Looking through funds to see concentration
Series XXI-B case study · set 3, case 1 of 6 · 5 questions · 2 marks each
Question 1 of 5Case practice
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The case · stays here for all 5 questions
A ₹100 lakh portfolio contains ₹25 lakh of direct bank shares, ₹35 lakh in Fund A, ₹30 lakh in Fund B and ₹10 lakh cash. Fund A has 40% of its assets in banks and Fund B has 20%. The direct bank sleeve has beta 1.4, Fund A beta 1.2, Fund B beta 0.8 and cash beta zero, all measured against the same market. Assume these estimates and each fund’s sector weights remain fixed during the exercise. The client’s agreed mandate caps total bank exposure, including exposure through funds, at 35% of total portfolio value. The manager may sell direct bank shares into cash without fees or price movement. No other transaction is planned.
All amounts and contract terms in this case are hypothetical.
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The case and its answers
Every question of this case, with its answer and why each other option is wrong.
A ₹100 lakh portfolio contains ₹25 lakh of direct bank shares, ₹35 lakh in Fund A, ₹30 lakh in Fund B and ₹10 lakh cash. Fund A has 40% of its assets in banks and Fund B has 20%. The direct bank sleeve has beta 1.4, Fund A beta 1.2, Fund B beta 0.8 and cash beta zero, all measured against the same market. Assume these estimates and each fund’s sector weights remain fixed during the exercise. The client’s agreed mandate caps total bank exposure, including exposure through funds, at 35% of total portfolio value. The manager may sell direct bank shares into cash without fees or price movement. No other transaction is planned.
All amounts and contract terms in this case are hypothetical.
Q1What is the portfolio’s total bank exposure before any sale?
Option A. ₹90 lakh, or 90%
Why it is wrong: Not all of the fund holdings are banks.
Option B. ₹60 lakh, or 60%
Why it is wrong: The fund sector percentages cannot simply be added to direct holdings.
Option C. ₹45 lakh, or 45% of the portfolio — Correct answer
Option D. ₹25 lakh, or 25%
Why it is wrong: This omits the banks held inside both funds.
Answer: C. ₹25 lakh + 40%×₹35 lakh + 20%×₹30 lakh = ₹25 + ₹14 + ₹6 = ₹45 lakh. Remember: Look through pooled holdings when measuring an agreed sector limit.
Hint, shown before you answer in practice mode: Add direct banks to the bank portion of each fund.
XXIB-S3-C01-Q1mediumnumerical
Q2What is the weighted portfolio beta before the sale?
Option A. 1.01 — Correct answer
Option B. 3.40
Why it is wrong: This adds betas without weighting.
Option C. 1.13
Why it is wrong: This gives all non-cash sleeves equal weights.
Option D. 0.76
Why it is wrong: This omits part of the direct bank exposure.
Answer: A. Portfolio beta = 0.25×1.4 + 0.35×1.2 + 0.30×0.8 + 0.10×0 = 1.01. Remember: Portfolio beta is a value-weighted measure when the inputs use the same market benchmark.
Hint, shown before you answer in practice mode: Use each sleeve’s fraction of the entire portfolio, including cash.
XXIB-S3-C01-Q2mediumnumerical
Q3What minimum direct bank sale meets the agreed sector cap?
Option A. ₹10 lakh — Correct answer
Option B. ₹0
Why it is wrong: The look-through bank exposure currently exceeds the cap.
Option C. ₹5 lakh
Why it is wrong: This leaves bank exposure at 40%.
Option D. ₹20 lakh
Why it is wrong: This reduces bank exposure below the cap more than necessary.
Answer: A. Bank exposure must fall from ₹45 lakh to ₹35 lakh. Selling ₹10 lakh of direct banks into cash achieves that result. Remember: Use the stated portfolio limit after including indirect exposure.
Hint, shown before you answer in practice mode: The cash sale leaves total portfolio value unchanged.
XXIB-S3-C01-Q3easynumerical
Q4What is portfolio beta after that minimum sale?
Option A. 0.91
Why it is wrong: The sold shares have beta 1.4, not beta 1.
Option B. 0.14
Why it is wrong: This is the reduction in beta, not the remaining portfolio beta.
Option C. 1.01
Why it is wrong: This ignores the change from bank shares to cash.
Option D. 0.87 — Correct answer
Answer: D. New beta = 0.15×1.4 + 0.35×1.2 + 0.30×0.8 + 0.20×0 = 0.87. Remember: A concentration reduction can also change broad market sensitivity.
Hint, shown before you answer in practice mode: Replace ten percentage points of beta-1.4 shares with beta-zero cash.
XXIB-S3-C01-Q4hardnumerical
Q5Why should the manager continue reviewing the fund holdings after this sale?
Option A. Owning two funds always removes sector concentration
Why it is wrong: Different funds can own the same sector or securities.
Option B. A compliant portfolio can never become non-compliant without a client deposit
Why it is wrong: Prices, holdings and fund allocations can change relative exposures.
Option C. Cash guarantees that every remaining investment is diversified
Why it is wrong: Cash does not change overlap inside the remaining funds.
Option D. A fund’s changing bank exposure could cause the portfolio to breach the cap again — Correct answer
Answer: D. The sale reaches the cap under current assumptions. Ongoing changes in fund holdings and relative market values can alter the combined sector exposure. Remember: Diversification requires monitoring underlying exposures, not just counting product names.
Hint, shown before you answer in practice mode: The calculation fixes fund weights only for this exercise.
XXIB-S3-C01-Q5mediumapplication
Matching two known cash payments
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