Justification this strategy would mitigate manager as

Justification: This strategy would mitigate Manager A’s weakness by
hedging all currency exposures into index-like weights. This would
allow capture of Manager A’s country and stock selection skills while
avoiding losses from poor currency management. This strategy would
also mitigate Manager B’s weakness, leaving an index-like portfolio
construct and capitalizing on the apparent skill in currency management.
2. Recommendation: Another strategy would be to combine the portfolios of
Manager A and Manager B, with Manager A making country exposure and
security selection decisions and Manager B managing the currency exposures
created by Manager A’s decisions (providing a “currency overlay”).
Justification: This recommendation would capture the strengths of both
Manager A and Manager B and would minimize their collective weaknesses.
13. a. Indeed, the one year results were terrible, but one year is a poor statistical base
from which to draw inferences. Moreover, the board of trustees had directed
Karl to adopt a long-term horizon. The Board specifically instructed the
investment manager to give priority to long term results.
b. The sample of pension funds had a much larger share invested in equities than
did Alpine. Equities performed much better than bonds. Yet the trustees told
Alpine to hold down risk, investing not more than 25% of the plan’s assets in
common stocks. (Alpine’s beta was also somewhat defensive.) Alpine should
not be held responsible for an asset allocation policy dictated by the client.
c. Alpine’s alpha measures its risk-adjusted performance compared to the market:
α = 13.3% – [7.5% + 0.90(13.8% – 7.5%)] = 0.13% (actually above zero)
d. Note that the last 5 years, and particularly the most recent year, have been bad
for bonds, the asset class that Alpine had been encouraged to hold. Within this
asset class, however, Alpine did much better than the index fund. Moreover,
despite the fact that the bond index underperformed both the actuarial return
and T-bills, Alpine outperformed both. Alpine’s performance within each asset
class has been superior on a risk-adjusted basis. Its overall disappointing
returns were due to a heavy asset allocation weighting towards bonds, which
was the Board’s, not Alpine’s, choice.
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e. A trustee may not care about the time-weighted return, but that return is more
indicative of the manager’s performance. After all, the manager has no control
over the cash inflows and outflows of the fund.
14. a. Method I does nothing to separately identify the effects of market timing and
security selection decisions. It also uses a questionable “neutral position,”
the composition of the portfolio at the beginning of the year.
b. Method II is not perfect, but is the best of the three techniques. It at least
attempts to focus on market timing by examining the returns for portfolios
constructed from bond market indexes using actual weights in various indexes
versus year-average weights. The problem with this method is that the year-
average weights need not correspond to a client’s “neutral” weights.