Workshop6 W8 Questions With Solution
Chapter 22
3. The following two quotes are from the website for the FTIF Franklin High Yield Fund dated December 31, 2009(http://www.franklintempleton.com.es/pdf/funds/fdata/0825_ksp_es.pdf):
a. “Portfolio risk is controlled primarily through our extensive bottom-up, fundamental analysis process, as well as through security and industry diversification.” What does this mean?
The statement refers to how FTIF Franklin High Yield Fund seeks to contain portfolio risk, which is to say how it seeks to lower the probability that individual investments in its portfolio will fall in value. It has chosen a bottom-up approach that involves a basic process using various forms of diversification to control market or systematic risk. More details are given below.
A major risk factor is the exposure of a benchmark or portfolio to changes in the level of interest rates. This risk can be controlled by using an indexing strategy. An enhanced indexing strategy involves matching primary risk factors. The primary risk factors can be divided into two general types: systematic risk factors and nonsystematic risk factors. Systematic risk factors are forces that affect all securities in a certain category in the benchmark. Nonsystematic risk factors are the risks that are not attributable to the systematic risk factors. Systematic risk factors, in turn, are divided into two categories: term structure risk factors and non-term structure risk factors. Term structure risk factors are risks associated with changes in the shape of the term structure.
Non-term structure risk factors include sector risk, credit risk, and optionality risk. Sector risk is the risk associated with exposure to the sectors of the benchmark. At the macro level, these sectors include Treasury, agencies, corporates, residential agency mortgage-backed securities, commercial mortgage-backed securities, and asset-backed securities. Each of these sectors is divided further. For example, the corporate sector (called the
3. The following two quotes are from the website for the FTIF Franklin High Yield Fund dated December 31, 2009(http://www.franklintempleton.com.es/pdf/funds/fdata/0825_ksp_es.pdf):
a. “Portfolio risk is controlled primarily through our extensive bottom-up, fundamental analysis process, as well as through security and industry diversification.” What does this mean?
The statement refers to how FTIF Franklin High Yield Fund seeks to contain portfolio risk, which is to say how it seeks to lower the probability that individual investments in its portfolio will fall in value. It has chosen a bottom-up approach that involves a basic process using various forms of diversification to control market or systematic risk. More details are given below.
A major risk factor is the exposure of a benchmark or portfolio to changes in the level of interest rates. This risk can be controlled by using an indexing strategy. An enhanced indexing strategy involves matching primary risk factors. The primary risk factors can be divided into two general types: systematic risk factors and nonsystematic risk factors. Systematic risk factors are forces that affect all securities in a certain category in the benchmark. Nonsystematic risk factors are the risks that are not attributable to the systematic risk factors. Systematic risk factors, in turn, are divided into two categories: term structure risk factors and non-term structure risk factors. Term structure risk factors are risks associated with changes in the shape of the term structure.
Non-term structure risk factors include sector risk, credit risk, and optionality risk. Sector risk is the risk associated with exposure to the sectors of the benchmark. At the macro level, these sectors include Treasury, agencies, corporates, residential agency mortgage-backed securities, commercial mortgage-backed securities, and asset-backed securities. Each of these sectors is divided further. For example, the corporate sector (called the