What is the implication of bullet 2, position size ?
Share
Please briefly explain why you feel this question should be reported.
Please briefly explain why you feel this answer should be reported.
Please briefly explain why you feel this user should be reported.
It refers to the size of a position in a particular security or asset class. Here, position size is measured as the weight in the portfolio.
So the maximum position size of the smallest of the securities in index would be 0.015% * 10 = 0.15% ?
If that is the case, 0.15% of 100 mil = $150,000.
Is this right ? the solution given does not mention anything related to this.
Yes
Core says 1.5 million instead of 150,000. Wrong answer given in curriculum ?
This is the answer from the core :
“Based on the index capitalization of $20 trillion, the size constraint indicates that the smallest stocks in his portfolio will have a minimum market cap of about $3 billion (0.015% × $20 trillion). The ADV of the stocks at the lower end of his capitalization constraint would be about $30 million (1% × $3 billion). Because Isaac does not want to represent more than 5% of any security’s ADV, the maximum position size for these smaller-cap stocks is about $1.5 million (5% × $30 million). It appears that Isaac’s strategy will not be constrained until the portfolio reaches about $1 billion in size ($1.5 million ÷ 0.15% = $1 billion). If the level of AUM exceeds $1 billion, his position size constraints will require the portfolio to hold a larger number of smaller-cap positions. There is room to grow this strategy.”
Hi. Sorry for the late reply.
I think you’re not understanding the problem in hand. There’s a condition that SIZE IN MY PORTFOLIO kisi bhi share ke ADV ka 5% se zyada nahi ho sakta. Smallest stocks ka ADV 30 million rehta hai so a maximum of 5% of 30m i.e., 1.5m is what I can spend on small stocks in my portfolio.
Abb doosre end pe dekhte hai. We’re given the condition ki maximum 0.015%*10 i.e., 0.15% of my wealth can be the size of a small stock in my portfolio. This means jab tak mera investable wealth is at or below 1.5m/0.15% i.e., 1 billion, tab tak I can have the maximum allowable position size of 0.15% for small stocks in my portfolio. Jab investable wealth crosses 1 billion, 0.15% of it will be more than 1.5m and that violates condition 3 of limiting investment amount to 5% of ADV of the stock.
So, our calculation of 150000 is correct only. In fact, our calculation of this amount means that this is the amount we are investing in a small stock which is well below the limit allowed by condition 3 i.e., of 1.5m. So, we can safely continue with our strategy for now.