Benchmark Selection

Identify the total return approach implemented by each of the fixed-income mutual funds, and provide at least two factors (for each) that support your answer.

You have run over the allotted time to provide your answer.

What approach did you say was implemented by Fund A?

No, that's not right.

That's correct.

What factors did you base that answer on?

That's too bad. Three of the above are correct.

Incorrect.

Fund A follows an enhanced indexing approach, indicated by - moderate management fees and active risk relative to the other funds, - a primary risk factor match, and - a return that approximates the benchmark return after fees.

What approach did you identify for Fund B?

That's not correct.

Nice!

What factors helped inform your answer?

That's too bad. Four of the above are correct.

Incorrect.

Fund B follows a pure indexing approach, indicated by - low management fees, - a primary risk factor match, - relatively low active risk, and - a return that falls short of the benchmark return after fees.

Well done!

Correct!

What approach did you say Fund C used?

Incorrect.

That's right!

What made you say that?

That's too bad. Three of the above are correct.

Incorrect.

Correct!

Fund C is actively managed, indicated by - relatively high management fees and active risk, - a primary risk factor mismatch, and - a return that materially exceeds benchmark return.

The primary total return approaches include pure indexing, enhanced indexing, and active management. Pure indexing attempts to replicate a bond index as closely as possible. The targeted active return and active risk are both 0. In practice, investment management fees result in a lower portfolio return than the index, even in the absence of any tracking error. In order to target an active return of 0, both major and minor risk factor exposures should be matched. Management fees are relatively low. Enhanced indexing maintains a close link to the benchmark but attempts to generate at least a modest amount of outperformance relative to the benchmark to make up for investment management fees. The approach allows for small deviations in portfolios' holdings from the benchmark index, but tracks the benchmark’s primary risk factor exposures very closely. Minor risk factor mismatches are allowed. Management fees are typically higher for enhanced indexing approaches. Active management allows larger risk factor mismatches relative to a benchmark index. This may cause significant return differences. Management fees are highest for active management. Fund A has a gross return that modestly exceeds the benchmark, while its return net of fees almost exactly matches the benchmark. Fund B’s gross return almost exactly matches the benchmark, while its return net of fees is below the benchmark. Fund C’s gross returns and returns net of fees exceed the benchmark. Based on returns alone, Fund A should be identified as an enhanced indexing approach, Fund B as a pure indexing approach, and Fund C as active management. The duration of Funds A and B nearly match the benchmark duration, suggesting a primary risk factor match, which is required for both enhanced indexing and pure indexing. Fund B’s management fees, measured as the difference between gross and net returns, are lowest, while Fund C’s management fees are highest.

Fund A follows an enhanced indexing approach, indicated by - moderate management fees and active risk relative to the other funds - a primary risk factor match - a return that approximates the benchmark return after fees.

Fund B follows a pure indexing approach, indicated by - low management fees - a primary risk factor match - relatively low active risk - a return that falls short of the benchmark return after fees.

Fund C is actively managed, indicated by - relatively high management fees and active risk - a primary risk factor mismatch - a return that materially exceeds benchmark return.

That's incorrect.

That's not right.

Pure indexing

Enhanced indexing

Active management

A primary risk factor mismatch

A primary risk factor match

A return that approximates the benchmark after fees

A return that exceeds the benchmark after fees

Moderate management fees and active risk relative to other funds

High active management fees and active risk relative to other funds

None of these

Pure indexing

Enhanced indexing

Active management

High management fees

Low management fees

A primary risk factor mismatch

A primary risk factor match

Relatively high active risk

Relatively low active risk

A return that falls short of the benchmark after fees

A return that approximates the benchmark after fees

None of these

Pure indexing

Enhanced indexing

Active management

Relatively high management fees and active risk

A primary risk factor mismatch

A primary risk factor match

A return that materially exceeds benchmark returns after fees

A return that approximates benchmark returns after fees

None of these.

Out of time step

Other responses

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