19-EquityPort Page 583 Friday, March 12, 2004 12:40 PM
Equity Portfolio Management 583Assessing the Exposure of a Portfolio
A fundamental multifactor risk model can be used to assess whether the
current portfolio is consistent with a manager’s strengths. Exhibit 19.10
is a list of the top 15 holdings of Portfolio ABC as of September 30,- Exhibit 19.11 is a risk-return report for the same portfolio. The
portfolio had a total market value of over $3.7 billion, 202 holdings,
and a predicted beta of 1.20. The risk report also shows that the portfo-
lio had an active risk of 9.83%. This is its tracking error with respect to
the benchmark, the S&P 500. Notice that over 80% of the active risk
variance (which is 96.67) comes from the common factor risk variance
(which is 81.34), and only a small proportion comes from the stock-spe-
cific risk variance (which is 15.33). Clearly, the manager of this portfo-
lio has placed fairly large factor bets.
Exhibit 19.12a assesses the factor risk exposures of Portfolio ABC rel-
ative to those of the S&P 500, its benchmark. The first column shows the
exposures of the portfolio, and the second column shows the exposures
for the benchmark. The last column shows the active exposure, which is
EXHIBIT 19.10 Portfolio ABC’s Holdings (Only the Top 15 Holdings Shown)Portfolio: ABC Fund Benchmark: S&P 500 Model Date: 2000-10-02
Report Date: 2000-10-15 Price Date: 2000-09-29 Model: U.S. Equity 3Price Weight Main Industry
Name Shares ($) (%) Beta Name Sector
General Elec. Co. 2,751,200 57.81 4.28 0.89 Financial Services Financial
Citigroup, Inc. 2,554,666 54.06 3.72 0.98 Banks Financial
Cisco Sys., Inc. 2,164,000 55.25 3.22 1.45 Computer Hardware Technology
EMC Corp., Mass. 1,053,600 99.50 2.82 1.19 Computer Hardware Technology
Intel Corp. 2,285,600 41.56 2.56 1.65 Semiconductors Technology
Nortel Networks Corp. N 1,548,600 60.38 2.52 1.40 Electronic Equipment Technology
Corning, Inc. 293,200 297.50 2.35 1.31 Electronic Equipment Technology
International Business 739,000 112.50 2.24 1.05 Computer Software Technology
Oracle Corp. 955,600 78.75 2.03 1.40 Computer Software Technology
Sun Microsystems, Inc. 624,700 116.75 1.96 1.30 Computer Hardware Technology
Lehman Bros. Hldgs. Inc. 394,700 148.63 1.58 1.51 Sec. & Asset Management Financial
Morgan Stanley Dean Wi. 615,400 91.44 1.52 1.29 Sec. & Asset Management Financial
Walt Disney Co. 1,276,700 38.25 1.32 0.85 Entertainment Cnsmr. Services
Coca-Cola Co. 873,900 55.13 1.30 0.68 Food & Beverage Cnsmr. (non-cyc.)
Microsoft Corp. 762,245 60.31 1.24 1.35 Computer Software TechnologySource: Exhibit 13.7 in Frank J. Fabozzi, Frank J. Jones, and Raman Vardharaj,
“Multi-Factor Risk Models,” Chapter 13 in Frank J. Fabozzi and Harry M.
Markowitz (eds.), The Theory and Practice of Investment Management (Hobo-
ken, NJ: John Wiley & Sons, 2002).