strategies?

Answer 36

Probability that active return is negative relative to benchmark.

Question 37

Explain the role of risk budgeting in active equity.

Answer 37

Allocating active risk across bets to maximize expected IR subject to constraints.

Question 38

Trap: Why does factor crowding reduce potential alpha?

Answer 38

When too many managers hold same factor exposures