Question
It is the year 2050. Phil is investigating an Australian large cap Value funds. The fund is benchmarked to ASX 50. Refinitiv provides the summary
It is the year 2050. Phil is investigating an Australian large cap Value funds. The fund is benchmarked to ASX 50. Refinitiv provides the summary holdings as follows:
Sector | ASX 50 | Value fund (%) | Volatility (%) |
Financials | 33.3 | 23.3 | 12.5 |
Materials | 22.3 | 15.1 | 15.1 |
Health Care | 13.4 | 14.4 | 10.4 |
Real Estate | 5.5 | 12 | 8.1 |
Energy | 5.5 | 11.3 | 14.9 |
Consumer Discretionary | 5.4 | 7.7 | 14.7 |
Consumer Staples | 5.3 | 6.8 | 4.2 |
Industrials | 4.3 | 5.1 | 18.8 |
Communication Services | 3.4 | 2.4 | 13.7 |
Information Technology | 1.6 | 1.9 | 22.8 |
Phil notes that the fund has the highest Information ratio (amongst all Australian large Cap Value funds) calculated using 1 year Alpha and 1 year Tracking Error from Refinitiv. Phil also notes that the fund 1 consists of 25 firms.
a) Phil wants to know that if he was to create a risk parity allocation of the sectors, which sector will receive the largest AND the smallest allocation. You must make sure that Phil understands why a sector will have the largest or the smallest allocation in a risk parity allocation.
b) Phil is keen to understand if the fund manager has market timing abilities. Based on the allocation of the sectors above, if the market was to rise in light of favorable economic conditions ahead, do you expect the fund to have positive or negative market timing?
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