Equity Investments

Correct Answer: Mark should recommend Fund A, which tracks the S&P 500 Index, as it has the lowest expense ratio and tracking error among the three funds, aligning with the client's preference for a low-cost, diversified portfolio that closely tracks a broad market index.

Fund A, which tracks the S&P 500 Index, is the best choice for the client's needs. Here's why: 1. The client has expressed interest in a low-cost, diversified portfolio that tracks a broad market index. Fund A has the lowest expense ratio (0.05%) among the three options, making it the most cost-efficient choice. 2. Fund A also has the lowest tracking error (0.02%), which means it closely mimics the performance of the S&P 500 Index. This is important for a passive investing strategy that aims to match the market's returns. 3. The S&P 500 Index is a well-established, widely followed benchmark that represents the large-cap segment of the U.S. equity market. It provides broad exposure to the market, making it suitable for a diversified portfolio. 4. Although Fund C tracks the Wilshire 5000 Total Market Index, which is even broader than the S&P 500, its higher expense ratio (0.10%) and tracking error (0.04%) make it less attractive given the client's preference for low costs and close index tracking. 5. Fund B, which tracks the Russell 1000 Index, offers exposure to a larger number of stocks compared to the S&P 500. However, its expense ratio (0.08%) and tracking error (0.03%) are higher than Fund A's, without providing significantly more diversification benefits. Considering the client's long-term investment horizon and desire for a low-cost, diversified portfolio that closely tracks a broad market index, Fund A is the most suitable choice among the three options.

Correct Answer: Gradually increase the allocation to the identified mid-cap growth companies while maintaining a balanced exposure across market caps and sub-sectors, ensuring compliance with the diversification requirements stated in the investment mandate.

The best course of action is to gradually increase the allocation to the identified mid-cap growth companies while maintaining a balanced exposure across market caps and sub-sectors, ensuring compliance with the diversification requirements stated in the investment mandate.

As a portfolio manager, it is essential to adhere to the fund's investment mandate, which requires maintaining a diversified portfolio. While the fund's performance has been lagging due to an underweight position in large-cap tech giants, significantly overweighting mid-cap growth companies to offset this underperformance would result in a less diversified portfolio, going against the mandate.

Maintaining the current portfolio structure and underweight position in large-cap tech giants is not advisable, as it would likely perpetuate the fund's underperformance relative to its benchmark. The investment team has identified mid-cap companies with strong growth potential, which could help boost returns if allocated properly.

The most appropriate action is to gradually increase exposure to these promising mid-cap growth companies while ensuring that the overall portfolio remains well-diversified across market capitalizations and sub-sectors. This approach allows the fund to capitalize on the growth potential of the identified companies without compromising the diversification requirements outlined in the investment mandate.

Correct Answer: Maintain the current overweight position in the energy sector, but refrain from adding to it further. Instead, focus on diversifying the portfolio's exposure to other sectors that offer attractive value opportunities.

The most appropriate course of action for Robert is to maintain the current overweight position in the energy sector but refrain from adding to it further. Instead, he should focus on diversifying the portfolio's exposure to other sectors that offer attractive value opportunities. The client's investment policy statement emphasizes diversification, which is a key consideration when managing a portfolio. While the energy sector appears undervalued and offers potential for outperformance, increasing the allocation significantly would result in a highly concentrated sector exposure. This goes against the principle of diversification and could expose the portfolio to undue risk. On the other hand, reducing the allocation to the energy sector to bring it in line with the benchmark weight may not be the best approach either. The research team has identified the sector as potentially undervalued, and the current overweight position could benefit from this insight. Completely eliminating the overweight would mean missing out on the potential outperformance. By maintaining the current overweight position, Robert can take advantage of the energy sector's undervaluation while managing the overall risk of the portfolio. Simultaneously, he should look for value opportunities in other sectors to diversify the portfolio's holdings and align with the client's investment policy statement.