CFA CFA Level 3 Reading 23 – Portable Alpha?

Reading 23 – Portable Alpha?

  • Author
    • Up

      Can you please help me with the answer provided to Question 7 in the EOC problems for Reading 23 (CFAI textbook):
      Q. Simon Hayes …. expertise lies in building market-neutral long-short strategies using UK equities. …. Hayes learns that the client is planning to hire an investment firm to manage a Japanese equity portfolio. How can Hayes satisfy this mandate using UK equities and no Japanese Equities?

      Solution: Hayes can produce such a portfolio through the use of a portable alpha. He submits a proposal to manage a market-neutral long-short portfolio of UK stocks. This strategy generates alpha. To produce beta, the Japanese equity exposure, Hayes takes a long position in a notional value of futures equal to the size of the portfolio.

      I don’t understand the solution — what futures is Hayes going to take a long position in — is it Japan Topix futures?

    • Avatar of vincenttvincentt
        • CFA Level 3

        The long position is definitely the Japanese equity index to get exposure from the Japanese beta.

        My opinion is that Hayes might sell UK equities future (of equal notional value of the portfolio hence removing exposure in the UK market) and take the proceeds to purchase Japanese equity index future since it’s a cheaper alternative (Assuming Hayes owns underlying UK equities).

    Viewing 1 reply thread
    • You must be logged in to reply to this topic.