CPM Equity Portfolio Management 1 — Questions and Answers
Question 1: The primary distinction between growth investing and value investing is:
- Growth investors only buy dividend-paying stocks
- Value investors seek underpriced stocks relative to fundamentals, while growth investors seek companies with above-average earnings growth potential (Correct answer)
- Value investing always outperforms growth investing
- Growth investing ignores earnings
Correct answer: Value investors seek underpriced stocks relative to fundamentals, while growth investors seek companies with above-average earnings growth potential
Value investing focuses on purchasing stocks trading below their intrinsic value, while growth investing targets companies expected to grow earnings significantly faster than the market.
Question 2: Which equity valuation multiple compares stock price to earnings per share and is most widely used by analysts?
- Price-to-book (P/B)
- Price-to-earnings (P/E) (Correct answer)
- Enterprise Value/EBITDA
- Dividend yield
Correct answer: Price-to-earnings (P/E)
The price-to-earnings (P/E) ratio is the most widely used equity valuation multiple, comparing a stock's current price to its earnings per share to assess relative value.
Question 3: A portfolio manager's active share measures:
- How much cash the portfolio holds
- The percentage of portfolio holdings that differ from the benchmark, indicating the degree of active management (Correct answer)
- The portfolio's standard deviation
- The manager's information ratio
Correct answer: The percentage of portfolio holdings that differ from the benchmark, indicating the degree of active management
Active share quantifies how different a portfolio's holdings are from its benchmark; a high active share indicates meaningful active bets, while a low active share suggests benchmark-hugging.
Question 4: Factor investing (smart beta) attempts to systematically capture returns associated with:
- Random stock selection
- Well-documented risk premia such as value, momentum, quality, and low volatility (Correct answer)
- Market-cap weighting
- Currency speculation
Correct answer: Well-documented risk premia such as value, momentum, quality, and low volatility
Factor investing targets specific, academically documented risk premia (e.g., the value premium, momentum, quality) by systematically tilting portfolio weights toward stocks with those characteristics.
Question 5: Which of the following best describes the information ratio (IR) in equity portfolio management?
- The ratio of total return to total risk
- The ratio of active return (alpha) to tracking error, measuring the efficiency of active management (Correct answer)
- The ratio of dividend income to capital gains
- The ratio of equity exposure to bond exposure
Correct answer: The ratio of active return (alpha) to tracking error, measuring the efficiency of active management
The information ratio measures how much active return (alpha) a manager generates per unit of active risk (tracking error), assessing the skill and efficiency of active management decisions.
Question 6: In a top-down equity portfolio management approach, the manager begins by:
- Selecting individual stocks based on earnings
- Analyzing macroeconomic conditions, then sectors, then individual stocks (Correct answer)
- Screening for the lowest P/E ratios
- Replicating the benchmark exactly
Correct answer: Analyzing macroeconomic conditions, then sectors, then individual stocks
Top-down investing starts with macroeconomic analysis (GDP growth, interest rates, inflation), then identifies favorable sectors, and finally selects individual stocks within those sectors.
CPM Equity Portfolio Management 1
The primary distinction between growth investing and value investing is: