Question

2. John Doe, a CFA charterholder, runs a mutual fund using stocks and cash only. The value of the portfolio is $500 million. For practical purpose, cash does not earn interest. He sets a strategy of a fixed percentage of funds in stocks and cash. As of now, he puts 60% in stocks and 40% in cash. a) Give the name of John Doe's asset allocation strategy. (5 pts) b) John Doe told his client, "My allocation strategy will definitley outperform a buy- (i) State one stock market condition which might cause John Doe's strategy to perform better than a buy-and-hold strategy. No explanation is necessary. (5 pts) In less than 40 words explain why John Doe's claim is a violation of CFA Institute's Standard of Practice (5 pts) (ii) (iii) After one week, stock value decreases 20%. Hence, the value of the stocks in John Doe's mutual fund drops up 20%. Calculate the amount of funds needs to be move using John Doe's asset allocation strategy. You need to be specific about stock to cash or cash to stock. (5 pts)

Answer 1

a) John Doe's strategy is Constant Weighting Allocation

b)

(i) One condition which might cause better performance than a buy and hold is if market price increases and drops again

(ii) John Doe's claim is in violation as he claims with surety that his fund will definitely outperform market as CFA Institute's of Practice Standards only allow to present facts and opinion on performance of funds and not surety, John Doe is clearly violating standards.

(iii) Revised value of stocks = $ 300 million*80% = $240 million

Cash =$ 200 million

Total value = $ 440 million

Value to be invested in Stocks = $ 440 million*60% = $ 264 million

Existing value of stocks = $ 240 million

Value to be invested Into Stocks = $24 Million (Cash to stock )